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LCDX > SEC Filings for LCDX > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for LUCID INC


9-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes. In addition to historical information, some of the information in this discussion and analysis contains forward-looking statements reflecting our current expectations and involves risk and uncertainties. For example, statements regarding our expectations as to our plans and strategy for our business, future financial performance, expense levels and liquidity sources are forward-looking statements. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under "Risk Factors" in

Part I, Item 1A in our Annual Report on Form 10-K for the year ended December
31, 2012, as updated in Part II, Item 1A in this Quarterly Report on Form 10-Q.

Overview

We are a medical device company that designs, manufactures and sells non-invasive cellular imaging devices enabling physicians to image and diagnose skin disease in real time without an invasive or surgical biopsy. Devices using our Rapid Cell ID technology allow physicians to detect and diagnose skin disease, including basal cell carcinoma, melanoma, and inflammatory and pigmentary disorders. Rapid Cell ID technology offers physicians the option to non-invasively diagnose, monitor and follow-up the non-invasive treatment of basal cell carcinoma, and includes the capacity to visualize the margins of the disease prior to surgery, improving patient outcomes. We have developed an integrated platform of tools, including the VivaScopeŽ 1500, VivaScopeŽ 2500 and VivaScopeŽ 3000 Rapid Cell ID Imagers along with our telepathology service that can be used by doctors, surgeons, and research laboratories. Our tools are already in use by doctors and researchers in major academic hospitals as well as at pharmaceutical and large cosmetic companies.

Our telepathology server, when connected to a physician's VivaScope imager, transfers images from a physician's office or operating room to another physician, pathologist or other diagnostic reader for near real-time diagnosis and reporting. In addition, the telepathology server stores images and pathology reports as a part of a patient's HIPAA compliant permanent, electronic, medical record increasing efficiency and reducing costs for medical institutions compared to current histology record retention processes.

We have devoted substantially all of our resources to the development of our Rapid Cell ID technology and telepathology service, which expenses have included research and development, conducting clinical investigations for our product candidates, protecting our intellectual property and the general and administrative support of these operations. While we have generated revenue through product sales, we have funded our operations largely through an initial public equity offering and multiple rounds of private debt and equity financings. We have never been profitable and we reported net losses of approximately $2.3 million and $5.7 million for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, we had an accumulated stockholders' deficit of approximately $9.9 million. We expect to incur operating losses for the foreseeable future as we invest substantial resources to promote the commercialization, and attempt to achieve widespread adoption, of our products. We will need to raise additional capital in the fourth quarter of 2013 and beyond. Adequate additional funding may not be available to us on acceptable terms, or at all. We expect that research and development expenses and sales and marketing expenses will increase along with general and administrative costs, as we grow and operate as a public company. We will need to generate significant revenues to achieve profitability and we may never do so.

Our revenues primarily consist of the sale of our products and services, primarily VivaScopes, as well as an immaterial amount of revenue from maintenance and support services. We recognize product revenue when evidence of an agreement exists, title has passed (generally upon shipment) or services have been rendered. When product sales do not include installation or training, such as for all distributor sales and many direct sales, revenue is recognized upon shipment. Certain direct sales contracts require installation at the customer's location prior to acceptance. As such, revenue recognition on these contracts is delayed until all aspects of delivery, including installation, are complete. In addition, should the contract include training, revenue recognition is delayed until training is complete.

Our Rapid Cell ID technology platform includes:

? In-Vivo Confocal Imagers. The VivaScope 1500 and the VivaScope 3000 (handheld device) confocal systems are cleared with a FDA 510(k) to acquire, store, retrieve, display and transfer in-vivo images of tissue, including blood collagen and pigment, in exposed unstained epithelium and the supporting stroma for review by physicians to assist in forming a clinical judgment. We designed our VivaScope System to support the capture of: (i) clinical images of the patient; (ii) images of the patient's lesions; and (iii) confocal images of the patient's lesions that can be evaluated at the point of care or transmitted over our HIPAA compliant telepathology network to a pathologist.

? Ex-Vivo Confocal Imagers. The VivaScope 2500 produces electro-optically enlarged images of unstained and unsectioned excised surgical tissue for medical purposes. The VivaScope 2500 is a Class I medical device and is exempt from FDA 510(k). We are developing the VivaScope 2500 confocal imager for the rapid imaging of tissue that has been surgically excised from the body. We expect these devices, which are intended to require little or no tissue preparation to render images similar to those obtained using traditional histology techniques, will streamline the practice of conventional laboratory pathology for excised tissue analysis.

? Telepathology. Our telepathology server is a Digital Imaging and Communications in Medicine (DICOM) standard compliant medical grade image server. The DICOM standard, established and in use since 1993, is a global technology standard for all aspects of the communication of medical images and is used in virtually all hospitals world-wide, ensuring that every hospital and medical imaging center is a potential customer. Our telepathology server is registered with the FDA as a Class I medical image device, which categorizes it as a radiology diagnostic device, for the storage, transfer and retrieval of images between physicians and diagnostic readers, typically pathologists.

During the first quarter of 2012, we began a program to enhance the functionality of our existing In-Vivo Confocal Imagers (the "2012 Enhancement Program") which was substantially completed by September 30, 2012. During the 2012 Enhancement Program we redesigned many optical and electrical components within our in-vivo confocal imagers to increase speed and functionality. Our redesigned products generate images of the highest level of optical quality with greater reliability and repeatability. We have also improved the user interface with a touch-screen monitor and an ergonomic redesign of the handheld device. During the 2012 Enhancement Program, sales of our existing products slowed, as our customers waited to place orders for the redesigned products.

Reimbursement

We have retained the services of a medical reimbursement firm, Scott Taylor & Associates, which has commenced discussions with the third party private payers in an effort to obtain positive coverage decisions and routine reimbursement.

A skin biopsy is typically performed by a dermatologist. We have designed our VivaScope and telepathology system to facilitate the detection of skin disease which we believe may over time make medical practices more productive by shifting physician procedures from surgical biopsies to excising lesions known to be cancerous as determined by confocal imaged optical biopsies.

The Company remains optimistic that it will ultimately receive third party private payer reimbursement, although the Company does not know what the timing of such reimbursement might be or if the reimbursement amount will be deemed adequate by the physicians and patients.

Emerging Growth Company Status

We are an "emerging growth company", or "EGC" as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies" including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, from which we are currently exempt as a smaller reporting company, and stockholder approval of any golden parachute payments not previously approved in connection with a transaction resulting in a change of control. We expect to take advantage of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and the stock price may be more volatile.

While we have not yet done so, Section 107 of the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

We could remain an "emerging growth company" for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period. Please see Part II , Item 1A Risk Factors.

Results of Operations

Three and Six Months Ended June 30, 2013 and 2012

We reported a net loss of $1.3 million or $(0.15) per share for the three month period ended June 30, 2013 as compared to a consolidated net loss of $2.3 million or $(0.30) per share for the three month period ended June 30, 2012. Decreased net losses for the three months ended June 30, 2013 resulted primarily from decreases in general and administrative costs as well as engineering, research and development expenses, partially offset by a decrease in income resulting from the fair value adjustment of warrants. We reported a net loss of $2.3 million or $(0.28) per share for the six month period ended June 30, 2013 as compared to a consolidated net loss of $5.7 million or $(0.73) per share for the six month period ended June 30, 2012. Decreased net losses for the six months ended June 30, 2013 resulted from increased sales and an overall decrease in operating expenses as compared to the six months ended June 30, 2012.

The following presents a more detailed discussion of our operating results:

Revenues. For the three months ended June 30, 2013 and 2012, we recorded sales of our products of $0.5 million and $0.6 million, respectively. The decrease was primarily attributed to decreases in sales of $0.2 million in Latin America and $0.1 million in Asia, offset by an increase in sales of $0.2 million in Europe. For the six months ended June 30, 2013 and 2012, we recorded sales of our products of $1.6 million and $0.9 million, respectively. The increase was primarily attributed to increases in sales of $0.3 million in North America, $0.3 million in Europe and $0.2 million in Asia. During 2012, we began a significant enhancement program to increase the speed and functionality of our VivaScope confocal imagers which was substantially completed by September 30, 2012. We believe that sales of our existing products were negatively impacted for the first three quarters of 2012 primarily because we informed our key distributors at the end of 2011 about the 2012 Enhancement Program.

Percentages of total sales by geographic region are as follows:

                                  Three months Ended                                           Six months Ended
                                       June 30,                                                    June 30,
                          2013                          2012                          2013                          2012
                    Product                       Product                       Product                       Product
                     Sales            %            Sales            %            Sales            %            Sales            %
                 (in millions)                 (in millions)                 (in millions)                 (in millions)
North America   $           0.1        27 %   $           0.1        14 %   $           0.5        28 %   $           0.2        26 %
Europe                      0.3        50 %               0.1        23 %               0.6        41 %               0.3        37 %
Asia                        0.1        23 %               0.2        36 %               0.4        24 %               0.2        20 %
Latin America                 -         0 %               0.2        27 %               0.1         7 %               0.2        17 %
Total           $           0.5       100 %   $           0.6       100 %   $           1.6       100 %   $           0.9       100 %

Cost of revenue. For each of the three months ended June 30, 2013 and 2012, we incurred cost of revenue of $0.6 million. As a percentage of product sales, cost of revenue was 113% and 107% for the three months ended June 31, 2013 and 2012, respectively. For the three months ended June 30, 2013, cost of revenue included a charge of $0.1 million to increase our warranty reserve related to specific products under warranty which were sold prior to our 2012 Enhancement Program. Based upon the increased functionality of our new enhancement products, we continue to expect that our new products will incur a lower rate of warranty charges. For the six months ended June 30, 2013 and 2012, we incurred cost of revenue of $1.3 million and $1.1 million, respectively. The increase in absolute dollars of cost of sales reflects a significant increase in sales compared to the six months ended June 30, 2012. As a percentage of product sales, cost of revenue was 85% and 124% for the six months ended June 31, 2013 and 2012, respectively.

General and administrative expenses. General and administrative expenses consist primarily of salaries and benefits, professional fees, including those associated with being a public company, occupancy costs for our facilities, insurance costs and general corporate expenses. For the three months ended June 30, 2013, general and administrative expenses totaled $0.4 million, a decrease of $0.7 million from the same period last year. The decrease resulted primarily from a $0.4 million decrease in severance costs, a $0.2 million decrease in stock-based compensation costs and a $0.1 million decrease in legal and accounting fees. For the six months ended June 30, 2013, general and administrative expenses totaled $0.9 million, a decrease of $1.7 million from the same period last year. The decrease resulted primarily from a $0.6 million decrease in severance costs, a $0.5 million decrease in stock-based compensation costs and a $0.4 million decrease in legal and accounting fees.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and benefits and general marketing expenses. For each of the three months ended June 30, 2013 and 2012, sales and marketing expenses totaled $0.3 million. For the six months ended June 30, 2013, sales and marketing expenses totaled $0.7 million, a decrease of $0.4 million from the same period in the prior year. The decrease primarily resulted from a decrease of $0.1 million in expenses related to physician education, reimbursement consulting and marketing support as well as a decrease in demo equipment expenses of $0.1 million.

Engineering, research and development expenses. Engineering, research and development expenses consist primarily of salaries and benefits, consulting fees and material costs used in the development of new products and product improvements. For the three months ended June 30, 2013, engineering, research and development expenses totaled $0.3 million, a decrease of $0.8 million from the same period in the prior year. The decrease in engineering, research and development expenses primarily resulted from a $0.3 million decrease in stock-based compensation charges and other compensation expenses and a $0.3 million decrease in consulting fees related to the 2012 Enhancement Program. For the six months ended June 30, 2013, engineering, research and development expenses totaled $0.8 million, a decrease of $1.1 million from the same period in the prior year. The decrease in engineering, research and development expenses primarily resulted from a $0.4 million decrease in stock-based compensation charges, a $0.2 million decrease in severance costs and other compensation expenses and a $0.4 million decrease in consulting fees related to the 2012 Enhancement Program.

Interest expense. Interest expense increased $0.1 million from $0.1 million for the three months ended June 30, 2012 to $0.2 million for the three months ended June 30, 2013. Interest expense increased $0.2 million from $0.1 million for the six months ended June 30, 2012 to $0.3 million for the six months ended June 30, 2013. The increases in interest expense were a result of the increase in the long term loan payable balance.

Gain (loss) on extinguishment of debt. The Company recorded a gain on extinguishment of debt of $0.1 million for the three months ended June 30, 2013 as compared to a loss on extinguishment of debt of $0.1 million during the same period in 2012. The decrease in loss resulted from a gain of $0.1 million on the extinguishment of a promissory note during the three months ended June 30, 2013. The Company recorded gain on extinguishment of debt of $0.1 million for the six months ended June 30, 2013 as compared to a loss on extinguishment of debt of $0.4 million during the same period of 2012. The decrease in the loss was a result of the conversion of debt in 2012 in connection with the IPO which resulted in a loss.

Fair value adjustment of warrants expense. For the three months ended June 30, 2013 and 2012, we recognized income of approximately $11,000 and $0.4 million, respectively, to record changes in the fair value of certain of our outstanding warrants not indexed to our own stock. We recognized income for the change in fair value for these warrants for the six months ended June 30, 2013 and 2012 of approximately $35,000 and $0.5 million, respectively.

Liquidity and Capital Resources

As of June 30, 2013, we had $4.7 million in current assets and $2.9 million in current liabilities, resulting in a working capital surplus of $1.8 million. As of December 31, 2012, we had $2.5 million in current assets and $3.1 million in current liabilities, respectively, resulting in a working capital deficit of $0.6 million. Our working capital increased during the six months ended June 30, 2013 primarily as a result of the capital raised in May 2013 when the Company borrowed $5.0 million from an affiliate of the Company under a Subsequent Term Note (the "2013 Term Loan"). The increase in working capital was partially offset by net operating losses during the period. Our current assets consist of cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets. Our current liabilities consist of the current portion of our long-term debt, accounts payable, accrued expenses, and deferred revenue.

We anticipate that we will continue to generate losses for at least the next year as we develop and expand our product offerings and seek to commercialize our products and expand our corporate infrastructure. We believe that our existing cash and cash equivalents will allow us to fund our operating plan through the fourth quarter of 2013.

We will require significant amounts of additional capital to fund our operations in the fourth quarter of 2013 and beyond, and such capital may not be available when we need it on terms that we find favorable, if at all. We may seek to raise these funds through public or private equity offerings, debt financings, credit facilities, or partnering or other corporate collaborations and licensing arrangements. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of opportunities, develop products and technologies, and otherwise respond to competitive pressures could be significantly delayed or limited, and we may need to downsize or halt our operations. Prevailing market conditions may not allow for such a fundraising or new investors may not be prepared to purchase our securities at prices that are greater than the purchase price of shares sold in our initial public offering.

There can be no assurance that the Company will be successful in its plans described above or in attracting alternative debt or equity financing. These conditions have raised substantial doubt about the Company's ability to continue as a going concern.

Because of the numerous risks and uncertainties associated with research, development and commercialization of medical devices, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

? the cost of development and growth of our VivaScope business;

? the cost of commercialization activities of our products, and of our future product candidates, including marketing, sales and distribution costs;

? the number and characteristics of any future product candidates we pursue or acquire;

? the scope, progress, results and costs of researching and developing our future product candidates, and conducting clinical trials;

? the timing of, and the costs involved in, maintaining and obtaining regulatory approvals for our existing products and future product candidates;

? the cost of manufacturing our existing VivaScope products and maintaining our telepathology server, as well as such costs associated with any future product candidates we successfully commercialize;

? our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;

? the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and

? the timing, receipt and amount of sales of, or royalties on, our future products, if any.

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