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VirtualScopics (NASDAQ:VSCP)

Q4 2012 Earnings Call

February 19, 2013 11:00 AM ET

Executives

Tim Ryan - IR, Shoreham Group

Jeff Markin - President and CEO

Molly Henderson - Chief Business and Financial Officer and SVP

Analysts

Keith Gil - JHS Capital Advisors

Operator

Greetings and welcome to the VirtualScopics Fourth Quarter and Full Year 2012 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tim Ryan with the Shoreham Group. Thank you Mr. Ryan, you may now begin.

Tim Ryan

Thank you Jessie and good morning everyone. Thank you for joining for us on our fourth quarter yearend 2012 investor call at VirtualScopics We are pleased that you are taking the opportunity to learn more about VirtualScopics and are looking forward to updating you on our progress.

This call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

When used in this presentation, statements that are not statements of current or historical fact may be deemed to be forward-looking statements without limiting the foregoing the words plan, intend, may, will, expect, believe, could, anticipate, estimate, or continue or similar expressions or other variations or comparable terminology are intended to identify such forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only to the date hereof.

Except as required by law, the company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Investors are urged to examine these and other risks and uncertainties detailed in the VirtualScopics periodic public filings on file with the Securities and Exchange Commission.

This call will run for approximately 30 minutes. We will begin with management introductions, followed by a brief Company overview. We will follow our prepared remarks with the Q&A session.

I will now turn this call over to VirtualScopics’ President & CEO, Jeff Markin, Jeff?

Jeff Markin

Thank Tim. Good morning, with me today is Molly Henderson, our Chief Business and Financial Officer. My prepared remarks today will focus on three areas, some comments on our financial performance in 2012 along with review of some of our achievements, some perspectives on the dynamics that play in the CRO and pharmaceutical development market and then our key initiatives for 2013.

Molly will go into more detail on our fourth quarter and full year financial results. It goes without saying that we’re not pleased with our financial performance in 2012. While we achieved the high-end of our revised revenue guidance, we underperformed our full year expectations in both revenue generation and bookings of new contracts which impacted our other financial metrics.

As I stated during multiple calls last year, our underperformance was somewhat puzzling given the significant number and size of the RFPs we are seeing. What was evident was the significant delay in decisions and the lower win rate than we have historically experienced. We ended the year having responded to more than 200 RFPs totaling more than a $100 million. In a typical year we would expect to see that close to 70% of RFPs received in a typical year, we have a decision made on them.

During 2012 this dropped to 35% with no single reason being a key driver. We identified the slow progress of awards in the first half of the year and mobilized our sales team as well as cost functional internal teams to determine root cause. The focus of the internal teams was to redouble our efforts and those areas that we could control namely client satisfaction and operational efficiency while the sales team was determining any systemic issues that could be identified.

As I stated in our press release, we did begin to see things improve in the fourth quarter. And our awards and bookings to date in 2013 have continued this positive momentum. One further note on the internal teams, we initiated 10 independent teams each with a specific focus, objective and time frame. They were led by employees with the member of the executive teams as an advisor. These groups did a superb job with many meeting their objectives on or before the target date they were given, increasing an already high level of client satisfaction.

Also during 2012, we completed development of our next generation imagery in platform. This platform was designed to increase the efficiency of our radiologists and performing analysis especially with the array of complex assessment criteria in place today and under discussion for the future. A key feature of the new system enables new and emerging criteria to be programmed into the system in a few weeks versus what would have taken a few months in the past. The still system also facilitates higher data integrity on a more straight forward data extraction methodology for client deliveries and uploads.

In April 2012, we brought on Merck Global Health Innovations Fund as a strategic investor in the company. We enjoy a strong relationship with Merck as a client and to bring them into the company as an investor was a very strong achievement. The commitment by Merck is also significant external validation of our vision for participation in personalized medicine due to launch of quantitative imaging center with technology that can be used to stratify patients most likely to respond or not respond to a specific therapy within days of first dosing or to identify responders or non-responders to therapy much earlier as a result of more sensitive response measures.

During 2012, we made very good progress across five specific areas that we identified as being crucial towards progressing this new business opportunity. Most notable is the pursuit of 510 (k) approval for our DCE-MRI blood flow measurement device, and the development of a regulatory compliant workstation to perform the analysis. I will talk more about the status of this initiative and our future plans later in my prepared remarks.

So in summary while we remained disappointed in the financial performance we delivered in 2012, we believe the resulting work that was done in response to these challenges and in the further development of our core business and scientific capabilities will pay dividend in 2013 and beyond.

Before I talk about our plans for 2013, I want to say a few words about the pharmaceutical development services market which has been characterized by a significant level of industry consolidation as many of the mid-tier players have merged to attempt to form larger, more global full service providers to compete for a greater portion of the outsourcing from top-tier pharma companies.

Most recently this dynamic has been evident with the announced merging of BioClinica and Core Lab partners that upon completion of the transaction, creates the largest independent imaging Core Lab. The merging of these two organizations takes two very confident competitors and creates an entity that has strength and late phase studies across oncology, musculoskeletal, and CNS therapeutic variants.

The combination, we also believe creates an opportunity for us to capitalize on situations where they were individually preferred providers with the same client to fill the void that the merger creates. Longer term, we believe our leadership in early phase, which is not impacted by this merger, still provides an entrée into late phase studies, both with direct clients and through our strategic alliance with PPD who are very heavily rated in late phase participation.

I would now like to move to our plans from 2013. My discussion here will focus on business development, the PPD alliance and personalized medicine. Our top priority and focus continues to be business development and our broader relationship with clients. This is not only with our sales team but with every person in the company through their daily work and through their participation on the improvement teams I referenced earlier.

With respect to our sales team, our two newest members that we brought on eight months ago are now familiar with their territories, their clients and our solutions. Both have closed business and along with the balance of our team are focused on making 2013 a successful year. From a sales perspective, the momentum we saw on the fourth quarter has continued through January and February with our awards and bookings well ahead of last year which gives us confidence that the actions speak on last year across the company are beginning to payoff.

With respect to the PPD alliance, our sales pipeline with PPD remains very strong with greater than 40 RFPs in progress. Reinforcing this strong pipeline, the fact that for 2013 PPD will now be compensating their sales representatives for all sales of VirtualScopics services. This compensation will be in the form of a separate and additional payment on top of their normal compensation plan.

The plan also significantly increases the payment if the PPD salesperson proactively gets the VirtualScopics sales team in with the client ahead of the RFP being issued or in a separate meeting after the bid defense for PPD and VirtualScopics to review the benefits of the integrated clinical imaging solution for that particular study.

Both companies believe this proactive approach will increase the win rate for proposals incorporating the integrated solution and thus the compensation plan accordingly reinforces this behavior monetarily for the PPD sales person. There is a lot of enthusiasm on both the PPD and VS sales teams for this plan. And we jointly believe this will significantly impact the number of win through the alliance in 2013.

With respect to personalized medicine, we made good progress on the 510 (k) registration for our DCE-MRI blood for measurement device. In a recent discussion with the FDA, they accepted our approach for testing and demonstrating the robustness of the algorithm. The data resulting from this discussion has been incorporated into our overall application which will be filed shortly.

We believe that based on our last call with the agency that we address their questions and are cautiously optimistic that we will receive approval. The next area of priority and personalized medicine is development of the standalone image workstation that will process and quantify the clinical DCE-MRI images in a regulatory compliant fashion.

We anticipate version 1.0 to be available in the second quarter. We are also nearing the end of the planning process for the prospective trials that will provide the clinical response data for review with the payer community. It is anticipated that the study when initiated would run in three U.S. [Audio Gap]. The proposed centers have signaled their interest in participating in such a study.

So, in summary, with respect to 2013 our focus falls in two major areas. The first on business development and sales for our direct accounts and further capitalizing on the PPD relationship, which has a very strong sales pipeline, and with the newly launched sales incentive plan we anticipate an uptick in activity and results.

Secondly, we intend continue to focus on personalized medicines, which in the near term focuses on our filing with the FDA and delivery of standalone workstation. I will now turn things over to Molly for a review of our fourth quarter and full year financial results and some insights into our planned investments in 2013 along with our status with respect to NASDAQ.

Molly Henderson

My comments today will center around the results for the fourth quarter and year ended at December 31st 2012, along with an overview of our financial positions including 10 investments in 2013 in select key areas.

Starting with our statement of operations, revenue for the quarter ended December 31st 2012, were $2.6 million bringing our full year 2012 revenues to $13 million compared to $14.3 million in 2011. Although at the high end of our revised guidance for 2012, we were disappointed to report a decline in our full year 2012 revenue.

Over the past year, we’ve been indicating that the pace of new project bookings has been slow due to general market conditions and demand. As a result we have begun seeing the impact on our revenue. During 2012, as Jeff mentioned, we experienced a dramatic increase in the time for products to reach decision. As a point of comparison, we were notified the decisions of roughly 35% of proposals that we have sent in response to customer request, compared to 70% average decision rates experienced in previous years.

As such, we continue to have a significant amount of projects that are waiting decisions from customers. We are optimistic that we'll see a reversal of this trend in 2013; in fact we've both already experienced a rebound of seven new project awards so far this year, including three new customers.

Also, adjustments we've actively taken steps to address our sales performance we've included the increase of sales staff in key regions of the world, and revamping our sales process to best leverage our strength.

For the 12 months ended December 31st, 2012, our gross profit was $5.3 million compared to $6.3 million for 2011, excluding reimbursement cost which includes costs directly passed through to our customers without mark-ups and include items like freight and travel, our gross margins for 2012 was 44% compared to 48% recorded in 2011.

Our gross margin excluding reimbursements for the three months ended December 31st, 2012 was 42% compared to 43% in fourth quarter of 2011. As previously indicated, our gross margins fluctuate based on the therapeutic area mix and phased study. Due to the higher percentage of the business coming from our sales projects which historically have had lower margins and the level of revenue we anticipated, we expected to see lower margins for 2012. Even with the slowdown in revenues, we are pleased that we were able to still continue to report gross margins greater than 40%.

Research and development costs increased $200,000 or 15% to $1,525,000 for the year ended December 31st, 2012 compared to 2011 in the fourth quarter of 2012 of approximately $370,000 was spent within our personalized medicine initiative in support of creating a new software platform to house our applications as well our efforts in support of our 510(k) application with the FDA.

Additionally, our R&D expenditures within our clinical trial business center around finding our software applications to gain efficiencies which we believe will better allow us standardize our operating processes, improve our margins and better meet the demands of Phase III clinical trials. In addition, we continue to invest in the commercialization of new imaging techniques across modalities and therapeutic areas.

Sales and marketing costs increased 27% or $301,000 to $1.4 million for the 12 months ended December 31st, 2012. As Jeff and I have been indicating today and over the past few earnings calls, last year we began experiencing slowdown in the new project awards when compared to our historical growth averages. We believe that PPD alliance will continue to be an important channel and a relationship for us and while the RFPs through PPD are increasing, it’s not met our expectations regarding new business of work. Both we and PPD are actively working to improve the performance of the alliance and we equally believe that we will see an increased benefit from this relationship. It goes without saying that the financial benefits from the alliance have taken longer than we expected.

In addition to leveraging the PPD sales force, we increased our investments in our direct sales activities. One of our direct activities and one that we believe is of a significant benefit for our customers, is our technical webinars.

During 2012, we conducted 16 webinars on topics ranging from quantitative imaging in clinical trials for orthopedic devices, chronic obstructive pulmonary disease or COPD, cardiovascular and CNS diseases as well as integration of functional and structural imaging in the clinical trials. The attendance at our webinars increased 40% in 2012 when compared to 2011. And so far in 2013, we’ve seen an increase in over 50% in attendance when compared to last year. It is evidence of the market value, that acknowledge strong imagining experience across many therapeutic areas and we firmly believe that these types of activities will result in new business for us.

It is our technical expertise that the market values and the area we’ll continue to leverage within our sales and marketing strategy. Although we strive to bring on new customers, so that realize the best sales force we have into letting our current customer.

In 2012, we focused on the expectations of our customers and through employee sponsored committees, drove awareness of certain things employees can do each day to improve the experiences of our customers.

We believe these efforts will pay dividends and not just increasing the amount of returning customers, but drive a strong referral network which due to the relatively small concentration of the market, and several of the large pharmaceutical companies along with their relatively mobile employee base, we believe this will be a strong benefit to us.

General and administrative costs for the year ended December 31, 2012 were 2.6 million up 100,000 or 4% when compared to G&A cost in 2011. The increase is due to consulting cost associated within our personalized medicine commercialization strategy.

G&A cost also includes expenses and personnel costs within quality, HR, IT, finance, and administration groups and also includes court fees, legal, audit expenses as well as public company filing, fees, and related cost. impacting our net income for the yearend December 31, 2012 for the onetime and noncash theme dividend charge related to the financing from Merck Global Health Innovation Fund in April of last year.

Accounting pronouncement requires us to find a fair value to the warrants issued in the transaction and reflects that value in our statement of operations as a one-time charge. The fair value is based on the Black-Scholes calculation which is heavily influenced by our stock price, which at the time of closing was $54 thereby causing a significant increase in the value assigned to those warrants.

This charge in no way reflects amounts owed rather, is only a mechanism required by accounting pronouncement to reflects artificial warrant values in the financial statement at the time of issuance.

Turning briefly to the balance sheet. Our cash position remains strong and represents over two-thirds of the assets of the Company. This coupled with having no debt, we believe we are positioned well to invest in opportunities that we believe will be an integral part of the future success of our company.

While we are monitoring our expenses due to the short fall in revenues, we believe the fundamentals of the business are intact and we are identifying the key elements of the market and our process to ensure we have the perfect strategies both in the short and long term. One of these key strategies is our opportunities in the developing market of personalized medicine. It is this concept that Merck Global Health Innovation Fund invested in April of last year, is a significant due diligence. We were excited to bring Merck on not just as an investor but a strong strategic partner in the company. As such¸ we’ve done using the proceeds of their investment to advance our efforts.

We are making progress in several funds within personalized medicine, including the hiring of dedicated staff to drive our commercialization efforts. In addition to the work I’ve just mentioned, we’ve also engaged experience from a fair market research and coupled with their expertise in brining diagnostic related products to market, they will provide us with their perspectives on the best cash forward to commercialization of our technology.

My last comments are on our situation of NASDAQ and our overall financial position. We believe in the all of the requirements for the NASDAQ to bring us an additional 180 day extension to regain compliance with their listing requirement. It is also our belief that our listing in NASDAQ is important to our stockholders and that it provides liquidity and therefore we will actively work to regain compliance during this 180 days period.

Lastly, as it relates to our financial position as Jeff mentioned and his comment and mine, we were disappointment with the slowdown in 2012. However, we will continue to believe there are a significant opportunities in the company and we are encouraged by the level of activity we’ve seen so far in 2013. In order to fully capitalize on our sales opportunities we’ve plan to make a few important capital investments in our core business this year which will greatly enhance our ability to effectively and efficiently service the Phase III market which is where the maturity of the market opportunity exists.

We plan to make the investments throughout 2013 and beginning marketing a robust offering in the later part of this year. To also actively pursue our 510 (k) clearance for our first preference mentioned product as well as investing in the development of what we believe will be the first of its kind applications to revise critical image for fusion information to clinics and oncology patients across the globe.

Due to a few very large projects expected to come up whole as well as a significant amount of proposals and change request the waiting decisions and the possible result and positive impact to our top line, we have elected to not yet provide our 2013 revenue guidance. We will update the invested communities with a clearer picture once we gain better visibility and capacity spending items.

With the strength of our cash balance, strong reputation in the industry, PPD relationship and solid stockholder base, we remain confident in our ability to once again return to a solid growth rate.

I will now turn it back over to Jeff.

Jeff Markin

Thank you, Molly. As you can see from Molly and my prepared remarks, we’re aggressively working through the issues we experienced last year and new awards in bookings and given our very strong balance sheet are continuing to invest in areas that make sense for the company and both the short and longer term.

We would now like to open up the call for any questions.

Question-and-Answer Session

Operator

Thank you, we will now be conducting our questions-and-answer session. (Operator Instructions).

We do have a question from the line of Keith Gil with JHS Capital Advisors, Please proceed with your question.

Keith Gil - JHS Capital Advisors

I was wondering if you could comment on the time decision that it went from 70% or down to 35%, did you ever discover why that occurred, and was that industry wide?

Molly Henderson

We have talked to several people in the industry and we've had some with bit experiences and some that haven’t. But I think what a lot of it is our cost therapeutic area. I think a lot of the decisions, what we experienced at least around the oncology side of the business; we did find that especially within some of the PPD relationship as well. And then some decisions were just contingent upon the FDA approval. So, we weren’t able, I think in Jeff’s comment, he mentioned it too; we weren’t able to pin point a specific reason. I think it was just a general overall trend for that one driving force.

Keith Gil - JHS Capital Advisors

And they are still in the decision making process?

Molly Henderson

We've seen some turnaround so far in '13. There's been a few decisions made as I mentioned in my prepared remarks, we've been awarded seven new projects, so that was significantly more than what we experienced in the first months of 2012. So we believe it’s starting to rebound a bit.

Keith Gil - JHS Capital Advisors

Now that BioClinica has been bought out or going private, is there any other public companies that you'd be compared to?

Jeff Markin

No, within the imaging CRO space, BioClinica and us were the only independent public companies.

Keith Gil - JHS Capital Advisors

So you wanted to invest in imaging, you would be (inaudible).

Operator

Thank you, it appears that there are no further questions at this time. I would like to turn back the call over to management for any concluding remarks.

Jeff Markin

Thank you. Given that there are no additional questions, we like to close today's call. We are optimistic that 2013 will be a much stronger year in terms of new awards and bookings given our progress today and a new relaunch sales in center's plan with PPD. We appreciate the interest you have in the company and look forward to updating you on our progress. Thanks and have a good rest of the day.

Operator

Thank you ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.

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