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VirtualScopics, Inc. (NASDAQ:VSCP)

Q4 2013 Earnings Conference Call

March 7, 2014 11:00 ET

Executives

Gerard Carney - Investor Relations, FleishmanHillard

Eric Converse - Interim Chief Executive Officer

Jim Groff - Acting Chief Financial Officer

Analysts

Paul Rodgers - Gold Leaf Capital Management

Douglas Russell - Brown Harris Stevens

Robert Kessler - Private Investor

John Bair - Ascend Wealth Advisors

Sam Torr - Private Investor

Operator

Greetings and welcome to the VirtualScopics Fourth Quarter and Full Year Ended December 31, 2013 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

I would now like to turn the conference over to your host, Gerard Carney of FleishmanHillard. Please go ahead, sir.

Gerard Carney - Investor Relations, FleishmanHillard

Hello and thank you for joining us for VirtualScopics fourth quarter year end 2013 investor call. My name is Gerard Carney. I am with FleishmanHillard, the company’s retained communications firm. Thank you for taking the time to listen to today’s call.

I want to remind you that 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 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 facts maybe 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 as of the date hereof, except as required by law, the company undertakes no obligations 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 VirtualScopics’ periodic public filings on file with the Securities and Exchange Commission.

This call will run for approximately 30 minutes. We will begin with a brief overview of the company’s fourth quarter full year 2013 results and priorities for 2014. We will follow our prepared remarks with a Q&A session.

I will now turn this call over to VirtualScopics’ Interim CEO, Eric Converse.

Eric Converse - Interim Chief Executive Officer

Thanks Gerard. Good morning everyone. With me today is Jim Groff, our Acting Chief Financial Officer.

I am going to begin this morning with a short review of our fiscal year 2013 and then we will discuss some exciting developments we foresee in 2014. I will then turn the call over to Jim to provide a detailed review of our quarterly and full year results. As we have noted previously, 2013 was a challenging year from a financial results perspective. Based on the guidance from our last earnings call, we ended the year with revenue better than projected. We were just over $11 million. However, we are keenly aware that we still have much to do on our path to increase our revenues and return to profitability.

As a reminder, it typically takes many months for bookings to become recognized as revenue. And these timings can vary. So the 2013 results reported today are largely driven by the softness in bookings during 2012. For more background, the timing involved for a booking to be converted to revenue has various factors, including the time to get the site setup for the trial, to recruit the participants to join the trial, and then finally the years over which the trial takes place. As a result of the long-term nature of the bookings revenue process, our 2014 results will be impacted by the 2012 bookings as well.

2013 was also the start of a period of transition and positive change for VirtualScopics. This transition is continuing and we maintained it is necessary to make investments that will ensure successful future for our company. While 2013 was economically challenging, we were able to refocus on our core competency developing and maintaining strong relationships with our customers. It is because of this focus on our commitment to quality service that we ended 2013 with more than $17 million in bookings more than double those in 2012. And in 2014, we expect our bookings to grow even higher. Just over two months into the year, all-time point to this positive trajectory as we are almost three times higher in our bookings so far this year than we were at this time last year.

To be clear, I am now projecting that we are going to triple our bookings, but we are certainly trending in a positive direction. The good news about these bookings is that they are in our core competency areas and reflect our ability to attract sponsors with our scientific capability in early phase trials, also attracting sponsors for our process in later stage trial. In short revenues are a sign of the past, bookings are a sign of the future and as a result of our progress in this area we feel positive about the VirtualScopics future.

For 2014, we are focused on continuing to secure and grow our core business that will ensure long-term revenue growth as a result of our immediate bookings and a business that will ensure sustained profitability as a result of dedication to infrastructure investments. In terms of revenues growth, this is achieved by increasing bookings. Now, as I mentioned we saw our bookings increase in 2013 and expect that to continue in 2014. We have been and we will continue to increase bookings by establishing new customer relationships and by deepening relationships with our current customers.

We have worked hard on getting our bookings and in demonstrating strong project management on our projects and we feel very good about the trust we have earned from current customers and the impression we make on prospective customers. The key indication of our success in this area is our ability to attract more requests for proposal specifically for Phase 3 clinical trials. Our total number of RFPs increased over 20% from 2012 to 2013 and the Phase 3 RFPs increased by over 30% between the same period. Though we are growing our Phase 3 business, we maintain our dedication to early phase trials, but these are the ones which truly explore - exploit our scientific knowledge base and allow our project management teams the opportunity to impress our sponsors with our clinical trial management abilities and lead our cooperative efforts to continue joint work in later stage trials.

I am also happy to report to you all today that not only have we made VirtualScopics contender in Phase 3 clinical trials, we have also recently won a program award with one of our large pharmaceutical customers. This award is a multi-million dollar oncology program including early and late phase studies. As all phases are set to begin in 2014, this award will most likely be reflected in our overall bookings in this year as well. What makes us most proud of this achievement that this win was truly a team effort and it demonstrates how we drive revenue through existing customers. As a background, this win originated years ago through a series of smaller projects secured by our business development team and it was then up to our operations and project management teams to become a value partner to the customer and to ensure that all our work was well managed and successful.

To clarify an award is essentially a confirmed notification that a contract will be signed and accounted as a booking. This means that we are confident that this award win will convert to a booking this year, which over time will convert to revenue. In addition to revenue growth, we are focused on investing in continuous improvements that will enable us to better serve our customers and will drive efficiencies for improved profitability. These investments – these will include investments in both systems and talent development.

First to note on our system, the infrastructure investments, be they operational or analytical tools are the result of recent internal discussions about maximizing the team we have and leveraging them through continuous and more focused technology investments. We have been and will continue to invest in our infrastructure to enable more automation and greater efficiencies across the company. So what does this mean? Well, as our industry continues to advance, we need to have seamless end-to-end integration among our system and stronger integration with our customers. Our entire platform is currently under review as we discussed further improvements. The goal is to help us determine the most important advances needed such as our potential to have more robust systems, which allow for better communications with our customers and partners.

Now, I would like to take a moment to talk about the amazing talent I have discovered during my time at VirtualScopics. This talent is the lifeblood of our business and it needs to be constantly developed, so if they are ahead of emerging trends and can lead our customers into the future of quantitative imaging. We are working to ensure that our team has access to resources that put them in a position to provide the best service possible to our customers, whether it’s training on new systems, building leadership skills or attaining technical certification, one constant mantra is echoed throughout the company, good people keep us good results. In my experience always the people that make the company successful.

We also plan to open a satellite office in the Pennsylvania and New Jersey areas in 2014. It will be primarily for sales and project management so that our representatives can be closer to our customers in the area, the location somewhat also provide us with a new geography from which to draw talent as we grow our business. In 2014 we will also focus on alliance partnership that took our relations to the PPD. At this small company these alliances are important to our growth.

With this in mind, we are placing additional focus on channel management. Our focus did not only on building on our success with PPD but also on developing other strategic partnerships that will enable us to extend our therapeutics and global reach. The therapeutics potential new alliances will be with IXICO; the brain health company based in London and the UK, This alliance will allow us to extend our global presence by having a part in Europe and add a complementary therapeutic area in neurology.

There will be more on this alliance as 2014 progresses. We’re pleased to know that both the team at VirtualScopics and the team at IXICO are very excited about this alliance. We believe that some of the consolidation in this industry will lead to less focus on the science aspect of our business which we believe is critical. We at VirtualScopics would like to maintain our focus on our scientific expertise as it relates to early stage clinical trials and expand our midst to alliances with companies that have other therapeutic focuses such as IXICO with neurology because we believe this will lead to continued early involvement with the sponsors and a pathway to maintain involvement through all stages of clinical trial.

To share a bit more about our PPD relationship we’ve made some changes to our Executive Steering Committee, this group had earlier discussed how we can further enhance our collaboration and build on our success from 2013 as the PPD channel was responsible to 30% off of our 2013 bookings. Our most discussions are confidential and I can report that we’re extremely pleased with the partnership and we have PPD and the direction of our cooperation.

Finally, we are continuing to work on our scientific advisory board, our Chief Scientific Officer, Ed Ashton have begun recruitment for the board which will help, enhance and deepen our knowledge base and our core competencies and will allow for an exchange of ideas and knowledge in each therapeutic area as far as new measurement approaches and analysis modalities.

As far as our current CEO search the progress is ongoing and building. As you can hear we’ve begun to generate strong positive momentum which we expect will continue throughout 2014 and beyond. At this time however I want to remind you that we do not anticipate seeing immediate revenue appreciation. And I’d like to emphasize that we’re currently in a period of strategic reassessment and a focus on returning to compassing prior revenue levels and profitability in our core business.

It will be a slower ramp-up and it will take sometime for us to see drastic improvement on top and bottom line. However as I said we should all feel encouraged that VirtualScopics is coming off a year of substantially increased bookings and then we’re starting 2014 with even higher expectations for the year than we did at this time in 2013 has to be stay laser-focused on our core business. As in our side although I’m confident in our pipeline I feel it is necessary to remind you that as is the case for others in our industry there was always a risk of a project cancellation due to a drug’s inability to show efficacy during the trial or for other reasons.

Now, I’d like to provide a note on what you can expect longer term from the company. As we look down this year, I am working with the board and the management team to determine and set our longer term strategy, including how we will exploit our competencies in other areas. And we expect to provide you with updates throughout the year as key decisions are cemented. However, this year, our focus is solely on securing core business, which will ensure long-term revenue again as a result of bookings and sustained profitability as a result of investment and infrastructure and our people.

As mentioned in our last call, my passion lies in unlocking the potential in companies and assisting in driving them to success. My experience has been to identify areas when an organization has opportunities and challenges and I have not been shy about discussing them here at VirtualScopics. What I have learned in this role has not only come from internal observation, but also from speaking with and visiting our customers and partners. The feedback from these discussions has been overwhelmingly positive and has also helped for some constructive comment on how we can improve ourselves and further grow our business. This feedback has been strongly embraced by management and the entire team. In any business, the most important resources are the people. The philosophy needs to be applied at all levels of the company and happily this is catching. We focused squarely on accountability and building trust among all our team members and I see improvements in this area daily. I am further encouraged by the talent of the entire team and look forward to continuing to work with them and empowering them to fully utilize their talents and expertise.

As an organization we know change for the better is a good thing. As we strive to be a team, which is stronger than some of our individual parts there has been and they will continued to change as we solidify our longer term strategy. But one thing which will not change is our commitment to our customers, the happiness of our employees and the satisfaction of our shareholders.

Now, let me turn it over to Jim for a financial review.

Jim Groff - Acting Chief Financial Officer

Thank you, Eric. My comments today will center around the results for the fourth quarter and full year ended December 31, 2013. Our financials continue to tell a story about the investments and repositioning efforts that made 2013 a year of transition and strategic change for VirtualScopics. Starting with our statement of operations, full year revenues exceeded our expectations coming in at $11.2 million for 2013, down from $13 million for the full year 2012. Revenues for the fourth quarter ended December 31, 2013 were $2.7 million, up 4% from $2.6 million in the fourth quarter of 2012.

As Eric noted previously 2013 revenues were impacted by the slowdown in new project bookings during 2012. Revenues were also impacted by the timing of 2013 awarded and contracted projects and the large number of studies that ended during the year. New project awards and bookings for 2013 exceeded $20 million, more than double of those achieved in 2012. Our improved bookings were the result of our company wide renewed focus on enhancing and building customer relations as well as our alliance with PPD. These efforts translate into an increase in RFPs during the year, which then translated into increased awards and bookings. It is important to note that a typical projects contract life can stand over multiple years, so there could be a gradual impact on revenue. A project’s revenue cycle is depending on number of factors including the time it takes for a drug trial to begin, which varies to the time required to set up trial sites and to recruit participants.

Also during the life of a project it is not uncommon for there to be an expansion in the size of the study, which can increase our potential revenue. However, there are also situations when the sponsor does not recruit the number of subjects or sites as originally budgeted or a drug fails and the study therefore comes to a premature end. In those cases there are remaining budget dollars at the end of the study that will not be recognized as revenue. These amounts are reconciled and removed from our backlog. Currently our backlog stands at over $26 million with approximately $7 million in project awards, awaiting final budgets and assigned contracts.

Now, I will turn into gross profit. For the fourth quarter of 2013 gross profit was approximately $1 million, which is flat when compared to gross profit for the fourth quarter of 2012. Gross margin for the fourth quarter of 2013 was 39% compared to 40% in the fourth quarter of 2012. For the full year 2013 gross profits totaled $4.4 million, down from $5.3 million in 2012. Full year 2013 gross margin was 40% compared to 41% in 2012. Our gross margins fluctuate based on therapeutic area mix and phase of study and specifically as it relates to the volume of revenue.

In our industry, there are certain amount of fixed costs required to support the business, specifically regulatory, quality and technical staff. As a result our gross margin fluctuates with our revenues as these certain costs are predominantly required with expenses and support of servicing our customers in this industry. On the flipside, these costs can spur a high level of revenues thereby making the economies of scale strong in these areas. In 2014, we plan to invest in our core infrastructure to further enhance our abilities as a Phase 3 provider and to continue improving on our operational efficiencies. Next, research and development cost decreased by nearly $99,000 to $314,000 for the quarter ended December 31, 2013 compared to the same period in 2012.

For the full year 2013, R&D costs were $1.4 million, down 5% compared to 2012. The decrease was a result of no additional money spent on the personalized medicine initiatives during the fourth quarter of 2013. We are currently re-evaluating our approach in personalized medicine and have delayed any additional work on the fabrication as we focus on our clinical trial business. Our research and development efforts center around the refining of our processes through the use of our software platform in order to expand the nature of our services as well as to gain efficiencies, which we believe will allow us to drive improvements in our gross margin especially in Phase 3 clinical trials. For example in 2013, we launched a third generation analysis platform that was used in completing analysis of 10,000 scan Phase 3 breast cancer trial, one week ahead of the schedule and delivered with 100% accuracy.

Sales and marketing cost decreased 6% to $418,000 for the three months ended December 31, 2013 from $446,000 in 2012. Overall, 2013 sales and marketing expenses rose to $1.5 million from $1.4 million in 2012. As we mentioned on our last call with you, in 2013 we continued investing in our direct sales force and related activities to help enhance and build customer relationships. These activities included targeting educational webinars, more frequent customer interaction by our sales force and our healthier presence at trade shows. Additionally, we leveraged and further developed the PPD sales channel. We believe that these activities that led to our improved booking performance in 2013 and we plan to continue these efforts going forward.

General and administrative costs for the quarter ended December 31, 2013 were $1.1 million, up 43% from $744,000 in 2012. Looking at the full year, G&A cost rose 30% to $3.4 million in 2013 from $2.6 million in 2012. The increase was primarily due to professional costs associated with the reverse stock split as well as severance costs related to the CEO’s resignation that occurred during the fourth quarter of 2013. General and administrative costs also include expenses and personnel costs within the quality, HR, IT, finance, and administration groups and also include board fees, legal and auto expenses as well as public company related fees and filing costs.

Turning to the balance sheet, our cash position remained strong. As of December 31, 2013, we had a cash balance of $7.3 million compared to $8.5 million at the close of 2012. The cash balance represents nearly two-thirds of the company’s assets. This coupled with having no debt positions us low to invest wisely in both the short and long-term to further develop internal capabilities in order to improve our operational quality, productivity and profitability.

To wrap up, while 2013 was challenging from a financial results perspective, it was positive and that we were able to make the necessary investments help drive vital changes through out our company. As demonstrated by the increase in new project awards and bookings, we have made great strides improving our business development efforts and our customer relationships. As a result of this progress, we believe there are significant opportunities ahead for our company and we are encouraged by a level of activity we have seen so far in 2014. This combined with our cash balance and strong reputation in the industry makes us confident in our ability to move the company forward and over time return to a solid growth rate.

I will now turn it back over to Eric.

Eric Converse - Interim Chief Executive Officer

Thanks Jim. To everyone on the call, I believe we have been informative, but we would like to now open it to some questions, if you have any comments or questions or things that may not have been covered or you just wanted a little bit more explanation around it.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Paul Rodgers from Gold Leaf Capital Management.

Paul Rodgers - Gold Leaf Capital Management

Gentlemen, please. In your CEO search, what is the most significant attribute you are looking forward in a person, a sales person and somebody who can execute a scientist and why that particular attribute for VirtualScopics going forward?

Eric Converse

Thank you very much for that question. I think at the CEO search as uncovered quite a few different candidates with different skill sets. I would tell you from where we are sitting now, leadership is the most important piece of what we are looking for. There is a lot of talent here in this company and properly let, they will be able to really develop this company into a much stronger corporation.

Operator

Our next question comes from Douglas Russell from Brown Harris Stevens.

Douglas Russell - Brown Harris Stevens

My question is also on the CEO search, I am wondering how it’s progressing and if you have offered it to anyone or if you are close to offering it to anyone?

Eric Converse

I would say at this time we are still looking at candidates. Korn/Ferry has supplied quite a few of them. They have initiated the search and screening process for the selection of the new CEO and the search committee has also been conducting some of its own interviews. At this time, there is no status to report on a new candidate.

Operator

Our next question comes from Robert Kessler, a Private Investor.

Robert Kessler - Private Investor

Okay. Well, continuing with the executive search topic, are you gentlemen, Eric and Jim are you candidates for these positions?

Eric Converse

Again, a very good question. As far as Jim is concerned no, he is not a candidate for the CEO position. He is our Acting CFO and I will tell you at this point there is no search going on. Jim is doing his job remarkably well at the size of the company and his talent. We are very well covered there. As far as the CEO search from my perspective, I have spent in here to learn much about the company and to let the board know more and more about it. I have very much fallen in love with these people, what they are doing. I think we have got a great team. I am enjoying working with them. As far as an official candidacy for this position that has not been decided yet.

Operator

Thank you. Our next question comes from John Bair from Ascend Wealth Advisors.

John Bair - Ascend Wealth Advisors

Good morning. I have a couple of questions here. What do you think your SG&A trends in ‘14 are going to be relative obviously hopefully it will be lower than in ‘13, but do you think that will fallback and be more normalized towards what you saw in 2012?

Eric Converse

I think that question is one that is going to be very difficult right now for me to give you guidance on it for the year, but I will tell you that there are certain key roles that I have identified where we needed to expand our team. And I think when you are expanding team and you are doing it strategically and thoughtfully, you will be gaining efficiencies, which will make the company more profitable in the long run, but there are few areas such as on costing and some of our medical review that I have been looking at with the team to make sure that we are investing in that. So our offering only gets stronger.

Operator

Our next question comes from Keith Gil from JHS Capital Advisors.

Keith Gil - JHS Capital Advisors

Yes, good morning. I wonder if you can put some clarity, I wasn’t sure the dollar amount of new bookings and awards for 2013 were how much?

Eric Converse

Just over, bookings and awards was almost $21 million, but the bookings themselves were just over $17 million.

Operator

Thank you. We have a follow-up question coming from Paul Rodgers from Gold Leaf Capital Management.

Paul Rodgers - Gold Leaf Capital Management

Please, back to the G&A line, perhaps Jim you can handle this better. If we just roughly back out – back out the $450,000 in severance costs, fourth quarter G&A would have been roughly $613,000, is that true and is that true given just what Eric said, I mean, can we see a stabilization or even a decrement in G&A going forward.

Jim Groff

Yes, what you will see is right, we won’t have those costs reoccur in the next year, but what happens to is there is other cost involved in there as far as, for one example might be board fees, legal costs, roughly filing cost. So we should start to see some consistency in there, but as far as I do want to say along the same lines, but we are also looking at some resources through the improved efficiencies in the fed area also in the IT area.

Paul Rodgers - Gold Leaf Capital Management

Just to clarify you don’t see the CEO...

Jim Groff

Right, we don’t see that large, I don’t see amount we expect to occur.

Operator

Thank you. We do have a follow-up question coming from John Bair from Ascend Wealth Advisors.

John Bair - Ascend Wealth Advisors

Yes, are you able to give us an idea of the percentage breakdown of what your phase, say your brand new bookings are versus extension of trials and in other words you have indicated you have overall booking numbers were up to what $20 million or something in 2013, so can you give us an idea of what the balance is between the very brand new stuff versus essentially extension of existing projects?

Jim Groff

I just want to clarify it’s not bookings that $20 million and it was in 2014, the bookings in 2013 were $17 million and bookings and awards were just as over – were just below $21 million. We do not have information to detail for you as of today on our bookings now. We have had some of our existing programs actually have change requests which have been very favorable, I will tell you that and I will say that what we are working on right now in 2014 it’s coming out of our established customer base and with that we are very encouraged.

Operator

Thank you. We have time for one last question. Our last question comes from Sam Torr, a Private Investor.

Sam Torr - Private Investor

Good morning. My question is related to with respect to personalized medicine there is another company, (indiscernible) they have taken a different approach in that, they have decided to basically base developed a diagnostic test which is a companion for specific drug. They have received FDA approval using this approach, in your original FDA comments it appear the FDA wanted VirtualScopics to take a similar approach. Have you considered that type of approach? In general, if you could give us an update on the personalized medicine what you guys intend to do with that?

Eric Converse

I’m not sure, if you are on the last earnings call or not, but on that call, I have said I have put everything on personalized medicine on hold as we are addressing some of the core issues in our business and I think as this year further unfolds, we can address some longer term strategies, but at this point that is on hold very clearly and we are focusing on getting the core of this business and our clinical trials strong before we are going to start revisiting that topic.

Operator

Thank you. I will now turn our call back over to our speakers for closing comments.

Eric Converse - Interim Chief Executive Officer

Okay. I appreciate everyone’s time today. If you have any other questions, feel free to reach out to our representatives or Jim Groff and we wish you all a very good day.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you.

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