Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
You should
read the following discussion and analysis of our financial condition and results of operations together with our financial statements
and related notes. In addition to historical information, some of the information in this discussion and analysis contains forward-looking
statements reflecting our current expectations and involves risk and uncertainties. For example, statements regarding our expectations
as to our plans and strategy for our business, future financial performance, expense levels and liquidity sources are forward-looking
statements. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements
as a result of many factors, including those set forth under “Risk Factors” in Part I, Item 1A in our Annual
Report on Form 10-K for the year ended December 31, 2013, as updated in Part II, Item 1A in this Quarterly Report on Form 10-Q.
Overview
We are a medical
device company that develops, manufactures, markets and sells point-of-care cellular imaging systems. Our patented and FDA-cleared
VivaScope® technology provides physicians with real-time images of the epidermis and superficial dermis of the skin, as well
as other epithelial tissues at a cellular level that can be interpreted by the physician at the bedside and/or transferred securely
to a pathologist on VivaNet®, our HIPAA-compliant private telepathology network for remote diagnosis. With sensitivity and
specificity that can rival the current “gold standard”, clinical histopathology, but without all of the associated
costs of a traditional biopsy, our platform imaging technology has the potential to significantly improve patient outcomes while
simultaneously reducing costs.
Our core products
are FDA 510(k) cleared for clinical use and have regulatory approvals in most major markets. Our technology is already in use
by physicians and researchers at major academic hospitals, and by pharmaceutical and cosmetic companies across the globe. Our
devices allow these researchers to quickly and efficiently study the efficacy of new products, test ingredients, validate claims
and determine safety. The technology is protected by 78 issued or pending patents worldwide.
To date, our
proprietary platform imaging technology has been the subject of more than 350 independently sponsored studies or publications
spanning numerous clinical and research fields. Extensive research has been conducted in dermatologic disorders including melanoma
and nonmelanoma skin cancers, dermatoses, inflammatory and pigmentation disorders. Additionally, the technology has been used
to noninvasively study burns, wound healing, neuropathy and oral tissues. Ex-vivo research has been conducted in head and neck,
breast biopsy and surgical specimens. Our in-vivo products are ideal for applications in which a traditional biopsy is counterproductive,
such as validating the diagnosis of benign lesions (thus, reducing unnecessary biopsies), monitoring noninvasive therapies and
determining product efficacy. In the future, the technology may be used to perform real-time pathology in the operating room on
tissues removed from the body and to identify tissues in the body during surgery.
We are an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we are eligible to take advantage
of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging
growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports
and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, from which
we are currently exempt as a smaller reporting company, and stockholder approval of any golden parachute payments not previously
approved in connection with a transaction resulting in a change of control. We expect to take advantage of these exemptions. Some
investors may find our common stock less attractive as a result of our utilization of these exemptions, which may result in a
less active trading market for our common stock and a more volatile stock price.
In addition,
Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting
standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until
those standards would otherwise apply to private companies.
We could remain
an “emerging growth company” until 2016, or until the earliest of (i) the last day of the first fiscal year in which
our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in
Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that
is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter,
or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
We were organized
as a New York corporation on November 27, 1991 under the name Lucid Technologies, Inc. We subsequently amended our Certificate
of Incorporation to change our name to Lucid, Inc
.
We are operating as Caliber Imaging & Diagnostics, or Caliber
I.D. Our principal executive offices are located at 50 Methodist Hill Drive, Suite 1000, Rochester, New York 14623. Our telephone
number is (585) 239-9800. Our web site is www.caliberid.com.
Product Portfolio
Our product
portfolio consists of a variety of in-vivo and ex-vivo imaging systems, as well as a telepathology system, covering a wide variety
of applications.
Our VivaScope in-vivo devices, the
VivaScope® 3000 (handheld device) and the VivaScope® 1500, use confocal cellular imaging to create a layer-by-layer scan
of living tissue, with a >0.2mm imaging depth. This provides physicians with a microscopic view of living cells in the skin,
with 3-5 micron cellular resolution comparable to histology. Our in-vivo imagers are FDA 510(k) cleared with an intended use to
“acquire, store, retrieve, display and transfer in-vivo images of tissue, including blood collagen and pigment, in exposed
unstained epithelium and the supporting stroma for review by physicians to assist in forming a clinical judgment.”
Our VivaScope
ex-vivo device, the VivaScope® 2500, uses confocal imaging to produce electro-optically enlarged images of unstained and unsectioned
excised surgical tissue without the laborious tissue preparation procedures required to prepare the microscope slides used in
traditional pathologic examination of tissue. As a Class I medical device, the VivaScope 2500 is exempt from 510(k) clearance.
Our VivaNet
telepathology server transfers images from the point of capture at a physician’s office or operating room to another physician,
pathologist or other diagnostic reader for near real-time diagnosis and reporting. This HIPAA-compliant, cloud-based system stores
images and diagnostic reports as a part of a patient’s permanent, electronic, medical record, increasing efficiency and
potentially reducing costs for medical institutions as compared to current histology record retention processes. Our VivaLAN product
is a telepathology system which retains all patient data within the customer’s facility. As Class I medical devices, our
VivaNet and VivaLAN systems are exempt from 510(k) clearance.
We have devoted
substantially all of our resources to the development of our technologies, which expenses have included research and development,
conducting clinical investigations for our product candidates, protecting our intellectual property and the general and administrative
support of these operations. While we have generated revenue through product sales, we have funded our operations largely through
an initial public equity offering and multiple rounds of private debt and equity financings. We have never been profitable and
we reported net losses of approximately $1.8 million and $1.1 million for the three months ended March 31, 2014 and
2013, respectively. As of March 31, 2014, we had total stockholders’ deficit of approximately $14.2 million. We expect
to incur operating losses for the foreseeable future as we invest substantial resources to promote the commercialization, and
attempt to achieve widespread adoption, of our products. We expect that research and development expenses and sales and marketing
expenses will increase along with general and administrative costs, as we grow and operate as a public company. We will need to
generate significant revenues to achieve profitability and we may never do so.
As of March
31, 2014, we had cash and cash equivalents of $0.2 million and a working capital deficit of $6.8 million. During the three months
ended March 31, 2014, our cash used in operating activities totaled $0.5 million. As a result of our limited cash resources and
working capital deficit, we are delinquent in paying a number of our creditors. Unless we obtain additional financing in the coming
months, we will need to substantially curtail operations and may be unable to continue our business.
Our revenues
are derived from the sale of our products and services, primarily VivaScopes, as well as an immaterial amount of revenue from
maintenance and support services. We recognize product revenue when evidence of an agreement exists, title has passed (generally
upon shipment) or services have been rendered. Certain direct sales contracts require installation at the customer’s location
prior to acceptance. As such, revenue recognition on these contracts is typically delayed until all aspects of delivery, including
installation, are complete. In addition, should the contract include training, revenue recognition is delayed until training is
complete.
Results of Operations
Three Month Period Ended March 31,
2014 and 2013
We reported a net loss of $1.8 million
or $(0.22) per share for the three month period ended March 31, 2014 as compared to a net loss of $1.1 million or $(0.13)
per share for the three month period ended March 31, 2013. The increase in net loss for the three months ended March 31, 2014
resulted from increases in operating and other expenses during the period.
The following presents a more detailed
discussion of our operating results:
Revenues.
For
the three months ended March 31, 2014 and 2013, we recorded sales of our products of $0.9 million and $1.1 million,
respectively. The decrease resulted from lower revenue in North America, partially offset by increased revenue in Europe. Percentages
of total sales by geographic region are as follows:
|
|
Three months Ended
March 31,
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|
|
|
2014
|
|
|
2013
|
|
|
|
Product Sales
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|
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%
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|
|
Product Sales
|
|
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%
|
|
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|
(in millions)
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|
|
|
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(in millions)
|
|
|
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|
North America
|
|
$
|
0.1
|
|
|
|
15
|
%
|
|
$
|
0.4
|
|
|
|
39
|
%
|
Europe
|
|
|
0.5
|
|
|
|
55
|
%
|
|
|
0.4
|
|
|
|
37
|
%
|
Asia
|
|
|
0.3
|
|
|
|
30
|
%
|
|
|
0.3
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
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|
$
|
0.9
|
|
|
|
100
|
%
|
|
$
|
1.1
|
|
|
|
100
|
%
|
Cost of revenue.
Cost
of revenue remained relatively consistent at $0.7 million for the three months ended March 31, 2014 and 2013. As a percentage
of product sales, cost of revenue was 83% and 71% for the three months ended March 31, 2014 and 2013, respectively. The increase
in cost of revenue as a percentage of sales reflects the discounts extended to customers. For the three months ended March 31,
2014 and 2013, cost of revenue included non-cash stock-based compensation expenses of approximately $6,000 and $3,000, respectively.
General and
administrative expenses.
General and administrative expenses consist primarily of salaries and benefits,
professional fees, including those associated with being a public company, occupancy costs for our facilities, insurance costs
and general corporate expenses. For the three months ended March 31, 2014, general and administrative expenses totaled $0.8 million,
an increase of $0.3 million from the same period last year. The increase was primarily due severance expenses incurred of
$0.1 million, a $0.1 million increase in stock-based compensation costs, and a $0.1 million increase in insurance costs. For the
three months ended March 31, 2014 and 2013, general and administrative expenses included non-cash stock-based compensation expenses
of $0.1 million and approximately $15,000, respectively.
Sales and
marketing expenses.
Sales and marketing expenses consist primarily of salaries and benefits and general
marketing expenses. For the three months ended March 31, 2014 and 2013, sales and marketing expenses totaled $0.6 million and
$0.3 million, respectively. The increase primarily resulted from an increase of $0.1 million in wages due to increased headcount.
For the three months ended March 31, 2014 and 2013, sales and marketing expenses included non-cash stock-based compensation expenses
of approximately $7,000 and $14,000, respectively.
Engineering,
research and development expenses.
Engineering, research and development expenses consist primarily
of salaries and benefits, consulting fees and material costs used in the development of new products and product improvements.
For the three months ended March 31, 2014, engineering, research and development expenses totaled $0.4 million, a decrease of
$0.1 million from the same period in the prior year resulting from patent related costs. For the three months ended March 31,
2014 and 2013, engineering, research and development expenses included non-cash stock-based compensation expenses of approximately
$15,000 and $35,000, respectively.
Interest
expense.
Interest expense increased $0.1 million from $0.1 million for the three months ended
March 31, 2013 to $0.2 million for the three months ended March 31, 2014. The increase in interest expense was a result of the
placement of our 2013 Term Loan in May 2013 in the amount of $5 million.
Loss on abandonment
of long-lived assets.
We recorded a loss on abandonment of long-lived assets of approximately $16,000 during the
three months ended March 31, 2014 related to leasehold improvements at our former headquarters.
Fair value
adjustment of warrants expense.
For the three months ended March 31, 2014 and 2013, we recognized non-cash
gains of approximately $1,000 and $24,000, respectively, to record changes in the fair value of certain of our outstanding warrants
not indexed to our own stock.
Liquidity and Capital Resources
As of March 31,
2014, we had $2.0 million in current assets and $8.8 million in current liabilities, resulting in a working capital
deficit of $6.8 million. As of December 31, 2013, we had $2.3 million in current assets and $7.4 million in
current liabilities, respectively, resulting in a working capital deficit of $5.1 million. Our current assets consist of
cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets. Our current liabilities
consist of the current portion of our long-term debt, accounts payable, accrued expenses, and deferred revenue. During the three
months ended March 31, 2014, our cash used in operating activities totaled $0.5 million. As a result of our limited cash resources
and working capital deficit, we are delinquent in paying a number of our creditors. Unless we obtain additional financing in the
coming months, we will need to substantially curtail operations and may be unable to continue our business.
In March 2014,
the Company terminated its engagement with its financial advisor, H.C. Wainwright & Co., LLP (“H.C. Wainwright”).
As a result of this termination, H.C. Wainwright forfeited and returned to the Company the unvested two-thirds of the warrant
to purchase 2,125,000 shares of the Company’s common stock.
In March 2014,
the Company engaged R.F. Lafferty & Co., Inc. (“Lafferty”) to provide general investment banking services. In
addition to paying a $2,000 monthly retainer for the 6-month term of the engagement, which is creditable against a cash fee at
the time of a funding, the Company has agreed to pay Lafferty a transaction fee of 8% of the gross proceeds from the placement
of any securities and a fee for unallocated expenses of 1.5% of the gross proceeds. In connection with the placement of any securities,
the Company has agreed to issue Lafferty common stock warrants equal to 10% of the number of shares of common stock underlying
the securities issued in the financing. Such 10% will only be on the actual common stock issued and shall not apply to any derivative
securities. The warrants shall have an exercise price equal to 120% of the price of the securities issued to the investors, except
that if the price of the securities issued to investors reaches $0.80 then the exercise price will then become 110% of the price
of the securities issued to investors. Additionally, the Company will issue 100,000 shares of its common stock to Lafferty in
the event that Lafferty places a minimum of $3 million in escrow by June 1, 2014. Lafferty will receive no fees on monies invested
by its directors, employees, stockholders or friends.
We anticipate
that we will continue to generate losses for at least the next year as we develop and expand our products and offerings and seek
to commercialize our products and expand our corporate infrastructure. We will continue to require significant amounts of additional
capital to fund our operations, and such capital may not be available when we need it on terms that we find favorable, if at all.
We are seeking to raise these funds as described above, though we may seek additional debt financings, credit facilities, partnering
or other corporate collaborations and licensing arrangements. If adequate funds are not available or are not available on acceptable
terms, our ability to fund our operations, take advantage of opportunities, develop products and technologies, and otherwise respond
to competitive pressures could be significantly delayed or limited, and we may need to downsize or halt our operations. Prevailing
market conditions may not allow for such a fundraising or new investors may not be prepared to purchase our securities at prices
that are greater than the current market price.
In October 2013,
we entered into a letter agreement with the holder of the Loan and Security Agreement (the “2012 Term Loan”) and 2013
Term Loan. With respect to the 2013 Term Loan, the parties agreed that upon closing of the offering described above in which we
raise at least $6 million, all outstanding amounts of principal and interest under the 2013 Term Loan will convert into our common
stock on the same terms as such shares sold to other investors in the offering. With respect to the 2012 Term Loan, the holder
agreed to (i) extend the maturity date by three years to July 5, 2020, (ii) provide that interest will be payable only on maturity,
and (iii) provide that the events of default will only be nonpayment at maturity or our insolvency. Upon conversion of the
2013 Term Loan as set forth above, we agreed to issue to the holder a fully-vested warrant to purchase 150,000 shares of our common
stock at an exercise price equal to the higher of $1.00 per share or the price at which shares are sold in the offering.
In March 2014,
our Board of Directors authorized us to issue up to approximately $0.9 million in convertible debt and common stock to provide
funding to us pending completion of a private placement of equity securities (the “Bridge Loan Program”). All convertible
debt issued pursuant to the Bridge Loan Program will be payable on demand after November 20, 2014 and will bear interest at a
rate of 7% per annum payable upon maturity. Upon closing of a financing in which we raise at least $6 million (the “Qualified
Financing”), the principal and accrued interest on the convertible debt shall be automatically converted into identical
equity securities as those issued in the Qualified Financing on the same terms as in the Qualified Financing. In March 2014, we
borrowed $0.1 million from a Director of ours pursuant to the Bridge Loan Program. In April 2014, we borrowed under the Bridge
Loan Program an additional $0.2 million from other Directors of ours and $0.2 million from an investment fund in which one of
our Directors is a general partner.
There can be
no assurance that we will be successful in our plans described above or in attracting alternative debt or equity financing. These
conditions have raised substantial doubt about our ability to continue as a going concern.
Because of the
numerous risks and uncertainties associated with research, development and commercialization of medical devices, we are unable
to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors,
including, but not limited to:
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●
|
the
cost of development and growth of our VivaScope business;
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|
●
|
the cost of commercialization
activities of our products, and of our future product candidates, including marketing, sales and distribution costs;
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|
●
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the number and characteristics
of any future product candidates we pursue or acquire;
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●
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the scope, progress, results
and costs of researching and developing our future product candidates, and conducting clinical trials;
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●
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the
timing of, and the costs involved in, maintaining and obtaining regulatory approvals
for our existing products and future product candidates;
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●
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the cost of manufacturing
our existing VivaScope products and maintaining our telepathology server, as well as such costs associated with any future
product candidates we successfully commercialize;
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●
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our ability to establish
and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;
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|
●
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the costs involved in preparing,
filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such
litigation; and
|
|
●
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the timing, receipt and amount
of sales of, or royalties on, our future products, if any.
|
As of the date
of this report we are delinquent in paying a number of creditors and our liquid assets (cash, cash equivalents and accounts receivable)
are not sufficient to meet our obligations many of which are past due. These conditions have raised substantial doubt about the
Company’s ability to continue as a going concern.
Summary of Cash Flows
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Operating activities
|
|
$
|
(485,211
|
)
|
|
$
|
(564,669
|
)
|
Investing activities
|
|
|
(171,761
|
)
|
|
|
(15,650
|
)
|
Financing activities
|
|
|
100,000
|
|
|
|
(12,750
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(556,972
|
)
|
|
$
|
(593,069
|
)
|
Net cash
used in operating activities.
Cash used in operating activities was $0.5 million and $0.6 million
for the three months ended March 31, 2014 and 2013, respectively.
Net cash
used in investing activities.
Cash used in investing activities was $0.2 million and approximately
$16,000 for the three months ended March 31, 2014 and 2013, respectively, and represents the purchases of fixed assets during
these periods.
Net cash
provided by (used in) financing activities.
Cash provided by financing activities was $0.1 million
for the three months ended March 31, 2014 and cash used in financing activities was approximately $13,000 for the three months
ended March 31, 2013. During the three months ended March 31, 2014, we borrowed $0.1 million from a director of ours under a Bridge
Loan.
Term Loans.
As of March 31, 2014 and December 31, 2013, term loans outstanding totaled $12.0 million.
Promissory
Notes.
As of March 31, 2014 and December 31, 2013, promissory notes outstanding totaled approximately
$24,000, respectively, and is classified as a current liability on the accompanying condensed balance sheets, as the note was
not repaid at its maturity date and is currently in default.
Convertible
Promissory Note.
As of March 31, 2014, Bridge Loans outstanding totaled $0.1 million.
Trade Payables
and Receivables.
Generally, the terms for our trade payables are 30 days from the date of receipt.
Certain vendors require partial or full prepayment, especially for parts unique to our orders. As of the date of this report,
we are overdue in paying a number of vendors and such condition may adversely impact the Company’s business and its ability
to continue to operate as a business.
As of March
31, 2014, we had accounts receivable of approximately $0.4 million. We generally request 50% prepayment from all customers, with
the balance due 30 days after shipment, although in certain circumstances we require the full balance prior to shipment.
Amounts collected prior to the recognition of revenue are recognized as customer deposits and are included in “accrued expenses
and other current liabilities” in the accompanying condensed balance sheets.
Warrants.
At March 31, 2014, we had warrants to purchase up to 2,790,180 shares of our common stock outstanding at a weighted average
exercise price of $4.34.
Stock Options.
At March 31, 2014, we had 3,425,000 stock options outstanding at a weighted average exercise price of $1.40 with 846,721 shares
available for issuance upon the grant or issuance of awards.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements
as of March 31, 2014 and as of the date of this report.
Recently Issued Accounting
Standards
In the normal
course of business, management evaluates all new accounting standards issued by the Financial Accounting Standards Board, SEC,
Emerging Issues Task Force, American Institute of Certified Public Accountants and other authoritative accounting bodies to determine
the potential impact they may have on our financial statements. Based upon this review, we do not expect any of the recently issued
accounting standards to have a material impact on our financial statements.
Critical Accounting Policies
and Estimates
During the quarter
ended March 31, 2014, there were no significant changes in our critical accounting policies and estimates. Please refer to Management’s
Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2013, for a more complete discussion of our estimates and critical accounting policies.