ITEM 1. Financial Statements
VirtualScopics, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
7,145,743
|
|
|
$
|
8,523,807
|
|
Accounts receivable, net
|
|
|
2,968,997
|
|
|
|
1,762,507
|
|
Prepaid expenses and other current assets
|
|
|
311,685
|
|
|
|
437,698
|
|
Total current assets
|
|
|
10,426,425
|
|
|
|
10,724,012
|
|
|
|
|
|
|
|
|
|
|
Patents, net
|
|
|
1,396,844
|
|
|
|
1,470,436
|
|
Property and equipment, net
|
|
|
280,007
|
|
|
|
399,569
|
|
Other assets
|
|
|
-
|
|
|
|
5,428
|
|
Total assets
|
|
$
|
12,103,276
|
|
|
$
|
12,599,445
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
746,042
|
|
|
$
|
872,652
|
|
Accrued payroll
|
|
|
664,251
|
|
|
|
481,661
|
|
Unearned revenue
|
|
|
446,714
|
|
|
|
272,509
|
|
Dividends payable
|
|
|
209,333
|
|
|
|
125,333
|
|
Total current liabilities
|
|
|
2,066,340
|
|
|
|
1,752,155
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.001 par value; 15,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
Series C-1 3,000 shares authorized; issued and outstanding,
3,000 shares at June 30, 2013 and December 31, 2012; liquidation preference $1,000 per share
|
|
|
3
|
|
|
|
3
|
|
Series B 6,000 shares authorized; issued and outstanding,
600 shares at June 30, 2013 and December 31, 2012; liquidation preference $1,000 per share
|
|
|
1
|
|
|
|
1
|
|
Series A 8,400 shares authorized; issued and outstanding,
2,190 shares at June 30, 2013 and December 31, 2012; liquidation preference $1,000 per share
|
|
|
2
|
|
|
|
2
|
|
Series C-2 3,000 shares authorized; issued and outstanding,
0 shares at June 30, 2013 and December 31, 2012; liquidation preference $1,000 per share
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value; 85,000,000 shares authorized; issued
29,958,795 and 29,799,523 shares at June 30, 2013 and December 31, 2012, respectively; outstanding, 29,799,523 shares at June
30, 2013 and December 31, 2012, respectively
|
|
|
29,800
|
|
|
|
29,800
|
|
Additional paid-in capital
|
|
|
21,949,391
|
|
|
|
21,781,084
|
|
Accumulated deficit
|
|
|
(11,942,261
|
)
|
|
|
(10,963,600
|
)
|
Total stockholders' equity
|
|
|
10,036,936
|
|
|
|
10,847,290
|
|
Total liabilities and stockholders' equity
|
|
$
|
12,103,276
|
|
|
$
|
12,599,445
|
|
See notes to condensed consolidated financial
statements.
VirtualScopics, Inc. and Subsidiary
Condensed Consolidated Statements of
Operations
(unaudited)
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,546,607
|
|
|
$
|
3,098,316
|
|
|
$
|
5,829,438
|
|
|
$
|
6,391,974
|
|
Reimbursement revenues
|
|
|
160,070
|
|
|
|
237,545
|
|
|
|
409,826
|
|
|
|
646,045
|
|
Total revenues
|
|
|
3,706,677
|
|
|
|
3,335,861
|
|
|
|
6,239,264
|
|
|
|
7,038,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
1,776,524
|
|
|
|
1,754,379
|
|
|
|
3,274,063
|
|
|
|
3,637,124
|
|
Cost of reimbursement revenues
|
|
|
160,070
|
|
|
|
237,545
|
|
|
|
409,826
|
|
|
|
646,045
|
|
Total cost of services
|
|
|
1,936,594
|
|
|
|
1,991,924
|
|
|
|
3,683,889
|
|
|
|
4,283,169
|
|
Gross profit
|
|
|
1,770,083
|
|
|
|
1,343,937
|
|
|
|
2,555,375
|
|
|
|
2,754,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
349,754
|
|
|
|
375,441
|
|
|
|
803,164
|
|
|
|
756,676
|
|
Sales and marketing
|
|
|
430,153
|
|
|
|
310,509
|
|
|
|
787,805
|
|
|
|
646,723
|
|
General and administrative
|
|
|
768,251
|
|
|
|
717,690
|
|
|
|
1,763,623
|
|
|
|
1,518,316
|
|
Depreciation and amortization
|
|
|
90,554
|
|
|
|
106,991
|
|
|
|
186,867
|
|
|
|
218,610
|
|
Total operating expenses
|
|
|
1,638,712
|
|
|
|
1,510,631
|
|
|
|
3,541,459
|
|
|
|
3,140,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
131,371
|
|
|
|
(166,694
|
)
|
|
|
(986,084
|
)
|
|
|
(385,475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
3,342
|
|
|
|
715
|
|
|
|
4,351
|
|
|
|
1,130
|
|
Other expense
|
|
|
(9,510
|
)
|
|
|
(5,446
|
)
|
|
|
(10,881
|
)
|
|
|
(5,713
|
)
|
Unrealized gain (loss) on change
in fair value of the derivative liabilities
|
|
|
9,083
|
|
|
|
108,459
|
|
|
|
13,953
|
|
|
|
(286,453
|
)
|
Total other income (expense)
|
|
|
2,915
|
|
|
|
103,728
|
|
|
|
7,423
|
|
|
|
(291,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
134,286
|
|
|
|
(62,966
|
)
|
|
|
(978,661
|
)
|
|
|
(676,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock deemed dividend
|
|
|
-
|
|
|
|
1,806,919
|
|
|
|
-
|
|
|
|
1,806,919
|
|
Preferred stock dividends
|
|
|
42,000
|
|
|
|
41,333
|
|
|
|
84,000
|
|
|
|
53,333
|
|
Net income (loss) available
to common stockholders
|
|
$
|
92,286
|
|
|
$
|
(1,911,218
|
)
|
|
$
|
(1,062,661
|
)
|
|
$
|
(2,536,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
29,799,523
|
|
|
|
29,706,704
|
|
|
|
29,799,523
|
|
|
|
29,538,381
|
|
Weighted average diluted shares outstanding
|
|
|
34,671,384
|
|
|
|
29,706,704
|
|
|
|
29,799,523
|
|
|
|
29,538,381
|
|
Basic and diluted earnings (loss) per share
|
|
$
|
0.00
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.09
|
)
|
See notes to condensed consolidated financial
statements.
VirtualScopics, Inc. and Subsidiary
Condensed Consolidated Statements of
Cash Flows
(unaudited)
|
|
For the Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(978,661
|
)
|
|
$
|
(676,511
|
)
|
Adjustments to reconcile net loss to net cash used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
186,867
|
|
|
|
218,610
|
|
Loss on the disposal of assets
|
|
|
9,862
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
252,307
|
|
|
|
321,943
|
|
Fair value adjustment of derivative liabilities
|
|
|
(13,953
|
)
|
|
|
286,453
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,206,490
|
)
|
|
|
(388,460
|
)
|
Prepaid expenses and other assets
|
|
|
131,441
|
|
|
|
(6,690
|
)
|
Accounts payable and accrued expenses
|
|
|
(112,657
|
)
|
|
|
(244,050
|
)
|
Accrued payroll
|
|
|
182,590
|
|
|
|
(159,239
|
)
|
Unearned revenue
|
|
|
174,205
|
|
|
|
(133,513
|
)
|
Total adjustments
|
|
|
(395,828
|
)
|
|
|
(104,946
|
)
|
Net cash used in operating activities
|
|
|
(1,374,489
|
)
|
|
|
(781,457
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(25,198
|
)
|
|
|
(104,753
|
)
|
Proceeds from the sale of equipment
|
|
|
28,441
|
|
|
|
-
|
|
Acquisition of patents
|
|
|
(6,818
|
)
|
|
|
(10,511
|
)
|
Net cash used in investing activities
|
|
|
(3,575
|
)
|
|
|
(115,264
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of warrants
|
|
|
-
|
|
|
|
262,500
|
|
Proceeds from the exercise of stock options
|
|
|
-
|
|
|
|
20,200
|
|
Proceeds from the issuance of series C-1 preferred stock and warrant, net of issuance costs
|
|
|
-
|
|
|
|
2,667,571
|
|
Cash dividends on series B preferred stock
|
|
|
-
|
|
|
|
(12,000
|
)
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
2,938,271
|
|
Net (decrease) increase in cash
|
|
|
(1,378,064
|
)
|
|
|
2,041,550
|
|
Cash
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
8,523,807
|
|
|
|
5,737,009
|
|
End of period
|
|
$
|
7,145,743
|
|
|
$
|
7,778,559
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Non-cash financing activity:
|
|
|
|
|
|
|
|
|
Accrued dividends on series B and C-1 preferred stock
|
|
$
|
209,333
|
|
|
$
|
41,333
|
|
Reclassification of derivative liabilities to additional
paid in capital in connection with the series C-1 preferred stock issuance
|
|
$
|
-
|
|
|
$
|
405,233
|
|
See notes to condensed consolidated financial
statements.
VirtualScopics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(unaudited)
NOTE 1 -
Nature of Business and Basis
of Presentation
Nature
of Business
The Company’s headquarters
are located in Rochester, New York. The Company has created a suite of image analysis software tools and applications which are
used in detecting and measuring specific anatomical structures and metabolic activity using medical images. The Company’s
developed proprietary software provides measurement capabilities designed to improve pharmaceutical and medical device research
and development and improve clinical medical image analysis.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements of the Company have been condensed in certain respects and should, therefore, be read in conjunction with
the audited consolidated financial statements and notes related thereto contained in the Company’s Annual Report on Form
10-K as of and for the year ended December 31, 2012. In the opinion of management, these financial statements contain all adjustments
necessary for a fair presentation for the interim period, all of which were normal recurring adjustments. The results of operations
for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year
ending December 31, 2013.
As of the date of this report,
and as previously disclosed in reports filed with the Securities and Exchange Commission (“SEC”), the Company is out
of compliance with Rule 5550(a)(2) of the Nasdaq Stock Market (“Nasdaq”) Marketplace rules, the minimum bid price
requirements. Nasdaq has extended the compliance period due to general market conditions, and the Company now has until August
26, 2013 to regain compliance by maintaining a bid price of its common stock of $1.00 or higher for a minimum of 10 consecutive
business days, or such longer period as Nasdaq may determine to show the ability to maintain long-term compliance. The Company’s
intention is to maintain its listing on Nasdaq and is currently assessing its options to regain compliance.
NOTE 2 -
Summary of Certain Significant
Accounting Policies
Principles of Consolidation
The accompanying condensed
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, VirtualScopics, LLC. All
significant intercompany balances and transactions have been eliminated in consolidation.
Derivative Financial Instruments
The Company does not use derivative
instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments
to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based
derivative financial instruments, the Company uses the Black-Scholes option valuation model to value the derivative instruments
at inception and on subsequent valuation dates. The warrants issued with the Company’s Series B preferred stock, and to
the placement agent in the Series B financing, did not have fixed settlement provisions because their exercise prices may be lowered
if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order
to protect the warrant holders from the potential dilution associated with future financings. Accordingly, the warrants are recognized
as a derivative instrument.
VirtualScopics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Revenue
Recognition
The Company recognizes revenue
when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when an agreement
exists, services and products have been performed, prices are fixed or determinable, and collectability is reasonably assured.
Revenues are reduced for estimated discounts and other allowances, if any.
The Company provides advanced
medical image analysis on a per analysis basis, and recognizes revenue when the image analysis is completed. Revenue related to
project, data and site management services is recognized as the services are rendered and in accordance with the terms of the
contract. Consulting revenue is recognized once the services are rendered and typically charged as an hourly rate.
Occasionally, the Company has
provided software development services to its customers, which may require development, modification, and customization. Software
development revenue is billed on a fixed price basis and recognized upon delivery of the software and acceptance by the customer
on a completed contract basis. The Company does not sell software licenses, upgrades or enhancements, or post-contract customer
services.
Reimbursements received and related
costs incurred for out-of-pocket expenses are separately reported as revenue and cost of services, respectively, in the financial
statements.
Income Taxes
Income taxes are accounted for
under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases,
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment
date. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will
not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and
the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit
of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial
statements if such positions are more likely than not of being sustained.
VirtualScopics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Research
and Development
Research and development expense
relates to the development of new applications and processes including improvements and enhancements to existing software applications.
These costs are expensed as incurred.
Fair
Value of Financial Instruments
Fair
value of financial instruments is defined as an exit price, which is the price that would be received upon sale of an asset or
paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of
judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability.
Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively
quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely,
financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured
at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation
and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the
asset or liability. The Company has categorized its financial assets and liabilities measured at fair value into a three-level
hierarchy.
Preferred Stock
The Company applies the accounting
standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock.
Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally
redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the
holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified
as temporary equity. At all other times, preferred shares are classified as stockholders’ equity.
Convertible Instruments
The Company applies the accounting
standards for derivatives and hedging and for distinguishing liabilities from equity when accounting for hybrid contracts that
feature conversion options. The accounting standards require companies to bifurcate conversion options from their host instruments
and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances
in which (i) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related
to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting
principles with changes in fair value reported in earnings as they occur and (iii) a separate instrument with the same terms
as the embedded derivative instrument would be considered a derivative instrument. The derivative is subsequently marked to market
at each reporting date based on current fair value, with the changes in fair value reported in results of operations.
VirtualScopics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Conversion options that contain
variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked
securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from
the host instrument.
The Company accounts for convertible
debt instruments when the Company has determined that the embedded conversion options should not be bifurcated from their host
instruments in accordance with Accounting Standards Codification (“ASC”) 470-20 “Debt with Conversion and Other
Options”. The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options
embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment
date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements
are amortized over the term of the related debt. The Company also records, when necessary, deemed dividends for the intrinsic
value of the conversion options embedded in preferred stock based upon the difference between the fair value of the underlying
common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred stock.
Common Stock Purchase Warrants
and Other Derivative Financial Instruments
The Company classifies as equity
any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement
or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts
are indexed to the Company's own stock as defined in ASC 815-40 "Contracts in Entity's Own Equity" (“ASC 815-40”).
The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement
to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the
counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The
Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to
determine whether a change in classification between assets and liabilities or equity is required.
NOTE 3 -
Stock-Based Compensation
For the three and six months
ended June 30, 2013 and 2012, the Company’s condensed consolidated statements of operations reflect stock-based compensation
expense for stock options granted under its long-term stock incentive plans and allocated as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenues
|
|
$
|
12,371
|
|
|
$
|
13,427
|
|
|
$
|
25,214
|
|
|
$
|
26,758
|
|
Research and development
|
|
|
16,331
|
|
|
|
17,602
|
|
|
|
35,896
|
|
|
|
42,510
|
|
Sales and marketing
|
|
|
2,780
|
|
|
|
-
|
|
|
|
5,823
|
|
|
|
4,258
|
|
General and administrative
|
|
|
72,692
|
|
|
|
101,647
|
|
|
|
173,022
|
|
|
|
240,292
|
|
Total stock-based compensation
|
|
$
|
104,174
|
|
|
$
|
132,676
|
|
|
$
|
239,955
|
|
|
$
|
313,818
|
|
VirtualScopics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Stock options issued under the
Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company’s
stock at the date of grant and expire up to ten years from the date of grant. These options generally vest over a three or four-year
period.
The fair value of stock options
granted was determined on the grant date using assumptions for risk free interest rate, the expected term, expected volatility,
and expected dividend yield. The risk free interest rate is based on U.S. Treasury zero-coupon yield curve over the expected term
of the option. The expected term assumption is determined using the weighted average midpoint between the vesting and expiration
term for all individuals within the grant. Through the second quarter of 2012, the Company had estimated its expected volatility
from an index of historical stock prices of comparable entities whose share prices were publicly traded and averaged with the
Company’s historical stock prices, excluding the first ten months due to the discreet and non-recurring nature of the trading.
Beginning in the third quarter of 2012, the Company estimated its expected volatility using only its own historical stock prices,
continuing to exclude the first ten months due to the discreet and non-recurring nature of the trading, as management determined
this assumption to be a better indicator of value at this time. The Company’s model includes a zero dividend yield assumption,
as the Company has not historically paid nor does it anticipate paying dividends on its common stock. The Company’s model
does not include a discount for post-vesting restrictions, as the Company has not issued awards with such restrictions. The periodic
expense is then determined based on the valuation of the options, and at that time an estimated forfeiture rate is used to reduce
the expense recorded. The Company’s estimate of pre-vesting forfeitures is primarily based on the Company’s historical
experience and is adjusted to reflect actual forfeitures as the options vest. The estimated forfeiture rates used during the six
months ended June 30, 2013 and 2012 ranged from 7.2% to 7.5%. The following assumptions were used to estimate the fair value of
options granted for the six months ended June 30, 2013 and 2012 using the Black-Scholes option-pricing model:
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Risk free interest rate
|
|
|
1.3
|
%
|
|
|
1.1
|
%
|
Expected term (years)
|
|
|
6.6
|
|
|
|
6.3
|
|
Expected volatility
|
|
|
68.3
|
%
|
|
|
56.2
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
A summary of the employee stock option activity for
the six months ended June 30, 2013 is as follows:
VirtualScopics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(unaudited)
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Options outstanding at January 1, 2013
|
|
|
5,975,038
|
|
|
$
|
1.30
|
|
|
|
|
|
Granted
|
|
|
12,000
|
|
|
|
0.74
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
(21,000
|
)
|
|
|
1.13
|
|
|
|
|
|
Expired
|
|
|
(148,316
|
)
|
|
|
1.59
|
|
|
|
|
|
Options outstanding at June 30, 2013
|
|
|
5,817,722
|
|
|
|
1.29
|
|
|
|
5.26
|
|
Options exercisable at June 30, 2013
|
|
|
4,837,270
|
|
|
|
1.29
|
|
|
|
4.77
|
|
The weighted-average grant-date
fair value of options granted during the six months ended June 30, 2013 and 2012 was $5,632 and $219,946, respectively.
NOTE 4 -
Stockholders’ Equity
On April 3, 2012, the Company
and Merck Global Health Innovation Fund, LLC (“GHI”) entered into a Series C Preferred Stock and Warrant Purchase
Agreement (the “Purchase Agreement”) under which the Company agreed to sell GHI up to 6,000 shares of the Company’s
Series C Preferred Stock and warrants to purchase up to 2,722,632 shares of common stock at an exercise price of $1.2043 per share
(the “Series C Warrants”) for a purchase price of $6,000,000 in two separate closings.
The initial closing under the
Purchase Agreement took place on April 3, 2012 at which the Company sold to GHI 3,000 shares of Series C-1 Preferred Stock which
are initially convertible into 2,491,073 shares of common stock and Series C-1 Warrants which are exercisable to purchase 1,361,316
shares of common stock for an aggregate purchase price of $3,000,000, net of issuance costs of approximately $334,000. The terms
of the financing provided for a second closing of $3,000,000 of Series C-2 Preferred Stock, if, among other things, certain milestones
are met toward the development of its quantitative imaging center on or before April 3, 2013. The second closing did not occur,
however, the Company is continuing to pursue its efforts in this area, specifically, as it relates to obtaining FDA acceptance.
As of June 30, 2013, dividends
payable to Series B and C-1 convertible preferred stockholders amounted to $60,000 and $149,333, respectively and are included
in dividends payable on the Company’s condensed consolidated balance sheet.
Restricted Stock Awards
A restricted stock award
entitles the recipient to receive shares of unrestricted common stock upon vesting of the award and expiration of the restrictions.
The fair value of each restricted stock award is determined upon granting of the shares and the related compensation expense is
recognized ratably over the vesting period and charged to the operations as non-cash compensation expense. Shares contained in
the unvested portion of restricted stock awards are forfeited upon termination of employment, unless otherwise agreed. The fair
value of restricted stock issued under the Plan is determined based on the closing price of the Company’s common stock on
the grant date.
A summary of the restricted
stock award activity for the six months ended June 30, 2013 is as follows:
|
|
Number
of Units
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Nonvested at January 1, 2013
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
159,272
|
|
|
|
0.74
|
|
Vested
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
Nonvested at June 30, 2013
|
|
|
159,272
|
|
|
|
0.74
|
|
The Company incurred $12,352
and $8,125 in compensation expense during the six months ended June 30, 2013 and 2012, respectively, and $7,346 and $0 in compensation
expense during the three months ended June 30, 2013 and 2012, respectively, related to the restricted stock awards granted to
Board members and Company officers. During the first six months of 2013, the Company issued an aggregate 159,272 restricted stock
awards to the CEO and CFO having a grant date fair value of $117,861 ($0.74 per unit) and vest over a four year period.
NOTE 5 -
Derivative Liabilities
Derivative liabilities resulting
from certain warrants issued in connection with the Company’s Series B financing were valued using the Black-Scholes option
valuation model and the following assumptions on the following dates:
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
Series B warrants:
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.19
|
%
|
|
|
0.22
|
%
|
Expected volatility
|
|
|
64.04
|
%
|
|
|
65.94
|
%
|
Expected life (in years)
|
|
|
1.19
|
|
|
|
1.69
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Number of warrants
|
|
|
214,229
|
|
|
|
214,229
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
1,997
|
|
|
$
|
15,950
|
|
VirtualScopics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(unaudited)
The risk-free interest rate was
based on rates established by the Federal Reserve. The Company’s policy for expected volatility is disclosed in Note 3 Stock-Based
Compensation. The expected life of the warrants was determined by the expiration date of the warrants. T
he
expected dividend yield was based upon the fact that the Company has not historically paid dividends on its common stock, and
does not expect to pay dividends on its common stock in the future. The warrants are considered to be level 3 financial liabilities
in accordance with ASC 820 as there is no current market and determining the fair value requires significant judgment or estimation.
The fair value of these warrant
liabilities was $1,997 at June 30, 2013 as compared to $37,816 at June 30, 2012 and has been classified within accounts payable
and accrued expenses on the accompanying condensed consolidated balance sheet. The net change in fair value during the first six
months of 2013 is $13,953, which was reported in the Company’s condensed consolidated statement of operations as an unrealized
gain on the change in fair value of the derivative liabilities. The fair value of the derivative liabilities are re-measured at
the end of every reporting period and upon the exercise of the warrant. The change in fair value is reported in the consolidated
statement of operations as an unrealized gain or loss on the change in fair value of the derivative liability. During the six
months ended June 30, 2013, there were no transfers in or out of Level 3.
NOTE 6 –
Earnings (Loss) Per
Share
Basic earnings and loss per
share are computed by dividing the net income or loss available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares
and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common
shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s
convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes the shares issuable
upon the conversion of preferred stock, the exercise of stock options and warrants from the calculation of net loss per share
as their effect would be antidilutive.
VirtualScopics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(unaudited)
The following table reconciles the numerator
and denominator for the calculation:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net income (loss)
available to common stockholders - basic
|
|
$
|
92,286
|
|
|
$
|
(1,911,218
|
)
|
|
$
|
(1,062,661
|
)
|
|
$
|
(2,536,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
29,799,523
|
|
|
|
29,706,704
|
|
|
|
29,799,523
|
|
|
|
29,538,381
|
|
Basic earnings (loss) per common
share
|
|
$
|
0.00
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders - diluted
|
|
$
|
92,286
|
|
|
$
|
(1,911,218
|
)
|
|
$
|
(1,062,661
|
)
|
|
$
|
(2,536,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
29,799,523
|
|
|
|
29,706,704
|
|
|
|
29,799,523
|
|
|
|
29,538,381
|
|
Common share equivalents of outstanding stock options
|
|
|
64,088
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common share equivalents of outstanding
stock convertible preferred stock
|
|
|
4,807,773
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average number of common shares outstanding
|
|
|
34,671,384
|
|
|
|
29,706,704
|
|
|
|
29,799,523
|
|
|
|
29,538,381
|
|
Dilutive earnings (loss) per
common share
|
|
$
|
0.00
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities excluded from the weighted average dilutive
common shares outstanding because their inclusion would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
-
|
|
|
|
4,807,773
|
|
|
|
4,807,773
|
|
|
|
4,807,773
|
|
Non-vested restricted stock awards
|
|
|
159,272
|
|
|
|
-
|
|
|
|
159,272
|
|
|
|
-
|
|
Stock options to purchase common stock
|
|
|
5,759,066
|
|
|
|
6,055,273
|
|
|
|
5,823,066
|
|
|
|
6,055,273
|
|
Warrants to purchase common stock
|
|
|
2,337,528
|
|
|
|
2,425,341
|
|
|
|
2,337,528
|
|
|
|
2,425,341
|
|
NOTE 7 -
Income Taxes
The Company
has significant net operating loss and business credit carryovers which are subject to a valuation allowance due to the uncertain
nature of the realization of the losses. The Internal Revenue Code imposes certain limitations on the utilization of net operating
loss carryovers and other tax attributes after a change in control. The Company does not believe it has encountered ownership
changes which could significantly limit the possible utilization of such carryovers. It is not anticipated that limitations, if
any, would have a material impact on the condensed consolidated balance sheet as a result of offsetting changes in the deferred
tax valuation allowance. Based on all available evidence, the Company believes that its deferred tax assets should be fully reserved
as of June 30, 2013 because it is still currently more likely than not that the benefits of the Company’s deferred tax assets
will not be realized in future periods. The Company will continue to assess the likelihood of recognizing a portion of its deferred
tax assets and will make an assessment of whether it should reduce the valuation allowance.
VirtualScopics, Inc. and Subsidiary
Notes to Condensed Consolidated Financial
Statements
(unaudited)
The Company
will recognize interest and penalties accrued related to unrecognized tax benefits as components of its income tax provision.
As of June 30, 2013, the Company does not have any interest and penalties accrued related to unrecognized tax benefits.
NOTE 8 -
Concentration of Credit Risk
The Company’s top three
customers accounted for approximately 48%, 10%, and 10% of total revenue for the six months ended June 30, 2013. Two customers
accounted for 47% and 10% of total revenue for the six months ended June 30, 2012.
The Company’s top two
customers accounted for approximately 58% and 10% of total revenue for the three months ended June 30, 2013. Two customers accounted
for 48% and 10% of total revenue for the three months ended June 30, 2012.
Two customers accounted for
approximately 63% and 12% of accounts receivable as of June 30, 2013 as compared to the two customers accounting for 61% and 13%
of accounts receivable as of June 30, 2012.
NOTE 9 –
Related Party
In April 2012, the Company issued Merck Global Health
Innovation Fund, LLC 3,000 shares of Series C-1 Preferred Stock which are initially convertible into 2,491,073 shares of common
stock and Series C-1 Warrants which are exercisable to purchase 1,361,316 shares of common stock. Revenues generated from Merck
were $129,435 and $700,535 for the six months ended June 30, 2013 and 2012, respectively and $33,792 and $303,298 for the three
months ended June 30, 2013 and 2012, respectively. The accounts receivable balance due from Merck was $9,164 and $96,096 as of
June 30, 2013 and December 31, 2012, respectively.
NOTE 10 -
Subsequent Events
The Company evaluates events
that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the
Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure
in the condensed consolidated financial statements.
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 June 30, 2013 and December 31, 2012
and the related condensed consolidated statements of operations and cash flows for the three and six months ended June 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 are also pursuing the application of
one of our technologies into the personalized medicine market. Specifically, we believe there could be further benefit of our
blood flow and vascular permeability software tool in assisting patients and oncologists in determining whether an anti-angiogenic
therapy is having the desired effect. We believe this application will assist oncologists with treatment planning for patients
undergoing anti-angiogenic cancer therapies. We have begun the regulatory process for obtaining 510(k) clearance from the FDA
for our application to be used as a tool to analyze Dynamic Contrast-Enhanced Magnetic Resonance Images (DCE-MRI), however, there
can be no assurance that our software will be approved by the FDA or that it will achieve commercial success.
Results of Operations
Results of Operations for Quarter Ended June 30, 2013
Compared to Quarter Ended June 30, 2012
Revenues
We had revenues of $3,707,000 for the
quarter ended June 30, 2013 compared to $3,336,000 for the comparable period in 2012, representing a $371,000, or 11%, increase
in revenues. The increase was related to a six week, phase III breast cancer study that was delivered during the second quarter
of 2013 and generated over $1 million in revenues and represented 35% of our revenues for the quarter. We do not anticipate a
further significant revenue contribution from this project, or another project of equal magnitude in a condensed period, this
year.
During the second quarter of 2013, we
performed work on 90 different projects, in connection with our pharmaceutical drug trials in the fields of oncology, osteoarthritis
and various other therapeutic areas. This compares to 96 projects during the same period in 2012. During the second quarter of
2013, 68% of our business was in oncology services and 20% in musculoskeletal, the remaining 12% was in other therapeutic areas.
This compares to 67%, 24% and 9%, respectively, in 2012. During the second quarter of 2013, 82% of the revenues were derived from
Phase II and III studies compared to 76% during the comparable period in 2012.
Gross Profit
We had a gross profit of $1,770,000 for
the second quarter of 2013 compared to $1,344,000 for the comparable period in 2012, representing a $426,000, or a 32% increase.
Our gross profit margin was 48% during the quarter ended June 30, 2013 compared to 40% during the second quarter of 2012. Excluding
reimbursed charges, which yield no margin, our gross margin was 50% for the second quarter of 2013 compared to 43% in the second
quarter of 2012. Our margins increased year over year due to the project mix and the volume of business during a given quarter.
During the second quarter of 2013, we achieved improved gross margins due to the large Phase III study which we were able to deliver
efficiently due to our new software release that enables quick, efficient and reliable analysis of traditional Phase III imaging
endpoints.
Research and Development
Research and development costs decreased
in the quarter ended June 30, 2013 by $26,000, or 7%, to $350,000, when compared to the quarter ended June 30, 2012. The decrease
was due to a reduction in professional fees to support our 510k filing with the FDA for our first personalized medicine application
and two fewer employees within the department during the quarter ended June 30, 2013 as compared to the second 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 June 30, 2013 by $120,000, or 39% to $430,000, when compared to the quarter ended June 30, 2012. 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. 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 our strategic alliance with PPD, Inc.
General and Administrative
General and administrative expenses for
the quarter ended June 30, 2013 were $768,000, an increase of $51,000 or 7%, when compared to the quarter ended June 30, 2012.
The increase was attributed to general rate increases for personnel and the transfer of one employee to the department during
the third quarter of 2012 in support of
our personalized medicine initiative
. 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 $91,000 for the quarter ended June 30, 2013 compared to $107,000 during the quarter ended June 30, 2012. The reduction was
due to a number of capital assets being completely depreciated during the first six months of 2013 and a lower amount of capital
purchases during 2012 and 2013.
Other Income
Other income for the quarter ended June
30, 2013 was $3,000 compared to $104,000 for the quarter ended June 30, 2012. During the second quarter of 2013, we recognized
a marked to market unrealized gain of $10,000, 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 gain of $108,000
for the quarter ended June 30, 2012. The aggregate decrease of $99,000 when compared to the second quarter of 2012 is attributable
to the lower average price of our common stock during the first six months of 2013 as compared to the same period in 2012.
Net Income (Loss)
Net income for the quarter ended June
30, 2013 was $134,000 compared to a net loss of $63,000 for the quarter ended June 30, 2012. The improvement in our net income
over the prior period loss was primarily related to the increase in the gross profit and revenues during the quarter as described
above.
Results of Operations for the Six Months Ended June 30,
2013 Compared to the Six Months Ended June 30, 2012
Revenues
Our revenues
for the six months ended June 30, 2013 were $6,239,000, a decrease of $799,000 or 11% over the first half of 2012.
The
decrease in revenues is related to a slowdown in the amount of new projects awarded in 2012, delays in decisions being made by
new and returning customers on outstanding proposals, and delays in the initiation of previously awarded and contracted projects.
In July of 2012 we hired two individuals to augment our sales efforts in Europe and the US West Coast,
two areas which we believed had been underserviced in the past. We believe greater presence in these regions will enable us to
better attack the market and provide us greater visibility in those regions. In addition to hiring sales representatives, we have
reorganized our sales function over the past year, which we believe will allow our sales personnel more time to pursue opportunities
and interface with existing and prospective customers. Although the amount of new project awards has been slower than we experienced
in previous years, we did see an increased number of requests for proposals in 2012 and the first six months of 2013, in particular
through the PPD channel. We believe that this increase in requests for proposals and our strategic alliance with PPD, Inc. will
help increase the level of business activity from what we experienced in 2012.
During the first six months of 2013, we
performed work on 100 different projects in connection with our pharmaceutical drug trials in the fields of oncology, osteoarthritis
and various other therapeutic areas. This compares to 107 projects during the same period in 2012. During the first six months
of 2013, 65% of our business was in oncology services and 22% in musculoskeletal, and the remaining 13% was in other therapeutic
areas. This compares to 69%, 23% and 8%, respectively, in 2012. During the first six months of 2013, 76% 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 $2,555,000 for
the six months ended June 30, 2013 compared to $2,755,000 for the comparable period in 2012, representing a $200,000, or 7%, decline.
Our gross margin for the six months ended June 30, 2013 was 41% compared to 39% for the first half of 2012. Excluding reimbursed
charges, which yield no margin, our gross margin was 44% for the first six months of 2013 compared to 43% in the first six months
of 2012. Our margins increased slightly year over year due to the project mix and the volume of business during a given quarter.
Specifically, during the second quarter of 2013, we achieved improved gross margins due to the large Phase III study which we
were able to deliver efficiently due to our new software release that enables quick, efficient and reliable analysis of traditional
Phase III imaging endpoints.
Research and Development
Total research and development expenditures
were $803,000 in the first half of 2013 compared to $757,000 for the comparable period in 2012, an increase of 6%. The expenditures
were higher due to consultant and professional fees related to the continued development of the personalized medicine application.
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 six
months ended June 30, 2013 were $788,000 compared to $647,000 for the first half of 2012, an increase of 22%. 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. 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 our strategic alliance with PPD, Inc.
General and Administrative
General and
administrative expenses for the six months ended June 30, 2013 were $1,764,000, an increase of $245,000 or 16%, over the first
half 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.
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 $187,000 for the six months ended June 30, 2013 compared to $219,000 during the first half of June 30, 2012. The reduction
was due to a number of capital assets being completely depreciated during the first six months of 2013 and by decreases in capital
purchases during 2012.
Other Income (Expense)
Other income
for the six months ended June 30, 2013 was $7,000 compared to other expense of $291,000 in the same period in 2012. During the
first six months of 2013, we recognized a marked to market unrealized gain of $14,000, 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 $286,000 for the six months ended June 30, 2012. The aggregate decrease of $300,000 when compared
to the first six months of 2012 is attributable to the lower average price of our common stock during the first six months of
2013 as compared to the first six 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 June 30, 2013, the Company had 214,229 warrants outstanding subject to the anti-dilution adjustment provision, as compared
to the 902,038 prior to the Series C-1 financing that occurred on April 3, 2012.
Net Loss
Our net loss for the six months ended
June 30, 2013 was $979,000 compared to a net loss of $677,000 for the same period in 2012. The increase in our net loss was primarily
related to lower revenues and gross profit during the first quarter of 2013, in addition to expenditures for the personalized
medicine application, as discussed above.
Liquidity and Capital Resources
Our working capital as of June 30, 2013
was approximately $8,360,000 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 $1,374,000 in the six months ended June 30, 2013 compared to net cash used in operating activities of $781,000 in the
comparable 2012 period. The decrease is mostly due to the decrease in revenues and the timing of advance payments on new projects
and receipts from customers in the first six months of 2013 as compared to the first half of last year.
We invested $32,000 in the purchase of
equipment and the acquisition of patents in the first six months of 2013, compared to $115,000 for the investment in these items
in the first six months of 2012. The decrease reflects investments in our IT and IS infrastructure in the first six months of
2012 that did not reoccur in 2013.
There was no cash provided or used by
our financing activities in the six months ended June 30, 2013 compared to cash provided of $2,938,000 in the six months ended
June 30, 2012. The decrease is a result of one time proceeds from the exercise of options and warrants during the first six 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. Although we believe we have
sufficient capital to continue our efforts to commercialize our personalized medicine solutions in the short term, our capital
requirements will depend on the feedback we receive from the FDA and insurance providers (payers). As a result, there can be no
assurance that we will have sufficient capital available to successfully commercialize our personalized medicine applications.
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:
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·
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adverse
economic conditions;
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·
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inability
to raise sufficient
additional capital
to operate our business;
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·
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unexpected
costs, lower than
expected sales and
revenues, and operating
defects;
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·
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adverse
results of any legal
proceedings;
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·
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the
volatility of our
operating results
and financial condition;
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·
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inability
to attract or retain
qualified senior
management personnel,
including sales
and marketing, and
scientific personnel;
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·
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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;
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a
continued decline
in new bookings
and awards causing
a decrease in our
revenues and cash
flows;
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·
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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
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·
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other
specific risks that
may be referred
to in this report
or in our report
on Form 10-K or
the year ended December
31, 2012.
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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.