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 March 31, 2015______________________________________

 

¨ 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 ¨  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 ¨	Accelerated filer ¨
Non-accelerated filer ¨  (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 ¨  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 May 11, 2015, there were 2,994,928 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 March 31, 2015 (unaudited) and December 31, 2014	1
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements  (unaudited)	4-10
	ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations	11-16
	ITEM 4: Controls and Procedures	16
PART II	OTHER INFORMATION
	ITEM 1: Legal Proceedings	17
	ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds	17
	ITEM 3: Defaults Upon Senior Securities	17
	ITEM 4: Mine Safety Disclosures	17
	ITEM 5: Other Information	17
	ITEM 6: Exhibits	17

 

  

PART 1: FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

VirtualScopics, Inc. and Subsidiary

Condensed Consolidated Balance Sheet

 

		March 31,				December 31,
		2015				2014
		(Unaudited)
Assets
Current assets
Cash		$	2,393,968			$	4,046,599
Accounts receivable, net			2,097,513				1,814,143
Prepaid expenses and other current assets			535,549				410,188
Total current assets			5,027,030				6,270,930
Patents, net			1,166,284				1,211,770
Property and equipment, net			337,174				330,873
Other Assets			8,486				10,661
Total assets		$	6,538,974			$	7,824,234
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable and accrued expenses		$	1,015,871			$	1,289,099
Accrued payroll			414,966				681,964
Unearned revenue			475,299				670,332
Dividends payable			335,333				335,333
Total current liabilities			2,241,469				2,976,728
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock, $0.001 par value; 1,000,000 shares authorized;
Series C-1 3,000 shares authorized; issued and outstanding, 3,000 shares at March 31, 2015 and December 31, 2014; liquidation preference $1,000 per share			3				3
Series B 6,000 shares authorized; issued and outstanding, 600 shares at March 31, 2015 and December 31, 2014; liquidation preference $1,000 per share			1				1
Series A 8,400 shares authorized; issued and outstanding, 2,165 shares at March 31, 2015 and December 31, 2014; liquidation preference $1,000 per share			2				2
Series C-2 3,000 shares authorized; none issued and outstanding,  at March 31, 2015 and December 31, 2014; liquidation preference $1,000 per share			-				-
Common stock, $0.001 par value; 20,000,000 shares authorized; issued and outstanding, 2,994,928 shares at March 31, 2015 and December 31, 2014			2,995				2,995
Additional paid-in capital			21,977,738				21,975,069
Accumulated deficit			(17,683,234	)			(17,130,564	)
Total stockholders' equity			4,297,505				4,847,506
Total liabilities and stockholders' equity		$	6,538,974			$	7,824,234

 

See notes to condensed consolidated financial statements.

 

  

VirtualScopics, Inc. and Subsidiary

Condensed Consolidated Statement of Operations

 

		For the Three Months Ended March 31,
		2015				2014
Revenues		$	2,641,221			$	2,246,954
Reimbursement revenues			173,221				106,032
Total revenues			2,814,442				2,352,986
Cost of services			1,666,644				1,489,079
Cost of reimbursement revenues			173,221				106,032
Total cost of services			1,839,865				1,595,111
Gross profit			974,577				757,875
Operating expenses
Research and development			349,837				285,896
Sales and marketing			280,397				345,077
General and administrative			799,386				687,002
Depreciation and amortization			96,972				86,502
Total operating expenses			1,526,592				1,404,477
Operating loss			(552,015	)			(646,602	)
Other income (expense)
Other income			259				1,037
Other expense			(914	)			(808	)
Total other (expense) income			(655	)			229
Net loss			(552,670	)			(646,373	)
Preferred stock dividends			42,000				42,000
Net loss available to common stockholders		$	(594,670	)		$	(688,373	)
Weighted average basic and diluted shares outstanding			2,994,928				2,991,990
Basic and diluted loss per share		$	(0.20	)		$	(0.23	)

 

See notes to condensed consolidated financial statements.

 

  

VirtualScopics, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

		For the Three Months Ended
		March 31,
		2015				2014
Cash flows from operating activities
Net loss		$	(552,670	)		$	(646,373	)
Adjustments to reconcile net loss to net cash  used in operating activities:
Depreciation and amortization			96,972				86,502
Stock-based compensation			44,669				41,388
Changes in operating assets and liabilities
Accounts receivable			(283,370	)			82,278
Prepaid expenses and other assets			(123,186	)			(34,768	)
Accounts payable and accrued expenses			(273,228	)			112,182
Accrued payroll			(266,998	)			(341,639	)
Unearned revenue			(195,033	)			283,959
Total adjustments			(1,000,174	)			229,902
Net cash used in operating activities			(1,552,844	)			(416,471	)
Cash flows from investing activities
Purchases of property and equipment			(52,882	)			(28,563	)
Patent applications and maintenance			(4,905	)			(6,024	)
Net cash used in investing activities			(57,787	)			(34,587	)
Cash flows from financing activities
Cash dividends on series B preferred stock			(42,000	)			(42,000	)
Net cash used in financing activities			(42,000	)			(42,000	)
Net decrease in cash			(1,652,631	)			(493,058	)
Cash
Beginning of period			4,046,599				7,330,630
End of period		$	2,393,968			$	6,837,572

 

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 headquarters of VirtualScopics. Inc. and its wholly-owned subsidiary, VirtualScopics, LLC (the “Subsidiary” and, together, the “Company”) 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 prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for condensed financial statements and should 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, 2014. In the opinion of management, these financial statements contain all adjustments necessary for a fair presentation for and as of the end of the interim period, all of which were normal recurring adjustments. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.

 

NOTE 2 – Liquidity and Financial Condition

 

The Company had a net loss attributable to common stockholders of $552,670 for the three months ended March 31, 2015. At March 31, 2015, the Company’s accumulated deficit amounted to $17,683,234 and the Company had working capital of $2,785,561. The Company’s future plans and growth are dependent on its ability to increase revenues and continue its business development efforts surrounding its contract award backlog. If the Company continues to incur losses and revenues do not generate from the backlog as expected, the Company may need to raise additional capital to expand its business and continue as a going concern. The Company currently anticipates that its cash and cash equivalents will be sufficient to meet its working capital requirements to continue its sales and marketing and research and development efforts for at least 12 months. If in the future our plans or assumptions change or prove to be inaccurate, the Company may need to raise additional funds through public or private debt or equity offerings financings, corporate collaborations or other means. The Company may also be required to reduce operating expenditures or investments in its infrastructure. The Company has not secured any commitment for new financing at this time, nor can it provide any assurance that other new financings will be available on commercially acceptable terms, if needed. If the Company is unable to secure additional capital, it may be required to curtail its research and development activities and take additional measures in reducing costs to conserve its cash.

 

  

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

NOTE 3 - Summary of Certain Significant Accounting Policies

 

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and the Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. Estimates included in these consolidated financial statements relate to assessing the collectability of accounts receivable, the valuation of securities underlying share-based compensation, realization of deferred tax assets, tax contingencies and any related valuation allowance, and the useful lives and potential impairment of the Company’s property and equipment and intangible assets. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.

 

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 or delivered, as the case may be, 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 at an hourly rate.

 

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.

 

 

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Income Taxes 

In its interim financial statements, the Company follows the guidance of Accounting Standards Codification (“ASC”) 270 “Interim Reporting” and ASC 740 “Income Taxes” whereby it uses the expected annual effective tax rate in determining its interim tax provisions. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized based upon 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.

 

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.

 

NOTE 4 - Stock-Based Compensation

 

For the three months ended March 31, 2015 and 2014, the Company’s condensed consolidated statements of operations reflect stock-based compensation expense for stock options granted and restricted stock awards under its long-term incentive plans and allocated as follows:

 

		Three Months Ended
		March 31,
		2015				2014
Cost of service revenues		$	9,096			$	11,041
Research and development			9,053				9,573
Sales and marketing			3,179				2,691
General and administrative			23,341				18,083
Total stock-based compensation		$	44,669			$	41,388

 

Stock options issued under the Company’s long-term incentive plans are granted with an exercise price equal to but 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 from the date of grant. As of March 31, 2015, there was $355,403 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a remaining weighted-average vesting period of 3.08 years.

 

  

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

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. The Company estimated its expected volatility using its own historical stock prices. 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 three months ended March 31, 2015 and 2014 using the Black-Scholes option-pricing model:

 

		March 31,
		2015				2014
Risk free interest rate			1.8	%			1.9	%
Expected term (years)			6.0				5.9
Expected volatility			63.5	%			64.5	%
Expected dividend yield			-				-

 

A summary of the employee stock option activity for the three months ended March 31, 2015 is as follows:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term
Options outstanding at January 1, 2015			404,612			$	10.03
Granted			13,000				3.78
Exercised			-
Cancelled/Forfeited			(1,748	)			(11.28	)
Expired			(11,167	)			(10.10	)
Options outstanding at March 31, 2015			404,697				9.82				6.36
Options exercisable at March 31, 2015			199,320				15.41				3.47

 

The weighted-average grant-date fair value of options granted during the three months ended March 31, 2015 and 2014 was $28,924 and $2,511, respectively.

 

  

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

NOTE 5 - Stockholders’ Equity

 

As of March 31, 2015, the Company has authorized 1,000,000 shares of preferred stock, par value $0.001 per share, of which 8,400 are designated as Series A Convertible Preferred Stock (“Series A”), 6,000 are designated as Series B Convertible Preferred Stock (“Series B”), 3,000 are designated as Series C-1 Convertible Preferred Stock (“Series C-1”), and 3,000 are designated as Series C-2 Convertible Preferred Stock (“Series C-2”) as specified in the Certificate of Designation (the “Certificate”). There were no conversions of the Company’s convertible Series A, B and C-1 preferred stock during the three months ended March 31, 2015 and 2014.

 

Each share of Series A is convertible into 83.036 shares of the Company’s common stock and is senior in liquidation preference in comparison to shares of the Company’s common stock.

 

Each share of Series B is convertible into 83.036 shares of the Company’s common stock and has a liquidation preference that is pari passu with the Company’s Series A and senior to the Company’s common stock. Cumulative dividends on the Series B accrue on the stated value of $1,000 per share at an annual rate of 8%, payable monthly in cash and/or shares of the Company’s common stock at the option of the Company. Subject to certain exceptions, the Series B holders are only entitled to be paid dividends if full dividends are first paid or concurrently paid to the holders of the Series C-1. As of March 31, 2015 and December 31, 2014, there was $96,000 of accrued dividends payable to Series B stockholders. During the three months ended March 31, 2015 and 2014, cash dividends paid to Series B stockholders aggregated to $12,000.

 

Each share of Series C-1 is convertible into shares of the Company’s common stock at a conversion rate determined by dividing (i) the stated value per share of $1,000, plus, if consented to by the Company, all accrued and unpaid dividends, by (ii) the conversion price of $12.043. The Series C-1 is senior in liquidation preference in comparison to shares of the Company’s common stock and the Series A and Series B preferred stock. Cumulative dividends on the Series C accrue on the stated value of $1,000 per share at an annual rate of 4%. As of March 31, 2015 and December 31, 2014, there was $239,333 of accrued dividends payable to Series C-1 stockholders. During the three months ended March 31, 2015 and 2014, cash dividends paid to Series C-1 stockholders aggregated to $30,000.

 

NOTE 5 – 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)

 

Securities that could potentially dilute earnings per share in the future that were not included in the computation of diluted loss per share consist of the following numbers of shares into which preferred stock could have been converted and shares for which outstanding options and warrants could have been exercised during the three months ending March 31, 2015 and 2014:

 

		2015				2014
Convertible preferred stock			478,701				480,777
Warrants to purchase common stock			136,132				233,753
Options to purchase common stock			404,697				247,002
Total			1,019,530				961,532

 

NOTE 6 - 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 March 31, 2015 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.

 

The Company will recognize interest and penalties accrued related to unrecognized tax benefits as components of its income tax provision. As of March 31, 2015, the Company does not have any interest and penalties accrued related to unrecognized tax benefits.

 

NOTE 7 - Concentration of Credit Risk

 

The Company’s top three customers accounted for approximately 21%, 20%, and 18% of total revenue for the three months ended March 31, 2015. Three customers accounted for 32%, 23%, and 14% of total revenue for the three months ended March 31, 2014.

 

Five customers accounted for approximately 23%, 19%, 16%, 14%, and 11% of accounts receivable as of March 31, 2015. Three customers accounted for approximately 27%, 19%, and 18% of accounts receivable as of December 31, 2014.

 

  

VirtualScopics, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

NOTE 8 – Related Party

 

In April 2012, the Company issued Merck Global Health Innovation Fund, LLC (“Merck”) 3,000 shares of Series C-1 which are convertible into 249,107 shares of common stock and Series C-1 Warrants which are exercisable to purchase 136,132 shares of common stock. Revenues generated from Merck were $98,664 and $23,115 for the three months ended March 31, 2015 and 2014, respectively. The accounts receivable balance due from Merck was $65,488 and $95,985 as of March 31, 2015 and December 31, 2014, respectively.

 

NOTE 9 - 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 March 31, 2015 and December 31, 2014 and the related condensed consolidated statements of operations and cash flows for the three months ended March 31, 2015 and 2014, 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.

 

Business Overview

 

We are a provider of clinical trial imaging solutions currently serving the pharmaceutical, biotechnology and medical device industries. We have 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. Our proprietary software and algorithms provide measurement capabilities designed to improve clinical research and development. We focus on applying our imaging technology to improve the efficiency and effectiveness of the pharmaceutical and medical device research and development processes. We believe our technology can also be used in improving the treatment planning for patients with cancer and other debilitating diseases.

 

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, fatty liver disease, neurology, cardiovascular, and osteoarthritis. We have also derived a small portion of our revenue from consulting services. We expect that the concentration of our revenue will continue in these services and in those areas in 2015. Revenues are recognized as the medical images that we process are quantified and delivered to our customers and/or the services are performed.

 

We are focused on strengthening our core business and increasing the number of contract awards we receive. This effort includes investments in our infrastructure and sales function.

We continue to submit proposals and bids for new contracts, however, there can be no assurance that we will secure or maintain contracts from these efforts. Additionally, due to recent consolidation within the industry, our pricing and services may not stay competitive with companies that have a stronger global presence.

 

There are several factors that can affect whether we will realize the full benefits under any 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.

 

  

Results of Operations

 

Results of Operations for Quarter Ended March 31, 2015 Compared to Quarter Ended March 31, 2014

 

Revenues

 

We had revenues of $2,814,000 for the quarter ended March 31, 2015 compared to $2,353,000 for the comparable period in 2014, representing a $461,000, or 20%, increase in revenues. This is in direct correlation with the increase in bookings during 2014 as the projects begin their set up phase. The set up phase includes qualifying and training the sites on the scanning of subjects and the procedures for submitting data according to the imaging protocol for a particular study. During the first quarter of 2015, we performed work on 108 different projects, in connection with our pharmaceutical drug trials in the fields of oncology, osteoarthritis and various other therapeutic areas. This compares to 99 projects during the same period in 2014. During the first quarter of 2015, 52% of our business was in oncology services, 33% in musculoskeletal services, and the remaining 15% was in other therapeutic areas. This compares to 44%, 28% and 28%, respectively, in 2014. During the first quarter of 2015, 77% of the revenues were derived from Phase II and III studies compared to 76% during the comparable period in 2014.

 

Gross Profit

 

We had a gross profit of $975,000 for the first quarter of 2015 compared to $758,000 for the comparable period in 2014, representing a $217,000, or a 29% increase. Our gross profit margin was 35% during the quarter ended March 31, 2015 compared to 32% during the first quarter of 2014. Our gross margins tend to fluctuate based on therapeutic area mix and phase of study and specifically as it relates to the volume of revenue as there are a certain amount of fixed costs required to support the business. During the first quarter of 2015 we experienced an increase in revenue derived from oncology projects which historically drive higher margins. Excluding reimbursed charges our gross margin was 37% for the first quarter of 2015 compared to 34% in the first quarter of 2014.

 

Research and Development

 

We had research and development costs of $350,000 for the first quarter of 2015 compared to $286,000 for the comparable period in 2014, representing a $64,000, or a 22% increase. The increase was attributed to the hiring of software developers during late Q1 2014 to support the increase in projects and enhancements in our infrastructure. 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. In 2014, we finalized the recruitment of our Scientific Advisory Board which we believe will help enhance and deepen our knowledge base in our core competencies and allow for an exchange of ideas and knowledge in each therapeutic area.

 

  

Sales and Marketing

 

We had sales and marketing costs of $280,000 for the first quarter of 2015 compared to $345,000 for the comparable period in 2014, representing a $65,000, or 19% decrease. The decrease is related to the timing of trade shows and conferences during the three months ended March 31, 2015 as compared to the previous year, offset by the hiring of a proposal manager during late 2014. Currently, there are 6 individuals within our sales and marketing department. Our sales and marketing initiatives encompass attendance and presentations at leading industry conferences, frequent educational webinars and active calling on existing and new customers as well as our continued efforts to attract new business through the PPD, IXICO, and recently added Micron channel.

 

General and Administrative

 

We had general and administrative expenses of $799,000 for the first quarter of 2015 compared to $687,000 for the comparable period in 2014, representing an $112,000, or 16% increase. The increase was largely attributable to additional headcount the information technology, quality, and finance departments. 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 $97,000 for the quarter ended March 31, 2015 compared to $87,000 during the quarter ended March 31, 2014. The increase was due to a number of capital assets purchased in 2014. The amortization and depreciation costs are based on the timing and life of patents and property and equipment. Our IT systems are the basis of our operating platform. In 2015, we expect our investments to increase in our IT infrastructure to ensure we have a robust and reliable operating system. This will be contingent on the availability of financing as referenced in Note 2 Liquidity and Financial Condition.

 

Other (Expense) Income

 

Other expense for the quarter ended March 31, 2015 was $655 compared to other income of $229 for the quarter ended March 31, 2014. The decrease is a result of lower average cash balances in the Company’s interest bearing accounts during the first quarter of 2015 as compared to the previous comparable period in 2014.

 

Net Loss

 

Net loss for the quarter ended March 31, 2015 was $553,000 compared to $646,000 for the quarter ended March 31, 2014. The decrease in our net loss was primarily related to the increase in revenue and a higher gross margin recognized during the first quarter of 2015 as compared to the previous comparable period in 2014.

 

  

Liquidity and Capital Resources

 

Our working capital as of March 31, 2015 was approximately $2,786,000 compared to $3,294,000 as of December 31, 2014. The decrease in working capital was primarily a result of payments made during the first quarter of 2015 related to previous year expenses, continued losses, and the timing of receivables. We do not expect, nor have we experienced, significant write-offs of 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 $1,553,000 in the three months ended March 31, 2015 compared to net cash used in operating activities of $416,000 in the comparable 2014 period. The increase in the use of cash in operations during the first three months of 2015 compared to the first three months of 2014 is mainly due to continued losses and the timing of cash receipts from customers.

 

We invested $58,000 in the purchase of equipment and the maintenance of patents in the first three months of 2015, compared to $35,000 for the investment in these items in the first three months of 2014. Our IT systems are the basis of our operating platform. Therefore, we plan to continue to invest in our IT infrastructure during 2015 to ensure we have a robust and reliable operating system to further support our core business.

 

There was $42,000 in cash used by our financing activities during the three months ended March 31, 2015 and March 31, 2014. The Series C-1 and B preferred stock cash dividends resulted from the Series C-1 stockholders electing to receive cash dividends.

 

We currently anticipate that our cash will be sufficient to meet our working capital requirements to continue our sales and marketing and research and development efforts for at least the next 12 months. Our future plans and growth are dependent on our ability to continue our business development efforts surrounding our project award backlog and in turn, increasing the revenues of the Company. 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, corporate collaborations or other means. We may also be required to reduce our operating expenditures and investments in our infrastructure especially if revenues are not realized as expected from our backlog. As part of our efforts in managing our overall cash position, we are currently evaluating several credit facility and equipment lease financing options that have been presented to us from various financial institutions. We have not secured any commitment for new financing at this time, nor can we provide any assurance that other new financings will be available on commercially acceptable terms, if needed, or at all. If we cannot raise sufficient funds on acceptable terms, we may have to reduce or restrict our level of expenditures, curtail our research and development activities and take additional measures to reduce costs in order to conserve our cash.

 

Off Balance Sheet Arrangements

 

We have no off-balance sheet arrangements (other than our consulting agreements and operating leases for our corporate headquarters, satellite office 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 Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. These statements are made pursuant to the safe harbor provisions 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;

 

·

loss of market share due to competing products and services;

 

·

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

 

·

study cancellations and delays in the startup of trials;

 

·

adverse results of any legal proceedings;

 

·

the volatility of our operating results and financial condition;

 

·

inability to attract or retain qualified senior management personnel;

 

·

inability to raise sufficient additional capital to operate our business, if necessary;

 

·

changes in government regulations; and

 

·

other specific risks that may be referred to in this report or in our report on Form 10-K for the year ended December 31, 2014.

 

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, 2014 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.

 

  

Information regarding market and industry statistics contained in this report is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources, and we cannot assure our stockholders or potential investors of the accuracy or completeness of the data included in this report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We have no obligation to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. See “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission (“SEC”), for a more detailed discussion of uncertainties and risks that may have an impact on future results.

 

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 March 31, 2015. 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 March 31, 2015 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

 

None

 

Item 3. Defaults upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6.  Exhibits

 

Exhibit 10.1         Indemnification Agreements between the Company and Andrew Levitch dated March 2, 2015 and Michael Woehler dated March 2, 2015 (Reference is made to the VirtualScopics, Inc. Form of Indemnification Agreement by and among the Company and the directors and officers of the Company, filed as Exhibit 10.19 to the VirtualScopics, Inc. Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 2, 2006 (File No. 333- 133747).

 

Exhibit 10.2          Consulting Agreement between the Company and Michael Woehler, dated March 6, 2015.

 

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: May 14, 2015		VIRTUALSCOPICS, INC.
		/s/  Eric Converse
		Eric Converse
		President and Chief Executive Officer
		/s/  James Groff
		James Groff
		Chief Financial Officer

 

  

Exhibit Index

 

Exhibit 10.1 Indemnification Agreements between the Company and Andrew Levitch dated March 2, 2015 and Michael Woehler dated March 2, 2015 (Reference is made to the VirtualScopics, Inc. Form of Indemnification Agreement by and among the Company and the directors and officers of the Company, filed as Exhibit 10.19 to the VirtualScopics, Inc. Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 2, 2006 (File No. 333- 133747).

 

Exhibit 10.2          Consulting Agreement between the Company and Michael Woehler, dated March 6, 2015.

 

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.