VIRTUALSCOPICS, INC. - 10-K - : Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with VirtualScopics'
consolidated balance sheet, and related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years ended December 31,
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 in "Risk Factors" and elsewhere in this report. We disclaim
any obligation to update information contained in any forward-looking
VirtualScopics, Inc. is 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 our customers to make better decisions faster.
Since inception, revenues have been derived primarily from image processing
services in connection with pharmaceutical drug trials. For these services, we
have been concentrating in the areas of oncology, fatty liver disease,
neurology, cardiovascular, and osteoarthritis. We have also derived a small
portion of revenue from consulting services. We expect that the concentration of
our revenue will continue in these services and in those areas in 2014. Revenues
are recognized as the medical images that we process are quantified and
delivered to our customers and/or the services are performed.
As of December 31, 2013, the amount remaining to be earned from active projects
and awards was approximately $24 million. Once we enter into a new contract for
participation in a drug trial, there are several factors that can effect 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
performance reasons 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 the
award is made. Recognition of revenue under the contract may also be affected by
the timing of patient recruitment and image site identification and training.
Additionally, the majority of contracts we have with customers are cancelable
for any reason by giving 30 days advance notice.
Results of Operations
Results of Operations for Year Ended December 31, 2013 Compared to Year Ended
December 31, 2012
We had revenues of $11,174,000 for the year ended December 31, 2013 compared to
$12,963,000 for the year ended December 31, 2012, representing a 14% decrease.
The decrease in revenues is related to the slowdown in the amount of new
projects awarded in 2012, the effects of which slowdown carried over into 2013.
Revenues were also impacted by the timing of the initiation of awarded and
contracted projects and the large number of studies that had been completed in
2013. During the life of a project, quite often there is an expansion in the
size of the study. However there are also situations where the sponsor does not
recruit the number of subjects or sites as originally budgeted and in those
cases there are remaining dollars at the end of the study that will not be
realized into revenue. These amounts are reconciled and removed from the
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. As a result of these changes, we have experienced an
increased number of proposals to 257 during 2013 as compared 216 from the same
period in 2012, in particular through our strategic alliance with PPD, Inc. We
believe that this increase in requests for proposals and our strategic alliance
with PPD, Inc. will continue to increase the level of business activity into
2014. As of December 31, 2013, we had active projects with 10 of the leading 15
pharmaceutical and biotechnology companies in the world.
We had a gross profit of $4,419,000 for the year ended December 31, 2013
compared to $5,251,000 for the comparable period in 2012. The gross margin for
the year ended December 31, 2013 was 40% compared to 41% for the year ended
December 31, 2012. Our margins declined year over year primarily as a result of
the decrease in revenues encountered during 2013 as discussed above and the mix
of services performed during 2013. Historically, we have experienced lower
margins in our musculoskeletal projects than our oncology projects.
During 2013, we performed work for 35 customers, representing 138 different
projects, in connection with their pharmaceutical drug trials primarily in the
fields of oncology and musculoskeletal diseases (osteoarthritis and rheumatoid
arthritis) along with various other projects. This compares to 31 customers
representing 123 projects in 2012. In 2013, 47% of our revenues were generated
from Phase III studies compared to 48% in 2012. Additionally, for the year ended
December 31, 2013, oncology, musculoskeletal and other projects represented 59%,
26%, and 15%, respectively, of our revenues. This compares to 69%, 21%, and 10%,
respectively, for 2012.
Research and Development
Research and development costs decreased in 2013 by $92,000, or 6%, to
$1,511,000, when compared to 2012. The decrease was the result of three
employees terminating employment without being replaced in early third quarter
of 2013 and no additional monies being spent on the personalized medicine
initiative during the fourth quarter of 2013. These cost reductions were
partially offset by an increase in employment incentives during the twelve month
ended December 31, 2013. We are currently reevaluating our approach in this
personalized medicine opportunity and have delayed any additional work on this
application. Our research and development efforts within our core business
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 and improve our gross margin. Additionally, we continue to invest
in the commercialization of new imaging techniques across various imaging
modalities and therapeutic areas. As of December 31, 2013 and 2012,
respectively, there were 11 and 14 employees in our research and development
Sales and Marketing
Sales and marketing costs increased in 2013 by $145,000, or 10%, to $1,556,000,
when compared to 2012. The increase was the result of hiring two experienced
sales individuals to cover the European and West Coast US territories in 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 year ended December 31, 2013 as compared to the same period in 2012.
Our sales and marketing efforts include conference attendance and presentations,
technically-focused webinars, customer webinars and related travel along with
advertising in key scientific journals. During 2013, we made further investments
in driving awareness of our strategic alliance with PPD and the benefits it
provides the pharmaceutical and medical device industries. The PPD alliance was
expanded in January 2012 to include cardiovascular, central nervous system and
medical device studies.
General and Administrative
General and administrative expenses for the year ended December 31, 2013 were
$3,749,000, representing an increase of $669,000 or 22%, when compared to 2012.
The increase was driven by expenses realized as part of the former CEO's
separation agreement and the associated search for a replacement, and the legal,
franchise, and other fees associated with the reverse stock split transaction
and business initiatives, offset by a decrease in stock compensation. 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 decreased for the year ended December 31,
2013 by $54,000 or 13%, to $367,000, when compared to 2012. The reduction was
due to a number of capital assets becoming completely depreciated during 2013
and reductions in spending for capital purchases during 2012. The amortization
and depreciation costs are based on the timing and life of patents and property
and equipment. We continue to invest in our patent portfolio, however, we do not
anticipate significant expenditures are necessary to support our current
business and future strategies. Our IT systems are the basis of our operating
platform. Therefore, we will continue to invest in our IT infrastructure to
ensure we have a robust and reliable operating system.
Other income (expense), net
Interest income for the year ended December 31, 2013 was $6,000, representing
interest derived on the Company's operating and savings accounts, compared to
interest income of $3,000 in 2012. Additionally, we recognized an unrealized
gain of $16,000 related to the fair value of certain warrants that were issued
in connection with our 2007 Series B offering (see Financial Statement Note 5).
During 2012, we recognized an unrealized loss of $265,000 related to the fair
value of those warrants. The aggregate increase of $281,000 when compared to
2012 is attributable to the lower average price of our common stock during 2013
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 that occurred in April 2012.
Our net loss for the year ended December 31, 2013 was $2,745,000 compared to a
net loss of $1,529,000 for the year ended December 31, 2012. The increase in our
net loss over the prior period was attributable to lower revenues and gross
profit during 2013 in addition to the expenditures relating to the former CEO's
separation, search for a replacement, and fees incurred in connection with our
reverse stock split.
Liquidity and Capital Resources
Our working capital as of December 31, 2013 and 2012 was approximately
$6,731,000 and $8,972,000, respectively. The decrease in working capital was
primarily a result of the decline in 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 $1,126,000 in the twelve months
ended December 31, 2013 compared to net cash provided in operating activities of
$43,000 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
2013 as compared to the previous year.
We invested $67,000 in the purchase of equipment and the costs in patent
applications and their maintenance in 2013, compared to $194,000 for the
investment in these items in 2012. The decrease reflects investments in our IT
and IS infrastructure in 2012 that did not reoccur in 2013. In 2014, we are
planning to investment in our operating systems and infrastructure in connection
with our core business. We believe these planned investments will help further
enhance our abilities as a Phase III provider and continue to improve our
operational efficiencies. During 2013 we incurred $18,000 in patent costs
associated with filing costs for intellectual property, as compared to $23,000
in 2012. The decrease is due to the timing of office actions on our existing
Net cash provided in financing activities was $0 and $2,937,000 in 2013 and
2012, respectively. The decrease was a result of no financing transactions
occurring during 2013 as compared to the previous year when we received proceeds
from the exercise of options and warrants and the closing of the investment by
Merck Global Health Innovation Fund, LLC in 2012.
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 operating leases (as
described in "Contractual Obligations" below) that have or are reasonably likely
to have a current or future effect that is material to investors on our
financial condition, revenues or expenses, results of operations, liquidity,
capital resources or capital expenditures.
The following table summarizes our contractual obligations at December 31, 2013
which we expect to have an effect on our liquidity and cash flow in future
periods. (See Item 2: Description of Property for a full description of our
Payments Due by Period
Total 1 Year 1-4 Years
Operating Leases $ 1,141,735 $ 318,409 $ 823,326
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