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| VSCP > SEC Filings for VSCP > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
The following discussion should be read in conjunction with VirtualScopics' condensed consolidated balance sheets as of September 30, 2008 and December 31, 2007 and the related condensed consolidated statements of operations and cash flows for the periods ended September 30, 2008 and 2007, included elsewhere in this report. This discussion contains forward-looking statements, the accuracy of which involve 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 was established in December 2000 in Rochester, New York. We are a leading provider of quantitative imaging for pharmaceutical and medical device development. Our imaging technology evolved from research initially begun in 1990 at the University of Rochester's Medical Center and School of Engineering and Applied Sciences. These early efforts were directed primarily toward the accurate and reproducible measurement of advanced image-based biomarkers.
We have an extensive intellectual property portfolio of 15 patents and patents pending, covering methods, systems, and biomarkers. Many of these techniques are imbedded in the analysis tools used in our clinical trial services today. We utilize the patented suite of image analysis algorithms to detect, measure and analyze specific biological structures from medical image data, such as those provided by computed tomography (CT), magnetic resonance imaging (MRI), positron emission tomography (PET), and ultrasound. We believe our technology enables faster and more reliable detection of disease progression or therapeutic benefit, which can then accelerate the clinical trial process. The societal benefits include the ability to get the right drugs to market faster and ultimately save lives. Additionally, terminating an ineffective drug early in the development cycle can save a pharmaceutical company millions of dollars. We have developed successful collaborative relationships with companies such as Pfizer, Inc., who is an investor in the company as with GE Healthcare and are currently working with 12 of the leading 15 pharmaceutical, biotechnology and medical device companies in the world.
Our services support all aspects of imaging in clinical trials, from design to FDA submission. Our semi-automated systems measure and monitor disease progression and changes in biological processes over time. This process provides highly reproducible results, enabling us to measure minute changes in various biological structures and functions, both rapidly and with a high degree of confidence. Other current image analysis techniques can be time-consuming, inaccurate and highly variable. Even when the exact same data is being repetitively measured, results in these other techniques can vary from measurement to measurement, from technician to technician and from radiologist to radiologist. We believe our semi-automated methodology provides several significant benefits:
· Level of reproducibility that was previously unattainable
· Less dependence on a single reader
· Greater precision
· Higher throughput
· Smaller sample sizes
· Shorter analysis times
· Shorter trial times
· Significantly reduced costs
We have found that our customers value our extensive imaging knowledge and experience coupled with the ability to better understand the efficacy profile of their compounds. Throughout 2008, we have had over 80 active projects with another 7 that have been awarded to us. There can be no assurance that we will secure contracts from these awards or that any such contracts or any of our existing contracts will not be cancelled on 30 days' advance notice by a customer. Additionally, once we enter into a new contract for participation in a drug trial, there are several factors that can effect whether we will realize the full benefits under the contract, and the time over which we will realize that revenue. Customers may not continue our services due to performance reasons with their compounds in development. Furthermore, the contracts may contemplate performance over multiple years, therefore, revenue may not be realized in the fiscal year in which the contract is signed or awarded or to the total value of the contract or award. Recognition of revenue under the contract may also be affected by the timing and ability of our customers to recruit patients and image site identification and training.
Results of Operations
Results of Operations for Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007
Revenue
We had revenues of $1,816,000 for the quarter ended September 30, 2008 compared to $1,370,000 for the comparable period in 2007, representing a $446,000, or 33%, increase. During the quarter, we performed work for 66 different projects, in connection with our pharmaceutical drug trials in the fields of oncology, arthritis and neurology. This compares to 58 projects during the same period in 2007. The increase in revenues for the quarter is attributable to the broadening of our customer base as well as increasing demand for our services from our current customers. We continue to see an increase in the demand for our services relating to new imaging techniques within the industry. We believe that the demand we have seen aligns well to our business model and growth plan. As of September 30, 2008, we had active projects with 12 of the top 15 pharmaceutical companies. The majority of the pharmaceutical trial projects for which we have performed work to date are in pre-clinical, Phase I or Phase II studies. We are experiencing increased demand for our services in Phase II/III trials, and we expect that a majority of our work on pharmaceutical trial projects will be focused in Phase I, II and III studies throughout the rest of 2008.
Gross Profit
We had a gross profit of $810,000 for the third fiscal quarter of 2008 compared to $407,000 for the comparable period in 2007. Our gross profit margin improved to 45%, from 30%, and gross profit increased $403,000, or 99%, in the third quarter of 2008 compared to the same period in 2007 due to efficiencies made in our processes throughout the past year along with reductions in our headcount made at the end of 2007. Also impacting the improvement in gross margin is the inherent efficiency obtained in performing work in later stage clinical trials. Our stated objective is to expand our technology and services into later stage (Phase II/III) trials. During the third quarter of 2008, 70% of our revenues were generated from Phase I/II/III trials as compared to 61% during the same quarter a year ago. We anticipate this trend to continue throughout the rest of 2008.
Research and Development
Research and development costs decreased in the quarter ended September 30, 2008 by $104,000, or 31%, to $233,000, when compared to the quarter ended September 30, 2007. The decrease was a result of the realignment of our resources at the end of 2007 to better reflect the demand in the market for our services and the direction of our self-funded research and development initiatives. We plan to continue to centralize the majority of our research and development efforts around the development and commercialization of image-based biomarkers which have early indications of correlation to disease progression, with a focus in Oncology, Musculoskeletal, Cardiovascular and Central Nervous System disease areas. Additionally, we will continue efforts to refine our processes through the use of our software platform in order to gain efficiencies which we believe will enhance our operating margins and standardize our processes. As of September 30, 2008, there were 10 employees in our research and development group, which includes the algorithm development and software development groups.
Sales and Marketing
Sales and marketing costs increased in the quarter ended September 30, 2008 by $113,000, or 75%, to $264,000, when compared to the quarter ended September 30, 2007. The increase was a result of the doubling of our sales force, including the hiring of a European Sales Director, over the past year. The hiring within our sales group was a result of the need to broaden our reach within the pharmaceutical, medical device and biotechnology industry. We have been successful in broadening our awareness within the industry as demonstrated in the 115% increase in our contracted and awarded backlog, bringing the total backlog to over $20 million as of July 2008. As of September 30, 2008, we had four individuals in our sales department.
General and Administrative
General and administrative expenses for the quarter ended September 30, 2008 were $751,000, a decrease of $28,000 or 4%, when compared to the quarter ended September 30, 2007. The decrease was largely due to the reduction in stock compensation expense for vested stock options during the third quarter of 2008 compared to the third quarter of 2007. We do not anticipate significant increases in our general and administrative costs for the remainder of 2008.
Depreciation and Amortization
Depreciation and amortization charges were $116,000 for the quarter ended September 30, 2008, compared to $127,000 for the quarter ended September 30, 2007. The reduction represents the timing and obsolescence period of certain IT equipment. The company does not anticipate significant expenditures on IT related equipment during the rest of 2008.
Other Income (Expense)
Interest income for the quarter ended September 30, 2008 was $14,000, representing interest derived on our operating and savings accounts, compared to interest income of $22,000 in the three months ended September 30, 2007. The interest income was lower due to the lower rates of return on our savings accounts in the third quarter of 2008 compared to the third quarter of 2007. Other expense for the quarters ended September 30, 2008 and 2007 was $8,600 and $5,700, respectively, which largely represents state franchise taxes.
Net Loss
Net loss for the quarter ended September 30, 2008 was $549,000 compared to a net loss of $969,000 for the quarter ended September 30, 2007. The significant decrease in our net loss over the prior period was primarily related to the increase in revenues and improvement in gross margin, as outlined above.
Results of Operations for the Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
Revenues
Our revenues for the nine months ended September 30, 2008 were $5,183,000, an increase of $998,000 or 24% over the first nine months of 2007. The increase in sales is a reflection of the broadening of our customer base, the broader penetration of our services in the industry and the shift to later stage clinical trials which are inherently larger contracts. Additionally, we continue to see an increase in the demand for our services relating to new imaging techniques within the industry. We believe that the demand we have seen aligns well to our business model and growth plan. We performed services for a total of 82 projects in the first three quarters of 2008, as compared to 68 in the comparable period of 2007. We are experiencing increased demand for our services in Phase II/III trials, and we expect that a majority of our work on pharmaceutical trial projects will be focused in Phase I, II and III studies throughout the rest of 2008.
Gross Profit
We had a gross profit of $2,126,000 for the nine months ended September 30, 2008 compared to $1,453,000 for the comparable period in 2007. Our gross profit margin improved six percentage points to 41% for the first three quarters combined in 2008 compared to 35% in the first three quarters combined in 2007. Gross profit increased $673,000, or 46%, in the first nine months of 2008 compared to the first nine months of 2007. The improvements in gross profit and gross margin are a result of higher revenues coupled with better operating efficiencies and cost reductions that were made at the end of 2007 to better align our cost structure with the nature of the demand for our services in the market. Also impacting the improvement in gross margin is the inherent efficiency obtained in performing work in later stage clinical trials. During the first nine months of 2008, 70% of our revenues were generated from Phase I/II/III trials as compared to 56% during the same quarter a year ago.
Research and Development
Total research and development expenditures were $698,000 in the first nine months of 2008 compared to $1,125,000 for the comparable period in 2007, a decrease of 38%. The decrease was largely attributed to the realignment of our resources, as previously stated, at the end of 2007 to better reflect market demand. The realignment resulted in a reduction in our resources within self-funded biomarker research. We plan to continue our research and development efforts to support new imaging techniques in the industry as well as to improve our internal software platform to optimize our operating efficiency. We currently have 10 individuals in our research and development group, including software development.
Sales and Marketing
Sales and marketing costs for the nine months ended September 30, 2008 increased to $937,000, an increase of $381,000 or 69% over the first nine months of 2007. The increase was a result of the doubling of our sales force over the past year as well as a new marketing strategy to better align our marketing materials with our value proposition and service offering in the industry. We incurred the majority of our marketing expenses for 2008 in the first and second quarters. We anticipate continued investment in our marketing initiatives throughout the remainder of 2008 and into 2009 to more broadly address the market.
General and Administrative
General and administrative expenses for the nine months ended September 30, 2008 were $2,513,000, a decrease of $217,000 or 8%, over the first nine months of 2007. The decrease is mainly due to a reduction in stock compensation expense for vested stock options and the settling of a legal matter with a former executive during the second quarter of 2007.
Depreciation and Amortization
Depreciation and amortization charges remained relatively consistent in the nine months ended September 30, 2008 and 2007. We do not anticipate significant capital expenditures for the remainder of 2008.
Other Income (Expense)
Interest income for the nine months ended September 30, 2008 was $60,000 and composed of interest derived on the Company's operating and savings accounts, compared to interest income of $115,000 in the same period in 2007. The decrease in interest income was a reflection of the lower average rates of return on our savings accounts in 2008 compared to 2007. Other expense for the nine month period ended September 30, 2008 and 2007 were $12,000 and $9,000, respectively, representing interest due to loans from certain stockholders of the Company and bank and other fees.
Net Loss
Our net loss for the nine months ended September 30, 2008 was $2,324,000 compared to a net loss of $3,214,000 for the same period in 2007. The significant improvement in our net loss over the prior period was primarily related to higher revenues and gross profit, as outlined above.
Liquidity and Capital Resources
Our working capital as of September 30, 2008 was approximately $3,013,000 compared to $4,239,000 as of December 31, 2007. The decrease in working capital was a result of investments in sales and marketing, operations along with information technology purchases and patent costs.
Net cash used in operating activities totaled $950,000 in the nine months ended September 30, 2008 compared to $2,353,000 in the comparable 2007 period. This significant decrease in usage was a result of increases in revenues and gross profit along with a reduction in spending in research and development and general and administrative expenses. Also impacting operating cash flow was the timing of receivables and advance payments from customers as well as timing on the payment of payroll.
We invested $90,000 in the purchase of equipment and the acquisition of patents in the first nine months of 2008, compared to $306,000 for the investment of these items in the first three quarters of 2007. The decrease represents investments for furniture and leasehold improvements related to the move to a new location during the first half of 2007.
Cash provided by our financing activities in the nine months ended September 30, 2008 was $143,000, compared to cash provided of $1,431,000 in the nine months ended September 30, 2007. A significant portion of the decrease represents the proceeds received from our convertible series B preferred stock issuance in 2007.
We plan to continue to utilize the net proceeds from our 2007 private placement to support our operations, including research and development plans as well as our sales and marketing efforts, until we achieve cash flow breakeven. We also plan to continue to expand our sales efforts with presentations to pharmaceutical, biotechnology and medical device companies and participation in relevant medical conferences.
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.
In February 2008, we received a written notice from the Nasdaq Stock Market ("Nasdaq") indicating that our common stock was not in compliance with minimum bid price required for continued listing on Nasdaq. The notice stated that in accordance with section 4310(c)(8) of the Nasdaq Marketplace Rules, the Company has until August 6, 2008 to regain compliance by maintaining a bid price of common stock at a close of $1.00 or higher for a minimum of 10 consecutive business days, or such longer period as Nasdaq may determine to show the ability to maintain long-term compliance. On August 7, 2008 the Company received a Staff Determination Letter from Nasdaq stating that it had not regained compliance with the $1.00 minimum bid price requirement and that its securities are subject to delisting. On September 18, 2008, the Company attended a hearing before the Nasdaq Listing Qualifications Panel and presented its plan for compliance and requested a further stay of delisting until February 2009. On October 8, 2008, the Company received word from Nasdaq that it had granted the Company's request to stay delisting until February 3, 2009, and as such, have until that time to meet the minimum listing requirements. Further, on October 21, 2008, the Company received notice from Nasdaq stating that due to the current market conditions, Nasdaq had suspended the continued listing requirements for the minimum bid price until January 16, 2009, for all of its listed companies. The Company has been informed by Nasdaq that it now has until May 11, 2009 to meet the minimum bid requirements.
Our stockholders have authorized the Board of Directors to implement a reverse stock split of our outstanding common stock in a ratio from 1:2 to 1:4 as part of our efforts to regain compliance. If we have not met the minimum bid requirements by the end of the first quarter of 2009, we plan to effect a reverse stock split. If implemented, the Company expects that a reverse stock split will help it regain compliance with Nasdaq Capital Market listing standards, although there can be no assurance that it will be successful in doing so or that it will be able to maintain compliance with other continued listing standards.
Under the terms of our Series B Preferred Stock and related warrants, we are required to meet specific milestone financial performance for the 2008 fiscal year. These milestone events, which are detailed in our Certificate of Designation for our Series B Preferred Stock and in the related warrants, include generating $7.0 million in revenue for the 12 month period ending on December 31, 2008. If we fail to meet or exceed any of the milestone events, then the Series B Preferred Stock conversion price will be reduced to a lower market price measured on the last trading day of our fiscal year, or the market price five trading days after we file our next Form 10-K, whichever is lower. If we make a major announcement around this time, the measurement date can be changed to a date one trading day prior to the announcement or 10 trading days after the announcement, whichever is lower.
An adjustment to the conversion price of our Series B Preferred Stock and related warrants for failure to meet the applicable milestone goals would also trigger a downward adjustment to the conversion price of our Series A Preferred Stock and the exercise price of the related warrants issued in connection with the Series A Preferred Stock. These price adjustments would give the holders of those securities the ability to acquire additional shares of our common stock upon conversion or exercise, and cause dilution to the holders of our common stock. At this point, we fully anticipate that we will meet the milestone goals and that a price adjustment will not be necessary, however, there can be no assurance that we meet these goals. Additionally, there are no required financial performance criteria under the terms of the Series B Preferred Stock and related warrants after 2008.
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.
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133" ("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. The guidance in SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. At this time, management is evaluating the impact of the adoption of SFAS No. 161 on the Company's consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position SFAS 142-3, Determination of the Useful Life of Intangible Assets ("FSP SFAS 142-3"). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The objective of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, Business Combinations, and other U.S. GAAP principles. FSP SFAS 142-3 is effective for fiscal years beginning after December 15, 2008. The adoption of FSP SFAS 142-3 is effective January 1, 2009 and is not expected to have a material impact on the Company's consolidated financial statements.
In October 2008, the FASB issued FSP 157-3 "Determining Fair Value of a Financial Asset in a Market That Is Not Active" (FSP 157-3). FSP 157-3 clarified the application of SFAS No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have a material impact on our consolidated financial statements.
Adoption of Statement of Financial Accounting Standards No. 159 and 157 In February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159's objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between Companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 requires Companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the Company's choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet. We adopted SFAS No. 159 as of January 1, 2008. The adoption of SFAS No. 159 did not have a material effect on the Company's consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. We adopted SFAS No. 157 as of January 1, 2008. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157", which provides a one year deferral of the effective date of SFAS No.157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. The adoption of SFAS No. 157 did not have a material effect on the Company's consolidated financial statements.
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. . . .
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