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VYCOR MEDICAL INC - Quarter Report: 2009 March (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549


FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934


For the fiscal quarter ended_________March 31, 2009_______________


[   ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from                                         to


VYCOR MEDICAL, INC.

(Exact name of small business issuer as specified in its charter)


Delaware

333-149782

20-3369218

(State of Incorporation)

(Commission File Number)

(IRS Employer Identification No.)


80 Orville Drive, Suite 100, Bohemia, New York 11716
(Address of principal executive offices) (Zip code)


Issuer’s telephone number: (631) 244 1435
 Securities registered under Section 12(g) of the Exchange Act:

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No o 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o 

Accelerated filer o 

Non-accelerated filer o   (Do not check if a smaller reporting company)

Smaller reporting company þ


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No þ

 

There were 26,356,638 shares outstanding of registrant’s common stock, par value $.001 per share, as of April 30, 2009.


Transitional Small Business Disclosure Format (check one):     Yes o   No þ





TABLE OF CONTENTS


Page


 

PART I

 

Item 1.

Financial Statements

 

 

Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008

1

 

Unaudited Consolidated Statements of Operations for the three months ended March 31, 2009 and March 31, 2008

2

 

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008

3

 

Notes to Unaudited Consolidated Financial Statements

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

16

Item 3

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4

Controls and Procedures

24

 

PART II

 

Item 1.

Legal Proceedings

24

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 3

Defaults Upon Senior Securities

24

Item 4.

Submission of Matters to a Vote of Security Holders

24

Item 5.

Other Information

24

Item 6.

Exhibits

24

 

 

 

SIGNATURES

 

25











PART I


ITEM 1.  FINANCIAL STATEMENTS

VYCOR MEDICAL, INC.
Balance Sheet
March 31, 2009

        March 31,
2009
(unaudited)
     December 31,
2008
(audited)
ASSETS
                                        
 
                                        
Current Assets
                                       
Cash
               $ 92,542          $ 196,138   
Accounts receivable
                  46,143             89,765   
Inventory
                  56,101             71,527   
Prepaid expenses
                  16,678             7,040   
 
                  211,464             364,470   
 
                                      
Fixed assets, net
                  208,221             213,958   
 
                                      
Other assets:
                                        
Patents, net of accumulated amortization
                  40,165             42,507   
Website, net of accumulated amortization
                  9,374             10,152   
Security deposits
                  2,350             2,350   
 
                  51,889             55,009   
 
                                      
TOTAL ASSETS
               $ 471,574          $ 633,437   
 
                                        
LIABILITIES AND STOCKHOLDERS’ DEFICIT
                                       
 
                                      
Current Liabilities
                                       
Accounts payable
               $ 312,539          $ 313,611   
Accrued interest
                  101,501             88,588   
Accrued liabilities
                  131,003             75,468   
Current portion of long-term debt
                  1,096,399             1,077,197   
 
                  1,641,442             1,554,864   
 
                                      
Long-term debt less current portion
                  —              —    
 
                                      
TOTAL LIABILITIES
                  1,641,442             1,554,864   
 
                                      
STOCKHOLDERS’ DEFICIT
                                        
Preferred stock, $1.00 par value, 10,000,000 shares authorized, none issued and outstanding
                  —              —    
Common Stock, $0.001 par value,
100,000,000 shares authorized,
26,356,638 and 25,463,455 shares issued and outstanding
at March 31, 2009 and December 31, 2008, respectively
                 26,357             25,463   
Additional Paid-in Capital
                  2,959,214             2,788,415   
Accumulated Deficit
                  (4,155,439 )            (3,735,305 )  
 
                  (1,169,868 )            (921,427 )  
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
               $ 471,574          $ 633,437   




See accompanying notes to financial statements


1







VYCOR MEDICAL, INC.
Statement of Operations

        For the three months ended March 31,
    
        2009
(unaudited)
     2008
(unaudited)
 
                                      
Revenue
              $ 70,088          $ —    
 
                                      
Cost of Goods Sold
                                       
Beginning Inventory
                 71,527             —    
Cost of goods purchased
                 —              —    
 
                                      
Goods available for sale
                 71,527             —    
Less: Clinical samples
                 (5,923 )            —    
Less: Ending inventory
                 (56,101 )            —    
 
                                      
Total Cost of Goods Sold
                 9,503             —    
 
                                      
Gross Profit
                 60,585             —    
 
                                      
Operating expenses:
                                       
Research and development
                 —              6,333   
General and administrative
                 341,965             478,628   
 
                                      
Total Operating expenses
                 341,965             484,961   
 
                                      
Operating loss
                 (281,380 )            (484,961 )  
 
                                      
 
                                      
Interest expense
                 138,754             93,499   
 
                                      
 
                                      
Net Loss
              $ (420,134 )         $ (578,460 )  
 
                                      
 
                                      
Loss Per Share
                                       
Basic and diluted
              $ (0.02 )         $ (0.03 )  
 
                                      
Weighted Average Number of Shares Outstanding
                 26,058,910             20,062,100   




See accompanying notes to financial statements


2


VYCOR MEDICAL, INC.
Statement of Cash Flows

        For the three months ended March 31,
    
        2009
(unaudited)
     2008
(unaudited)
 
                                       
Cash flows from operating activities:
                                       
 
                                      
Net loss
               $ (420,134 )         $ (578,460 )  
 
                                      
Adjustments to reconcile net loss to cash used in operating activities:
                                        
Amortization of intangible assets
                  3,120             2,443   
Depreciation of fixed assets
                  5,737             —    
Amortization of debt discount expense
                  119,201             87,509   
Share based compensation
                  60,069             —    
Shares issued for consulting services
                  5,000             203,525   
Interest satisifed with stock conversion
                  6,625             —    
 
                                      
Changes in assets and liabilities:
                                       
Accounts receivable
                  43,622             2,565   
Inventory
                  15,426             —    
Prepaid expenses
                  (9,638 )            (24,660 )  
Security deposit
                  —              (834 )  
Accounts payable
                  (1,072 )            (91,094 )  
Accrued interest
                  12,913             7,694   
Accrued liabilities
                  55,535             32,262   
 
                                      
Cash used in operating activities
                  (103,596 )            (359,050 )  
 
                                      
Cash flows used in investing activities:
                                       
Acquisition of patents
                  —              (15,865 )  
Cash used in investing activities
                  —              (15,865 )  
 
                                      
Cash flows from financing activities:
                                       
Proceeds from sale of equity
                  —              240,000   
Payment on Notes Payable-GC Advisors
                  —              (8,000 )  
Proceeds from Fountainhead Convertible Note Payable
                  —              150,000   
Proceeds from Regent Convertible Note Payable
                  —              500,000   
Payment on Optimum Health Services Loan Payable
                  —              (41,000 )  
Cash provided by financing activities
                  —              841,000   
 
                                      
Net increase (decrease) in cash
                  (103,596 )            466,085   
 
                                      
Cash at beginning of period
                  196,138             15,739   
 
                                      
Cash at end of period
               $ 92,542          $ 481,824   
 
                                      
Supplemental Disclosures of Cash Flow information:
                                       
Interest paid:
               $ —           $ —    
Taxes paid
               $ —           $ —    
Non-Cash Tranactions:
                                       
Warrants, options and stock issued for debt financing
               $ 100,000          $ 23,950   




See accompanying notes to financial statements


3


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009



1.  BASIS OF PRESENTATION

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included.  Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  For further information, refer to the financial statements and footnotes thereto for the year ended December 31, 2008.


2.          FORMATION AND BUSINESS OF THE COMPANY


Business description


Vycor Medical, LLC, (the “Company”) was formed in June 17, 2005 under the laws of the State of New York. The Company converted its entity form on August 14, 2007 from a New York Limited Liability Company to a Delaware Corporation with 16,048 of common stock exchange for each partnership unit with 1122 units outstanding at date of conversion. The assets, liabilities and operations of the Company did not change pursuant to this reorganization, and the accompanying financial statements are presented as if the change occurred on the first day of the earliest period presented; thus all are references to number of shares prior to the date of conversion are based upon the common stock equivalent of the units. The Company’s business plan is to develop and market a commercially feasible surgical access system for sale to hospitals and medical professionals.


3.          ACCOUNTING POLICIES

 

Research and Development

 

The Company expenses all research and development costs as incurred. For the three months ended March 31, 2009 and 2008, the amounts charged to research and development expenses were $0 and $6,333, respectively.

 

Concentration of Credit Risk

 

The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company's accounts at these institutions may, at times, exceed the federally insured limits. The Company has not experienced any losses in such accounts.


Fair Values of Financial Instruments


At March 31, 2009, fair values of cash, accounts receivable, accounts payable, and accrued expenses short term promissory notes, approximate their carrying amount due to the short period of time to maturity. The fair value of the Company’s long term debt is based on the present value using a discount rate comparable with borrowing rates available to the Company along with various fair value model calculations used to value certain debt related securities.


Property and equipment


The Company records property and equipment at cost and calculates depreciation using the straight-line method over the estimated useful life of the assets, which is estimated to be between three and ten years.





4


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009



3.          ACCOUNTING POLICIES (continued)


Income taxes


The Company accounts for income taxes in accordance with SFAS 109, Accounting for Income Taxes. This statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. The Company has provided a full valuation allowance against the gross deferred tax asset as of March 31, 2009 as it is more likely than not that this deferred tax asset may not be realized.


Uses of estimates in the preparation of financial statements


The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Critical estimates include depreciation, amortization of intangible assets, and the fair values of options and warrant included in the determination of debt discounts and share based compensation.


Patents


The Company capitalizes legal and related costs associated with the establishment of patents for its products. Costs associated with the development of the patented item or processes are charged to research and development costs as incurred. The costs associated with the establishment of the patents are amortized over the life of the patent.


The Company reviews existing patents as well as those in the approval process for impairment on an annual basis using a present value, cash flow method pursuant to Statement of Financial Accounting Standards 142, Goodwill and Other Intangible Assets. Since the Company’s patents are either very new or still in the process of approval, the Company does not believe that any impairment of these amounts exists.


Revenue Recognition


The Company records revenue, pursuant to Staff Accounting Bulletin Topic 13(a) when a completed contract for the sale exists, title transfers to the buyer and the product is invoiced and shipped to the customer. The Company sells a surgical access system which has already cleared the U.S. FDA 510(k) review process. It has been granted a 510(k) number for marketing the system to hospitals and other medical professionals. The Company does not expect the need to provide for product returns or warrantee costs but will review such potential costs after the commencement of sales.


Educational and marketing expenses


The Company may incur costs for the education of customers on the uses and benefits of its products. The Company will expense such costs as a component of selling, general and administrative costs as such costs are incurred.


Website Costs


The Company capitalizes the costs associated with the acquisition of hardware and development tools as well as the creation of database tools in connection with the Company’s website pursuant to Statement of Position 98-1 and Emerging Issues Task Force 00-20. Other costs including the development of functionality and identification of software tools are expensed as incurred.





5


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009



3.           ACCOUNTING POLICIES (continued)


Stock-Based Compensation

 

Prior to January 1, 2006, the Company accounted for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations, and followed the minimum value disclosure provisions of Statement of Financial Accounting Standards NO. 123 (SFAS 123), Accounting for Stock-Based Compensation.  Under APB 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and the exercise price. Stock-based compensation determined under APB 25 is recognized over the option vesting period.

 

Prior to the adoption of a stock option plan adopted on February 13, 2008, the Company only issued share based compensation to consultants for goods or services. The Company accounted for these transactions under guidance for Emerging Issues Task Force Abstract No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services. Under EITF 96-18, options, warrants, and stock are recorded at their fair value on the measurement date. The Company remeasured the fair value of such instruments granted at each reporting period until performance under the consulting arrangements were completed and the measurement date was reached. The Company records the expense of such services on the estimate fair value of the equity instrument using the Black-Sholes pricing model. The initial expense is recognized over the term of the service agreement.

 

For future awards to employees, the Company will adopt the fair value provisions of the Statement of Financial Accounting Standards No. 123(R) (SFAS 123R), Share-Based Payment, which supersedes its previous accounting under APB 25. SFAS 123(R) requires the recognition of compensation expense for future stock-based compensation awards to employees. Using a fair-value-based method, for costs related to all share-based payments including stock options.  SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. All option grants valued after January 1, 2006 will be expensed on a straight-line basis over the vesting period.

 

Fair Values of Assets and Liabilities

 

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), which provides a framework for measuring fair value under GAAP. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. SFAS 157 also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels.

 

There are three general valuation techniques that may be used to measure fair value, as described below:

 

a)    Market approach – Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources;

 

b)    Cost approach – Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and

 

c)    Income approach – Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.

 




6


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009



3.           ACCOUNTING POLICIES (continued)


Financial assets and liabilities are valued using either level 1 inputs based on unadjusted quoted market prices within active markets or using level 2 inputs based primarily on quoted prices for similar assets or liabilities in active or inactive markets.  For certain long-term debt, fair value is based on present value techniques using inputs derived principally or corroborated from market data. Using level 3 inputs using management’s assumptions about the assumptions market participants would utilize in pricing the asset or liability. In the Company’s case this entailed assumptions used in pricing models for attached warrant calculations. Valuation techniques utilized to determine fair value are consistently applied.

 

The Company’s long-term debt is the only item that is subject to SFAS 157 as of March 31, 2009 as follows:

 

Other observable inputs (level 1)

  

$

923,899

  

Unobservable inputs (level 3)

  

$

172,500

  

 

Net Loss Per Share


Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is based on the weighted-average common shares outstanding during the period plus dilutive potential common shares calculated using the treasury stock method.  Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. The Company’s potential dilutive shares, which include outstanding common stock options, convertible notes payable and warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive.


The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented:

 

  

  

March 31,
2009

  

  

December 31,
2008

  

Stock options outstanding

  

  

1,050,000

  

  

  

1,707,894

  

Warrants to purchase common stock

  

  

5,610,452

  

  

  

6,460,920

  

 

Recently Issued Accounting Standards

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160, Interests in Consolidated Financial Statements - an amendment of ARB No. 51, (“SFAS 160”), that establishes and expands accounting and reporting standards for the non-controlling interest in a subsidiary. SFAS 160 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This Statement is required to be adopted by us in the first quarter of the Company's fiscal year 2009. The effect the adoption of SFAS 160 will have on the Company's financial statements will depend on the nature and size of any acquisitions the Company completes in the future.


In December 2007, the FASB issued SFAS No. 141R, Business Combinations, (“SFAS 141R”), which impacts the accounting for business combinations. The statement requires changes in the measurement of assets and liabilities required in favor of a fair value method consistent with the guidance provided in SFAS 157. Additionally, the statement requires a change in accounting for certain acquisition related expenses and business adjustments which no longer are considered part of the purchase price. Adoption of this standard is required for fiscal years beginning after December 15, 2008. Early adoption of this standard is not permitted. The statement requires prospective application for all acquisitions after the date of adoption. The effect the adoption of SFAS 141R will have on the Company's financial statements will depend on the nature and size of any acquisitions the Company completes in the future.


In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities, (“SFAS 161”), which requires enhanced disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial reporting. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not anticipate the adoption of this statement to have a material effect on its consolidated financial position and results of operations.




7


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009



3.           ACCOUNTING POLICIES (continued)

 

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (“SFAS No. 162”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not anticipate the adoption of this statement to have a material effect on its consolidated financial position and results of operations.


In May 2008, the FASB issued FASB Staff Position (FSP) No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), (“FSP 14-1”) which specifies that issuers of these instruments should separately account for the liability and equity components in a manner that reflects the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FSP 14-1 is also to be applied retrospectively to all periods presented except if these instruments were not outstanding during any of the periods that are presented in the annual financial statements for the period of adoption but were outstanding during an earlier period. The Company does not anticipate the adoption of this statement to have a material effect on its consolidated financial position and results of operations.

 

In June 2008, the FASB ratified EITF Issue 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-5”). Paragraph 11(a) of SFAS No 133, Accounting for Derivatives and Hedging Activities, (“SFAS 133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. EITF 07-5 will be effective for the first annual reporting period beginning after December 15, 2008, and early adoption is prohibited. While the Company is currently still evaluating the effects of adoption of EITF 07-5, it is expected that adoption may result in the reclassification of the Company’s warrants from equity to liabilities recorded at fair value and additionally could result in bifurcation and fair value accounting for the conversion rights embedded in the Company’s Series A preferred stock.


In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF No. 03-6-1”).  Under FSP EITF No. 03-6-1, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years, and is not expected to have a significant impact on the Company’s financial statements.

 

The Company does not believe that any other recently issued, but not yet effective accounting standards will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

Going Concern


The Company’s financial statements have been presented on a basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and assumes the Company will continue as a going concern. The Company has incurred losses since its inception, including a net loss of $420,134 for the three months ended March 31, 2009, and the Company expects to continue to incur substantial additional losses in the future, including additional development costs, costs related to clinical trials and manufacturing expenses. The Company has incurred negative cash flows from operations since inception. As of March 31, 2009, the Company had a stockholders’ deficiency of $1,169,868 and cash and cash equivalents balance of $92,542. The Company also has certain debt obligations that were not paid by their respective due dates. In these circumstances the Company believes it may not have enough cash to meet its various cash needs through June 2009 unless the Company is able to obtain additional cash from the issuance of debt or equity securities.  There is no assurance that additional funds from the issuance of equity will be available for the Company to finance its operations on acceptable terms. If adequate funds are not available, the Company may have to delay development or commercialization of products or technologies that the Company would otherwise seek to commercialize, or cease operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 




8


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009



4.           LONG-TERM DEBT

 

As of March 31, 2009 and December 31, 2008, long-term debt consists of:

 

  

  

March 31,  2009

  

  

December 31, 2008

  

  

  

 

  

  

 

  

 

 

 

 

 

 

 

 

 

On December 15, 2006 the Company entered into a Convertible debenture, in the amount of $172,500 payable to Fountainhead Capital Partners Limited (FCPL), with interest at the “Applicable Federal Rate” as defined in sec. 1274 (d) of the Internal Revenue Code, initially due June 21, 2007. The Debenture may be transferred or exchanged only in compliance with the Security Act of 1933, as amended and applicable state securities laws. The Holder is entitled at its option to convert debenture into a number of shares of common stock calculated to be equal to be ten percent of the issued and outstanding aggregate shares of the Company on the date of issuance of the Debenture. The following discloses the calculation the conversion price and the 1,979,456 conversion shares: 

  

  

  

  

  

  

  

  

 

Number of membership units outstanding at 12/21/2006  

1,110.11     

Units 

  

  

  

  

  

  

  

The note was for 10% of Units post-money (1,110.11/90%):         

1233.46

Units 

  

  

  

  

  

  

  

Fountainhead is entitled to 10% of the units equal to   

123.346

Units 

  

  

  

  

  

  

  

Each unit converted into 16,048 shares   

1,979,456   

Shares 

  

  

  

  

  

  

  


The conversion feature is subject to standard anti-dilution provisions. The Company has computed a beneficial conversion feature of $111,099 which resulted in a debt discount of such amount which is being amortized over the life of the loan to interest expense. The Company had used $0.19 per share in the computation of the beneficial conversion feature as it represents sales of private placements of the Company’s securities at the time of entering into the debenture. The Holder has the sole option to extend the due date of this debenture and has extended principal and interest payments until February 15, 2009. Currently, this debt remains unpaid.  In conjunction with the convertible debenture the Company issued a warrant to Fountainhead Capital Partners Limited to purchase 50.22 Membership Units of the Company (805,931 shares of common stock) at $.50 per share for five years. The warrant’s fair value of $0.13 per share was calculated using the Black-Scholes Valuation Model, using the following assumptions: volatility of 99%, dividend rate of 0%, approximate risk free interest rate of 4.5% and a five year warrant life. The warrant resulted in an additional debt discount of $61,401 which is being amortized over the term of the debt. In conjunction with this debt the Company also entered into an agreement with Fountain Capital Partners Limited (FCPL) which granted to FCPL an option to invest up to $1,850,000 for three years in exchange for issuing new convertible debentures due two years from the issuance of these new notes and included with the exercise of this option would be a warrant to purchase up to 3,017,409 shares at a price of $0.44 per share. The debenture is convertible up to 5,652,954 shares of common stock.  No value was assigned to the options as there was no acquired beneficial conversion feature or acquisition of the warrants. The note reflects an unamortized discount of $0 and $3,450 as of March 31, 2009 and December 31, 2008, respectively.

  

  

172,500

  

  

  

169,050

  

 




9


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009




        March 31, 2009
                      December 31, 2008
On February 15, 2008 the Company entered into a $150,000 Convertible Debenture payable to Fountainhead Capital Partners Limited, with interest at 6% per annum, due but not paid, on or before February 15, 2009. The Holder is entitled to convert all or any amount of the principal face amount of the debenture then outstanding into shares of common stock of the Company at the conversion price of $0.1230 per share, subject to adjustment and does not require bifurcation. The Company has computed a beneficial conversion feature debt discount of $81,707, which is being amortized over the life of the loan. The note reflects an unamortized discount of $0 and $10,213 as of March 31, 2009 and December 31, 2008, respectively.
                  150,000                            139,787   
 
                                                     
On February 15, 2008 the Company entered into a $500,000 Convertible Debenture, payable to Regent Private Capital, LLC, with Interest at 6% per annum, due but not paid, on or before February 15, 2009. The Holder is entitled to convert all or any amount of the principal face amount of the debenture then outstanding into shares of common stock of the Company at the Conversion price of $0.1230 per share, subject to adjustment and does not require bifurcation. The Company has computed a beneficial conversion feature debt discount of $272,358, which is being amortized over the life of the loan. Subsequently, Regent assigned the principal amount of each note to Altcar Investments and Derek Johansen. On December 15, 2008, Johansen converted $250,000 of the debenture into 2,032,520 shares of common stock. This resulted in the recognition of unamortized beneficial conversion feature debt discount attributable to the debenture of $17,023. Further, on March 23, 2009, Altcar Investments converted $100,000 of the debenture plus accrued interest into 866,867 shares of common stock. The unamortized discount on the $150,000 debt as of March 31, 2009 and $250,000 debt as of December 31, 2008 is $0 and $17,023, respectively.
                  150,000                            232,977   
 
                                                     
On April 15, 2008 the Company entered into a $150,000 Convertible Debenture payable to Fountainhead Capital Partners Limited, with interest at 6% per annum, due but not paid, on or before February 15, 2009. The Holder is entitled to convert all or any amount of the principal face amount of the debenture then outstanding into shares of common stock of the Company at the conversion price of $0.1230 per share, subject to adjustment and does not require bifurcation. The Company has computed a beneficial conversion feature debt discount of $81,707 which is being amortized over the life of the loan. The unamortized discount as of March 31, 2009 and December 31, 2008 is $3,404 and $23,831, respectively.
                  146,596                            126,169   
 
                                                     
On April 22, 2008 the Company entered into a $500,000 Convertible Debenture, payable to Regent Private Capital, LLC, with interest at 6% per annum, due on or before April 22, 2009. The Holder is entitled to convert all or any amount of the principal face amount of the debenture then outstanding into shares of common stock of the Company at the Conversion price of $0.1230 per share, subject to adjustment and does not require bifurcation. The Company has computed a beneficial conversion feature debt discount of $272,358, which is being amortized over the life of the loan. The unamortized discount as of March 31, 2009 and December 31, 2008 is $22,697 and $90,786, respectively.
                  477,303                            409,214   
 
                                                     
All discounts are being amortized on a straight line basis that approximates effective yield method under EITF 98-5.
                                                        
 
                                                     
Total long-term debt:
                  1,096,399                            1,077,197   
 
                                                     
Less current portion of debt
                  1,096,399                                    1,077,197   
 
                                                     
Long-term portion of debt
               $ —                        $ —    
 

The following is a schedule of future minimum loan payments:

Twelve months ending March 31,
                  Amount    
2010
               $ 1,122,500   
2011
                  —    
2012
                  —    
2013
                  —    
2014
                  —    
Thereafter
                  —    
Total
               $ 1,122,500   
Less debt discount
                  26,101   
 
               $ 1,096,399   
 

The Company’s long-term debt is all secured by a first security interest in all of the assets of the Company.



10


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009



5.           EQUITY 


Certain Equity Transactions


As prescribed in a previous agreement, in consideration for services provided to the Board of Directors, the Company issued 26,318 shares of its common stock to Steven Girgenti on March 23, 2009.


6.           SHARE-BASED COMPENSATION


The Company accounts for the following transactions under the guidance of Emerging Issues Task Force Abstract No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services. Under EIFT 96-18, options are recorded at their fair value on the measurement date. The Company remeasured the fair value of the options or warrants granted at each reporting period until performance under the consulting agreement was completed and the measurement date was reached. The Company expensed the fair value of the instrument granted over the requisite service period which was the term of the consulting agreement, or one year.


For employee based awards which consist only of awards made under the “Stock Option Plan” described below, the company follows the provisions of Statement of Financial Accounting Standards No. 123R (SFAS 123 R),  Share –Based Payment which requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. Under SFAS 123 R, compensation cost for employee cost for employee stock-based awards is based on the estimated grant-date fair value and recognized over the vesting period of the applicable award on a straight-line basis.  There were no employee stock options granted for the three months ended March 31, 2009.


Stock Option Plan


The Company has adopted the Vycor Medical, Inc Employee, Director, and Consultant Stock Plan as of February 13, 2008, that includes both incentive stock options and nonqualified stock options to be granted to employees, officers, and consultants, independent contractors, directors and affiliates of the Company.   The board of directors establishes the terms and conditions of all stock options grants, subject to the Plan and applicable provisions of the Internal Revenue Code.  Incentive stock options must be granted at an exercise price not less than the fair market value of the common stock on the grant date.  The options granted to participants owning more than 10% of the Company’s outstanding voting stock must be granted at an exercise price not less than 110% of the fair market value of the common stock on the grant date.  The options expire on the date determined by the board of directors, but may not extend mare than 10 years from the grant date, while incentive stock options granted to participants owning more than 10% of the Company’s outstanding voting stock expire five years from the grant date. The vesting period for employees is generally over three years.  The vesting Period for nonemployees is determined based on the services being provided.


Initial grants totaling 500,000 shares each were issued on February 13, 2008 to Kenneth T. Coviello, Chief Executive Officer and Heather N. Jensen, President at an exercise price of $.135 per share.  The options vest 33 1/3 % on each of the first, second, and third anniversary of the grant and expire February 12, 2018.  Accordingly, for the three months ended March 31, 2009, the Company recognized share-based compensation amounts of $28,920 and $28,920, for each of the respective grants.


The maximum number of shares of stock which may be delivered under the plan shall automatically increase by a number sufficient to cause the number of shares covered by the plan to equal 10% of the total number of shares of stock then outstanding on a fully diluted basis.


Stock appreciation rights may be granted either on a standalone basis or in conjunction with all or part of any other stock options granted under the plan.  As of March 31, 2009 there were no awards of any stock appreciation rights.





11


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009



6.           SHARE-BASED COMPENSATION (continued)


Consulting Agreements


The Company entered into no new consulting agreements during the three months ended March 31, 2009.  The details of the outstanding rights, options and warrants and value of such rights, options and warrants are as follows:

 

 STOCK WARRANTS:

  

Number of shares

  

  

Weighted average price per share

  

  

  

 

  

  

 

  

Balance, January 1, 2006

  

 

  

  

 

  

Granted

  

  

4,144,300

  

  

$

0.43

  

Exercised

  

  

  

  

  

  

  

  

Cancelled or expired

  

  

  

  

  

  

  

  

Outstanding at December 31, 2006

  

  

4,144,300

  

  

  

0.43

  

  

  

  

  

  

  

  

  

  

Granted

  

  

1,143,408

  

  

  

0.32

  

Exercised

  

  

  

  

  

  

  

  

Cancelled or expired

  

  

  

  

  

  

  

  

Outstanding at December 31, 2007

  

  

5,287,708

  

  

  

0.41

  

  

  

  

  

  

  

  

  

  

Granted

 

 

1,365,788

 

 

 

0.31

 

Exercised

 

 

 

 

 

 

 

 

Cancelled or expired

 

 

(192,576

)

 

 

0.24

 

Outstanding at December 31, 2008

 

  

6,460,920

  

  

$

0.39

  

 

 

 

 

 

 

 

 

 

Granted

  

  

 

  

  

  

 

  

Exercised

  

  

  

  

  

  

  

  

Cancelled or expired

  

  

(850,468

)

  

  

0.26

 

Outstanding at March 31, 2009

  

  

5,610,452

  

  

$

0.39

  

 

 STOCK OPTIONS:

  

  

  

  

  

Weighted average

  

  

  

Number of shares

  

  

exercise price per share

  

  

  

  

  

  

  

  

  

  

Balance, January 1, 2006

  

  

  

  

  

  

  

  

Granted

  

  

-

  

  

$

-

  

Exercised

  

  

  

  

  

  

  

  

Cancelled or expired

  

  

  

  

  

  

  

  

Outstanding at December 31, 2006

  

  

-

  

  

  

-

  

  

  

  

  

  

  

  

  

  

Granted

  

  

  

  

  

  

  

  

Exercised

  

  

  

  

  

  

  

  

Cancelled or expired

  

  

  

  

  

  

  

  

Outstanding at December 31, 2007

  

  

-

  

  

  

-

  

  

  

  

  

  

  

  

  

  

Granted

  

  

1,050,000

  

  

  

0.14

  

Exercised

  

  

  

  

  

  

  

  

Cancelled or expired

  

  

  

  

  

  

  

  

Outstanding at December 31, 2008

  

  

1,050,000

  

  

$

0.14

  

 

 

 

 

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

Cancelled or expired

 

 

 

 

 

 

 

 

Outstanding at March 31, 2009

 

 

1,050,000

  

  

$

0.14

 




12


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009



6.           SHARE-BASED COMPENSATION (continued)


In consideration for providing consulting services, the Company granted to GC Advisors LLC three warrants, each to purchase of 192,576 shares of the Company's common stock for a purchase price of $.24, .389, and .549 per share, respectively.  The warrants expire on January 9, 2008, 2009, and 2010, respectively and were fair valued under the Black-Scholes Model.


In consideration for being the Company's strategic business advisor, in 2007 the Company issued  a warrant to Martin Magida  to purchase up to 160,480 shares of the Company's common stock at $.24 per share. The warrant is valid from September 1, 2007 for a period of five years. This warrant was fair valued under the Black-Scholes Model and amortized over the life of the agreement.  For the three months ended March 31, 2009, $1,114 was recognized as share-based compensation in connection with this agreement.

 

In consideration for providing advisory services in 2007, the Company issued a warrant to Robert Guinta to purchase up to 160,480 shares of the Company's common stock at $.24 per share. The warrant is valid from September 1, 2007 for a period of five years. This warrant was fair valued under the Black-Scholes Model and amortized over the life of the agreement.  For the three months ended March 31, 2009, $1,114 was recognized as share-based compensation in connection with this agreement.


As of March 31, 2009, there was approximately $148,000 of total unrecognized compensation costs related to non-vested stock options awards, which are expected to be recognized over a weighted average period of 2 years.


Stock-based compensation expenses related to stock options granted to non-employees is recognized as the stock options are earned. The Company believes that the fair value of the stock options is more reliably measured than the fair value of the services received.  The fair value of the stock options granted is calculated at each reporting date, using the Black-Scholes option-pricing model, until the award vests or there is substantial disincentive for the non-employee not to perform the required services.  The following assumptions were used in calculations of the Black Scholes option pricing model:

 

Risk-free interest rates 

4 - 5 %

Expected life 

3 years

Expected dividends

0%

Expected volatility 

99%

 

Stock-based compensation expense charged to operations on options and warrants granted to the above non-employees for the three months ended March 31, 2009 is $2,229.


Expected Life.  The expected life is based on the “simplified” method described in the SEC Staff Accounting Bulletin, Topic 14: Share-Based Payment.


Volatility.  Since the Company was a private entity for most of 2007 with no historical data regarding the volatility of its common stock, the expected volatility used for 2006 and 2007 is based on volatility of similar entities, referred to as “guideline” companies. In evaluation similarity, the Company considered factors such as industry, stage of life cycle and size.

 

Risk-Free Interest Rate. The risk-free rate is based on rates approximating U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

 

Dividend Yield.  The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore, used an expected dividend yield of zero in the valuation method.

 

Forfeitures. SFAS No. 123R also requires the Company to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.  The Company uses historical data, however limited to date, to estimate pre-vesting options forfeitures and record stock-based compensation expense only for those awards that are expected to vest.  All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of awards, which are generally the vesting periods.  If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

 

The weighted-average remaining contractual life of outstanding warrants and options is two and two years, respectively.  All of the warrants outstanding are currently exercisable.




13


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009



7.           INCOME TAXES


The Company has incurred net operating losses since inception. The Company has not reflected any benefit of such net operating loss carry forward in the financial statements.  Prior to August 15, 2007 the Company was a limited liability company and losses were flowed through to the individual members, therefore the Company only has potential tax benefits from the date it became a ‘C’ corporation.


In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income.


Based on the level of historical taxable losses and projections of future taxable income (losses) over the periods in which the deferred tax assets can be realized, management currently believes that it is more likely than not that the Company will not realize the benefits of these deductible differences. Accordingly, the Company has provided a valuation allowance against the gross deferred tax assets as follows:

 

  

  

March 31,
2009

  

  

December 31,
2008

  

Gross deferred tax assets 

  

  

1,052,000

  

  

  

904,750

  

Valuation allowance 

  

  

(1,052,000

)  

  

  

(904,750

)  

Net deferred tax asset 

  

  

0

  

  

  

—

  

 

As of March 31, 2009 and December 31, 2008, the Company has estimated U.S. federal net operating loss carryforwards of approximately $3,005,000 and $2,585,000.  The federal net operating loss carryforwards expire in the years 2027 and 2028.


Federal tax laws impose significant restrictions on the utilization of net operating loss carryforwards and research and development credits in the event of a change in ownership of the Company, as defined by the Internal Revenue Code Section 382. The Company’s net operating loss carryforwards and research and development credits may be subject to the above limitations.


The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, on January 1, 2007.  Implementation of FIN 48 resulted in no adjustments to the Company’s liability for unrecognized tax benefits. As of both the date of adoption and as of December 31, 2008 there were no unrecognizable tax benefits. Accordingly, a tabular reconciliation from beginning to ending periods is not provided. The Company will classify any future interest and penalties as a component of income tax expense if incurred. To date, there have been no interest or penalties charged or accrued in relation to unrecognized tax benefits.


The Company is subject to federal and state examinations for the year 2006 forward. There are no tax examinations currently in progress.

 

8.           COMMITMENTS AND CONTINGENCIES

 

Employment and Consulting Agreements


There were no new employment or consulting agreements executed during the three months ended March 31, 2009


8.           COMMITMENTS AND CONTINGENCIES (continued)


Lease

 

The Company leases its office space on a short-term basis.  The current lease period expires June 30, 2009.  Typically, this venue has the availability for four to six month extensions for existing tenants in good standing.  Rental expense for the three months ended March 31, 2009 and 2008 were $7,653 and $5,227, respectively.





14


VYCOR MEDICAL, INC.

 NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2009



9.

SUBSEQUENT EVENTS


On April 27, 2009, the company entered into an agreement with Concordia Financial Group (“Concordia”), who will provide consulting services to the company in its efforts to raise capital.  Under this agreement, the company agrees to pay Concordia $5,000 per month plus stipulated out-of-pocket expenses until terminated by either party, with ten business day’s written notice.


On April 1, 2009, the Company executed an amendment to a convertible debenture in the amount of $172,500 payable to Fountainhead Capital Partners Limited, (“FCPC”). Under the amendment FCPC agrees to extend the maturity date of the debenture from February 15, 2009 to August 15, 2009. In consideration for the extension, the Company agrees to the modification of the conversion price from $0.08715 to $0.07545 per share, and other anti-dilution adjustments in favor of FCPC.




15




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

Forward Looking Statements


This Form 10-Q contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans and (e) our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” as well as in this Form 10-Q generally. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.

 

Any or all of our forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

 

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to publicly update any forward-looking statements, whether as the result of new information, future events, or otherwise.


Organizational History

 

We were formed as a limited liability company under the laws of the State of New York on June 17, 2005 as “Vycor Medical LLC”. On August 14, 2007, we converted into a Delaware corporation and changed our name to “Vycor Medical, Inc.” (“Delaware Corporation”). Our sole reason for conversion to the Delaware Corporation was to facilitate the raising of additional capital, as prospective investors had expressed resistance to investing in the Company as the NY LLC. At August 14, 2007, we had approximately 1,122 membership units of the NY LLC issued and outstanding. The managing members of the NY LLC determined, in their reasonable business judgment, that such units, in the aggregate, should convert to an aggregate of 17,999,999 shares of common stock of the Delaware Corporation. On this basis, we adopted a conversion ratio of 16,048 shares of common stock of the Delaware Corporation for each former unit of the NY LLC. Likewise, all conversion rights, options, warrants and any other rights to acquire units of the NY LLC (including but not limited to units issuable pursuant to the terms of the Fountainhead Bridge Loan Debenture, Fountainhead Warrant to purchase 50.22 units of the NY LLC, the Company’s Option Agreement with Fountainhead dated December 14, 2006), were converted to conversion rights, options, warrants and rights to acquire common shares of the Delaware Corporation, based on the same conversion ratio. The action authorizing the conversion was adopted by the unanimous consent of the Managing Members of the NY LLC pursuant to the terms of the NY LLC Operating Agreement.

 

Overview of Business

 

We are a developer of neurosurgical medical devices.  We have been conducting research, developing, prototyping, and producing mold development work for the Brain Access System. This product is designed to assist the neurosurgeon with brain surgery. It allows the surgeon to gain access to various regions in the brain through a working channel.

 

We are in the process of marketing our first series of products to the marketplace.  Our first product line that we introduced to the market is a new type of self retaining brain retractor called the ViewSite Brain Access System.  We started marketing the Brain Access System in September 2008 and started shipping all sizes in November 2008.  The product line consists of various port sizes and lengths to allow the surgeon to use the device for various regions of the brain and different procedures.

 



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The second product in our pipeline is the Cervical Access System, which, pending receipt of additional funding and successful market testing, is planned for launch during 2010 pending funding. Like the Brain Access System, this product is designed to assist the surgeon in cervical surgeries, allowing the surgeon to gain access to the anterior cervical surgery site.

 

We have received FDA 510(k) clearance for both our Brain Access System and Cervical Access System products. Section 510(k) of the United States Food, Drug and Cosmetic Act requires medical device manufacturers to register with the U.S. Food and Drug Administration of their intent to market a medical device at least 90 days in advance. The 510(k) submission allows the U.S. Food and Drug Administration to determine whether a device is generally equivalent to any similar product already on the market. With the FDA 510(k) clearance, we are authorized to take our products to market in the U.S. without further approvals.

 

We have also received CE Marking for our products in September 2006 and are able to sell them in member countries of the European Union. The European Medical Device Directive makes it mandatory to fulfill CE certification requirements in order to export medical devices of Class I, IIa, IIb, and III to any country within the European community.

 

We believe that our Brain Access System and Cervical Access System products will replace standard retraction devices to establish a new standard of care in neurosurgery, leading to a broad and rapid adoption of our products.


Our Products

 

Our initial product applications for the retractor technology will be in neurological surgeries involving brain and spinal access.

 

We believe our Brain Access System offers several advantages over the brain retractor systems, commonly known as ribbon or blade retractors that are metallic and non transparent. When designing the products, we felt that if we can incorporate certain features into our products, the surgeon reaction and acceptance would be favorable. We attempted to incorporate the following features:


·

gently separate delicate tissue;

·

improve surgical outcomes (reducing potential surgeon and hospital liability), for example, decreased insertion tissue trauma, less need for readjustment during surgery and minimum interface surface pressures;

·

increase surgical site access;

·

provide superior field of vision and lighting;

·

minimal invasive surgery;

 

The Brain Access System and Cervical Access System were invented by Dr. John Mangiardi. Dr. Mangiardi assigned the rights to the Brain Access System and Cervical Access System to Sawmill Trust on September 17, 2005 pursuant to an assignment agreement on the same date. Sawmill Trust then, in turn, assigned the same rights to us on September 17, 2005 pursuant to another assignment agreement dated the same date.

 

Brain Access System Products


The Brain Access System series of disposable products are used by the neurosurgeon to access the surgical site. This is done by inserting the Brain Access System through the brain tissue and then removing the Brain Access System introducer, leaving the remaining hollow working channel in place to provide the surgeon with access to the precise location desired for surgery.

 

The Brain Access System is available in multiple sizes and is a single-use product. We have designed multiple sizes and intend to add additional sizes in the future. During our design process we listed what product benefits would be of value to the neurosurgeons when using a retractor system. We then designed our product with the following intent:


•

To minimize brain disruption during surgery by utilizing a tapered forward edge;

•

To minimize venous pressure in the brain;

•

To reduce “target shift” to allow the surgeon to reach the site accurately;

•

To minimize off site healthy tissue damage;

•

To allow for accurate neuronavigational image guidance systems (“IGS”) performance;

•

To integrate with the leading surgical IGS systems such as Medtronics® and BrainLab®

•

To allow for easier positioning during surgery;

•

To reduce damage to healthy brain tissue leading to shorter post-op recovery and reduced hospital stay; and

•

To allow direct surgical visualization of brain tissue via optically transparent construction;



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The extent to which we are successful in achieving the above objectives will be judged by the acceptance of the devices in the market.


The Brain Access System products have the potential to significantly reduce brain tissue trauma resulting from the currently used retractors and standard access procedures. First, the unique design of the product minimizes the size of the brain entry access necessary for surgical procedures, and in turn the amount of brain tissue exposed. For instance, a typical brain procedure involving the removal of a 7cm cystic astrocyctoma would result in an access site (corticotomy) of approximately 20mm. However, the same procedure that was performed utilizing the Company’s Brain Access System product required a corticotomy of only 2mm.

 

Furthermore, retractors that are currently in use are metallic and non-transparent. This requires the surgical team to maintain the retracted surface, typically by packing gauze around the access edges increasing movement and pressures over a greater portion of the brain and extending overall elapsed surgery times. We believe that the Brain Access System product eliminates this process, while providing better visibility for the surgeon and lower pressures on the retracted brain tissue.

 

Product shortcomings


Our products have a few shortcomings:


•

One of the shortcomings of our products as compared to existing blade retractors is that our device diameter is fixed as opposed to variable. This gives the surgeon less flexibility once he is at the location unless he knows where he needs to go in the brain first.

•

Another shortcoming is that the diameters and lengths of our devices are set to specific measurements, which limits the surgeon to these specific sizes.

•

Depending on the case, usage of a disposable product may be viewed as costing more over time and may not be accepted by our potential customers.

 

IGS Opportunity for the Brain Access System

 

The VBAS product has the potential to significantly improve surgical acceptance and use of IGS (Image Guidance Systems) used in many surgeries, by addressing the two substantial IGS-related problems of target shifting and the lack of real-time retractor positioning data during procedures:


•

Target Shifting

 

The normal surgical procedure utilizing standard retractors in brain surgery require pulling away the healthy tissue to expose the targeted region of the brain located underneath. However, in many cases, the amount of pulling required causes the targeted area to shift away from what is shown on the IGS system. This target shifting then requires the surgeon to cause additional trauma to healthy tissue and spend additional time as the shifted target area is located and the retractor is repositioned. The VBAS system is designed to minimize or eliminate target shift, as the elliptical shape of the product distributes relatively uniform pressure on the surrounding brain tissue.


•

Real-Time Retractor Positioning Data

 

Current retractor technology (commonly known as ribbon or blade retractors) is not well integrated with IGS systems. During insertion, the surgeon typically does not have real-time data to allow visualization of retractor insertion on the IGS monitor. The VBAS product line has been designed to adapt entirely to IGS systems, such that the use of a Brain Access System unit will allow the surgeon to see on the surgical monitor, in real-time, exactly where the retractor is in relation to critical brain structures and underlying pathologies. With the IGS enabled unit, the tip of the introducer is literally the “pointer” on the IGS system.

 

We plan on offering a version of all Brain Access System models that are IGS-friendly.


Brain Access System Product Models

 

The Brain Access System products consists of two models initially, namely, TC-VBAS and EC-VBAS and any additional models in the future, each designed to allow the surgeon the choice for specific brain surgeries for various procedures. Each of these models will be manufactured in various lengths to accommodate different depths for surgical access.




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•

TC-VBAS

 

The series consist of twelve disposable products, offered in four different port diameters of 12mm, 17mm, 21mm, and 28mm and a choice of three lengths for each of 3, 5, and 7cm.


•

EC-VBAS

 

At present, this is available only in one size – 34mm x 5cm.

 

Cervical Access Products

 

The Cervical Access System products are to be used by the neurological surgeon to access the anterior cervical surgical site (the uppermost vertebrae located in the neck). This type of surgery is near very critical and delicate structures such as the larynx, esophagus and carotid artery. The shape of the Cervical Access System with the introducer lets the surgeon carefully place the device and the unique anchor screws then safely hold the access channel in place during the procedure. The clear body of the retractor allows the surgeon to see the entire field both during the insertion process as well as throughout the surgical procedure.

 

We have designed the Cervical Access System to:


•

reduce the possibility of surrounding anatomic tissue damage, which include the trachea, esophagus, carotid artery, recurrent laryngeal and sympathetic nerve;

•

minimize skin disruption with the utilization of tapered outward edges;

•

eliminate retractor induced electrocautery burn injuries because it is made with surgical grade plastic materials;

•

enable stable fixation (directly to the spinal column) in order to avoid accidental displacement and surrounding “tissue creep” and

•

allow for direct visualization of underlying anatomic structures using optically clear plastic.


Because our products have not been brought to market yet, there is no guarantee that any of the abovementioned features would prove effective and even so, be welcomed by the consumer.

 

 Cervical Access System Product Models

 

The plan for the Cervical Access System series will consist of disposable products. The widths are able to accommodate from one to three levels of the cervical spine, from 26mm to 54mm. We are also evaluating a telescoping design that would reduce the number of sizes necessary and a version that incorporates a distractor. Further research and development is needed for a market-ready product.


Brain Retractors

 

Future plans include developing additional Brain Access System retractors to allow for access to various regions of the brain. This allows us to target more diverse neurosurgical specialties. We anticipate research and developing work starting in 2009 and estimate a research and development budget of $1,000,000 for 2009 and 2010, pending future funding.

 

Our plans are to eventually include retractor lines that are designed for the requirements of specific surgical applications like aneurisms, tumors and endoscopic work.




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Intellectual Property

 

Patent Applications

 

Below is a table setting out the status and particulars of our patent applications:


Filing Date  

  

Application No.

  

Country

  

Title

  

Status

June 22, 2005  

  

60/692,959  

  

US — provisional

  

Surgical Access

Instruments for Use

with Spinal or Orthopedic

Surgery (Cervical)  

  

Converted to PCT

June 22, 2006  

  

PCT/US06/24243  

  

PCT  

  

Surgical Access

Instruments for Use with

Spinal or Orthopedic

Surgery (Cervical)  

  

Entered National Phase

June 22, 2005  

  

11/155,175  

  

US — utility  

  

Surgical Access

Instruments for Use with

Delicate Tissues (Brain)  

  

Pending

November 27, 2006  

  

PCT/US06/61246  

  

PCT  

  

Surgical Access

Instruments for Use with

Delicate Tissues (Brain)  

  

Pending — National Phase Entry on May 27, 2009

June 22, 2006  

  

    

  

Canada  

  

Surgical Access

Instruments for Use with

Spinal or Orthopedic

Surgery  

  

Pending

June 22, 2006  

  

06785312.7  

  

Europe  

  

Surgical Access

Instruments for Use with

Spinal or Orthopedic

Surgery  

  

Pending

June 22, 2006  

  

    

  

India  

  

Surgical Access

Instruments for Use with

Spinal or Orthopedic

Surgery  

  

Pending

June 22, 2006  

  

    

  

Israel  

  

Surgical Access

Instruments for Use with

Spinal or Orthopedic

Surgery  

  

Pending

June 22, 2006  

  

    

  

Japan  

  

Surgical Access

Instruments for Use with

Spinal or Orthopedic

Surgery  

  

Pending

December 20, 2007

  

11/993,280  

  

US  

  

Surgical Access

Instruments for Use with

Spinal or Orthopedic

Surgery  

  

Pending

 

The above-indicated patent applications were invented by Dr. John Mangiardi, who assigned the rights to the Sawmill Trust on September 17, 2005 under the terms of an assignment agreement between the parties. The Sawmill Trust then, in turn, assigned the same rights to us on September 17, 2005 pursuant to an assignment agreement between the Sawmill Trust and the Company dated the same date. The consideration for such assignment was the issuance of one-third of the initial equity of our predecessor (Vycor Medical, LLC) and the inclusion of certain rights in favor or the Sawmill Trust, including but not limited to certain supermajority voting rights and the right to appoint members of the board of managers, which were incorporated in the Operating Agreement of such entity. Dr. Mangiardi’s wife, Pascale Mangiardi, who is a director of the Company, was the Settlor of the Sawmill Trust and Dr and Mrs. Mangiardi are both beneficiaries of the Sawmilll Trust. The Sawmill Trust is an irrevocable trust and A. Mitchell Green is the sole Trustee and has sole voting power and investment power with respect to the assets of the trust.


Trademarks

 

VYCOR MEDICAL is a registered trademark and VYCOR VIEWSITE is both pending registration as a trademark with the United States Patent Office



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Results of Operations

 

The following table presents the dollar amount changes from period to period of the line-items included in our Statements of Operations for the three months ended March 31, 2009 and 2008:

  

  

  

Three months ended:

  

2009

  

  

2008

  

  

Increase/

(Decrease)

  

  

  

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

  

 

  

  

 

  

  

 

  

  

  

Sales

  

$

70,088

  

  

$

-

  

  

$

70,088

  

  

  

Cost of Goods Sold

  

  

9,503

  

  

  

-

  

  

  

9,503

  

  

  

Gross Profit

  

  

60,585

  

  

  

-

  

  

  

60,585

  

  

  

Operating expenses: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

  

  

-

  

  

  

6,333

  

  

  

(6,333

) 

  

  

General and administrative

  

  

341,965

  

  

  

478,628

  

  

  

(136,663

) 

  

  

Operating loss

  

  

(281,380

)

  

  

(484,961

)

  

  

203,581

 

  

  

Interest Expense

  

  

138,754

  

  

  

93,499

  

  

  

45,255

  

  

  

Net loss

  

$

(420,134

)

  

$

(578,460

)

  

$

158,326

 

  

  


Comparison of the Three Months Ended March 31, 2009 to the Three Months Ended March 31, 2008

 

Revenue:

 

The company recorded revenue of $70,088, after posting no revenue from the sale of our products in the three months ended March 31, 2009. The company has acquired sufficient inventory, affected a meaningful product launch, and has sold various quantities of each of the twelve sizes of its Brain Access System product to both domestic and international customers.

 

Research and Development Expenses:

 

Research and development expenses decreased from $6,333 to $0 for the three months ended March 31, 2009.  This decrease can be attributed to the ceasing of research and development activities on the existing product line.

 

General and Administrative Expenses:

 

General and administrative expenses decreased by 28.55%, or $136,663 from $478,628 for the three months ended March 31, 2009 to $341,965 for the three months ended March 31, 2009. The decrease was attributable to the elimination of certain nonrecurring legal and consulting costs related to the company’s capital transactions in 2008.

 

Interest Expense (Income):

 

The company recorded interest expense of $138,754 and $93,499 for the three months ended March 31, 2009 and 2008, respectively. The increase is related to the company’s increased principal balances on convertible debt agreements, generating both increased accrued interest and increased recognition of debt discounts.  For the three months ended March 31, 2009 and 2008, interest expense was offset with interest income of $201 and $1,704, respectively.


Liquidity and Capital Resources

 

Liquidity

 

On February 15, 2008, the company entered into a transaction with Regent Private Capital, LLC, whereby Regent Private Capital, LLC agreed to invest $1,000,000 in the purchase of the company’s Convertible Debentures—such investment to be made in two tranches of $500,000 each.  These Convertible Debentures have a term of one year and are convertible into shares of the our common stock at a price of approximately $.123 per share. If fully converted, the Convertible Debentures would result in the issuance of 8,129,529 shares to Regent Private Capital, LLC.  On April 22, 2008 Regent Private Capital assigned $250,000 of the principal amount of the Convertible Debentures representing the first tranche to Derek Johannson and $100,000 of the principal amount of the Convertible Debentures to Altcar Investments Ltd.  On December 2, 2008 Derek Johannson converted $250,000 of his debenture to 2,032,520 shares of common stock of the company. On March 23, 2009, Altcar Investments converted $100,000 of the debenture plus accrued interest of $6,625 into 866,867 shares of common stock.



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For the three months ended March 31, 2009, the Company issued common stock valued at $5,000 for consulting services.  During the same period, share-based compensation of $60,069 was recognized relating to previously executed consulting agreements and the vesting of employee-held options.


For the three months ended March 31, 2009, the Company realized a reduction in cash and cash equivalents of $103,596.  This amount was entirely attributable to cash used in operating activities, as there was no cash used in or provided by either investing or financing transactions during the period.

 

The company believes that its existing cash, cash equivalents and available borrowings will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for approximately 2 months. No assurances can be made that this will be the case or that assumptions regarding sales and expenses underlying this belief will be accurate. The company will need to seek additional funding through public or private financings or other arrangements during this period and thereafter. Adequate funds may not be available when needed or may not be available on terms favorable to us. If additional funds are raised by issuing equity securities, dilution to existing stockholders may result. If the company raises additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If funding is insufficient at any time in the future, the company may be unable to develop or enhance our products, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

 Going Concern


Our independent auditors have added an explanatory paragraph to their audit issued in connection with the financial statements for the period ended December 31, 2008, relative to our ability to continue as a going concern. This means that there is substantial doubt that the company can continue as an ongoing business for the next 12 months. The financial statements do not include any adjustments that might result from the uncertainty about our ability to continue our business. The company has incurred losses since inception, including net losses of $2,381,295 for the year ended December 31, 2008 and $420,134 for the three months ended march 31, 2009, and expects to incur substantial additional losses, including additional development costs, costs related to clinical trials and manufacturing expenses. The company has incurred negative cash flows from operations since inception. As of March 31, 2009 and December 31, 2008, the company had stockholders’ deficiencies of $1,169,868 and $921,427, respectively, and cash and cash equivalents balance of $92,592 and $196,138 at March 31, 2009 and December 31, 2008, respectively. The Company also has certain debt obligations that were not paid by their respective due dates. Since there is no record of profitable operations, there is high a possibility that you may suffer a complete loss of your investment.  Because our auditors have issued a going concern opinion, there is substantial uncertainty we will continue operations in which case you could lose your investment.  In these circumstances the Company believes it may not have enough cash to meet its various cash needs through June 2009 unless the Company is able to obtain additional cash from the issuance of debt or equity securities.  There is no assurance that additional funds from the issuance of equity will be available for the Company to finance its operations on acceptable terms. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.


Recently Issued Accounting Pronouncements


The Company has adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective, is not anticipated to have a material effect on the financial position or results of operations of the Company.


Critical Accounting Policies and Estimates

 

Uses of estimates in the preparation of financial statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Currently, the Company estimates depreciation, amortization of intangible assets, and the fair values of options and warrants.

 



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The most critical estimates that impact the financial position and results of operation of the company have to do with the methodologies and assumptions used in determining the fair value of various debt estimates. These include assumptions associated with warrants, options and stock issued in conjunction with such debt. Additionally, the Black-Scholes option pricing model and its related assumptions of volatility, risk free interest, stock price also significantly impacted share based compensation and the results of operations.

 

Research and Development

 

The Company expenses all research and development costs as incurred. For the three months ended March 31, 2009 and 2008, the amounts charged to research and development expenses were $ 0 and $6,333, respectively.


Cash and cash equivalents

 

The Company considers all highly liquid debt investments with original maturities of three months or less when purchased to be cash equivalents. The carrying amounts approximate fair market value because of the short maturity. The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company's accounts at these institutions may, at times, exceed the federally insured limits. The Company has not experienced any losses in such accounts.

 

Fair Values of Financial Instruments

 

At March 31, 2009 and 2008, fair values of cash and cash equivalents, accounts payable, convertible promissory notes, and options and warrants approximate their carrying amount due to the short period of time to maturity and various fair value model calculations.

 

Property and equipment

 

The Company records property and equipment at cost and calculates depreciation using the straight-line method over the estimated useful life of the assets, which is estimated to be between three and ten years.

 

Income taxes

 

The Company accounts for income taxes in accordance with SFAS 109, Accounting for Income Taxes.  This statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

 

Patents

 

The Company capitalizes legal and related costs associated with the establishment of patents for its products. Costs associated with the development of the patented item or process are charged to research and development costs as incurred. The costs associated with the establishment of the patents are amortized over the life of the patent.

 

The Company reviews existing patents as well as those in the approval process for impairment on an annual basis using a present value, cash flow method pursuant to Statement of Financial Accounting Standards 142, Goodwill and Other Intangible Assets. Since the Company’s patents are either very new or still in the process of approval, the Company does not believe that any impairment of these amounts exists.

 

Revenue Recognition

 

The Company records revenue at the time, pursuant to Staff Accounting Bulletin Topic 13(a), that a completed contract for the sale exists, title transfers to the buyer and the product is invoiced and shipped to the customer. The Company intends to sell a surgical access system which has already cleared the U.S. FDA 510(k) review process.  It has been granted a 510(k) number to market to hospitals and other medical professionals.  The Company does not expect the need to provide for product returns or warrantee costs but will review such potential costs after the commencement of sales.


Educational and marketing expenses

 

The Company may incur costs for the education of customers on the uses and benefits of its products. The Company will expense such costs as a component of selling, general and administrative costs as such costs are incurred.




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable


ITEM 4. CONTROLS AND PROCEDURES


(a)          Disclosure Controls and Procedures

 

The Company’s management, with the participation of its principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were adequate and effective.

 

(b)         Changes in Internal Controls

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


PART II

ITEM 1. LEGAL PROCEEDINGS

We are subject from time to time to litigation, claims and suits arising in the ordinary course of business. As of March 31, 2009, we were not a party to any material litigation, claim or suit whose outcome could have a material effect on our financial statements.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  



ITEM 3 DEFAULTS UPON SENIOR SECURITIES    


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


ITEM 5. OTHER INFORMATION

Not Applicable.   


ITEM 6. EXHIBITS


Index to Exhibits

  

31.1

Certification of Chief Executive Officer under Rule 13(a) - 14(a) of the Exchange Act.

31.2

Certification of Chief Financial Officer under Rule 13(a) - 14(a) of the Exchange Act.

32

Certification of CEO and CFO under 18 U.S.C. Section 1350



24




SIGNATURES


In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 15, 2009.

 

 

VYCOR MEDICAL, INC.

 

 

 

 

 

 

By:

/s/ Kenneth T. Coviello 

 

 

 

Kenneth T. Coviello

 

 

 

Chief Executive Officer and Director (Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

By: 

/s/ Heather N. Jensen 

 

 

 

Heather N. Jensen 

 

 

 

President, Founder and Director (Principal Executive Officer) 

 



25