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VSCP > SEC Filings for VSCP > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for VIRTUALSCOPICS, INC.

Form 10-Q for VIRTUALSCOPICS, INC.


14-Nov-2013

Quarterly Report


ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with VirtualScopics' condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012 and the related condensed consolidated statements of operations and cash flows for the three and nine months ended September 30, 2013 and 2012, included elsewhere in this report. This discussion contains forward-looking statements, the accuracy of which involves risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons including, but not limited to, those discussed under the heading "Forward Looking Statements" below and elsewhere in this report. We disclaim any obligation to update information contained in any forward-looking statements.

Overview

We are a leading provider of imaging solutions to accelerate drug and medical device development. We have developed a robust software platform for analysis and modeling of both structural and functional medical images. In combination with our industry-leading experience and expertise in advanced imaging biomarker measurement, this platform provides a uniquely clear window into the biological activity of drugs and devices in clinical trial patients, allowing pharmaceutical, biotechnology and medical device companies to make better decisions faster. Additionally, we believe our technology helps to curtail trials that are not likely to be beneficial and to avoid mistaken termination of trials of compounds that are likely to prove efficacious, as well as to allow our customers to expedite compounds that are demonstrating response. This is done through:

improved precision in the measurement of existing imaging-based biomarkers resulting in shorter observation periods, with beneficial cost savings within a clinical trial;

new imaging biomarkers, which are better correlated with disease states, again reducing trial length and therefore costs; and

reduced processing time for image data analysis through automation.

In addition, we believe our technology helps reduce aggregate clinical development costs through:

improved precision for existing biomarkers, thus requiring smaller patient populations and lower administrative costs; and

new biomarkers that serve as better correlates, leading to better early screening and elimination of weak drug candidates in pre-clinical trials.

In July 2000, we were formed after being spun out of the University of Rochester and in June 2002, we purchased the underlying technology and patents created by our founders from the University of Rochester. We own all rights to the patents underlying our technology.

Revenues since inception have been derived primarily from image analysis services in connection with pharmaceutical drug trials. For these services, we have been concentrating in the areas of oncology and musculoskeletal diseases. We have also derived a portion of our revenue from consulting services and pharmaceutical drug trials in the neurology and cardiovascular therapeutic areas. Revenues are recognized as the services are performed and as images are analyzed.

We continue to submit proposals and bids for new contracts, however, there can be no assurance that we will secure contracts from these efforts or that any such contracts or any of our existing contracts will not be cancelled by a customer. Additionally, due to the recent consolidation within our industry there can be no assurance that our pricing and services will be able to continue to stay competitive with other companies that may now have a stronger global presence as well as more experience within the phase III market as a result of this consolidation.

Additionally, once we enter into a new contract for participation in a drug trial, there are several factors that can affect whether we will realize the full benefits under the contract and the time over which we will realize that revenue. Customers may not continue our services due to many reasons including lack of demonstrated efficacy with their compounds in development. Furthermore, the contracts may contemplate performance over multiple years. Therefore, revenue may not be realized in the fiscal year in which the contract is signed or awarded. Recognition of revenue under the contract may also be affected by the timing of patient recruitment and image site identification and training.

We have been pursuing the application of our technology into the personalized medicine market. We are currently reevaluating our approach in this area. Over the past quarter, we worked on our response to the FDA's latest questions on our 510k filing, however, we have delayed any additional work on the filing until we have more fully developed our business strategy in this area.

Results of Operations

Results of Operations for Quarter Ended September 30, 2013 Compared to Quarter Ended September 30, 2012

Revenues

We had revenues of $2,228,000 for the quarter ended September 30, 2013 compared to $3,328,000 for the comparable period in 2012, representing a $1,100,000, or 33%, decrease in revenues. The decrease in revenues is related to a slowdown in the amount of new projects awarded in 2012 and the timing of the initiation of awarded and contracted projects during the first nine months of 2013. Over the past 15 months we have reorganized our sales function, which allows our sales personnel more time to pursue opportunities and interface with existing and prospective customers which included the hiring of two additional sales representatives. As a result of these changes, we have experienced an increased number of requests for proposals and an increase in new project awards during the first nine months of 2013 as compared to the same period in 2012, in particular through our strategic alliance with PPD, Inc ("PPD").

During the third quarter of 2013, we performed work on 99 different projects, in connection with our pharmaceutical drug trials in the fields of oncology, osteoarthritis and various other therapeutic areas. This compares to 93 projects during the same period in 2012. During the third quarter of 2013, 56% of our business was in oncology services and 28% in musculoskeletal, the remaining 16% was in other therapeutic areas. This compares to 72%, 18% and 10%, respectively, in 2012. During the third quarter of 2013, 71% of the revenues were derived from Phase II and III studies compared to 75% during the comparable period in 2012.

Gross Profit

We had a gross profit of $816,000 for the third quarter of 2013 compared to $1,462,000 for the comparable period in 2012, representing a $646,000, or a 44% decrease. Our gross profit margin was 37% during the quarter ended September 30, 2013 compared to 44% during the third quarter of 2012. Excluding reimbursed charges, which yield no margin, our gross margin was 38% for the third quarter of 2013 compared to 47% in the third quarter of 2012. Our gross profit declined due to the decrease in our revenues as discussed above and our margins decreased from the mix of services performed during the third quarter. Historically, we have experienced lower margins in our musculoskeletal projects than our oncology projects.

Research and Development

Research and development costs decreased in the quarter ended September 30, 2013 by $38,000, or 9%, to $377,000, when compared to the quarter ended September 30, 2012. The decrease was due to a reduction in professional fees to support our previous 510k filing with the FDA and two fewer employees within the department during the quarter ended September 30, 2013 as compared to the third quarter of 2012. We believe our investments within the development group will better enable us to efficiently deliver on Phase III studies and enhance our productivity. Our research and development efforts center around refining our processes through the use of our software platform in order to allow for greater reporting capabilities by our customers and to gain efficiencies which we believe will better allow us to standardize our processes as we scale the business. Additionally, we continue to invest in the commercialization of new imaging techniques across modalities and therapeutic areas to best serve our customers.

Sales and Marketing

Sales and marketing costs increased in the quarter ended September 30, 2013 by $33,000, or 10% to $348,000, when compared to the quarter ended September 30, 2012. We experienced an increase in bookings, due to our sales and marketing initiatives, which resulted in higher commissions during the third quarter of 2013 as compared to the same period in 2012. Currently, there are 6 individuals within our sales and marketing department. Our sales and marketing initiatives encompass attendance and presentations at leading industry conferences, frequent educational webinars and active calling on existing and new customers as well as our continued efforts to attract new business through the PPD channel.

General and Administrative

General and administrative expenses for the quarter ended September 30, 2013 were $748,000, an increase of $64,000 or 9%, when compared to the quarter ended September 30, 2012. The increase was largely attributed to higher professional fees in connection with the reverse stock split transaction and business initiatives, which were offset by a decrease in stock compensation expense during the third quarter of 2013. General and administrative expenses include both personnel and non-personnel costs. Departments included within general and administrative function are finance, information technology, quality, human resources and the CEO position. Non-payroll related costs included within general and administration include stock option expense, audit and legal fees, regulatory and compliance fees, Nasdaq listing fees, board fees, non-capitalizable hardware and software costs and licenses and non-sales related travel costs.

Depreciation and Amortization

Depreciation and amortization charges were $89,000 for the quarter ended September 30, 2013 compared to $101,000 during the quarter ended September 30, 2012. The reduction was due to a number of capital assets being completely depreciated during the first nine months of 2013 and a lower amount of capital purchases during 2012 and 2013.

Other Expense

Other expense for the quarter ended September 30, 2013 was $6,000 compared to $26,000 for the quarter ended September 30, 2012. During the third quarter of 2013, we recognized a marked to market unrealized loss of $658 relating to the increase in fair value of warrants that were issued in connection with our 2007 Series B offering (see Financial Statement Note 5) compared to a non-cash marked to market unrealized loss of $20,000 for the quarter ended September 30, 2012. The aggregate decrease of $20,000 when compared to the third quarter of 2012 is attributable to the higher average price of our common stock during the third quarter of 2013 as compared to the same period in 2012.

Net Loss

Net loss for the quarter ended September 30, 2013 was $751,000 compared to a net loss of $79,000 for the quarter ended September 30, 2012. The increase in our net loss was primarily related to lower revenues and gross profit, in addition to increased general and administrative expenditures, as discussed above.

Results of Operations for the Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012

Revenues

Our revenues for the nine months ended September 30, 2013 were $8,467,000, a decrease of $1,899,000 or 18% over the first nine months of 2012. The decrease in revenues is related to a slowdown in the amount of new projects awarded in 2012 and the timing of the initiation of awarded and contracted projects during the first nine months of 2013. Over the past 15 months we have reorganized our sales function, which allows our sales personnel more time to pursue opportunities and interface with existing and prospective customers which included the hiring of two additional sales representatives. As a result of these changes, we have experienced an increased number of requests for proposals and an increase in new project awards during the first nine months of 2013 as compared to the same period in 2012, in particular through our strategic alliance with PPD, Inc.

During the first nine months of 2013, we performed work on 117 different projects in connection with our pharmaceutical drug trials in the fields of oncology, osteoarthritis and various other therapeutic areas. This compares to 114 projects during the same period in 2012. During the first nine months of 2013, 63% of our business was in oncology services and 24% in musculoskeletal, and the remaining 13% was in other therapeutic areas. This compares to 70%, 21% and 9%, respectively, in 2012. During the first nine months of 2013, 75% of the revenues were derived from Phase II and III studies compared to 75% during the comparable period in 2012.

Gross Profit

We had a gross profit of $3,372,000 for the nine months ended September 30, 2013 compared to $4,217,000 for the comparable period in 2012, representing a $845,000, or 20%, decline. Our gross margin for the nine months ended September 30, 2013 was 40% compared to 41% for the first nine months of 2012. Excluding reimbursed charges, which yield no margin, our gross margin was 42% for the first nine months of 2013 compared to 44% in the first nine months of 2012. Our gross profit declined due to the decrease in our revenues as discussed above and the margins decreased from the mix of services performed during the first nine months of 2013. Historically, we have experienced lower margins in our musculoskeletal projects than our oncology projects.

Research and Development

Total research and development expenditures were $1,180,000 in the first nine months of 2013 compared to $1,172,000 for the comparable period in 2012, an increase of 1%. The expenditures were slightly higher due to consultant and professional fees related to the development of the personalized medicine application offset by four fewer employees within the department during the nine months ended September 30, 2013 as compared to the first nine months of 2012. Our research and development efforts center around refining our processes through the use of our software platform in order to gain efficiencies which we believe will better allow us to standardize our processes as we scale the business. Additionally, we continue to invest in the commercialization of new imaging techniques across many modalities and therapeutic areas to best serve our customers.

Sales and Marketing

Sales and marketing costs for the nine months ended September 30, 2013 were $1,136,000 compared to $962,000 for the first nine months of 2012, an increase of 18%. The increase was the result of hiring two experienced sales individuals to cover the European and West Coast US territories during the third quarter of 2012. Additionally, we experienced an increase in bookings, due to our sales and marketing initiatives, which resulted in higher commissions during the first nine months of 2013 as compared to the same period in 2012. Currently, there are 6 individuals within our sales and marketing department. Our sales and marketing initiatives encompass attendance and presentations at leading industry conferences, frequent educational webinars and active calling on existing and new customers as well as our continued efforts to attract new business through the PPD channel.

General and Administrative

General and administrative expenses for the nine months ended September 30, 2013 were $2,511,000, an increase of $309,000 or 14%, over the first nine months of 2012. The increase was attributed to higher consulting fees and administrative costs which includes the transfer of one employee to the department during the third quarter of 2012 in support of our personalized medicine initiative. Additionally, the Company incurred higher professional fees in connection with the reverse stock split transaction and business initiatives offset by a decrease in stock compensation expense during the third quarter of 2013. General and administrative expenses include both personnel and non-personnel costs. Departments included within general and administrative function are finance, information technology, quality, human resources and the CEO position. Non-payroll related costs included within general and administration include stock option expense, audit and legal fees, regulatory and compliance fees, Nasdaq listing fees, board fees, non-capitalizable hardware and software costs and licenses and non-sales related travel costs.

Depreciation and Amortization

Depreciation and amortization charges were $276,000 for the nine months ended September 30, 2013 compared to $320,000 during the first nine months ended September 30, 2012. The reduction was due to a number of capital assets being completely depreciated during the first nine months of 2013 and decreases in capital purchases during 2012.

Other Income (Expense)

Other income for the nine months ended September 30, 2013 was $1,000 compared to other expense of $317,000 in the same period in 2012. During the first nine months of 2013, we recognized a marked to market unrealized gain of $13,000, relating to the decrease in fair value of warrants that were issued in connection with our 2007 Series B offering (see Financial Statement Note 5) compared to a non-cash marked to market unrealized loss of $306,000 for the nine months ended September 30, 2012. The aggregate decrease of $319,000 when compared to the first nine months of 2012 is attributable to the lower average price of our common stock during the first nine months of 2013 as compared to the first nine months of 2012 and the decrease in the number of derivative instruments outstanding due to the elimination of the anti-dilution adjustment provision in certain Series B warrants as part of the Series C-1 financing. As of September 30, 2013, the Company had 21,423 warrants outstanding subject to the anti-dilution adjustment provision, as compared to the 90,204 prior to the Series C-1 financing that occurred on April 3, 2012.

Net Loss

Our net loss for the nine months ended September 30, 2013 was $1,730,000 compared to a net loss of $756,000 for the same period in 2012. The increase in our net loss was primarily related to lower revenues and gross profit during the first nine months of 2013, in addition to expenditures for the personalized medicine application, as discussed above.

Liquidity and Capital Resources

Our working capital as of September 30, 2013 was approximately $7,689,000 compared to $8,972,000 as of December 31, 2012. The decrease in working capital was primarily a result of decreased revenue resulting in additional cash used in operations. We do not expect, nor have we experienced, significant write-offs within our receivables, however, we continue to see an extension of payment terms within the industry and with several of our largest customers.

Net cash used in operating activities totaled $1,513,000 in the nine months ended September 30, 2013 compared to net cash used in operating activities of $474,000 in the comparable 2012 period. The increase in the use of cash is mostly due to the decrease in revenues and the timing of receipts from customers in the first nine months of 2013 as compared to the first nine months of last year.

We invested $35,000 in the purchase of equipment and the acquisition of patents in the first nine months of 2013, compared to $140,000 for the investment in these items in the first nine months of 2012. The decrease reflects investments in our IT and IS infrastructure in the first nine months of 2012 that did not reoccur in 2013.

There was no cash provided or used by our financing activities in the nine months ended September 30, 2013 compared to cash provided of $2,937,000 in the nine months ended September 30, 2012. The decrease is a result of one time proceeds from the exercise of options and warrants during the first nine months of 2012, and the closing of the financing agreement with GHI.

We currently expect that existing cash will be sufficient to fund our existing operations for the next 12 months and foreseeable future. If in the future our plans or assumptions change or prove to be inaccurate, we may be required to seek additional capital through public or private debt or equity financings. If we need to raise additional funds, we may not be able to do so on terms favorable to us, or at all. If we cannot raise sufficient funds on acceptable terms, we may have to curtail our level of expenditures, our rate of expansion or our business operations.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements (other than our consulting agreements and operating leases for our corporate headquarters and certain equipment) 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 resources or capital expenditures that is material to investors.

Forward Looking Statements

Certain statements made in this discussion are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements that address activities, events or developments that we expect, believe or anticipate may occur in the future, including the following risk factors:

adverse economic conditions;

inability to raise sufficient additional capital to operate our business;

unexpected costs, lower than expected sales and revenues, and operating defects;

adverse results of any legal proceedings;

the volatility of our operating results and financial condition;

inability to attract or retain qualified senior management personnel, including sales and marketing, and scientific personnel;

our products and services require ongoing research and development and we may experience technical problems or delays and we may not have the funds necessary to continue their development;

a decline in new bookings and awards causing a decrease in our revenues and cash flows;

our new products and service offerings which are subject to government regulation and approval may cause us to incur additional costs in order to obtain such approval; and

other specific risks that may be referred to in this report or in our report on Form 10-K for the year ended December 31, 2012.

All statements, other than statements of historical facts, included in this report including, without limitation, statements regarding our strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans and objectives of management are forward-looking statements. When used in this report, the words "may," "believe," "anticipate," "intend," "estimate," "expect," "project," "plan," "could," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. We do not undertake any obligation to update any forward-looking statements or other information contained in this report. Existing stockholders and potential investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, we cannot assure our stockholders or potential investors that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under the heading entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission ("SEC") and elsewhere in this report. These risk factors qualify all forward-looking statements attributable to us or persons acting on our behalf.

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