SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D. C. 20459




FORM 10-Q




(Mark One)x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2010oro
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from                          to




COMMISSION FILE NUMBER 0-20970




VISION-SCIENCES, INC.


(Exact name of registrant as specified in its charter)




Delaware
13-3430173(State or other jurisdiction of

incorporation or organization)
(IRS Employer

Identification Number)40 Ramland Road South, Orangeburg, NY
10962(Address of principal executive offices)
(Zip Code)




(845) 365-0600


(Registrant’s telephone number, including area code)







(Former name, former address, and


former fiscal year if changed since last report)




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 requirement for the past 90 days. Yes x    No o




Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, 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 x  No  o





Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, or smaller reporting company. See definitions of “accelerated filer”, “large 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 x




Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).         Yes o    No x




Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 11, 2010




Common Stock, par value of $0.01
37,593,056(Title of Class)
(Number of Shares)


VISION-SCIENCES, INC.


TABLE OF CONTENTS




Part I.
Financial InformationItem 1.
Financial StatementsCondensed Consolidated Balance Sheets
3Condensed Consolidated Statements of Operations
4Condensed Consolidated Statement of Stockholders’ Equity
5Condensed Consolidated Statements of Cash Flows
6Notes to Condensed Consolidated Financial Statements
7Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13Item 3.
Quantitative and Qualitative Disclosures about Market Risk
20Item 4.
Controls and Procedures
20Part II.
Other InformationItem 1.
Legal Proceedings
21Item 1A.
Risk Factors
21Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
21Item 3.
Defaults Upon Senior Securities
21Item 4.
(Removed and Reserved)
21Item 5.
Other Information
21Item 6.
Exhibits
22Signatures
23


2


PART I—FINANCIAL INFORMATION




Item 1: Financial Statements




Vision-Sciences, Inc. and Subsidiaries


Condensed Consolidated Balance Sheets


(In thousands, except per share amounts)




June 30,


March 31,2010


2010ASSETS

(unaudited)Current assets:Cash and cash equivalents

$
2,305


$
2,540Short-term investments


497



447Accounts receivable, net of allowance for doubtful accounts of $117and $347, respectively


1,780



1,147Inventories, net


3,915



4,175Prepaid expenses and other current assets


309



886Total current assets


8,806



9,195Property and equipment, at cost:Machinery and equipment


3,816



3,584Furniture and fixtures


225



225Leasehold improvements


357



3574,398



4,166Less—accumulated depreciation and amortization


2,425



2,237Total property and equipment, net


1,973



1,929Other assets, net of accumulated amortization of $85 and $84,respectively


78



79Deferred debt cost, net of accumulated amortization of $58and $31, respectively


356



296Total assets

$
11,213


$
11,499LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Capital lease obligations

$
46


$
55Accounts payable


832



867Accrued expenses


795



984Accrued compensation


1,047



1,107Total current liabilities


2,720



3,013Line of credit—related party


4,500



2,500Capital lease obligations, net of current portion


51



61Total liabilities


7,271



5,574Commitments and Contingencies (Note 6)Stockholders’ equity:Preferred stock, $0.01 par value—Authorized—5,000 sharesissued and outstanding—none


-



-Common stock, $0.01 par value—Authorized—50,000 sharesissued and outstanding—37,593 shares and 36,856 sharesat June 30, 2010 and March 31, 2010, respectively


376



369Additional paid-in capital


82,447



81,968Accumulated deficit


(78,881
)


(76,412
)Total stockholders’ equity


3,942



5,925Total liabilities and stockholders’ equity

$
11,213


$
11,499





See accompanying notes to condensed consolidated financial statements.




3




Vision-Sciences, Inc. and Subsidiaries


Condensed Consolidated Statements of Operations


(In thousands, except per share amounts)


(Unaudited)




Three Months EndedJune 30,2010


2009Net sales

$
2,632


$
3,318Cost of sales


1,943



2,530Gross profit


689



788Selling, general, and administrative expenses


2,478



2,482Research and development expenses


598



786Loss from operations


(2,387
)


(2,480
)Interest income


2



50Interest expense


(55
)


-Debt cost expense


(27
)


-Other, net


1



(28
)Loss before provision for income taxes


(2,466
)


(2,458
)Income tax provision


3



10Net loss

$
(2,469
)

$
(2,468
)Net loss per common share - basic and diluted

$
(0.07
)

$
(0.07
)Shares used in computing net lossper common share


36,856



36,854


See accompanying notes to condensed consolidated financial statements.




4




Vision-Sciences, Inc. and Subsidiaries


Condensed Consolidated Statements of Stockholders’ Equity


(In thousands, except per share amounts)


(Unaudited)




Common Stock


Additional





TotalNumber


$
0.01


Paid-in


Accumulated


Stockholders’of Shares


Par Value


Capital


Deficit


EquityBalance at March 31, 2009

36,818


$
368


$
80,031


$
(63,988
)

$
16,411Exercise of stock options

38



1



42



-



43Issuance of stock warrants

-



-



327



-



327Stock-based compensation expense

-



-



1,568



-



1,568Net loss

-



-



-



(12,424
)


(12,424
)Balance at March 31, 2010

36,856



369



81,968



(76,412
)


5,925Issuance of stock warrants

-



-



87



-



87Issuance of restricted stock awards

737



7



-



-



7Stock-based compensation expense

-



-



392



-



392Net loss

-



-



-



(2,469
)


(2,469
)Balance at June 30, 2010

37,593


$
376


$
82,447


$
(78,881
)

$
3,942
  See accompanying notes to condensed consolidated financial statements.


5




Vision-Sciences, Inc. and Subsidiaries


Condensed Consolidated Statements of Cash Flows


(In thousands)


(Unaudited)




Three Months EndedJune 30,2010


2009Cash flows from operating activities:Net loss

$
(2,469
)

$
(2,468
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


189



150Stock-based compensation expense


392



321Provision for (gains) losses on accounts receivable


(178
)


12Debt cost expense


27



-Loss on sale of investments


-



28Changes in assets and liabilities:Accounts receivable


(455
)


(697
)Inventories


38



(37
)Prepaid expenses and other current assets


577



44Other assets


-



(3
)Accounts payable


(35
)


150Accrued expenses


(189
)


(114
)Accrued compensation


(60
)


(152
)Net cash used in operating activities


(2,163
)


(2,766
)Cash flows from investing activities:Purchase of short-term investments


(149
)


-Proceeds from short-term investment sales/maturities


99



981Purchase of property and equipment


(10
)


(183
)Net cash (used in) provided by investing activities


(60
)


798Cash flows from financing activities:Advance on line of credit—related party


2,000



-Payments of capital leases


(19
)


(9
)Proceeds from issuance of restricted stock awards


7



-Exercise of stock options


-



41Net cash provided by financing activities


1,988



32Net decrease in cash and cash equivalents


(235
)


(1,936
)Cash and cash equivalents from continuing operations, beginning of period

$
2,540


$
1,975Cash and cash equivalents from discontinued operations, beginning of period

$
-


$
8Cash and cash equivalents from discontinued operations, end of period

$
-


$
11Cash and cash equivalents from continuing operations, end of period

$
2,305


$
36Supplemental disclosure of cash flow information:Cash paid during the period for:Interest

$
4


$
14Income taxes

$
21


$
10Non-cash financing activities:Transfers of inventory to fixed assets for use as demonstration equipment

$
222


$
-Issuance of stock warrants with revolving loan agreement

$
87


$
-
  See accompanying notes to condensed consolidated financial statements.


6




Vision-Sciences, Inc. and Subsidiaries


Notes to Condensed Consolidated Financial Statements


(Unaudited, in thousands except per share amounts)




Note 1.   Basis of Presentation




Vision-Sciences, Inc. and Subsidiaries (the “Company” – which may be referred to as “our”, “us” or “we”) have prepared the consolidated financial statements included herein according to generally accepted accounting principles in the United States of America (“U.S. GAAP”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include, in the opinion of management, all adjustments that we consider necessary for a fair presentation of such information.  We have condensed or omitted certain information and footnote disclosures normally included in financial statements pursuant to those rules and regulations. We believe, however, that our disclosures are adequate to make the information presented not misleading. The results for the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year. Please read these condensed consolidated financial statements in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.





Note 2.   The Company and Summary of Significant Accounting Policies





Company Overview





We design, develop, manufacture, and market products for endoscopy - the science of using an instrument, known as an endoscope to provide minimally invasive access to areas not readily visible to the human eye. Our products are sold throughout the world through direct sales representatives in the United States and independent distributors for the rest of the world. Our largest geographic markets are the United States and Europe.





We were incorporated in Delaware, and are the successor to operations originally begun in 1987. In December 1990, Machida Incorporated (“Machida”) became our wholly-owned subsidiary, which designs, manufactures, and sells borescopes to a variety of users, primarily in the aircraft engine manufacturing and aircraft engine maintenance industries. Another one of our subsidiaries, Vision Sciences Ltd., an Israeli corporation, was established in 1998, but has been inactive since the fiscal year ended March 31, 2002. We own the registered trademarks Vision Sciences®, Slide-On®, EndoSheath®, and The Vision System®. Not all products referenced in this report are approved or cleared for sale, distribution, or use.





Liquidity and Capital Resources





We have incurred losses since our inception, and losses are expected to continue through at least fiscal years 2011 and 2012. We have funded the losses principally with cash flow from operations, funding of advances under a three-year $5.0 million revolving loan agreement (the “Loan”) with our Chairman, Lewis C. Pell (the “Lender”), proceeds from public and private equity financings, payments from Medtronic related to the sale of certain assets related to our ENT EndoSheath technology business, and the sale of other assets. We believe that our cash, short-term investments, and $0.5 million of capital available, subject to certain conditions, under the Loan will be sufficient to fund our working capital, capital expenditures, and future operating losses until September 30, 2011. However, if our performance expectations fall short (including regaining sales or profits historically generated from Medtronic) or our expenses exceed expectations, we will need to either secure additional financing or reduce expenses or a combination thereof; our failure to do so under these circumstances would have a material adverse impact on our financial condition. There can be no assurance that any contemplated external financing will be available on terms acceptable to us, if at all, or we will be able to reduce our expenses.





Summary of Significant Accounting Policies





Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable, based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are any differences (other than nominal differences) between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments, and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:





• Revenue recognition


• Stock-based compensation expense


• Allowances for doubtful accounts


• Inventory obsolescence reserves


• Other contingencies


7
  The accompanying condensed consolidated financial statements reflect the accounts of the Company. All significant inter-company accounts and transactions have been eliminated in consolidation.





Accounting Standards Updates Not Yet Effective





In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (“ASC Update 2010-06”), an update to ASC 820. This update provides amendments to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASC Update 2010-06 became effective for us with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 measurements, which will become effective for us with the reporting period beginning April 1, 2011 (our fiscal year 2012). We do not expect that the provisions of the update will have a material effect on our results of operations, financial position, or liquidity.





Note 3.   Basic and Diluted Net Loss per Common Share





Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding. For all periods presented, the diluted net loss per common share is the same as basic net loss per common share, as the inclusion of other shares of stock issuable pursuant to stock options and warrants would be anti-dilutive. Stock options, warrants, and restricted stock of 7,996,944 shares and 6,095,870 shares as of June 30, 2010 and 2009, respectively, were excluded from the calculation of fully diluted loss per share since their inclusion would have been anti-dilutive.





Note 4.   Inventories





Inventories are stated at the lower of cost or market using the first-in, first-out (“FIFO”) method and consist of the following:




June 30,


March 31,2010


2010Raw materials

$
3,185


$
3,330Work in process


384



269Finished goods


346



576$
3,915


$
4,175
  Raw materials include components purchased from independent suppliers. Most purchased components are available from multiple sources, with the exception of certain key components which are supplied to us by key suppliers, with whom we have long-term supply arrangements, but no long-term supply agreements.





Note 5.   Financial Instruments





Short-Term Investments





We classify investments with original maturities of greater than 90 days in certificates of deposit as short-term investments. We intend to hold these investments to maturity. Our short-term investments are carried at amortized cost in our condensed consolidated balance sheets.





The following table summarizes these securities classified as held to maturity.


June 30, 2010


March 31, 2010Amortized





AmortizedHeld to maturity less than one year:

Cost


Fair Value


Cost


Fair ValueCertificates of deposit

$
497


$
497


$
447


$
446Total short-term investments

$
497


$
497


$
447


$
446
  Fair Value Measurements





The carrying amounts reflected in our condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses, accrued compensation, and capital lease obligations approximate fair value due to their short-term nature. The fair value of the line of credit is based on its demand value, which is equal to its carrying value.


8
  Note 6.   Commitments and Contingencies





Line of Credit – Related Party





On November 9, 2009, we entered into a Loan with the Lender. Any amounts drawn against the Loan (an “Advance”) accrue interest at a per annum rate of 7.5%. The Lender receives an availability fee equal to a per annum rate of 0.5% on the unused portion of the Loan calculated based on the difference between the average annual principal amount of the outstanding Advances under the Loan and the maximum advance of $5.0 million. The availability of advances under the Loan is subject to customary conditions. Subject to the terms of the Loan, we will be required to prepay all amounts outstanding under the Loan in the event of a change of control of the Company and we will be required to prepay part or all of the amounts outstanding in the event we secure other financing or consummate a sale or license of assets, in each case resulting in net proceeds of $5.0 million or greater.





In connection with the Loan, the Lender received  a five-year warrant (the “Initial Warrant Shares”) to purchase up to 272,727 shares of our common stock at an exercise price of $1.375 per share (representing 7.5% warrant coverage, or approximately 0.7% of our outstanding common stock), which was immediately vested upon issuance. In addition, we issued a second five-year warrant (the “Additional Warrant Shares”) to purchase up to an additional 378,788 shares of our common stock at an exercise price of $1.65 per share (representing up to an additional 12.5% warrant coverage, or approximately 1.0% of our outstanding common stock) which vests at the time that each Advance is made in an amount equal to (i) the product of the amount of the Additional Warrant Shares multiplied by (ii) a ratio, (A) the numerator of which shall be the amount of the new Advance and (B) the denominator of which shall be $5.0 million.





On the date of issuance, the fair value of the Initial and Additional Warrant Shares was approximately $221 thousand and $249 thousand, respectively. We defer costs associated with securing a line-of-credit or revolving loan agreement over the applicable term. These costs are amortized as debt cost expense in our condensed consolidated statement of operations. Accordingly, we recorded the $221 thousand associated with the Initial Warrant Shares as a deferred debt cost asset with a corresponding amount as additional paid-in capital. The cost is being amortized on a straight-line basis over the three-year term of the Loan.





The following table summarizes Advances taken on the Loan and warrant issuances:




Number of

Fair Value ofAmount of

Warrant Shares

Warrant SharesMonth

Advance

Vested

on Date VestedJune 2010

$2.0 million

151,515

$87 thousandMarch 2010

$2.5 million

189,394

$106 thousandNovember 2009

n/a

272,727

$221 thousand


We recorded the fair value associated with the Additional Warrant Shares as a deferred debt cost asset with a corresponding amount as additional paid-in capital. The cost is being amortized over the remaining life of the Loan using the effective interest method. We recorded approximately $27 thousand as debt cost expense related to the amortization of the deferred debt cost for the Initial and Additional Warrant Shares in our condensed consolidated statement of operations in the three months ended June 30, 2010.





At June 30, 2010, we had $4.5 million in outstanding borrowings under the Loan, which is reflected as line of credit – related party on our condensed consolidated balance sheet. The $5.0 million revolving loan expires in November 2012, at which time we must repay all borrowings under the Loan. We recorded approximately $51 thousand as interest expense related to the availability fee and accrued interest on outstanding borrowings in our condensed consolidated statement of operations during the three months ended June 30, 2010.





Note 7.   Stock-Based Awards


Stock Option Plans





We maintain the following equity incentive plans:





·
The 2000 Stock Incentive Plan (the “2000 Plan”), approved by stockholders in August 2000, authorized 4,500,000 shares of common stock covering several different types of awards, including stock options, restricted shares, stock appreciation rights, and performance shares.


·
The 2007 Stock Incentive Plan (the “2007 Plan”), approved by stockholders in August 2007, authorized 4,000,000 shares of common stock covering several different types of awards, including stock options, restricted shares, stock appreciation rights, and other stock-based awards. Our Board approved, subject to stockholder approval at our upcoming annual meeting, an amendment to the 2007 Plan to increase the authorized shares issuable under the plan to 5,000,000 shares of common stock.


·
The 2003 Director Option Plan (the “2003 Plan”), approved by stockholders in July 2003 and amended in August 2008, authorized 450,000 shares of common stock covering the annual automatic grant of 10,000 stock options per outside director per year. The 2003 Plan also provides for granting newly elected outside directors a one-time grant of 10,000 stock options.




9




The stock option plans provide that options may be granted at an exercise price of 100% of fair market value of our common stock on the date of grant, may be exercised in full or in installments, at the discretion of the Board of Directors, and must be exercised within ten years from date of grant. We recognize stock-based compensation expense on a straight-line basis over the requisite service period based on fair values, generally four years. We use historical data to estimate expected employee behaviors related to option exercises and forfeitures and included these expected forfeitures as a part of the estimate of stock-based compensation expense as of the grant date.





Stock-Based Compensation Expense


We account for stock-based awards issued to employees in accordance with the provisions of ASC 718 (Topic 718, Compensation – Stock Compensation). We recognize stock-based compensation expense on a straight-line uniform basis over the service period of the award, which is generally four years for employees. Stock-based awards issued to consultants are accounted for in accordance with the provisions of ASC 718 and ASC 505-50 (Subtopic 50 “Equity-Based Payments to Non-Employees” of Topic 505, Equity). Options granted to consultants are periodically revalued as the options vest, and are recognized as an expense over the related period of service or the vesting period, whichever is longer.





Stock-based compensation expense for the three months ended June 30, 2010 and 2009 was recorded in our condensed consolidated statement of operations as follows:


Three Months Ended

June 30,2010


2009Cost of sales

$
76


$
73Selling, general, and administrative expenses


286



180Research and development expenses


30



68Total stock-based compensation expense

$
392


$
321


The fair value of the stock options granted was estimated on the date of grant using a Black-Scholes valuation model that used the weighted average assumptions noted in the following table. The risk-free interest rate assumption we use is based upon United States Treasury interest rates appropriate for the expected life of the awards. The expected life (estimated period of time that we expect employees, consultants and directors to hold their stock options) was estimated based on historical rates for two group classifications, (i) employees and consultants and (ii) outside directors. Expected volatility was based on historical volatility of our stock price for a period equal to the stock option’s expected life and calculated on a daily basis. The expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Under the provisions of ASC 718, members of the Board are considered employees for calculation of stock-based compensation expense.


Three Months EndedJune 30,2010

2009Risk-free interest rate
3.08%

2.30%Expected life (in years)
6.58

6.23Expected volatility
83%

87%Expected dividend yield
--

--
  The following table summarizes stock options activity for the three months ended June 30, 2010:


WeightedWeighted


AverageNumber


Exercise


Average


Remainingof Shares


Price Range


Exercise Price


Contractual LifeOutstanding at March 31, 2010

6,264,685


$
0.79 – $5.10


$
1.91



5.84Granted

382,500


$
0.96 – $1.03



0.97Exercised

-



–



–Canceled

(39,036
)

$
1.22 – $3.73



1.64Outstanding at June 30,  2010

6,608,149


$
0.79 – $5.10


$
1.86



5.87Vested and expected to vest at June 30, 2010

5,732,040


$
0.79 – $5.10


$
1.77



5.48Exercisable at June 30, 2010

4,322,470


$
0.79 – $5.10


$
1.64



4.42


At June 30, 2010, unrecognized stock-based compensation expense related to stock options was approximately $1.8 million and is expected to be recognized over a weighted average period of approximately 2.5 years.





10





The weighted average fair value of options granted during the three months ended June 30, 2010 and 2009 was $0.72 and $0.88 per share, respectively.





The total intrinsic value (the excess of the market price over the exercise price) was approximately $25 thousand for stock options outstanding, $16 thousand for stock options exercisable, and $23 thousand for stock options vested and expected to vest as of June 30, 2010. The total intrinsic value for stock options exercised during the three months ended June 30, 2009 was approximately $6 thousand. There were no stock options exercised during the three months ended June 30, 2010.





We do not expect to realize any tax benefits from future disqualifying dispositions, if any, because we currently have a full valuation allowance against our deferred tax assets.





Stock Warrants





The following table summarizes stock warrants activity related to the Loan with the Lender for the three months ended June 30, 2010:


WeightedNumber


Averageof Shares


Exercise PriceNonvested at March 31, 2010


189,394


$
1.65Granted


-



–Vested


(151,515
)


1.65Forfeited


-



–Nonvested at June 30, 2010


37,879


$
1.65Vested at June 30, 2010


613,636


$
1.53
  At June 30, 2010, unrecognized debt cost expense related to the Initial and Additional Warrant Shares was approximately $356 thousand, which is expected to be recognized over a weighted average period of approximately 2.4 years.





Restricted Stock





We granted 737,280 shares of restricted stock to management during the three months ended June 30, 2010. The restricted stock awards vest after certain Company (revenue and loss from operations) and individual milestones are met followed by a three-year graded vesting schedule. If the Company milestones are not met, regardless of whether the individual meets his or her performance milestones, the restricted stock awards are forfeited. The following table summarizes restricted stock activity for the three months ended June 30, 2010:


WeightedNumber


Averageof Shares


Grant PriceNonvested at March 31, 2010


-



–Granted


737,280


$
0.97Vested


-



–Forfeited


-



–Nonvested at June 30, 2010


737,280


$
0.97Vested at June 30, 2010


-



–
  At June 30, 2010, unrecognized stock-based compensation expense related to nonvested awards was approximately $690 thousand, which is expected to be recognized over a weighted average period of approximately 3.7 years.


11
  Note 8. Segment Information





We have two reportable segments, medical and industrial. Each of these operating segments has unique characteristics.





Our medical segment designs, manufactures and sells our advanced line of endoscopy-based products, including our state-of-the-art flexible endoscopes, and our Slide-On EndoSheath technology referred to as a sheath or EndoSheath disposable, for a variety of specialties and markets.





Our industrial segment, through our wholly-owned subsidiary Machida, designs, manufactures, and sells borescopes to a variety of users, primarily in the aircraft engine manufacturing and aircraft engine maintenance industries. A borescope is an instrument that uses optical fibers for the visual inspection of narrow cavities.  Our borescopes are used to inspect aircraft engines, casting parts and ground turbines, among other items.





Management evaluates the revenue and profitability performance of each of our product lines to make operating and strategic decisions. We have no intersegment revenue.





The following table presents key financial highlights, by reportable segments:


Three months ended June 30,

Medical


Industrial


Adjustments *


Consolidated2010Net sales to external customers

$
2,119


$
513


$
-


$
2,632Gross profit


522



167



-



689Operating loss


(2,300
)


(87
)


-



(2,387
)Interest expense, net


(53
)


-



-



(53
)Depreciation and amortization


185



4



-



189Stock-based compensation expense


352



40



-



392Total assets


10,927



2,297



(2,011
)


11,213Expenditures for property and equipment


10



-



-



102009Net sales to external customers

$
2,605


$
713


$
-


$
3,318Gross profit


440



348



-



788Operating (loss) income


(2,616
)


136



-



(2,480
)Interest income, net


50



-



-



50Depreciation and amortization


145



5



-



150Stock-based compensation expense


307



14



-



321Total assets


18,207



2,272



(3,224
)


17,255Expenditures for property and equipment


183



-



-



183June 30,* Adjustments


2010



2009Intercompany eliminations

$
(1,239
)

$
(1,810
)Investment in subsidiaries


(772
)


(1,414
)Total assets

$
(2,011
)

$
(3,224
)
  12
  Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations





Forward Looking Statements





This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in such statements. Such factors include, but are not limited to, further weakening of economic conditions that could adversely affect the level of demand for our products; our ability to satisfactorily distribute our ENT endoscopes without an arrangement with Medtronic; pricing pressures, including cost-containment measures which could adversely affect the price of, or demand for, our products; availability of parts on acceptable terms; our ability to design new products and the success of such new products; changes in foreign exchange markets; changes in financial markets and changes in the competitive environment. Examples of forward-looking statements include statements about expectations about future financial results, future products and future sales of new and existing products, future expenditures, and capital resources to meet anticipated requirements. Generally, words such as “expect” “believe”, “anticipate”, “may”, “will”, “plan”, “intend”, “estimate”, “could”, and other similar expressions are intended to identify forward-looking statements. The forward-looking statements are based on our future plans, strategies, projections and predictions and involve risks and uncertainties, and our actual results may differ significantly from those discussed in the forward-looking statements. Factors that might cause such a difference could include the availability of capital resources; the availability of third-party reimbursement; government regulation; the availability of raw material components; our ability to satisfactorily distribute our ENT endoscopes without an arrangement with Metronic; our dependence on certain distributors and customers; competition; technological difficulties; general economic conditions and other risks detailed in this Quarterly Report on Form 10-Q and any subsequent periodic filings we make with the Securities and Exchange Commission (“SEC”). While we believe the assumptions underlying such forward-looking statements are reasonable, there can be no assurance that future events or developments will not cause such statements to be inaccurate. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement. We do not undertake an obligation to update our forward-looking statements to reflect future events or circumstances.





Registered Trademarks, Trademarks and Service Marks





Vision-Sciences, Inc. owns the registered trademarks Vision Sciences®, Slide-On®, EndoSheath®, and The Vision System®. Not all products referenced in this report are approved or cleared for sale, distribution, or use.





Executive Summary





We design, develop, manufacture, and market products for endoscopy – the science of using an instrument, known as an endoscope - to provide minimally invasive access to areas not readily visible to the human eye. We operate in two segments, medical and industrial. Our medical segment designs, manufactures, and sells our advanced line of endoscopy-based products, including our state-of-the-art flexible fiber and video endoscopes and our Slide-On EndoSheath technology, for a variety of specialties and markets. Our industrial segment, through our wholly-owned subsidiary, Machida, Inc. (“Machida”), designs, manufactures, and sells borescopes to a variety of users, primarily in the aircraft engine-manufacturing and aircraft engine-maintenance industries. A borescope is an instrument that uses optical fibers for the visual inspection of narrow cavities.





Medical Segment Areas





Within our medical segment we target four main areas for our fiber and video endoscopes and our EndoSheath technology: ENT (ear, nose, and throat), urology, gastroenterology (“GI”), and pulmonology. Within the ENT area, we manufacture ENT endoscopes and, for the past three fiscal years, had sold these scopes exclusively to Medtronic Xomed, Inc., the ENT subsidiary of Medtronic, Inc. (“Medtronic”) for use by ENT physicians. On February 11, 2010, we announced that Medtronic will no longer serve as the distributor for our ENT endoscopes effective April 1, 2010. Since April 1, 2010, we have sold our ENT endoscopes through our direct sales force in the U.S. and through distributors internationally. We manufacture our TNE (trans-nasal esophagoscopy) endoscopes and market them to ENT and GI physicians. Within the urology area, we manufacture, market, and sell our cystoscopes and EndoSheath technology to urologists and other urology-gynecology related physicians.  Within the GI area, we manufacture, market, and sell our TNE scopes and EndoSheath technology to GI physicians, primary care physicians, and others with a GI focus as part of their practice. We manufacture, market, and sell our recently released bronchoscope (an endoscope that allows detailed viewing of the lungs) and EndoSheath technology for bronchoscopy to pulmonologists, oncologists, thoracic surgeons, and other pulmonology-related physicians.


13
  Value Proposition and Strategy





We believe our technology delivers significant value to our customers – doctors, clinics and hospitals – through reduced capital, staff and service costs, and increased patient throughput, practice revenue, and profitability. Our EndoSheath technology allows our customers to buy fewer endoscopes to service their patients and enables them to schedule more patient appointments in a single day. Our single-use EndoSheath technology provides a sterile barrier between patients and our reusable endoscopes, eliminating the need for time-consuming reprocessing routines necessary with conventional endoscopes. Our endoscopes are therefore typically ready for the next procedure in ten minutes, unlike conventional endoscopes which may take from 45 minutes to a day to reprocess. We believe our EndoSheath technology is the solution to the challenges and problems with conventional flexible endoscopes.  By offering a technology that provides simpler and quicker endoscope reprocessing and sterility derived from use of a single-use disposable sheath, we have removed the limitations of conventional flexible endoscopy.





Our current strategic focus is to transform ourselves from a research and development-focused company to a sales and marketing-driven Company, with the primary goal of increasing top-line revenue and margins.  We intend to do this by:





·
Growing our direct sales force in the U.S. and enhancing our international distribution network;


·
Expanding our downstream marketing efforts to end customers, including expanding our communications, advertising and branding;


·
Increasing our clinical study activity in order to have peer-reviewed papers published which outline the benefits of our products;


·
Targeting teaching hospitals and academic institutions as potential customers and reference and training centers;


·
Leveraging our existing technology platform to explore new potential products and procedures in markets where we currently sell; and


·
Exploring potential distribution arrangements with strategic partners.





New Product Releases





We continue to enhance our current family of videoscopes and improve and refine their manufacturing. With respect to our fiberscope line of products, in the first quarter of fiscal 2011, we launched our 4000 Series bronchoscope which is inserted down the mouth or nose into the lungs, providing visualization of the lungs and the ability to perform a variety of diagnostic and therapeutic procedures.





Line of Credit – Related Party





On November 9, 2009, we entered into a three-year $5.0 million revolving loan agreement (the “Loan”) with our Chairman, Lewis C. Pell (the “Lender”). Any amounts drawn against the Loan (an “Advance”) accrue interest at a per annum rate of 7.5%. The Lender receives an availability fee equal to a per annum rate of 0.5% on the unused portion of the Loan calculated based on the difference between the average annual principal amount of the outstanding Advances under the Loan and the maximum advance of $5.0 million. The availability of advances under the Loan is subject to customary conditions. Subject to the terms of the Loan, we will be required to prepay all amounts outstanding under the Loan in the event of a change of control of the Company and we will be required to prepay part or all of the amounts outstanding in the event we secure other financing or consummate a sale or license of assets, in each case resulting in net proceeds of $5.0 million or greater.





In connection with the Loan, the Lender received  a five-year warrant (the “Initial Warrant Shares”) to purchase up to 272,727 shares of our common stock at an exercise price of $1.375 per share (representing 7.5% warrant coverage, or approximately 0.7% of our outstanding common stock), which was immediately vested upon issuance. The second five-year warrant (the “Additional Warrant Shares”) to purchase up to an additional 378,788 shares of our common stock at an exercise price of $1.65 per share (representing up to an additional 12.5% warrant coverage, or approximately 1.0% of our outstanding common stock) vests at the time that each Advance is made in an amount equal to (i) the product of the amount of the Additional Warrant Shares multiplied by (ii) a ratio, (A) the numerator of which shall be the amount of the new Advance and (B) the denominator of which shall be $5.0 million.





On the date of issuance, the fair value of the Initial and Additional Warrant Shares was approximately $221 thousand and $249 thousand, respectively. We defer costs associated with securing a line-of-credit or revolving loan agreement over the applicable term. These costs are amortized as debt cost expense in our condensed consolidated statement of operations.





We took Advances of $2.0 million and $2.5 million in June 2010 and March 2010, respectively. At June 30, 2010, we had $4.5 million in outstanding borrowings under the Loan, which is reflected as line of credit – related party on our condensed consolidated balance sheet. The $5.0 million revolving loan expires in November 2012, at which time we must repay all borrowings under the Loan.


14
  Results of Operations





Three months ended June 30, 2010 compared to the three months ended June 30, 2009 (in thousands, except percentages)





Net Sales





Net sales decreased $0.7 million, or 21%, in the first quarter of fiscal 2011 to $2.6 million compared to $3.3 million in the first quarter of fiscal 2010. During the first quarter of fiscal 2011, our medical segment’s net sales of $2.1 million decreased by $0.5 million, or 19%, primarily attributable to lower sales to Medtronic of our fiberscopes ($0.6 million). Our industrial segment’s net sales of $0.5 million decreased by $0.2 million, or 28%, primarily attributable to lower sales of our borescopes ($0.2 million) compared to the same period last year.





In the medical segment, we track sales of endoscopes and EndoSheath disposables by market. We also track sales of peripherals and accessories which can be sold to more than one market. Sales by segment, market, and by category for the three months ended June 30, 2010 and 2009 were as follows:


Three Months EndedJune 30,Market/Category

2010


2009


Difference


PercentageENT and TNE

$
434


$
1,187


$
(753
)


-63
%Urology


945



738



207



28
%Bronchoscopy


417



196



221



113
%Repairs, peripherals, and accessories


323



484



(161
)


-33
%Total medical sales


2,119



2,605



(486
)


-19
%Borescopes


366



560



(194
)


-35
%Repairs


147



153



(6
)


-4
%Total industrial sales


513



713



(200
)


-28
%Net sales

$
2,632


$
3,318


$
(686
)


-21
%


Medical Segment




Medical Segment – ENT and TNE Markets





Sales to the ENT and TNE markets include both our ENT and TNE endoscopes and EndoSheath disposables and were as follows:


Three Months Ended

June 30,ENT/TNE Market

2010


2009


Difference


PercentageEndoscopes

$
422


$
1,158


$
(736
)


-64
%Slide-On EndoSheaths


12



29



(17
)


-59
%Total ENT/TNE market

$
434


$
1,187


$
(753
)


-63
%




15




Medical Segment – Urology Market





Sales to the urology market include urology endoscopes and EndoSheath disposables and were as follows:


Three Months Ended

June 30,Urology Market

2010


2009


Difference


PercentageEndoscopes

$
482


$
372


$
110



30
%Slide-On EndoSheaths


463



366



97



27
%Total urology market

$
945


$
738


$
207



28
%


Net sales to the urology market increased $0.2 million, or 28%, in the first quarter of fiscal 2011 to $0.9 million compared to $0.7 million in the first quarter of fiscal 2010. The increase in net sales was primarily attributable to higher sales of our fiberscopes ($0.1 million) and EndoSheath disposables ($0.1 million).





Medical Segment – Bronchoscopy Market





Sales to the bronchoscopy market include bronchoscopy endoscopes and EndoSheath disposables and were as follows:




Three Months Ended

June 30,Bronchoscopy Market

2010


2009


Difference


PercentageEndoscopes

$
394


$
182


$
212



116
%Slide-On EndoSheaths


23



14



9



64
%Total bronchoscopy market

$
417


$
196


$
221



113
%


Net sales to the bronchoscopy market increased $0.2 million, or 113%, in the first quarter of fiscal 2011 to $0.4 million compared to $0.2 million in the first quarter of fiscal 2010. The increase in net sales was primarily attributable to higher sales of our videoscopes ($0.1 million) and digital processing units, a component of our videoscope product line ($0.1 million).





Medical Segment – Repairs, Peripherals, and Accessories





Net sales of repairs, peripherals, and accessories decreased $0.2 million, or 33%, in the first quarter of fiscal 2011 to $0.3 million compared to $0.5 million in the first quarter of fiscal 2010. The decrease was primarily attributable to lower sales volume of peripherals and accessories for our ENT endoscopes ($0.2 million).





Industrial Segment





Net sales of industrial products of $0.5 million decreased $0.2 million, or 28%, in the first quarter of fiscal 2011 compared to the same period last year. The decrease was primarily attributable to lower sales of our borescopes ($0.2 million). This segment’s products are mature, and therefore, we expect future sales to remain relatively flat.


16
  Gross Profit (Net Sales Less Cost of Sales)




Gross profit from our two reportable segments was as follows:


Three Months Ended

June 30,Gross Profit

2010


2009


Difference


PercentageMedical

$
522


$
440


$
82



19
%As percentage of net sales


25
%


17
%


8
%Industrial


167



348



-181



-52
%As percentage of net sales


33
%


49
%


-16
%Gross profit

$
689


$
788


$
(99
)


-13
%Gross margin percentage


26
%


24
%


2
%


Gross profit decreased $0.1 million, or 13%, in the first quarter of fiscal 2011 to $0.7 million from $0.8 million in the first quarter of fiscal 2010, primarily attributable to lower sales ($0.7 million). Gross margin percentage increased 2% in the first quarter of fiscal 2011 to 26% of net sales from 24% of net sales in the first quarter of fiscal 2010. The higher gross margin percentage was primarily attributable to lower scrap inventory in the first quarter of fiscal 2011 compared to the same period last year ($0.1 million, or 2% gross margin percentage impact).


Gross Profit – Medical Segment





Gross profit in our medical segment increased $0.1 million, or 19%, in the first quarter of fiscal 2011 to $0.5 million from $0.4 million in the first quarter of fiscal 2010, primarily attributable to a higher gross margin percentage (up 8%). Gross margin percentage increased 8% in the first quarter of fiscal 2011 to 25% of net sales from 17% of net sales in the first quarter of fiscal 2010. The higher gross margin percentage was primarily attributable to lower scrap inventory in the first quarter of fiscal 2011 compared to the same period last year ($0.1 million, or 3% gross margin percentage impact on our medical segment gross profit).


Gross Profit – Industrial Segment


Gross profit in our industrial segment decreased $0.2 million, or 52%, in the first quarter of fiscal 2011 to $0.2 million from $0.3 million in the first quarter of fiscal 2010, primarily attributable to lower sales ($0.2 million) and a lower gross margin percentage (down 16%). Gross margin percentage decreased 16% in the first quarter of fiscal 2011 to 33% of net sales from 49% of net sales in the first quarter of fiscal 2010. The lower gross margin percentage was primarily attributable to higher manufacturing supplies expense and unfavorable purchase price variance ($0.1 million, or 12% gross margin percentage impact on our industrial segment gross profit).





Operating Expenses





Total operating expenses decreased $0.2 million, or 6%, in the first quarter of fiscal 2011 to $3.1 million compared to $3.3 million in the first quarter of fiscal 2010. Selling, general, and administrative (“SG&A”) expenses were flat while research and development (“R&D”) expenses decreased $0.2 million, or 24%, compared to the same period last year.





Operating expenses, by segment, were as follows:


Three Months Ended

June 30,Operating Expenses

2010


2009


Difference


PercentageSG&A expensesMedical

$
2,224


$
2,270


$
(46
)


-2
%Industrial


254



212



42



20
%Total SG&A expenses


2,478



2,482



(4
)


0
%R&D expensesMedical


598



786



(188
)


-24
%Industrial


-



-



-



-Total R&D expenses


598



786



(188
)


-24
%Total operating expenses

$
3,076


$
3,268


$
(192
)


-6
%
  17


SG&A Expenses – Medical Segment





SG&A expenses in our medical segment decreased $46 thousand, or 2%, in the first quarter of fiscal 2011 to $2.2 million, primarily attributable to lower bad debt expense as a result of the collection of fully reserved accounts receivable ($190 thousand), partially offset by higher expenses for vacation pay ($90 thousand) and attending more trade shows and conventions ($47 thousand).





SG&A Expenses – Industrial Segment





SG&A expenses in our industrial segment increased $42 thousand, or 20%, in the first quarter of fiscal 2011 to $0.3 million, primarily attributable to higher stock-based compensation expense ($28 thousand).





R&D Expenses – Medical Segment





R&D expenses in our medical segment decreased $188 thousand, or 24%, in the first quarter of fiscal 2011 to $0.6 million, primarily attributable to lower manufacturing overhead allocations ($98 thousand) and lower stock-based compensation expense ($38 thousand).





R&D Expenses – Industrial Segment





There were no material R&D expenses incurred by our industrial segment during the first quarter of fiscal 2011 or 2010.





Other (Expense) Income





Other (expense) income was as follows:


Three Months Ended

June 30,Other (Expense) Income

2010


2009


Difference


PercentageInterest income

$
2


$
50


$
(48
)


-96
%Interest expense


(55
)


-



(55
)


n/m
*Debt cost expense


(27
)


-



(27
)


n/m
*Other, net


1



(28
)


29



104
%Other (expense) income

$
(79
)

$
22


$
(101
)


-459
%


______________________


* Not meaningful





Interest Income





Interest income decreased $48 thousand, or 96%, in the first quarter of fiscal 2011 primarily attributable to lower cash and short-term investments balances.





Interest Expense





Interest expense increased $55 thousand in the first quarter of fiscal 2011 primarily attributable to the interest associated with the Advances of $4.5 million on the Loan.





Debt Cost Expense





In the first quarter of fiscal 2011, we recorded debt cost expense of $27 thousand associated with the issuance of the Initial and Additional Warrant Shares.





Other, Net





Other, net increased $29 thousand, or 104%, in the first quarter of fiscal 2011 primarily attributable to a loss on the sale of investments of $28 thousand that was recorded in the first quarter of fiscal 2010, which was not repeated in the current fiscal year.




18





Net Loss





Net loss was as follows:


Three Months Ended

June 30,Net Loss

2010


2009


Difference


PercentageLoss before provision for income taxes

$
(2,466
)

$
(2,458
)

$
(8
)


0
%Income tax provision


3



10



(7
)


-70
%Net loss

$
(2,469
)

$
(2,468
)

$
(1
)


0
%


Loss Before Provision for Income Taxes





Loss before provision for income taxes remained flat at $2.5 million in the first quarter of fiscal 2011 compared to the same period last year.





Income Tax Provision





We recorded a provision for state income taxes of $3 thousand and $10 thousand in the first quarter of fiscal 2011 and 2010, respectively.





Net Loss





Net loss remained flat at $2.5 million in the first quarter of fiscal 2011 compared to the same period last year.





Liquidity and Capital Resources





At June 30, 2010, our principal source of liquidity was working capital of approximately $6.1 million, including $2.8 million in cash and short-term investments. Our cash and cash equivalents decreased $0.2 million during the first quarter of fiscal 2011 as compared to $1.9 million in the first quarter of fiscal 2010. The lower decrease was primarily attributable to the proceeds from an Advance on the Loan with our Chairman during the first quarter of fiscal 2011 ($2.0 million), which was not available to us in the first quarter of fiscal 2010.





In the first quarter of fiscal 2011, we used $2.2 million of net cash in our operating activities compared to $2.8 million in the first quarter of fiscal 2010. The lower cash used in operations was primarily attributable to the receipt of a carryback refund claim for an alternative minimum tax net operating loss during the first quarter of fiscal 2011 ($0.4 million).





In the first quarter of fiscal 2011, we used $0.1 million of net cash in our investing activities compared to $0.8 million provided from our investing activities in the first quarter of fiscal 2010. The decrease was primarily attributable to reduced proceeds yielded from sales and maturities of our short-term investments ($0.9 million).





In the first quarter of fiscal 2011, we provided $2.0 million of net cash from our financing activities compared to $32 thousand in the first quarter of fiscal 2010. The increase was primarily attributable to the proceeds from an Advance on the Loan during the first quarter of fiscal 2011 ($2.0 million).





We have incurred losses since our inception, and losses are expected to continue through at least fiscal years 2011 and 2012. We have funded the losses principally with cash flow from operations, funding of advances under the Loan, proceeds from public and private equity financings, payments from Medtronic related to the sale of certain assets related to our ENT EndoSheath technology business, and the sale of other assets. We believe that our cash, short-term investments, and $0.5 million of capital available, subject to certain conditions, under the Loan will be sufficient to fund our working capital, capital expenditures, and future operating losses until September 30, 2011. However, if our performance expectations fall short (including regaining sales or profits historically generated from Medtronic) or our expenses exceed expectations, we will need to either secure additional financing or reduce expenses or a combination thereof, and in such instance, the failure to do so would have a material adverse impact on our financial condition. There can be no assurance that any contemplated external financing will be available on terms acceptable to us, if at all, or we will be able to reduce expenses.





Off-Balance Sheet Arrangements





We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.


19
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk





We are a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, and are not required to provide the information required by this item.





Item 4.  Controls and Procedures





Disclosure Controls and Procedures





We have evaluated, under the supervision and with the participation of our senior management, including our Interim Chief Executive Officer (“Interim CEO”) and Chief Financial Officer (“CFO”), the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010. Based upon the foregoing, our Interim CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2010.





Changes in Internal Controls Over Financial Reporting





There have been no changes in our internal controls over financial reporting during the three months ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.


20
  PART II—OTHER INFORMATION





Item 1.  Legal Proceedings




None




Item 1A.  Risk Factors




There have been no material changes from the information discussed in Part I, Item 1A. Risk Factors, on page 19 of our Annual Report on Form 10-K for the year ended March 31, 2010, except for the information discussed below. You should carefully consider the risks and uncertainties we discussed in our Form 10-K and the risks described below in this quarterly report before deciding to invest in, or retain, shares of our common stock. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, operating results, or liquidity could be materially harmed.





We have a history of operating losses and we may not achieve or maintain profitability in the future





We have incurred substantial operating losses since our inception and there can be no assurance that we will achieve a profitable level of operations in the future. We anticipate a negative cash flow during fiscal years 2011 and 2012, because of spending for research and development, increasing our global network of independent sales representatives and distributors, investing in a direct sales force for the North American market, general business operations, and capital expenditures. As of June 30, 2010, we had cash and cash equivalents, including short-term investments, totaling approximately $2.8 million. We expect that our current balance of cash, short-term investments, and $0.5 million of capital available, subject to certain conditions, under the Loan will be sufficient to fund our operations until September 30, 2011. However, if our performance expectations fall short (including regaining sales or profits historically generated from Medtronic) or our expenses increase, we will need to either secure additional financing or reduce expenses or a combination thereof, and in such instance, the failure to do so would have a material adverse impact on our financial condition. There can be no assurance that any contemplated external financing will be available on terms acceptable to us, if at all.





Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds




N/A




Item 3.  Defaults Upon Senior Securities




N/A




Item 4.  (Removed and Reserved)




N/A





Item 5.  Other Information





N/A


21


Item 6.  Exhibits





Exhibits31.1

Certifications of Interim Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32

Certification of Interim Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.


22


SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




VISION-SCIENCES, INC.Date: August 11, 2010
/s/ Warren Bielke

Warren Bielke

Interim Chief Executive Officer (Duly Authorized Officer)Date: August 11, 2010
/s/ Katherine L. Wolf

Katherine L. Wolf

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)





23




VISION-SCIENCES, INC.





EXHIBIT INDEX





Exhibit                      Description of Exhibit





31.1
Certifications of Interim Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2
Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32
Certification of Interim Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.