VirtualScopics, Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - VirtualScopics, Inc.	Financial_Report.xls
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AS REQUIRED BY RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - VirtualScopics, Inc.	v230510_ex31-1.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT 0F OF 2002 - VirtualScopics, Inc.	v230510_ex32-1.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT 0F OF 2002 - VirtualScopics, Inc.	v230510_ex32-2.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER AS REQUIRED BY RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - VirtualScopics, Inc.	v230510_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________________to______________________________________

Commission File Number: 000-52018

VirtualScopics, Inc.

(Exact name of registrant as specified in its charter)

Delaware	04-3007151
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

500 Linden Oaks, Rochester, New York	14625
(Address of principal executive offices)	(Zip Code)

(585)249-6231

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).X Yes □ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 31, 2011, there were 29,311,897 shares of the registrant’s common stock, $0.001 par value, outstanding.

VIRTUALSCOPICS, INC.

TABLE OF CONTENTS

		Page Numbers

PART I	FINANCIAL INFORMATION

	ITEM 1: Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010	1
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements (unaudited)	4-13
	ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations	14-22
	ITEM 4: Controls and Procedures	21-22

PART II	OTHER INFORMATION

	ITEM 1: Legal Proceedings	22
	ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds	22-23
	ITEM 3: Defaults Upon Senior Securities	23
	ITEM 5: Other Information	23
	ITEM 6: Exhibits	23

PART 1: FINANCIAL INFORMATION

ITEM 1. Financial Statements

VirtualScopics, Inc. and Subsidiary

Condensed Consolidated Balance Sheets

	June 30,			December 31,
	2011			2010
	(Unaudited)
Assets

Current assets
Cash	$	4,571,031		$	4,576,060
Accounts receivable, net		3,192,865			2,727,525
Prepaid expenses and other current assets		367,545			305,079
Total current assets		8,131,441			7,608,664

Patents, net		1,651,050			1,711,501
Property and equipment, net		614,032			404,426
Total assets	$	10,396,523		$	9,724,591

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable and accrued expenses	$	803,590		$	1,099,838
Accrued payroll		667,654			821,107
Unearned revenue		599,565			214,508
Derivative liability		864,797			2,609,708
Total current liabilities		2,935,606			4,745,161

Commitments and Contingencies

Stockholders' Equity
Convertible preferred stock, $0.001 par value; 15,000,000 shares authorized;
Series A 8,400 shares authorized; issued and outstanding, 2,290 and 3,188 shares at June 30, 2011 and December 31, 2010, respectively; liquidation preference $1,000 per share		2			3
Series B 6,000 shares authorized; issued and outstanding, 600 and 800 shares at June 30, 2011 and December 31, 2010, respectively; liquidation preference $1,000 per share		1			1
Common stock, $0.001 par value; 85,000,000 shares authorized;
issued and outstanding, 29,188,861 and 27,414,620 shares at June 30, 2011 and December 31, 2010, respectively		29,189			27,415
Additional paid-in capital		17,442,699			15,090,254
Accumulated deficit		(10,010,974	)		(10,138,243	)
Total stockholders' equity		7,460,917			4,979,430
Total liabilities and stockholders' equity	$	10,396,523		$	9,724,591

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,
	2011			2010			2011			2010

Revenues	$	3,576,253		$	2,970,039		$	6,925,863		$	5,811,795
Reimbursement revenues		276,672			251,554			586,039			480,804
Total revenues		3,852,925			3,221,593			7,511,902			6,292,599

Cost of services		1,755,235			1,331,022			3,505,104			2,574,665
Cost of reimbursement revenues		276,672			251,554			586,039			480,804
Total cost of services		2,031,907			1,582,576			4,091,143			3,055,469
Gross profit		1,821,018			1,639,017			3,420,759			3,237,130

Operating expenses
Research and development		382,464			290,811			728,918			559,720
Sales and marketing		310,318			341,665			618,831			650,358
General and administrative		856,983			789,020			1,652,786			1,551,131
Depreciation and amortization		113,224			127,094			250,448			252,013
Total operating expenses		1,662,989			1,548,590			3,250,983			3,013,222

Operating income		158,029			90,427			169,776			223,908

Other income (expense)
Other income		13,006			3,138			14,232			7,359
Other expense		(16,720	)		(5,115	)		(17,940	)		(5,286	)
Gain (Loss) on derivative financial instrument		173,335			252,574			(38,799	)		123,135
Total other income (expense)		169,621			250,597			(42,507	)		125,208

Net income		327,650			341,024			127,269			349,116

Series B preferred stock dividend		12,000			44,092			24,989			100,057
Net income attributable to common stockholders	$	315,650		$	296,932		$	102,280		$	249,059


Weighted average basic shares outstanding		29,045,428			26,081,487			28,544,856			25,804,026
Weighted average diluted shares outstanding		36,964,760			31,017,406			36,738,762			30,632,898
Basic and diluted earnings per share	$	0.01		$	0.01		$	0.00		$	0.01

See notes to condensed consolidated financial statements.

VirtualScopics, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

(unaudited)

	For the Six Months Ended June 30,
	2011			2010
Cash flows from operating activities
Net income	$	127,269		$	349,116
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		250,448			252,013
Gain on the disposal of assets		(12,500	)		-
Stock-based compensation		461,953			392,785
Derivative financial instrument		38,799			(123,135	)
Changes in operating assets and liabilities
Accounts receivable		(465,340	)		(384,946	)
Prepaid expenses and other assets		(95,724	)		(24,464	)
Accounts payable and accrued expenses		(288,366	)		459,445
Accrued payroll		(153,453	)		(265,295	)
Unearned revenue		385,057			(570,216	)
Total adjustments		120,874			(263,813	)
Net cash provided by operating activities		248,143			85,303

Cash flows from investing activities
Purchase of property and equipment		(346,640	)		(149,048	)
Acquisition of patents		(7,205	)		(7,253	)
Net cash used in investing activities		(353,845	)		(156,301	)

Cash flows from financing activities
Proceeds from the exercise of warrants for common stock		105,001			-
Proceeds from the exercise of stock options for common stock		32,383			25,250
Withholding taxes paid on cashless exercise of stock options		(11,722	)		-
Cash dividends on series B preferred stock		(24,989	)		(100,057	)
Net cash provided by (used in) financing activities		100,673			(74,807	)
Net decrease in cash		(5,029	)		(145,805	)
Cash
Beginning of period		4,576,060			4,327,410
End of period	$	4,571,031		$	4,181,605

Supplemental disclosure of cash flow information
Non-cash financing activity:
Issuance of restricted awards in settlement of accrued liability for
for board fees	$	30,250		$	132,304
Cashless exercise of stock options	$	191		$	-
Cashless exercise of warrants	$	532		$	-
Reclassification of derivative liabilities upon exercise of warrants
to additional paid in capital	$	1,783,710		$	-

See notes to condensed consolidated financial statements.

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

NOTE 1 - Organization 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 clinical research and development.

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, 2010. 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 six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

NOTE 2 - Summary of Certain Significant Accounting Policies

Principles of Consolidation

The accompanying 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.

Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on previously reported results of operations or stockholders’ equity.

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, do 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)

Although the Company determined the warrants include an implied downside protection feature, it performed a Monte-Carlo simulation and concluded that the value of the feature is de minimus and the use of the Black-Scholes valuation model is considered to be a reasonable method to value the warrants. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date (Note 5).

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 and delivered. 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 products. 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. See Note 5 – Derivative Liability for a further discussion regarding the Company’s measurement of financial assets and liabilities at fair value.

Recently Issued and Adopted Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU addresses fair value measurement and disclosure requirements within Accounting Standards Codification (“ASC”) Topic 820 for the purpose of providing consistency and common meaning between U.S. GAAP and IFRSs. Generally, this ASU is not intended to change the application of the requirements in Topic 820. Rather, this ASU primarily changes the wording to describe many of the requirements in U.S. GAAP for measuring fair value or for disclosing information about fair value measurements. This ASU is effective for periods beginning after December 15, 2011. It is not expected to have any impact on the Company’s consolidated financial statements or disclosures.

NOTE 3 - Stock-Based Compensation

For the three and six months ended June 30, 2011 and 2010, 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:

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

	Three Months Ended June 30				Six Months Ended June 30
	2011		2010		2011		2010

Cost of service revenues	$	14,252	$	8,154	$	24,019	$	15,659
Research and development		32,015		22,695		64,212		40,482
Sales and marketing		2,700		2,858		9,117		9,036
General and administrative		156,330		158,298		342,237		304,919
Total stock-based compensation	$	205,297	$	192,005	$	439,585	$	370,096

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 vest and expiration for all individuals within the grant. Since the Company has limited historical volatility information, it bases its expected volatility on the historical volatility of similar entities whose share prices are publicly available averaged with the Company’s historical volatility excluding the first ten months due to the discreet and non-recurring nature of the trading. In making its determination as to similarity, the Company considered the industry, stage of life cycle, size, and financial leverage of such other entities. 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 following assumptions were used to estimate the fair value of options granted for the six months ended June 30, 2011 and 2010 using the Black-Scholes option-pricing model:

	June 30,
	2011			2010
Risk free interest rate		2.6	%		2.8	%
Expected term (years)		6.2			6.2
Expected volatility		55.1	%		57.7	%
Expected dividend yield		-			-

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

A summary of the employee stock option activity for the six months ended June 30, 2011 is as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted-Average Remaining Contractual Term
Options outstanding at January 1, 2011		5,946,848		$	1.24
Granted		687,853			1.99
Exercised		(377,888	)		1.02
Cancelled/Forfeited		(109,815	)		1.93
Options outstanding at June 30, 2011		6,146,998			1.32		6.49
Options exercisable at June 30, 2011		3,631,815			1.37		5.13

The weighted-average grant-date fair value of options granted during the six months ended June 30, 2011 and 2010 was $745,020 and $916,396, respectively. There were 356,377 options exercised in a cashless manner during the six months ended June 30, 2011 including the exercise of 5,475 non-employee stock options, resulting in issuance of 191,015 shares of the Company’s common stock. Additionally, there were 26,986 options exercised resulting in cash proceeds of $32,383 during the six months ending June 30, 2011 as compared to 25,000 options exercised resulting in cash proceeds of $25,250 during the six months ending June 30, 2010.

NOTE 4 - Stockholders’ Equity

During the six months ended June 30, 2011, 898 shares of the Company’s series A convertible preferred stock were converted into 745,673 shares of the Company’s common stock and 200 shares of series B convertible preferred stock were converted into 166,072 shares of the Company’s common stock upon the conversion by existing holders thereof. The Company did not receive any cash or other consideration in connection with the conversions. Additionally, the Company issued 87,188 shares of common stock upon the exercise of warrants at an exercise price of $1.2043 per share, issued in 2007 in connection with the Series B Preferred Stock private placement. The Company received an aggregate of $105,001 upon the exercise of these warrants. The Company also issued 531,506 shares of common stock upon the cashless exercise of 1,120,982 warrants by the warrant holders, as permitted under the terms of the Series B Preferred Stock.

Restricted Stock Awards

A restricted stock award entitles the recipient to receive shares of unrestricted common stock upon vesting of the award. 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. Restricted stock awards granted but unvested shares 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. During the six months ended June 30, 2011, the Company issued 25,801 shares of its common stock valued at $30,250 in settlement of accrued stock awards.

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company incurred $22,368 and $22,689 in compensation expense in the first six months of 2011 and 2010, respectively, related to the restricted stock awards for services by Board members for those respective periods. As of June 30, 2011, accrued expenses includes $52,430 of accrued stock awards representing 33,734 shares of common stock granted but not yet issued to directors for their services on the board.

NOTE 5 - Derivative Liability

Derivative liabilities resulting from 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, 2011			January 1, 2011
Series B warrants:
Risk-free interest rate		0.9	%		1.4	%
Expected volatility		57.6	%		57.6	%
Expected life (in years)		3.2			3.7
Expected dividend yield

Number of warrants		902,038			2,110,208

Fair value	$	864,797		$	2,609,708

The risk-free interest rate was based on rates established by the Federal Reserve. The Company’s expected volatility was based on the historical volatility of similar entities whose share prices are publicly available averaged with the historical volatility of the Company’s trading history excluding the first ten months of trading due to the discreet and non-recurring nature of the trading. The expected life of the warrants was determined by the expiration date of the warrants. The 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 fair value of these warrant liabilities was $864,797 at June 30, 2011. The change in fair value during 2011 is $1,744,911 of which $38,799 is reported in our condensed consolidated statement of operations as a loss on derivative financial instruments and $1,783,710 is a reclassification of the fair value of the derivative liability to equity upon the exercise of the warrants. 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 a gain or loss on derivative financial instruments.

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

Fair Value Measurement

Valuation Hierarchy

ASC 820, “Fair Value Measurements and Disclosures,” establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the liabilities carried at fair value measured on a recurring basis as of June 30, 2011:

			Fair Value Measurements at June 30, 2011
	Total Carrying Value at June 30, 2011		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Derivative liabilities	$	864,797	$	-	$	-	$	864,797

The carrying amounts of cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short maturities. The derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors, and are classified within Level 3 of the valuation hierarchy.

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis:

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Beginning balance	$	1,038,132		$	1,269,392		$	2,609,708		$	1,139,953
Net unrealized (gain) loss on derivative financial instruments		(173,335	)		(252,574	)		38,799			(123,135	)
Reclassification to equity		-			-			(1,783,710	)		-
Ending balance	$	864,797		$	1,016,818		$	864,797		$	1,016,818

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

NOTE 6 - Earnings Per Share

Basic earnings per share is computed using 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).

The following table reconciles the numerator and denominator for the calculation

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010
Basic earnings per share
Numerator:
Net Income	$	327,650		$	341,024		$	127,269		$	349,116
Preferred stock cash dividends		(12,000	)		(44,092	)		(24,989	)		(100,057	)
Numerator for basic earnings
per share:
Net income available to
common stockholders	$	315,650		$	296,932		$	102,280		$	249,059

Denominator:
Weighted average basic shares
Outstanding		29,045,428			26,081,487			28,544,856			25,804,026

Earnings per basic share:
Net Income	$	0.01		$	0.01		$	0.00		$	0.01
Preferred stock cash dividends		0.00			0.00			0.00			0.00
Net income available to
common stockholders	$	0.01		$	0.01		$	0.00		$	0.01

Dilutive earnings per share
Numerator:
Net Income	$	327,650		$	341,024		$	127,269		$	349,116
Preferred stock cash dividends		-			-			-			-
Numerator for diluted earnings per share:

Net income available to
common stockholders	$	327,650		$	341,024		$	127,269		$	349,116

Denominator:
Weighted average basic shares
outstanding		29,045,428			26,081,487			28,544,856			25,804,026
Weighted average effect of dilutive
securities:
Employee stock options		4,998,433			411,385			5,115,143			358,452
Convertible preferred stock		2,399,736			4,329,496			2,399,736			4,329,496
Warrants		521,163			195,038			679,027			140,924
Weighted average diluted shares
outstanding		36,964,760			31,017,406			36,738,762			30,632,898

Net income per diluted share:
Net Income	$	0.01		$	0.01		$	0.00		$	0.01
Preferred stock cash dividends		0.00			0.00			0.00			0.00
Net income available to
common stockholders	$	0.01		$	0.01		$	0.00		$	0.01


Securities excluded from the weighted
average dilutive common shares
outstanding because their inclusion
would have been anti-dilutive:
Preferred Stock		-			-			-			-
Stock options		1,309,934			4,897,638			1,307,934			5,356,474
Warrants		87,813			1,205,195			87,813			2,322,577

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

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, 2011 because it is still currently more likely than not that the benefits of our 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, 2011, 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 customer accounted for approximately 61% of its accounts receivable as of June 30, 2011 and 59% of total revenue for the six months ended June 30, 2011. The largest customer accounted for 58% of its accounts receivable as of June 30, 2010 and 51% of total revenue for the six months ended June 30, 2010.

The Company’s top customer accounted for approximately 61% of its accounts receivable as of June 30, 2011 and 55% of its total revenue for the three months ended June 30, 2011. The largest customer accounted for 58% of its accounts receivable as of June 30, 2010 and 53% of total revenue for the three months ended June 30, 2010.

NOTE 9 – Subsequent Event

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, 2011 and December 31, 2010 and the related condensed consolidated statements of operations and cash flows for the quarters ended June 30, 2011 and 2010, 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

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 pharmaceutical, biotechnology and medical device companies to make better decisions faster. Additionally, our technology helps to curtail trials that are not likely to be beneficial and to avoid mistaken termination of compounds that are likely to prove efficacious, as well as 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, VirtualScopics was formed after being spun out of the University of Rochester and in June 2002, VirtualScopics purchased the underlying technology and patents created by VirtualScopics’ founders from the University of Rochester. VirtualScopics owns all rights to the patents underlying its 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 osteoarthritis. We have also derived a portion of 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 processed are quantified and delivered to our customers.

The amount of projects under management has steadily grown over the past several years, and 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, 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 also begun 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 510k clearance from the FDA for our application to be used as a tool to analyze Dynamic Contrast-Enhanced Magnetic Resonance Images (DCE-MRI). We will continue to assess the best mechanism for channeling our application into the market; however, there can be no assurance that approval will be granted or we will experience significant demand for our application.

Results of Operations

Results of Operations for Quarter Ended June 30, 2011 Compared to Quarter Ended June 30, 2010

Revenues

We had revenues of $3,853,000 for the quarter ended June 30, 2011 compared to $3,222,000 for the comparable period in 2010. This $631,000, or 20%, increase in revenues was directly related to the expansion of our penetration within the pharmaceutical and medical device industries. During the second quarter, we performed work on 106 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 2010. The majority of the demand is seen within our oncology service line; however, we have recently seen increased interest in our other applications, including musculoskeletal and cardiovascular services. During the second quarter of 2011, 80% of our business was in oncology services and 17% in musculoskeletal, the remaining 3% was in other therapeutic areas. This compares to 79%, 15% and 6%, respectively, in 2010. During the second quarter of 2011, 77% of the revenues were derived from Phase II and III studies compared to 71% during the comparable period in 2010. The gross margin we are able to realize on our revenues is impacted by the nature of the service mix during the reported quarter, as well as the phase of study. Site qualification activities tend to result in higher margins whereas image analysis activities yield a lower margin. Likewise, historically Phase I studies generally have higher margins than Phase III studies. Therefore, depending on the mix of services in a quarter, our margins may vary from quarter to quarter.

Gross Profit

We had a gross profit of $1,821,000 for the second quarter of 2011 compared to $1,639,000 for the comparable period in 2010, representing a $182,000, or 11%, improvement. Our gross profit margin was 47% during the quarter ended June 30, 2011 compared to 51% during the second quarter of 2010. Our margins declined year over year due to the project mix and phase of study during the second quarter of 2011 as compared to 2010. Of the revenues recognized during the second quarter of 2011, 39% were derived from image analysis work compared to 20% in the second quarter of 2010, our image analysis activities yield lower margin than our start-up/study initiation activities. Additionally, we increased our staff within our operations group by 30% during 2010 and 2011. The hiring was predominately in project management which is our direct link to our customers. Additionally, we continue to invest in our infrastructure to support efficiencies as we scale the business to support our growth. We anticipate these investments and the higher revenue volume will allow us to be more efficient in the processing of our services.

Research and Development

Research and development costs increased in the quarter ended June 30, 2011 by $92,000, or 32%, to $382,000, when compared to the quarter ended June 30, 2010. The increase was due to the hiring within our software development group at the end of 2010 and early 2011. We believe the investments we are making in our 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. As of June 30, 2011, there were 14 employees in our research and development group, which includes the algorithm and software development groups, this compares to 10 as of June 30, 2010.

Sales and Marketing

Sales and marketing costs declined $31,000, or 9%, to $310,000 in the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010 due to one less sales person within the sales and marketing group. The company is currently recruiting for an experienced individual to lead our sales and marketing efforts. Our sales and marketing initiatives encompass attendance and presentations at leading industry conferences, frequent educational webinars and active calling on existing and new customers. Currently, there are 5 individuals within our sales and marketing department.

General and Administrative

General and administrative expenses for the quarter ended June 30, 2011 were $857,000, an increase of $68,000 or 9%, when compared to the quarter ended June 30, 2010. The increase is driven by severance charges incurred during the second quarter of 2011 as well as higher SEC and legal fees. 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 $113,000 for the quarter ended June 30, 2011 compared to $127,000 during the quarter ended June 30, 2010. The reduction is due to the complete amortization of our right to use an MRI unit at the University of Rochester (a related party). Offsetting this reduction was higher depreciation charges related to recent capital purchases, including the purchase and installation cost of an ERP system. We anticipate our IT related costs to increase during 2011 due to the purchase of storage and system-related equipment to support our increasing capacity requirements.

Other Income (Expense)

Other income for the quarter ended June 30, 2011 was $170,000 compared to $251,000 for the quarter ended June 30, 2010. During the second quarter of 2011, we recognized a marked to market gain of $173,000, 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 gain of $253,000 for the three months ended June 30, 2010. The aggregate decrease of $80,000 when compared to the second quarter of 2010 is attributable to the higher average price of our common stock during the second quarter of 2011 compared to the second quarter of 2010.

Net Income

Net income for the quarter ended June 30, 2011 was $328,000 compared to income of $341,000 for the quarter ended June 30, 2010. The slight decrease in our net income over the prior period was primarily related to the decline in margins due to the project mix and phase of study, lower non-cash gain recognized for the marked to market adjustment for certain warrants outstanding, and the increase in non-cash stock compensation expense. Offsetting the lower gain on derivative, was higher operating income during the quarter ended June 30, 2011 as compared to the quarter ended June 30, 2010.

Results of Operations for the Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010

Revenues

Our revenues for the six months ended June 30, 2011 were $7,512,000, an increase of $1,219,000 or 19% over the first half of 2010. The increase in sales is due to the broader penetration of our services in the industry and the shift to later stage clinical trials which are inherently larger contracts. We performed services for a total of 117 projects in the first half of 2011, as compared to 106 in the first half of 2010. During the first half of 2011, 78% of our revenues were generated from Phase II/III projects compared to 72% during the first half of 2010. We expect that a majority of our revenues from pharmaceutical and medical device clinical trials will be derived from Phase II and III studies throughout the remainder of 2011.

Gross Profit

We had a gross profit of $3,421,000 for the six months ended June 30, 2011 compared to $3,237,000 for the comparable period in 2010. Our gross margin for the six months ended June 30, 2011 was 46% compared to 51% for the first half of 2010. Our gross margin fluctuations are largely a result of the mix of services performed during a given period. Of the revenues recognized during the first two quarters of 2011, 38% were derived from image analysis work compared to 20% in the first half of 2010. Our site initiation activities typically yield higher margins than our analysis services. In 2010, a higher percent of our business came from site initiation activities as we began work on several Phase III studies. We anticipate margins to approximate 45-48% for the remainder of 2011.

Research and Development

Total research and development expenditures were $729,000 in the first half of 2011 compared to $560,000 for the comparable period in 2010, an increase of 30%. The increase was due to the hiring within our software development group at the end of 2010 and early 2011. 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. As of June 30, 2011, there were 14 employees in our research and development group, which includes the algorithm and software development groups, this compares to 10 as of June 30, 2010.

Sales and Marketing

Sales and marketing costs for the six months ended June 30, 2011 were $619,000 compared to $650,000 for the first half of 2010 due to one less sales person within the sales and marketing group. 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 and occasional consulting and other costs associated with market research activities. As of June 30, 2011, there were 5 individuals in our sales and marketing group. The company is currently recruiting for an experienced individual to lead our sales and marketing group.

General and Administrative

General and administrative expenses for the six months ended June 30, 2011 were $1,653,000, an increase of $102,000 or 7%, over the first half of 2010. The increase is driven by severance charges incurred during the second quarter of 2011, higher SEC and legal fees, increased IT expenses, and an increase in non-cash stock compensation costs resulting from the issuance of employee stock options during the first half of 2011. 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 $250,000 for the six months ended June 30, 2011 compared to $252,000 during the first half of June 30, 2010. The slight reduction is due to the complete amortization of our right to use an MRI unit at the University of Rochester (a related party). Offsetting this reduction was higher depreciation charges related to recent capital purchases, including the purchase and installation cost of an ERP system.

Other Income (Expense)

Other expense for the six months ended June 30, 2011 was $43,000 compared to other income of $125,000 in the same period in 2010. The decrease in other income was a reflection of the recognition of a marked to market loss of $39,000 related to the increase in fair value of certain warrants that were issued in connection with our 2007 series B offering (see Financial Statement Note 5). During the first half of 2010, we recognized an unrealized gain of $123,000 due to the decrease in fair value of those warrants. The aggregate decrease of $162,000 when compared to the first half of 2010 is attributable to the higher average price of our common stock during the first half of 2011 compared to the first half of 2010.

Net Income

Our net income for the six months ended June 30, 2011 was $127,000 compared to a net income of $349,000 for the same period in 2010. The decrease in our net income over the prior period was related to the non-cash loss recognized for the marked to market adjustment for certain warrants outstanding during the first half of 2011 as compared to the gain recognized in 2010, the decrease in margins due to the project mix and phase of study, severance charges, higher SEC and legal fees, increased IT expenses, and the increase in non-cash stock compensation costs in 2011 compared to 2010.

Liquidity and Capital Resources

Our working capital as of June 30, 2011 was approximately $5,196,000 compared to $2,864,000 as of December 31, 2010. The significant increase in working capital was primarily a result of the growth in our operating income, the reclassification of the derivative liability to equity for the exercised warrants in accordance with ASC 815-40 and timing differences in the payment of accounts payable and receipt of accounts receivable.

Net cash provided by operating activities totaled $248,000 in the six months ended June 30, 2011 compared to net cash provided by operating activities of $85,000 in the comparable 2010 period. This increase is mostly due to the timing of receipts from customers as well as the timing of payroll payments in the first half of 2011 as compared to last year. Our days sales outstanding was 71 at the end of the second quarter of 2011, this compares to 57 as of December 31, 2010. We do not expect, nor have we experienced, significant write-offs within our receivables.

We invested $354,000 in the purchase of equipment and the acquisition of patents in the first six months of 2011, compared to $156,000 for the investment in these items in the first six months of 2010. The increase represents investments in our IT and IS infrastructure in 2011 and the costs associated with the acquisition of a new IT storage system to support the demand for our services.

Cash provided by our financing activities in the six months ended June 30, 2011 was $101,000, compared to cash used of $75,000 in the six months ended June, 30 2010. The increase is a result of proceeds from the exercise of options during the first two quarters of 2011 and lower dividend payments due to the conversion of series B preferred shares to common stock over the past year.

We currently expect that existing cash and cash equivalents will be sufficient to fund operations for the next 12 months. If in the next 12 months 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 and our rate of expansion.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements (other than the consulting agreements and operating leases) 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; and

·	other specific risks that may be referred to in this report.

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, 2010 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.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures, as defined in Section 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.

Changes in Internal Controls Over Financial Reporting

An evaluation was performed under the supervision of the Company’s management, including the CEO and CFO, as required under Exchange Act Rule 13a-15(d) and 15d-15(d) of whether any change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the fiscal quarter ended June 30, 2011. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that no change in the Company’s internal controls over financial reporting occurred during the fiscal quarter ended June 30, 2011 that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

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

During the quarter ended June 30, 2011, we issued the following shares of common stock in transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”):

(a) 755 shares of the Company’s series A convertible preferred stock were converted into 626,922 shares of the Company’s common stock and there were no conversions of the Company’s series B convertible preferred stock into shares of the Company’s common stock. The Company did not receive any cash or other consideration in connection with the conversions. Additionally, no commission or other remuneration was paid or given by the Company, directly or indirectly, in connection with such conversions. The issuance of common stock upon conversions of the series A convertible preferred stock was made in reliance on the exemption provided in Section 3(a)(9) of the Securities Act of 1933, as amended.

(b) The Company issued 113,965 shares of common stock upon the net exercise of options, as permitted under the terms thereof, granted under the 2001 and 2005 Long-Term Incentive Plans of the Company’s wholly-owned subsidiary, VirtualScopics, LLC, by participants under these plans. The Company fully and unconditionally assumed the obligation to issue its common stock upon the exercise of these options. The Company did not receive any cash or other consideration in connection with the exercise of these options. Additionally, no commission or other remuneration was paid or given by the Company, directly or indirectly, in connection with such exercised options. The issuance of common stock upon the exercise of the options was made in reliance on the exemption provided in Section 3(a)(9) of the Securities Act.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 5. Other Information

None

Item 6. Exhibits

Exhibit 31.1		Certification of Chief Executive Officer as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification of Chief Financial Officer as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2		Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase.

Exhibit 101.DEF		XBRL Taxonomy Extension Definition Linkbase.

Exhibit 101.INS		XBRL Instance Document.

Exhibit 101.LAB		XBRL Taxonomy Extension Label Linkbase.

Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase.

Exhibit 101.SCH		XBRL Taxonomy Extension Schema Linkbase.

SIGNATURES

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

Dated: August 12, 2011	VIRTUALSCOPICS, INC.


	/s/ Jeffrey Markin
	Jeffrey Markin
	President and Chief Executive Officer

	/s/ Molly Henderson
	Molly Henderson
	Chief Business and Financial Officer, Senior Vice President

Exhibit Index

Exhibit 31.1		Certification of Chief Executive Officer as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification of Chief Financial Officer as required by Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2		Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase.

Exhibit 101.DEF		XBRL Taxonomy Extension Definition Linkbase.

Exhibit 101.INS		XBRL Instance Document.

Exhibit 101.LAB		XBRL Taxonomy Extension Label Linkbase.

Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase.

Exhibit 101.SCH		XBRL Taxonomy Extension Schema Linkbase.

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