Annual Report (10-k)

Share Name	Share Symbol	Market	Type
Caliber Imaging and Diagnostics Inc (CE)	USOTC:LCDX	OTCMarkets	Common Stock

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER 001-35379

LUCID, INC.

(Exact name of registrant as specified in its charter)


New York	16-1406957
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

50 Methodist Hill Drive, Suite 1000 Rochester, NY	14623
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (585) 239-9800

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value

Warrants

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer (Do not check if a smaller reporting company) o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $7.7 million. For the sole purpose of making this calculation, the term “non-affiliate” has been interpreted to exclude directors, officers and holders of 10% or more of the Company’s common stock.

As of February 28, 2014, 8,507,374 shares of Registrant’s common stock were outstanding.

Documents incorporated by reference: Portions of the definitive Proxy Statement for the Registrant’s 2014 Annual Meeting of Shareholders that the Registrant intends to file with the Securities and Exchange Commission within 120 days of the end of the Registrant’s fiscal year ended December 31, 2013 are incorporated by reference into Part III of this Annual Report on Form 10-K.

LUCID, INC.

Annual Report on Form 10-K

For the Year Ended December 31, 2013

Table of Contents


		Page No.
Part I
Item 1.	Business	4
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	26
Item 2.	Properties	27
Item 3.	Legal Proceedings	27
Item 4.	Mine Safety Disclosures	27
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6.	Selected Financial Data	29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 8.	Financial Statements and Supplementary Data	37
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	57
Item 9A.	Controls and Procedures	57
Item 9B.	Other Information	58
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	58
Item 11.	Executive Compensation	58
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	58
Item 13.	Certain Relationships and Related Transactions, and Director Independence	58
Item 14.	Principal Accountant Fees and Services	58
Part IV
Item 15.	Exhibits, Financial Statement Schedules	59
Signatures		63
Exhibit Index		64

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties including information with respect to our plans and strategy for our business and related financing, thereof, contain forward-looking statements that involve risks, uncertainties and assumptions. All statements that express expectations, estimates, forecasts or projections are forward-looking statements. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,” “may,” “should,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements include but are not limited to statements under the captions “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as other sections in this Annual Report on Form 10-K. You should be aware that the occurrence of any of the events discussed under the heading “Item 1A. Risk Factors” and elsewhere in this report could substantially harm our business, results of operations and financial condition and that if any of these events occurs, the trading price of our securities could decline and you could lose all or a part of the value of your shares of our securities. The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear in this Annual Report on Form 10-K. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update our forward-looking statements, even if new information becomes available in the future.

Unless the context otherwise indicates, references in this report to the terms “Lucid,” “the Company,” “we,” “our,” and “us” refer to Lucid, Inc. operating as Caliber Imaging & Diagnostics, or Caliber I.D., and its subsidiary if pertaining to the period before January 29, 2013.

PART I

Item 1.

Business

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 (illustrated below right), 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. Please see Part II , Item 1A . Risk Factors.

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.”

(LUCID002_V1)

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.

Primary Market Opportunities

Skin Cancer Screening and Diagnosis

We believe there is significant market opportunity for our products in skin cancer screening and diagnosis, where our non-invasive, platform imaging technology can provide immediate and significant benefits for patients, physicians, and payers.

Skin cancer is the most prevalent cancer in the United States, with 3.5 million new cases annually and a lifetime incidence rate of 20% (one in five Americans), more than the combined incidence of breast, prostate, lung and colon cancers. Conventionally, skin cancers are diagnosed initially by visual inspection, with any suspect areas subsequently biopsied, an invasive and painful procedure in which a tissue sample is surgically removed – which can lead to complications such as infection or scarring – and then examined in a laboratory over the next few days.

Empirical data show that visual inspection is a poor diagnostic screening tool. Of the approximately 14.5 million biopsies performed annually in the United States at an estimated cost of $4.9 billion, only 3.5 million reveal skin cancer; the remaining 11 million biopsies are unnecessary. Visual inspection may miss skin cancers that appear benign. Of the three most common skin cancers, basal cell carcinoma (BCC), squamous cell carcinoma (SCC) and melanoma, melanoma is by far the most lethal. However, to detect the approximately 75,000 new cases of melanoma diagnosed in the United States annually, physicians perform an estimated 2.2 million biopsies –as many as 29 biopsies for each confirmed case of melanoma. Clearly, there is a significant unmet need for more accurate, cost-efficient, and rapid diagnosis of skin cancers and benign lesions.

With diagnostic sensitivity and specificity that can rival the current “gold standard”, clinical histopathology, physicians using our non-invasive, point-of-care imaging technology can quickly and accurately differentiate between malignant and non-malignant tissues. In addition, physicians can quickly get a second opinion by instantly transmitting patient images through our secure VivaNet telepathology network to a trained pathologist. Thus, while our proprietary platform imaging technology does not entirely replace the need for surgical biopsies, widespread adoption of our technology would significantly reduce the number of biopsies performed and, as a result, costs. By eliminating or reducing the number of unnecessary biopsies performed, we estimate that our technology could result in cost avoidance of more than $1 billion annually.

Our technology also offers significant secondary benefits to patients, physicians and payers. Patients benefit by receiving an immediate and painless diagnosis at the point-of-care, rather than having to wait for days or even weeks for results to come back from the pathology lab. When lesions are benign, confocal imaging can reduce the time, expense and side effects of an unnecessary biopsy. When lesions are malignant, treatment may begin immediately depending on the diagnosis, or can be planned, reducing the time to a treatment or cure. We believe that physicians who are early adopters will have a significant competitive advantage over late adopters: patients informed of the advantages of VivaScope technology over traditional biopsy are likely to migrate to dermatology or primary care practices offering this service, attracting new patients and increasing overall practice revenues. Finally, in addition to significantly reduced costs, payers will benefit by earlier and more widespread detection of skin cancers, allowing them to be treated more proactively.

Microscopy, Medical and Therapeutic Research

Other market opportunities are the microscopy, medical, and therapeutic research and development markets where our platform of products has allowed researchers and developers at academic centers, pharmaceutical and cosmetic companies to quickly and efficiently capture and store tissue images. These are attractive markets to target because our technology allows researchers and product developers to (1) repeatedly and nondestructively examine the same tissue, demonstrating tissue changes over time; and (2) quickly evaluate the safety and efficacy of new products without the time and expense of traditional biopsies, significantly shortening development cycles, and at a lower price point and smaller form factor compared to our competitors.

There are applications and opportunities for the VivaScope platform in a number of different research and development markets spanning the globe including:

●

Microscopy – Advanced imaging for research and industrial uses such as for biological, life and physical sciences applications.

●

Personal Care Products – Studying the development, efficacy and safety of products such as cosmetics, sunscreens and topical creams for anti-aging, pigmentation, moisturization, etc.

●

Academic Centers – Supporting the pre-clinical and clinical activities of medical academic centers; often funded by government grants.

●

Pharmaceutical / Ingredient Manufacturers – Evaluating individual ingredients or drugs for safety and efficacy in pre-clinical or clinical trials or prior to using ingredients in other products.

●

Contract Research Organizations – Conducting studies on behalf of cosmeceutical or pharmaceutical corporations to test the safety and efficacy of products.

●

Small Animal Research – Imaging of genetically engineered animal models for the study of the progression or treatment of disease.

Our Sales and Marketing Strategies

Our technology clearly offers meaningful advantages over the standard-of-care. Ultimately, we believe that third-party payers will cover our technology, but, in the interim, our sales and marketing strategies focus on markets where our technology offers significant benefits that are not reimbursement-sensitive. As we have indicated, the markets that we are initially targeting are skin cancer screening via managed care organizations, concierge medicine groups and physicians, and medical and therapeutic research and development.

In addition, we intend to raise our visibility through trade publications, appearances at trade shows, social media campaigns, direct-to-consumer advertising, targeted public relations, investor relations, strategic placement of loaner systems with potential high-revenue customers, and other general marketing efforts.

Skin Cancer Screening and Diagnosis

Strategies here will be focused on managed care organizations, concierge medicine groups and physicians. Dermatology is one of the largest areas of expense for managed care organizations (e.g. integrated healthcare networks, HMOs, and ACOs) and rapid adoption of our technology can significantly reduce short-, intermediate- and long-term costs for these organizations through (1) fewer referrals to dermatologists; (2) the reduction in unnecessary biopsies; and (3) earlier detection of potentially deadly skin cancers.

We believe that larger managed care organizations and integrated health networks, with a market in excess of a $465 billion, are attractive markets to target because they are highly concentrated: in the U.S., only 25 companies account for approximately two thirds of industry revenues. This concentration can help us generate significant sales with a relatively small managed care-focused sales force.

Examples of the managed care organizations and integrated health networks that we intend to target are as follows:

● UnitedHealth Group Inc.	● Cigna Health Group
● WellPoint, Inc.	● Coventry Health Care, Inc
● Kaiser Foundation Health Plan and Hospitals	● Health Net, Inc.
● Humana Inc.	● HealthSpring, Inc.
● Aetna Inc.

By comparison, concierge medicine groups are less focused on cost avoidance and more focused on providing best-in-class care for their patients, who pay an annual fee of $1,500-$1,800 per year, on average, and are willing to bear significant additional out-of-pocket expenses for best-in-class care, such as a non-invasive optical biopsy using our VivaScope technology.

We believe that both managed care organizations and concierge medicine groups will adopt an imaging center solution to service their network of patients and subscribers, and we intend to work closely with individual managed care organizations and concierge medicine groups to either integrate these imaging centers into existing facilities or launch new facilities owned either by the managed care organizations, concierge medicine groups, or possibly Caliber I.D.

Finally, we will continue to actively market our VivaScope technology to physicians outside of the U.S., where we already have traction and where reimbursement is less of a barrier to entry. To date, we have shipped 180 VivaScope systems to physicians, the majority of whom are outside of the United States.

Microscopy, Medical and Therapeutic Research

Other market opportunities that are readily addressable are the microscopy, medical, and therapeutic research and development markets (i.e. companies developing pharmaceuticals, biotherapeutics, cosmetics, cosmeceuticals, as well as companies engaged in human and animal cellular imaging pathology). With more than 300 VivaScope systems shipped, our platform of products are proven to be suited for this market, allowing researchers and product developers to quickly and efficiently capture and store tissue images.

Examples of the skin care product research and development companies to whom we have shipped a VivaScope system (*) and/or that we intend to target are as follows:


●	Allergan, Inc.	●	Genzyme	●	Pfizer Incorporated*
●	Arch Chemicals, Inc.	●	GlaxoSmithKline PLC*	●	Proctor & Gamble Company*
●	Ashland Inc.	●	Janson Beckett Cosmeceuticals	●	Revlon, Inc.*
●	Avon Products Inc.*	●	Johnson & Johnson*	●	Roche Holding Limited
●	BASF SE	●	Kao Corporation*	●	Royal DSM NV
●	Bayer AG	●	Kimberly Clark Corporation*	●	Sanofi-Aventis
●	Beiersdorf AG*	●	L’Oréal SA*	●	Schick Manufacturing, Inc.*
●	Clariant International AG	●	McNeil PPC, Inc.	●	SkinMedica Incorporated*
●	Colgate-Palmolive Co.*	●	Medicis Pharmaceutical Corporation	●	The Body Shop International
●	E.I. du Pont de Nemours and Co.	●	Merck & Co Inc.	●	The Estée Lauder Companies Inc.*
●	Eastman Chemical Company	●	Neutrogena*	●	Unilever Group*
●	Genentech, Inc.*	●	Ortho Dermatologics

We believe our unique platform of products and prestigious customer base present an attractive revenue opportunity for us in the United States and we have begun building a sales and support force focused on the microscopy, medical and therapeutic research and development markets. Annual expenditures in the US research market are approximately $140 billion. We have recently hired three sales representatives with extensive experience in these markets to cover the East Coast, Midwest and West Coast territories. In 2014 in the United States, we intend to market and sell into our existing customer base as well as well as participate in numerous trade shows and direct marketing campaigns to help grow our customer base.

Secondary Market Opportunities

In the future, our platform imaging technology could provide significant benefits in a variety of in-vivo and ex-vivo clinical applications by allowing physicians to quickly assess the efficacy and outcomes of therapeutic treatment. They could also identify, differentiate and diagnose various tissue types in surgery for rapid assessment of tissue pathology.

Therapeutic Monitoring

Therapeutic monitoring is a market where our technology provides numerous benefits over existing technologies, allowing physicians to quickly and efficiently monitor treatment results noninvasively, at the cellular level. The future of skin cancer treatment lies with minimally or noninvasive therapies that successfully eradicate skin cancer with little-to-no scarring. At present, the only way to determine if a treatment is successful is to visually monitor the patient for obvious signs of reoccurrence, or perform a traditional biopsy, which is invasive, painful, time consuming and often leaves a scar.

We believe that the therapeutic monitoring market is an attractive market to target because our technology allows physicians to (1) repeatedly and nondestructively examine tissue to determine whether it is responding to therapy; and (2) quickly and efficiently examine the tissue that has been treated to determine whether a minimally invasive therapy was successful. We are already in partnership discussions with several original equipment manufacturers (OEMs) to integrate our VivaScope 3000 in-vivo handheld imaging device into their existing systems.

Examples of the applications within this market are as follows:

Superficial Radiation Therapy

Laser Ablation Therapy

Photo Dynamic Therapy

Brachytherapy

Topical Biotherapeutics

We will need to integrate our VivaScope software with the OEM product, potentially obtain regulatory approvals for the new integrated product, and develop training programs for users of the new device. Since sales of an OEM product will typically consist of components of a VivaScope System, we expect the sales price to be less than a standard system.

Enable Real-Time Pathology

Our technology may allow surgeons to receive diagnostic information in minutes, on fresh tissue in the operating room, allowing surgeons to determine in real-time whether their efforts have been successful. Adoption of our technology could drastically reduce procedural time and the re-operative rate per patients, significantly reducing costs and improving patient outcomes. We believe that our platforms could eventually be used to further improve accuracy by allowing surgeons to proactively image tissue to differentiate and identify exactly which tissue should be removed.

Mohs surgery. The Mohs procedure entails removing one thin layer of tissue at a time, testing each layer until cancerous tissue is no longer detected which, although time-consuming, is beneficial because it spares the greatest amount of healthy tissue while completely removing the skin cancer. With cure rates for BCC and SCC at 98% or higher, significantly better than the rates for standard excision or any other accepted method, Mohs is clearly the most effective technique for removing BCCs and SCCs on the face, head and neck. Of the 3.5 million new BCC and SCC cases diagnosed per year in the United States, one in four (25%) patients with BCC or SCC will have a Mohs procedure to eliminate the cancer, resulting in a significant potential market opportunity.

The current approach for Mohs surgery involves removing a thin layer of tissue, which is then prepared by frozen section histology at an in-house lab for subsequent examination by the surgeon (or, in most of Europe, a pathologist). Preparation of each excision takes 20-45 minutes, during which time the patient waits with an open wound, often on their face under local anesthesia. While most Mohs procedures require only a few excisions, more invasive cases can require as many as 20 excisions; thus, on average, a Mohs procedure requires a minimum of two hours and, for invasive cases, can tie up an operating suite for much longer. While waiting for the slides to be prepared, Mohs surgeons typically operate on other patients, rotating back and forth between patients as pathology results become available. While effective, this is a time-consuming process that requires each patient to stay in the operating suite for a prolonged period of time.

By comparison, our VivaScope 2500 ex-vivo device allows surgeons to receive the same information in as little as four minutes – a five-fold decrease in the minimum time to receive pathology results – which then reduces the total operating suite time to an hour or less per procedure. As a result, individual patients spend much less time in the operating suite and, by eliminating unnecessary transfers between patients, surgeons are able to perform substantially more procedures within a given period of time. Ultimately we believe that our VivaScope 3000 in-vivo device could be used to further improve accuracy and decrease downtime by allowing surgeons to image the tissue directly to determine whether enough tissue has been excised. The VivaScope 3000 is already being used in Australia to identify surgical margins in difficult Mohs surgery cases and, in one study, changed the treatment plan in approximately 73% of patients either by more precisely targeting the tumor margins to reduce the number of excisions, or by demonstrating that a noninvasive topically-applied therapy was a more appropriate treatment plan.

Based on our market research, we believe that conventional Mohs histopathology is reasonably well entrenched in the U.S. and, as a result, will require a considerable investment of resources to displace. However, in Europe, the Mohs procedure is newer, and with our inherent advantages over conventional pathology, we believe we can seize a meaningful share of this market in the near-term. We believe that widespread use of our technology in Mohs surgery in Europe would create tailwinds toward adoption of our technology in the U.S.

Importantly; this market also allows us to gather data that supports the use of our technology in various other surgical applications and real-time pathology, opening up other market opportunities in the future.

Thyroid . Another area where adoption of our technology could significantly improve patient outcomes while simultaneously reducing costs is in thyroid cancer surgeries, where our technology has demonstrated feasibility in two independently sponsored studies.

Thyroid cancer affects approximately 500,000 people in the U.S., with over 200,000 thyroid surgeries annually. During thyroid surgery, the surgeon removes cancerous tissue from the thyroid while being careful to avoid damaging the adjacent parathyroid glands. Visually differentiating the parathyroid glands is extremely challenging, and, as a result, the parathyroid glands are damaged in approximately one-third of surgeries causing temporary (or occasionally permanent) hypocalcemia.

At present, surgeons use pathological frozen section analysis of head and neck specimens to determine whether any of the tissue removed contained any of the four parathyroid glands and, if so, they must then re-implant that tissue, which is only moderately successful. Similar to Mohs surgery, preparation of each slide takes 20-45 minutes, which significantly prolongs the amount of time that a patient spends in the operating suite under general anesthesia.

By comparison, our VivaScope 2500 ex-vivo device allows surgeons to receive the same information in as little as four minutes, significantly reducing procedure times and costs. Ultimately, we believe that our VivaScope 3000 in-vivo device could be used to further improve accuracy and decrease downtime by allowing surgeons to proactively image the tissue through a surgical incision to differentiate between various tissue types and identify exactly which tissue needs to be removed.

Breast. Breast cancer is one of the most prevalent and deadly cancers affecting women, accounting for approximately 23% of all cancers (excluding non-melanoma skin cancers) and causing approximately 459,000 deaths worldwide (14% of cancer deaths). In the United States, the lifetime incidence rate is 12% (one in eight), with approximately 235,000 new cases annually, of which approximately 65,000 are non-invasive (in situ) breast cancers.

Conventionally, treatment of in situ breast cancer involves surgical excision of the tumor through a lumpectomy or similar surgery. However, surgeons cannot differentiate between cancerous and healthy tissue, and must use pathology to determine whether enough tissue has been removed. Due to its inherent nature, breast tissue histology cannot be expedited and tissue processing takes more than 24 hours to complete, so it is currently impossible to determine whether enough tissue was removed during the surgery itself and thus, the patient is sent home waiting to find out if another surgery is needed. As a result, a second surgery is required in as many as 20-40% of cases to remove cancerous tissue that was missed during the first surgery.

Distribution Partners

Outside of the U.S., we have established exclusive distribution relationships pursuant to which the distributor sells our products within its specified territory. Our largest distributor is Mavig GmbH (“Mavig”) with territories including Europe and the Mediterranean region. ConBio (China) Co., Ltd. is our distributor in the People’s Republic of China, including Hong Kong.

Research and Development

Our technical R&D plan includes routine hardware and software product improvements that are generally driven by customer feedback. These items include activities such as the development of more clinically and environmentally acceptable disposables, enhanced VivaScope application software (VivaScan ® ) with features honed for use by private practice dermatologists and VivaNet ® telepathology workstation features that will enhance the efficiency of pathologists in analyzing images and reporting their interpretations.

For the years ended December 31, 2013 and 2012, we incurred research and development expenses of $1.5 million and $3.8 million, respectively. During 2012 we redesigned many optical and electrical components within our in-vivo confocal imagers to improve quality, manufacturability and functionality. This project began in the first quarter and was substantially completed by September 2012. Our redesigned products generate images which have a significantly improved level of optical quality and our devices now have greater reliability and repeatability. We have also improved the user interface with a touch-screen monitor and have incorporated an ergonomic redesign of the handheld device.

We have plans to further improve our existing products, both to further increase functionality as well as to streamline production and decrease costs. In addition, customers using our devices continue to suggest modifications to facilitate additional applications, many of which are easily accommodated.

To build support for the utility and economic value of our products, we conduct, sponsor or support clinical and other studies. Ongoing and planned U.S. and European studies include:

●

An ongoing U.S. based multi-center trial funded by the National Cancer Institute evaluating >400 pigmented lesions suspicious for malignancy based on clinical exam.

●

Two planned payer-based pilot studies to evaluate the economics of confocal imaging to set reimbursement rates within a primary care and dermatology clinical setting for the treatment of skin cancer.

●

An ongoing European-based study evaluating confocal images over a telepathology network with clinical sites in Italy and Spain.

●

A planned U.S. based study to differentiate parathyroid gland from lymph node and other tissues, intraoperatively.

Scientific Advisory Board

We utilize our scientific advisory board (“SAB”) to: assist us with medical education programs; advise us in the design of future products; help us design Company initiated clinical studies; and assist us in evaluation of external investigator proposed studies.

Martin C. Mihm Jr. MD, Chair. Dr. Mihm is clinical professor of dermatology and pathology at Harvard Medical School and director and co-director of the melanoma programs at the Brigham and Women’s Hospital and the Dana Farber Cancer Institute as well as co-director of the European Organization for Research and Treatment of Cancer (EORTC) melanoma pathology program. Dr. Mihm holds five adjunct professorships at different medical schools in the United States.

Allan Halpern MD. Dr. Halpern is Chief of the Dermatology Service and co-leader of the Melanoma Disease Management Team at Memorial Sloan-Kettering Cancer Center (MSKCC). He pioneered the development and use of whole-body photography for the early detection of melanoma. He previously served as the director of the Pigmented Lesion Clinic at the University of Pennsylvania.

Giovanni Pellacani MD, PhD. Dr. Pellacani is currently the Chairman of the Department of Dermatology of the University of Modena and Reggio Emila. He is a member of the scientific board in the International Dermoscopy Society (IDS); European Association of Dermato Oncology (EADO); International Confocal Working Group (ICWG); Associazione Italiana di Diagnostica Non Invasiva in Dermatologia (AIDNID). He has published over 200 papers, 19 book chapters and over 150 abstracts in national and international congresses and conferences.

Salvador Gonzalez MD, PhD. Dr. Gonzalez is a faculty member of Memorial Sloan-Kettering Cancer Center in New York and a research advisor at the Hospital Ramón y Cajal, Madrid. He is world renowned as an expert in the fields of optical diagnosis and sun protection. His work was fundamental for the approval of Reflective Confocal Microscopy by the FDA (Food & Drugs Administration). He is the President of the International Confocal Working Group and of the Grupo Español de Microscopía Confocal (Spanish Group of Confocal Microscopy). In February 2012, he was awarded the category of Full Professor (Catedrático) by the Spanish Education Ministry.

Phyllis Gimotty PhD. Dr. Gimotty is Professor of Biostatistics and a member of the Abramson Cancer Center’s Biostatistical Unit at the University of Pennsylvania. She serves as the Director of two biostatistics cores that support translational cancer research in melanoma and esophageal cancer. She also serves as the Principal Investigator of the Cancer Biostatistics Training Grant and is the Associate Director of Biostatistics Educational Programs in the Basic Sciences in the School of Medicine at the University of Pennsylvania.

Clinical Advisory Board

We plan to utilize our Clinical Advisory Board to advise us on all aspects of clinical applications in the U.S.-Market space. We anticipate adding additional members to the Clinical Advisory Board in 2014. Currently, the sole member of our clinical advisory board is:

Babar Rao MD, Chair. Dr. Rao is Assistant Clinical Professor of Dermatology and Program Director of the Dermatology Residency Program at Robert Wood Johnson Medical School in New Jersey. He is certified by the American Board of Dermatology and the American Board of Dermatopathology. He is a member of many professional organizations in Dermatology and has published numerous papers and book chapters.

Intellectual Property

General. Our policy is to protect our intellectual property by obtaining U.S. and foreign patents to protect the technology, inventions, and improvements important to the development of our business, U.S. and international trademarks to protect our company name, logo, brands and trade secrets, which we enforce through confidentiality agreements with our employees, members of our board of directors and scientific advisory board, and through non-disclosure agreements with certain others outside the Company. Our employees and consultants are required to execute patent assignment agreements.

Patents. We currently hold 58 patents, which consist of 45 U.S. patents, five Australian patents, three Japanese patents, three European patents, one Chinese patent and one Canadian patent. These patents are all owned by the Company, with the exception of two non-fundamental patents which are co-owned. We also have 20 additional U.S. and foreign patents pending. In addition to patents that cover our technology, the Company has patented solutions around clinical applications and the clinical care path, and therefore is not dependent upon any one particular patent. Our patent portfolio covers tissue stabilization and navigation during live clinical imaging, surgical pathology, and a HIPAA-compliant telepathology system for the remote transfer, viewing, diagnosis and storage of confocal images generated by all of our devices, allowing users access to confocal diagnostic specialists throughout the world. Generally, we file foreign counterparts of our most fundamental U.S. patents and we have been successful in obtaining issuance of these fundamental foreign patents in Europe, Australia, Japan, China and Canada while other foreign patent applications remain pending. We have granted limited licenses to our European intellectual property to our distribution partner in Europe. Given the continuous nature of our applications, many of our patents have expiration dates fifteen or more years into the future.

Trademarks and Domain Names. We have obtained U.S. trademark registrations for the following marks: “VivaScope”, “Caliber I.D.”, “Lucid”, VivaBlock”, “VivaStack”, “VivaCam”, “VivaNet”, “VivaCell”, “VivaScan”, “VivaScopy” as well as our corporate logo. Certain foreign trademarks have been obtained corresponding to some of our U.S. trademarks and others are pending foreign trademark approval.

Manufacturing

Our in-house manufacturing process is largely an assembly-and-test process that operates under the standardized procedures of our quality system. Piece parts such as mechanically machined components, populated circuit boards, precision optical components and electro-mechanical optical scanning devices are purchased from suppliers to either our custom specifications or the standard specifications of the supplier. We also purchase computers, LCD displays and medical grade equipment carts which are integrated into our completed VivaScope Systems. The application software for our VivaScopes is written by our in-house software staff and runs under a Windows operating system.

Generally, we single-source our component purchases to suppliers with which we have had a long-term relationship. In the event these suppliers are unable to deliver parts we generally have back-up suppliers established. A few of our VivaScope components are from sole source suppliers, which means we are purchasing a unique component from them that is not available from other suppliers. As we design future generations of VivaScopes, it is our intention to eliminate these specialized sole sourced component designs whenever possible.

Competition

Currently our largest competitive threat in clinical markets is a surgical biopsy, which is the standard of care. Although we possess patented technology for our VivaScope products and our VivaNet telepathology system, we face competition, both nationally and internationally, from companies marketing technologies which offer an alternative to confocal microscopy and traditional biopsy. Many of these companies have established name recognition, reputation, and market presence, and may have greater financial, technical, sales, marketing and other resources than we have, enabling them to better withstand the impact of risks associated with a highly competitive industry.

Companies that have developed devices using confocal microscopy include those which have applications in ophthalmology, such as Nidek, and in gastroenterology, such as Mauna Kea Technologies, which has a confocal endomicroscopy device. Although we do not currently view these companies as competitors, these companies may compete with us in their respective application areas, which could possibly become broader and expand into our applications. Our confocal imaging devices compete with other noninvasive screening technologies which are sold by companies such as FotoFinder Systems, Inc., Mela Sciences, Inc., Michelson Diagnostics and Verisante. Though we do not believe that we compete with any specific large companies currently, major medical imaging companies such as General Electric Co., Siemens and Philips Healthcare, each of which manufacture and market precision medical diagnostic products, could decide to develop or acquire a product or products to compete with our VivaScope confocal imagers.

Regulation

FDA Regulation of Medical Devices. Our products are considered medical devices and are subject to regulation by the FDA. The Food, Drug, and Cosmetic Act, or “FD&C Act,” and other federal and state statutes and regulations govern the research, design, development, preclinical and clinical testing, manufacturing, safety, approval or clearance, labeling, packaging, storage, record keeping, servicing, promotion, import and export, and distribution of medical devices.

The FDA cleared our 510(k) application for our VivaScope System (i.e., our VivaScope 1500 and VivaScope 3000) as a Class II device in September 2008. Our ex-vivo imager, the VivaScope 2500 is registered with the FDA as a Class I device, similar to conventional medical microscopes used by pathologists to view microscope slides of human tissue, and our VivaNet telepathology server is registered with the FDA as a Class I device. We believe these FDA clearances for our VivaScope products and telepathology are sufficient for us to pursue our business strategy for the foreseeable future. Future products or applications may require additional FDA clearances and may also involve clinical trials to demonstrate whether they are safe and effective for their indicated medical applications.

Devices like our VivaScopes that are approved or cleared and placed in commercial distribution are subject to numerous regulatory requirements, including: 1) establishment registration and device listing; 2) Quality System Regulation (QSR) which is an FDA requirement that manufacturers follow design, testing, control, documentation and other quality assurance procedures; 3) labeling regulations that impose labeling restrictions and prohibit the promotion of products for unapproved or “off-label” uses; 4) medical device reporting regulations that require reporting to the FDA if a device caused or contributed to a death or serious injury or malfunctioned so as to cause or contribute to a death or serious injury if the malfunction were to recur; and 5) corrections and removal reporting regulations that require manufacturers to report field corrections and product recalls or removals undertaken to reduce risk to health by the device or to correct an FD&C violation that presents a risk to health. Also, the FDA may require postmarket surveillance studies or establishment and maintenance of a system for tracking products through the distribution channel to the patient level.

Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may lead to any of the following sanctions: 1) warning letters; 2) fines and civil penalties resulting in unanticipated expenditures; 3) approval delays or refusal to approve our applications, including supplements; 4) withdrawal of FDA approval; 5) product recall or seizure; 6) interruption of production; 7) operating restrictions; 8) injunctions; and 9) criminal prosecution. To date, we have never received any such enforcement actions by the FDA.

Medical Device Regulation Outside of the U.S. Sales of our medical devices outside of the U.S. are subject to foreign government regulations that vary substantially from country to country. Some countries have little to no regulation whereas other countries have a premarket notice or premarket acceptance similar to the FDA for clinical applications. The time required to obtain approval in a foreign country may be either shorter or longer than that required for FDA approval, and the requirements for approval may differ. Generally, sales of our products outside of the U.S. for non-clinical use require little or no registration.

Our VivaScope 1500 and VivaScope 3000 are entitled to bear the CE mark for distribution as medical devices in the European Union, (“EU”). The EU has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout Europe.

Outside of the European Union, regulatory approval needs to be sought on a country-by-country basis in order for us to market our products for clinical applications. In this regard, we have obtained regulatory approval to market our VivaScope 1500 for clinical applications in Canada through its Health Canada Administration, in Australia through its Therapeutic Goods Administration, in Brazil through its Brazilian Health Surveillance Agency, and in China through its State Food and Drug Administration, although in China we are currently in a renewal process.

One aspect of CE compliance is that manufacturers are required to comply with international standards for quality management maintained by the International Organization for Standardization, (“ISO”) and its 13485 series of standards for quality operations necessary for EU and SFDA registration. The method of assessing conformity to EU regulations varies depending on the class of the product. Generally conformance involves self-assessment by the manufacturer and third party assessment by a “Notified Body.” This third party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s product. An assessment by a Notified Body of one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union. In order to meet this requirement, our quality system, device designs and manufacturing facilities are assessed annually by GMED North America, a certified EU Notified Body.

Other U.S. Government Regulation. The advertising of our medical devices is, and will continue to be, subject to both FDA and Federal Trade Commission regulations. In addition, the sale and marketing of our medical devices are subject to complex federal and state laws and regulations generally intended to deter, detect, and respond to fraud and abuse in the healthcare system. These laws and regulations often restrict or prohibit pricing, discounting, commissions and other commercial practices that are typical outside of the healthcare market. In particular, anti-kickback and self-referral laws and regulations limit our promotional programs and financial arrangements related to the sale of our products and related services to physicians seeking reimbursement from Medicare, Medicaid, private insurers or patients. Sanctions for violating the above federal laws include criminal and civil penalties ranging from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs.

Many states have adopted laws or have pending legislative proposals similar to the federal fraud and abuse laws, some of which prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of whether the service was reimbursed by Medicare or Medicaid. Many states have also adopted laws or are considering legislation to increase patient protections, such as limiting the use and disclosure of patient-specific health information. These state laws typically impose criminal and civil penalties similar to the federal laws.

Private enforcement of healthcare fraud is also increasing, due in part to amendments to the Civil False Claims Act in 1986. These amendments encourage private persons to sue on behalf of the government. HIPAA, in addition to its privacy provisions, created a series of new healthcare-related crimes. Our products fall under the regulation of HIPAA when our HIPAA-compliant telepathology server is used for clinical applications.

Product Liability and Insurance

Our business exposes us to the risks of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices, including those which may arise from design flaws or the misuse or malfunction of our products. We may be subject to product liability claims if any one of our products causes or appears to have caused an injury. Claims may be made by patients, healthcare providers or others using our medical devices. Although we carry product liability insurance that covers our VivaScope products, our anticipated current and anticipated product liability insurance may not be available to us in amounts and on acceptable terms, if at all, and if available, the coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage, or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business.

Employees

As of December 31, 2013, we had 28 full-time employees. Ten of our employees were engaged in product and software research and development, two in clinical and regulatory affairs, seven in production, six in marketing and sales and three in administration.

Item 1A.

Risk Factors

You should consider carefully the following information about the risks described below, together with the other information contained in this Annual Report on Form 10-K and in our other public filings in evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline.

Risks related to Our Financial Position and Capital Requirements

We have a history of losses, and we anticipate that we will incur continued losses for the foreseeable future.

We reported net losses of approximately $5.5 million and $9.8 million in 2013 and 2012, respectively. As of December 31, 2013, we had an accumulated deficit of approximately $52.0 million. We have devoted substantially all of our resources to research and development and sales of our products. Our success will depend upon, among other things, our ability to successfully market and sell our products and to generate revenues. Unanticipated problems, expenses and delays are frequently encountered in developing and commercializing new technology. These include, but are not limited to, competition, the need to gain clinical acceptance of our technology, the need for sales and marketing expertise, regulatory concerns, and setbacks in the continued development of new technology. We expect to continue to incur operating losses for the foreseeable future and require additional capital to fund ongoing operations. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity. If we are not able to fund our cash needs, we will not be able to continue as a going concern, and it is likely that all of our investors would lose their investment. If we are unable to obtain the necessary capital or financing to fund our cash needs it will adversely affect our ability to fund operations and continue as a going concern. Additional financing may not be available when needed or may not be available on terms acceptable to us. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more of our business strategies, which may affect our overall business results of operations and financial condition,

Our limited cash resources and working capital deficit may result in our inability to continue operations unless we obtain additional financing.

As of December 31, 2013, we had cash and cash equivalents of $0.8 million and a working capital deficit of $5.1 million. In 2013, our cash used in operating activities totaled $4.8 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 indebtedness and financing arrangements could negatively impact our business.

As of December 31, 2013, we had approximately $12.0 million of outstanding debt. We cannot be sure that our future working capital or cash flows, combined with any funds resulting from our current fund raising efforts, will be sufficient to meet our debt obligations and commitments. Any failure by us to repay such debt in accordance with its terms or to renegotiate and extend such terms would have a negative impact on our business and financial condition, and may result in legal claims by our creditors. In addition, the existence of our outstanding debt many hinder or prevent us from raising new equity or debt financing. Our ability to make scheduled payments on our debt as they become due will depend on our future performance and our ability to implement our business strategy successfully. Failure to pay our interest expense or make our principal payments would result in a default. A default, if not waived, could result in acceleration of our indebtedness, in which case the debt would become immediately due and payable. If this occurs, we may be forced to sell or liquidate assets, obtain additional equity capital or refinance or restructure all or a portion of our outstanding debt on terms that may be less favorable to us. In the event that we are unable to do so, we may be left without sufficient liquidity and we may not be able to repay our debt and the lenders may be able to foreclose on our assets or force us into bankruptcy proceedings or involuntary receivership.

We cannot assure you that we will be able to achieve or accomplish the projections of our future plans and prospects included in this report.

This report includes certain projections of our plans and prospects for the future. Our future actions and results may differ materially from these projections due to risks, uncertainties and other factors, many of which are beyond our control, including but not limited to:

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the level and timing of expenses for product development and sales, general and administrative expenses;

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our ability to successfully enter into or maintain partnering arrangements, and the terms of those relationships;

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commercial success with our existing product and success in identifying and sourcing new product opportunities;

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the development of new competitive technologies or products by others and competitive pricing pressures;

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the failure to obtain appropriate reimbursement for public and private third-party payers;

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the occurrence of unforeseen regulatory, including FDA, requirements or restrictions;

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changes in demand for our products;

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changes in product development costs;

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changes in the amount that we invest to develop, acquire or license new technologies and processes;

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business interruptions;

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departures of executives or other key management employees;

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foreign exchange fluctuations;

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changes in general economic, industry and market conditions, both domestically and in our foreign markets; and

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changes in governmental, accounting and tax rules and regulations, environmental, health and safety requirements, and other rules and regulations.

Based on the above factors and other risks and uncertainties, our future plans and prospects may differ materially from our projections.

The report of our independent registered public accounting firm expresses substantial doubt about our ability to continue as a going concern.

Our auditors have indicated in their reports on our financial statements for the fiscal years ended December 31, 2013 and 2012 that conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses from operations, deficit in equity, and the need to raise additional capital to fund operations. A “going concern” opinion could impair our ability to finance our operations through the sale of debt or equity securities. Our ability to continue as a going concern will depend on our ability to obtain additional financing when necessary, which is not certain. If we are unable to achieve these goals, our business would be jeopardized and we may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.

Any additional capital raising will likely cause dilution to existing stockholders and, if capital raising is a secured raise, it may restrict our operations or adversely affect our ability to operate our business.

The sale of equity or issuance of debt to raise capital could result in dilution to our stockholders. The incurrence of indebtedness , may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, expending capital, or declaring dividends, or which impose financial covenants on us that impede our ability to manage our operations.

Risks Related to the Development and Commercialization of Our Products

We have limited marketing experience, sales force or distribution capabilities. If we are unable to recruit key personnel to perform these functions, we may not be able to successfully commercialize our products.

Our ability to produce revenues ultimately depends on our ability to sell our products. We currently have limited experience in marketing or selling our products, and a limited marketing and sales staff and distribution capabilities. Developing a marketing and sales force is time-consuming and will involve the investment of significant amounts of financial and management resources, and could delay the launch of new products or expansion of existing product sales. In addition, we will compete with many companies that currently have extensive and well-funded marketing and sales operations. If we fail to establish successful marketing and sales capabilities or fail to enter into successful marketing arrangements with third parties, our ability to generate revenues will suffer.

Furthermore, even if we enter into marketing and distributing arrangements with third parties, we may have limited or no control over the sales, marketing and distribution activities of these third parties, and these third parties may not be successful or effective in selling and marketing our products. If we fail to create successful and effective marketing and distribution channels, our ability to generate revenue and achieve our anticipated growth could be adversely affected. If these distributors experience financial or other difficulties, sales of our products could be reduced, and our business, financial condition and results of operations could be harmed.

Our commercial success in clinical markets depends upon attaining significant market acceptance of our products by physicians, patients and healthcare payers.

The medical device industry is highly competitive and subject to rapid technological change. Our success in clinical markets depends, in part, upon physicians continuing to perform a significant number of diagnostic procedures and our ability to achieve and maintain a competitive position in the development of technologies and products in the skin cancer diagnosis field. If physicians, patients, or other healthcare providers opt to use our competitors’ products, or healthcare payers do not accept our products, our commercial opportunity in clinical markets will be reduced and our potential revenues will suffer.

Biopsy of the lesion, followed by pathologic examination of the tissue specimen, is today’s widely accepted standard of care with a long history of use. Two alternative diagnostic tools, clinical photography and dermoscopy, are currently gaining acceptance in the U.S. medical community. In addition, technological advances may result in improvements in these alternative diagnostic tools or new technologies may emerge that produce superior diagnostic results as compared to VivaScope and our telepathology server.

If we are unable to obtain adequate reimbursement from healthcare payers, or acceptable prices, for our products, our revenues and prospects for profitability in the clinical market will suffer.

Our future revenues and ability to become profitable will depend heavily upon the availability of adequate and timely reimbursement for the use of our products and services from governmental and other third-party payers. Reimbursement by a third-party payer may depend upon a number of factors, including the third-party payer’s determination that use of a product is: (i) a covered benefit under its health plan, (ii) safe, effective and medically necessary, (iii) appropriate for the specific patient, (iv) cost effective, and (v) neither experimental nor investigational. Obtaining reimbursement approval for our products and services from each government or other third-party payer will be a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data to each payer. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement. Even when a payer determines that a product is eligible for reimbursement, the payer may impose coverage limitations that preclude payment for some product uses that are approved by the FDA or similar authorities. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. If we are not able to obtain coverage and profitable reimbursement promptly from government-funded and private third-party payers for our products, our ability to generate revenues and become profitable will be compromised.

The termination of our distribution relationships with any of our key distributors, or a decline in revenue from such distributors, could have a material adverse effect on our business, financial condition, and results of operations.

Our sales to date have been to a limited number of distributors and customers. For the year ended December 31, 2013, sales to two distributors were in the amounts of approximately $1.4 million and $0.5 million representing 42% and 15%, respectively, of our total revenues. Our distribution agreements with these key distributors may be terminated, or our distributors may fail to perform their obligations under such agreements. If either of these events occurs, our marketing and distribution efforts may be impaired and our revenues may be adversely impacted. We may experience greater or lesser customer concentration in the future. However, it is likely that our revenue and profitability will continue to be dependent on a very limited number of large customers and distributors. In certain countries our regulatory approval is in the name of the distributor. In the event the relationship with such distributor terminated, we would need to go through the process of reobtaining the regulatory approval in another name which would impact our ability to sell product until such approval was obtained. The loss of, material reduction in sales volume to, or significant adverse change in our relationship with any of our key distributors could have a material adverse effect on our revenue in any given period and may result in significant annual and quarterly revenue variations. Although we may be able to sell directly to customers if our relationships with any or all of our key distributors terminate, the development of our sales and distribution capabilities could involve significant expense and delay.

We operate in highly competitive markets, which may result in others discovering, developing or commercializing products before, or more successfully, than we do.

In the medical and therapeutic product research and development market companies with confocal microscopy products that we compete with include Nikon Corporation, Olympus Corporation, Carl Zeiss AG and Leica Microsystems Inc. These companies have established name recognition, reputation, and market presence, and greater financial, technical, sales, marketing and other resources than we have.

New product development in the medical device industry is both costly and labor intensive with very low success rates for successful commercialization; if we cannot successfully develop or obtain future products, our ability to grow may be impaired.

Our long-term success is dependent, in large part, on the design, development and commercialization of new products and services in the medical technology industry. The product development process is time-consuming, unpredictable and costly. There can be no assurance that we will be able to develop or acquire new products, successfully complete clinical trials, obtain the necessary regulatory clearances or approvals required from the FDA on a timely basis, or at all, manufacture our potential products in compliance with regulatory requirements or in commercial volumes, or that potential products will achieve market acceptance. In addition, changes in regulatory policy for product approval during the period of product development, and regulatory agency review of each submitted new application, may cause delays or rejections. It may be necessary for us to enter into licensing arrangements in order to market effectively any new products or new indications for existing products. There can be no assurance that we will be successful in entering into such licensing arrangements on terms favorable to us or at all. Failure to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on our business, financial condition and results of operations.

If our products are approved for reimbursement, we anticipate experiencing significant pressures on pricing.

Our customers can include hospitals and physicians that typically bill various third-party payers, including governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care programs, for the healthcare diagnostic services provided to their patients. The ability of customers to obtain appropriate reimbursement for their products and services from private and governmental third-party payers is critical to the success of medical technology companies. The availability of reimbursement affects which products or services customers purchase and the prices they may be willing to pay. Reimbursement varies from country to country and can significantly impact the acceptance of new products and services. In the U.S. and in some foreign markets pricing and profitability of medical devices may be subject to government control. In the U.S. many private payers look to the Centers for Medicare & Medicaid Services, or CMS, which administer the Medicare program, in setting their reimbursement policies and amounts. If CMS or other agencies limit coverage or decrease or limit reimbursement payments for doctors and hospitals, this may affect coverage and reimbursement determinations by many private payers. Legislative or administrative reforms to reimbursement systems in a manner that significantly reduces reimbursement for procedures using our medical devices or denies coverage for those procedures, including price regulation, competitive pricing, coverage and payment policies, comparative effectiveness of diagnostic tools, technology assessments and managed-care arrangements, could have a material adverse effect on our business, financial condition or results of operations.

Even if reimbursement programs cover a device for certain uses, that does not mean that the level of reimbursement will be sufficient for commercial success. We expect to experience pricing pressures in connection with the commercialization of our products and our future products due to efforts by private and government-funded payers to reduce or limit the growth of healthcare costs, the increasing influence of health maintenance organizations, and additional legislative proposals to reduce or limit increase in public funding for healthcare services. Efforts to impose greater discounts and more stringent cost controls upon healthcare providers by private and public payers are expected to continue. Payers frequently review their coverage policies for existing and new diagnostic tools and can, sometimes without advance notice, deny or change their coverage policies. Significant limits on the scope of services covered or on reimbursement rates and fees on those services that are covered could have a material adverse effect on our ability to commercialize our products and therefore, on our liquidity and our business, financial condition, and results of operations.

We operate in a heavily regulated sector, and our ability to remain viable will depend on future legislative action and favorable government decisions at various points by various agencies.

Our products are regulated in the markets we operate as well as the associated manufacturing, labeling and record keeping procedures. Regulatory clearance or approval to market a diagnostic product may contain limitations on the indicated uses of the product. Marketing clearance or approval can also be withdrawn by regulators due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearance or approval. In addition, regulators have the authority to change or modify their regulations at any time, and also has the authority to change the medical classification of our products, thereby increasing the associated regulations to which we must adhere.

The regulations affecting healthcare change frequently, thereby increasing the uncertainty and risk associated with any healthcare related venture, including our business and our products. In addition, regulations and guidance are often revised or reinterpreted in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or regulations, guidance, or interpretations changed, and what the impact of such changes, if any, may be.

Applicable laws and regulations are extremely complex and, in some cases, still evolving. Though we incur significant fees related to regulatory compliance, if our operations are found to be in violation of any of the laws and regulations that govern our activities, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines or curtailment of our operations. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s time and attention from the operation of our business.

If we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems, our products could be subject to restrictions or withdrawal from the market.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Regulatory approval of our products may be subject to limitations on the indicated uses for which the products may be marketed or contain requirements for costly post marketing testing and surveillance to monitor the safety or effectiveness of the products. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.

Our business is subject to inspection by the FDA and international authorities, and we could face penalties if we are found to be non-compliant with the regulations of the FDA or international authorities.

The FDA and various other authorities will inspect our facilities from time to time to determine whether we are in compliance with regulations relating to medical device manufacturing, including regulations concerning design, manufacturing, testing, quality control, product labeling, distribution, promotion, and record keeping practices. Our facility was most recently inspected by the FDA in August 2009. A determination that we are in material violation of such regulations could lead to the imposition of civil penalties, including fines, product recalls, product seizures or, in extreme cases, criminal sanctions or a shutdown of our manufacturing facility. Even if regulatory approvals to market a product are obtained from the FDA, such approvals may contain limitations on the indicated uses of the product. The FDA could also limit or prevent the manufacture or distribution of our products and has the power to require the recall of products. FDA regulations depend heavily on administrative interpretation, and future interpretations made by the FDA or other regulatory bodies with possible retroactive effect may adversely affect us.

If the FDA or international authorities determine that our promotional materials or activities constitute promotion of our products for an unapproved use or other claim in violation of applicable law relating to the promotion of our products, it could demand that we cease the use of or modify our promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider promotional or other materials to constitute promotion of telepathology or VivaScope for an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. Our competitors may also assert claims either directly or indirectly with the FDA concerning any alleged illegal or improper marketing promotional activity.

Healthcare policy changes, including legislation to reform the U.S. healthcare system, may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Political, economic and regulatory influences are subjecting the healthcare industry to potential fundamental changes that could substantially affect our results of operations. In response to perceived increases in health care costs in recent years, there have been and continue to be proposals and enactments by the Obama administration, members of U.S. Congress, state governments, regulators and third-party payers to control these costs and, more generally, to reform the U.S. healthcare system. These changes are causing the marketplace to put increased emphasis on the delivery of more cost-effective treatments. Certain of these proposals and enactments or regulations promulgated to enforce them may limit the prices we are able to charge for our products or the amount of reimbursement that may be available if such products are approved for reimbursement. The adoption of some or all of these enactments and proposals could have a material adverse effect on us. We cannot predict the final form these might take or their effects on our business.

The Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act of 2010 were enacted into law in the U.S. in March 2010. As a U.S. headquartered company with sales in the U.S., this healthcare reform legislation will materially impact us. Certain provisions of the legislation will not be effective for a number of years, there are many programs and requirements for which the details have not yet been fully established or consequences not fully understood, and it is unclear what the full impact of the legislation will be. The legislation imposes on medical device manufacturers such as a 2.3 percent excise tax on U.S. sales of Class I, II and III medical devices beginning in 2013. Both downward pressure on reimbursement and the excise tax could have a material adverse effect on our business, financial condition and the results of operations. Other provisions of this legislation, including Medicare provisions aimed at improving quality and decreasing costs, comparative effectiveness research, an independent payment advisory board, and pilot programs to evaluate alternative payment methodologies, could meaningfully change the way healthcare is developed and delivered, and may adversely affect our business and results of operations. Further, we cannot predict what healthcare programs and regulations ultimately will be implemented at the federal or state level, or the effect of any future legislation or regulation in the U.S. or internationally. However, any changes that lower reimbursements for our products or reduce medical procedure volumes could adversely affect our business and results of operations.

We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians utilizing our products could be subject to significant penalties for noncompliance.

There are extensive federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant criminal and civil penalties. These federal laws include: the Anti-Kickback Law which prohibits certain business practices and relationships, including the payment or receipt of remuneration for the referral of patients or the purchase, order or recommendation of goods or services for which payment will be made by Medicare or other federal healthcare programs; the physician self-referral prohibition, commonly referred to as the Stark Law; the Anti-Inducement Law, which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered by either program; the Civil False Claims Act, which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment by the federal government, including the Medicare and Medicaid programs; HIPAA, which creates federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program and which also imposes certain obligations on entities with respect to the privacy, security and transmission of individually identifiable health information; the federal False Statements Statute, which prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; and the Civil Monetary Penalties Law, which authorizes the Department of Health and Human Services, (“HHS”), to impose civil penalties administratively for fraudulent or abusive acts. We are also subject to state laws that are analogous to the above federal laws, such as state anti-kickback and false claims laws (some of which may apply to healthcare items or services reimbursed by any third-party payer, including commercial insurers), as well as certain state laws that require pharmaceutical and medical device companies to comply with industry voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government.

Sanctions for violating these laws include criminal and civil penalties that range from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both. As federal and state budget pressures continue, federal and state administrative agencies may also continue to escalate investigation and enforcement efforts to root out waste and to control fraud and abuse in governmental healthcare programs. Private enforcement of healthcare fraud has also increased, due in large part to amendments to the Civil False Claims Act in 1986 that were designed to encourage private persons to sue on behalf of the government. Our ongoing efforts to comply with these laws may be costly, and a violation of any of these federal and state fraud and abuse laws and regulations could have a material adverse effect on our liquidity and financial condition. The risk of our being found in violation of these laws is increased by the fact that many of them have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of subjective interpretations. In addition, these laws and their interpretations are subject to change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation. An investigation into the use of telepathology, telepathology workstations and VivaScope by physicians may dissuade physicians from either purchasing or using telepathology, telepathology workstations and VivaScope and could have a material adverse effect on our ability to commercialize our products.

The application of the privacy provisions of HIPAA is unclear, and we will become subject to other laws and regulations regarding the privacy and security of medical information.

HIPAA, among other things, protects the privacy and security of individually identifiable health information by limiting its use and disclosure. HIPAA directly regulates “covered entities” (insurers, clearinghouses, and most healthcare providers) and indirectly regulates “business associates” with respect to the privacy of patients’ medical information. All entities that receive and process protected health information are required to adopt certain procedures to safeguard the security of that information. It is unclear whether we would be deemed to be a covered entity or a business associate under the HIPAA regulations. In either case, we will be required to physically safeguard the integrity and security of the patient information that we, or our physician customers, receive, store, create or transmit. If we fail to safeguard patient information, then we or our physician customers may be subject to civil monetary penalties, and this could adversely affect our ability to market our products. We also may be liable under state laws governing the privacy of health information. As and when we expand our commercialization efforts in the foreign markets that we have targeted, we will also become subject to a variety of international laws, regulations and policies designed to protect the privacy of health information. The costs associated with our ongoing compliance could be substantial, which could negatively impact our profitability.

Clinical trials associated with future applications of our technology may involve lengthy and expensive processes with uncertain outcomes, and results of earlier studies and trials may not be predictive of future trial results.

In the future, as we explore additional applications of our technology, clinical trials may be required for regulatory approval. We are not currently conducting any clinical trials related to any regulatory approval and we have no current plans to conduct any such clinical trials. However, should we decide to conduct such clinical trials, we cannot predict whether we will encounter problems with any future clinical trials, which would cause us or regulatory authorities to delay or suspend those clinical trials, or delay the analysis of data from those clinical trials. We estimate that clinical trials involving any of the various potential applications of VivaScope and telepathology which we may choose to pursue could continue for several years and that such trials may also take significantly longer to complete and may cost more money that we expect. Failure can occur at any stage of testing, and we may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent commercialization of the current, or a future, more advanced, version of our products, including but not limited to: delays in obtaining regulatory approvals to commence a clinical trial; slower than anticipated patient recruitment and enrollment; negative or inconclusive results from clinical trials; unforeseen safety issues; an inability to monitor patients adequately during or after treatment; and problems with investigator or patient compliance with the trial protocols.

A number of companies in the medical device industry, including those with greater resources and experience than us, have suffered significant setbacks in advanced clinical trials, even after seeing promising results in earlier clinical trials. Despite the successful results reported in early clinical trials regarding our products, we do not know whether any clinical trials we or our clinical partners may conduct will produce favorable results. The failure of clinical trials to produce favorable results could have a material adverse effect on our business, financial condition and results of operations.

Alternative applications of our technology may not be successful, which will limit our ability to grow and generate revenue.

Although we believe the early exploratory and pilot studies for other clinical applications of our technology beyond the early detection and diagnosis of skin cancer are encouraging, there can be no assurance any of these research and development activities, engineering efforts, or clinical studies will be successful or that any FDA clearances will be achieved for any of these other clinical applications. If alternative applications of our technology are not successful, our ability to grow the Company and generate revenue will be adversely impacted.

We face the risk of product liability claims and may not be able to obtain or maintain adequate insurance to protect against these claims.

Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices, including those that may arise from the misuse or malfunction of, or design flaws in, our products. We may be subject to product liability claims if any of our products cause, or merely appears to have caused, an injury or if a patient alleges that any of our products failed to provide appropriate diagnostic information on a lesion where melanoma, another skin cancer, or another form of disease, was subsequently found to be present. Claims may be made by patients, healthcare providers or others involved with telepathology, telepathology workstations or VivaScope. Although we carry product liability insurance that covers our VivaScope products, our anticipated current and anticipated product liability insurance may not be available to us in amounts and on acceptable terms, if at all, and if available, the coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage, or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.

We may be subject to claims against us even if the apparent injury is due to the actions of others. For example, we rely on the expertise of physicians, nurses and other associated medical personnel to operate VivaScope. If these medical personnel are not properly trained or are negligent, we may be subjected to liability. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the withdrawal of, or inability to recruit, clinical trial volunteers, or result in reduced acceptance of VivaScope in the market.

Insurance and surety companies have reassessed many aspects of their businesses and, as a result, may take actions that could negatively affect our business. These actions could include increasing insurance premiums, requiring higher self-insured retentions and deductibles, reducing limits, restricting coverage, imposing exclusions, and refusing to underwrite certain risks and classes of business. Any of these actions may adversely affect our ability to obtain appropriate insurance coverage at reasonable costs, which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to the Operation of Our Business

We rely on intellectual property and proprietary rights and may not be able to protect these rights.

We rely heavily on proprietary technology that we protect primarily through patents, licensing arrangements, trade secrets, copyrights, trademarks, proprietary know-how and non-disclosure agreements. We have 58 issued patents and 20 pending patent applications worldwide. There can be no assurance that any pending or future patent applications will be granted or that any current or future patents, regardless of whether we are an owner or a licensee of the patent, will not be challenged, rendered unenforceable, invalidated, or circumvented or that the rights will provide a competitive advantage to us. There can also be no assurance that our trade secrets or non-disclosure agreements will provide meaningful protection of our proprietary information. Further, we cannot assure you that others will not independently develop similar technologies or duplicate any technology developed by us or that our technology will not infringe upon patents or other rights owned by others. In addition, in the future, we may be required to assert infringement claims against third parties, and there can be no assurance that one or more parties will not assert infringement claims against us. Any resulting litigation or proceeding could result in significant expense to us and divert the efforts of our management personnel as well as lead to unfavorable publicity that harms our reputation and causes the market price of our common stock to drop, whether or not such litigation or proceeding is determined in our favor. In addition, to the extent that any of our intellectual property and proprietary rights were ever deemed to violate the proprietary rights of others in any litigation or proceeding or as a result of any claim, we may be prevented from using them, which could cause a termination of our ability to sell our products. Litigation could also result in a judgment or monetary damages being levied against us.

We may be adversely affected by breaches of online security.

To the extent that our activities involve the storage and transmission of confidential information, security breaches could damage our reputation and expose us to a risk of loss, or to litigation and possible liability. A substantial portion of our revenue in future years will rely upon the transmission and storage of medical data through a virtual private network, or VPN, across the Internet. Our business may be materially adversely affected if our security measures do not prevent security breaches. In addition, such information may be subject to HIPAA privacy and security regulations, the potential violation of which may trigger concerns by healthcare providers, which may adversely impact our business, financial condition and results of operations.

All of our manufacturing operations are conducted at a single location. Any disruption at our facility could increase our expenses.

All of our manufacturing operations are conducted at a single location. We take precautions to safeguard our facility, including insurance, health and safety protocols, contracted off-site engineering services, and off-site storage of computer data. However, a natural disaster, such as a fire, flood or earthquake, could cause substantial delays in our operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance we maintain against fires, floods, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.

Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply problems and price fluctuations, which could harm our business.

Our manufacturing efforts currently rely on various suppliers that supply components and subassemblies required for the final assembly and test of our devices. Some of these suppliers are sole-source suppliers. Contract manufacturers of some of our components, such as completed circuit boards, may also rely on sole-source suppliers to manufacture some of the components used in our products. Our manufacturers and suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction, long lead times and environmental factors, any of which could delay or impede their ability to meet our demand. Our reliance on these outside manufacturers and suppliers also subjects us to other risks that could harm our business, including: suppliers may make errors in manufacturing components that could negatively affect the effectiveness or safety of our products, or cause delays in shipment of our products; we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms; we may have difficulty locating and qualifying alternative suppliers for our sole-source suppliers; our suppliers manufacture products for a range of customers, and fluctuations in demand for the products these suppliers manufacture for others may affect their ability to deliver components to us in a timely manner; and our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements.

Any interruption or delay in the supply of components or materials, or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders.

Our success will depend on our ability to attract and retain our personnel.

Our success is particularly dependent upon the continued service of our executive officers and other key employees. We have currently executed employment agreements with our CEO, CFO, CTO and VP of Operations. The agreements range in term from three to five years and each are renewable for additional one-year terms unless either we or the executive send written notice to the other party of its intention not to renew at least ninety (90) days prior to expiration of the then-current term. Each of these executives has agreed, pursuant to his or her respective employment agreement, not to compete with us, nor solicit our customers or employees, for a period of one (1) year following the termination of such executive’s employment. All of our employees, including our executive officers, have executed our standard form of Employee Invention, Copyright, Proprietary Information and Conflicts of Interest Agreement. The loss of the services of any of our executive officers or other key employees could have a material adverse effect on our business and results of operations. Our future success will depend in part upon our ability to attract and retain highly qualified personnel. We may not be successful in hiring, retaining or developing sufficient qualified individuals.

Our employees may engage in misconduct or improper activities, including noncompliance with regulatory standards and prohibitions on insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with applicable manufacturing standards, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drug product, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

We may be liable for contamination or other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional expense.

Our manufacturing, research and development and clinical processes do not generally involve the handling of potentially harmful biological materials or hazardous materials, but they may occasionally do so. We are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our business, financial condition and results of operations. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We may be subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.

Failure to maintain an effective system of internal control over financial reporting may not allow us to be able to accurately report our financial condition, results of operations or prevent fraud.

We regularly review and update our internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures, and have concluded that our internal control over financial reporting was not fully effective. We maintain controls and procedures to mitigate risks, such as processing system failures and errors. Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and can provide only reasonable assurances that the objectives of the system are met. Events could occur which are not prevented or detected by our internal controls. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could cause a failure to meet our reporting obligations under applicable federal securities laws, which could have a material adverse effect on our business, results of operations and financial condition.

If our products contain defects or otherwise fail to perform as expected, we could be liable for damages and incur unanticipated warranty, recall and other related expenses, our reputation could be damaged, we could lose market share and, as a result, our financial condition or results of operations could suffer.

Our products are complex and may contain defects or experience failures due to any number of issues in design, materials, deployment and/or use. If any of our products contain a defect or do not operate properly, we may have to devote significant time and resources to find and correct the issue. Such efforts could divert the attention of our management team and other relevant personnel from other important tasks. A product recall or a significant number of product returns could be expensive; damage our reputation and relationships with our customers and distributors; result in the loss of business to competitors; and result in litigation against us. Because our products are relatively new and we do not yet have the benefit of long-term experience observing product performance in the field, our estimates of a product lifespan and incidence of claims may be inaccurate. Should actual product failure rates, claims levels, material usage, or other issues differ from the original estimates, we could end up incurring materially higher warranty or recall expenses than we anticipate.

We are an “emerging growth company,” or “EGC”, and any decision on our part to comply only with certain reduced disclosure requirements applicable to “emerging growth companies” could make our common stock less attractive to investors.

We are an “EGC” 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 these exemptions. If we do take advantage of any of these exemptions, investors may find our financial statements and other disclosures not comparable to companies that comply with public company effective dates, and will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and the stock price may be more volatile.

Poor or uncertain global economic conditions have had and could continue to have an adverse effect on our operating results.

The global economic environment began to deteriorate significantly in 2008, with declining values in real estate, increased unemployment and volatility in the global financial markets resulting in reduced credit lending by banks, solvency concerns of major financial institutions and sovereign debt issues. Economic and market conditions have continued to be volatile and uncertain in many markets around the world. In Europe where the sale of our products constituted 41% of our total sales in fiscal 2013, sovereign debt issues, government austerity programs, and bank credit issues continue to affect the capital markets of numerous European countries. These circumstances have had, and are expected to continue to have, a negative impact on our business. If the global economy continues to be weak or deteriorate further, there will likely be a negative impact on our revenues, operating margins and earnings.

Risks Relating to Our Securities

Because our securities are quoted on the OTCQB marketplace, our liquidity and the price of our securities are limited and our investors may be subject to significant restrictions on the resale of our securities due to state “Blue Sky” laws.

Our common stock and warrants are traded on the OTCQB marketplace quotation system, which is a FINRA-sponsored entity and operated inter-dealer automated quotation system for equity securities not included in a national exchange. Quotation of our securities on the OTCQB marketplace limits the liquidity and price of our securities more than if our securities were quoted or listed on the NYSE Amex or the Nasdaq Capital Market, which are national securities exchanges. Lack of liquidity will limit the price at which you may be able to sell our securities or your ability to sell our securities at all.

Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. We do not know whether our securities will be registered or exempt from registration under the laws of any state. Since our securities are listed on the OTCQB marketplace, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for our securities. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our securities. You should therefore consider the resale market for our securities to be limited, as you may be unable to resell your securities without the significant expense of state registration or qualification.

The exercise of our warrants may also be subject to “blue sky” laws. As a result, depending on the state of residence of a holder of the warrants, a holder may not be able to exercise its warrants unless we comply with any state securities law requirements necessary to permit such exercise or an exemption applies. Although we plan to use our reasonable efforts to assure that holders will be able to exercise their warrants under applicable state securities laws if no exemption exists, there is no assurance that we will be able to do so. As a result, the ability to exercise the warrants may be limited. The value of the warrants may be significantly reduced if holders are not able to exercise their warrants under applicable state securities laws.

Because our shares are subject to the penny stock rules, it may be more difficult to sell our shares.

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The OTC Markets does not meet such requirements and for so long as the price of our common stock is less than $5.00, our securities will be deemed penny stocks. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that prior to effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our securities, and therefore security holders may have difficulty selling their shares.

Our stock price may remain volatile and purchasers of our common stock could incur substantial losses.

As a result of the volatility which our stock has incurred since our initial public offering, a decline in the market price of our common stock could cause stockholders to lose some or all of their investment and may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly. Whether or not meritorious, litigation brought against us could result in substantial costs and could divert the time and attention of our management. Our insurance to cover claims of this sort may not be adequate.

The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock: the announcement of new products or product enhancements by us or our competitors; developments or disputes concerning patents or other intellectual property rights; changes in the structure of third-party reimbursement in the U.S.; the departure of key personnel; results of our research and development efforts and our clinical trials; regulatory developments in the U.S. and foreign countries; developments concerning our clinical collaborators, suppliers or marketing partners; changes in financial estimates or recommendations by securities analysts; lack of trading volume in the stock, failure of any new products, if approved, to achieve commercial success; product liability claims and litigation against us; the strength and variations in our financial results or those of companies that are perceived to be similar to us; general economic, industry and market conditions; and future sales of our common stock.

Concentration of ownership among our directors, executive officers, and principal stockholders may prevent new investors from influencing significant corporate decisions.

Based upon beneficial ownership as of December 31, 2013, our directors, executive officers, holders of more than 5% of our common stock, and their affiliates, in the aggregate, beneficially owned a significant percentage of our outstanding common stock. To the extent that our affiliates may purchase additional shares, that percentage will be even higher. As a result, these stockholders, subject to any fiduciary duties owed to our other stockholders under New York law, will be able to exercise a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have significant control over our management and policies. Some of these persons or entities may have interests that differ from those of the stockholders. For example, these stockholders may support proposals and actions with which you may disagree or which are not in your interests. The concentration of ownership could delay or prevent a change in control of our Company or otherwise discourage a potential acquirer from attempting to obtain control of our Company, which in turn could reduce the price of our common stock. In addition, these stockholders, some of whom have representatives sitting on our Board of Directors, could use their voting influence to maintain our existing management and directors in office, delay or prevent changes of control of our Company, or support or reject other management and board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.

Our charter documents and New York law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our stock.

Provisions of our certificate of incorporation and bylaws and applicable provisions of New York law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our Board of Directors. These provisions:

●

limit who may call a special meeting of stockholders; and,

●

do not permit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect directors;

In addition, Section 912 of the New York Business Corporation Law generally provides that a New York corporation may not engage in a business combination with an interested stockholder for a period of five years following the interested stockholder’s becoming such. An interested stockholder is generally a stockholder owning at least 20% of a corporation’s outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive stockholders of the opportunity to sell shares to potential buyers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

Future sales of our common stock may cause our stock price to decline.

If our existing stockholders sell, or indicate intent to sell, substantial amounts of our common stock in the public market the trading price of our common stock could decline significantly. Moreover, a relatively small number of our stockholders own large blocks of shares. We cannot predict the effect, if any, that public sales of these shares or the availability of these shares for sale will have on the market price of our common stock.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

We lease approximately 9,000 square feet of office, laboratory, and assembly space in the same building as our principal executive offices located at 50 Methodist Hill Drive, Suite 1000, Rochester, NY 14623 under a lease which expires in March 2021. As a cost-reduction measure, we recently moved from our previous location at 95 Methodist Hill Drive, Suite 500. In addition, in January 2014, we entered into a lease agreement for office space in Andover, MA that expires in February 2017. We believe these facilities will be adequate to meet our current and reasonably foreseeable requirements, and that, if needed, we will be able to obtain additional space on commercially reasonable terms.

Item 3.

Legal Proceedings

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings, incidental to the normal course of our business. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our units, each consisting of one share of common stock and one warrant, were traded on the OTC Bulletin Board and were maintained by the Financial Industry Regulatory Authority under the symbol “LCDCU” from December 28, 2011 to February 24, 2012. Upon a mandatory separation of our units on February 27, 2012, our units ceased trading on the OTC Bulletin Board and our common stock and warrants began trading on the OTC Bulletin Board, now OTCQB under the symbols “LCDX” and “LCDXW,” respectively.

The following tables set forth the range of high and low per share sales prices for our common stock, as reported by the OTCQB marketplace from the date on which our common stock began trading through December 31, 2013. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and do not represent actual transactions:

	2013				2012
Period	High ($)		Low ($)		High ($)		Low ($)
Quarter ended March 31	$	1.50	$	1.00		—		—
Quarter ended June 30	$	1.30	$	0.25	$	2.00	$	0.51
Quarter ended September 30	$	1.30	$	0.70	$	2.25	$	0.45
Quarter ended December 31	$	1.05	$	0.51	$	2.00	$	0.25

Holders

As of February 28, 2014, there were approximately 150 holders of record of our common stock. Because shares of our common stock are held by depositories, brokers and other nominees, the number of beneficial holders of our shares is larger than the number of stockholders of record.

Dividends

We have never paid any cash dividends on our common stock and we do not anticipate paying such cash dividends in the foreseeable future. We currently anticipate that we will retain all future earnings, if any, for use in the development of our business.

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth information as of December 31, 2013 with respect to compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuances:

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights		Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity compensation plans approved by security holders ⁽¹⁾		1,740,500	$	1.76		501,000

Equity compensation plans not approved by security holders ⁽²⁾		1,770,500		1.03		259,721

Total		3,511,000	$	1.39		760,721

(1)

Includes the Lucid, Inc. Year 2000 Stock Option Plan, the Lucid, Inc. 2007 Long-Term Incentive Plan, and the Lucid, Inc. 2010 Long-Term Equity Incentive Plan. No further awards may be made under the Year 2000 Stock Option Plan or the 2007 Long-Term Incentive Plan.

(2)

Includes the Lucid, Inc. 2012 Stock Option and Incentive Plan adopted by the Board of Directors in July 2012 and subject to stockholder approval at the next stockholder meeting.

See Note 13 of Item 8 of this Annual Report on Form 10-K for a summary of our equity compensation plans.

Recent Sales of Unregistered Securities

Set forth below is information regarding shares of common stock issued by us during the year ended December 31, 2013 that were not registered under the Securities Act. Also included is the consideration, if any, received by us for such shares and warrants and information relating to the section of the Securities Act, or rule of the SEC, under which exemption from registration was claimed.

Common Stock Warrants Issued in Lieu of Cash Payment for Services Rendered

In December 2013, we issued to our public relations firm stock warrants to purchase up to 42,500 shares of our common stock, at an exercise price of $1.00 per share, in connection with a letter agreement for services.

Common Stock Warrants

During 2013, we issued warrants to purchase 132,583 shares of common stock as a result of anti-dilution adjustments triggered by the issuances of shares of common stock and warrants.

No underwriters were involved in the foregoing issuances of securities. Unless otherwise stated, the sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated thereunder of the Securities Acts as transactions by an issuer not involving any public offering.

All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. The certificates representing the issued shares of capital stock and the warrants described herein included appropriate legends setting forth that the applicable securities have not been registered and the applicable restrictions on transfer.

Item 6.

Selected Financial Data

We are not required to provide the information required by this Item because we are a smaller reporting company.

Item 7.

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 the related notes appearing elswhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties – see “Special Note Regarding Forward-Looking Statements.” You should review “Item 1A. Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

	Year Ended December 31,
	2013			2012
Statement of Operations Data:

Revenue	$	3,341,253		$	2,434,585

Operating expenses:
Cost of revenue		2,687,397			2,401,729
General and administrative		2,305,264			4,025,245
Sales and marketing		1,670,041			1,809,434
Engineering, research and development		1,531,245			3,764,816
Total operating expenses		8,193,947			12,001,224

Loss from operations		(4,852,694	)		(9,566,639	)

Other expenses, net		(626,557	)		(253,986	)

Net loss	$	(5,479,251	)	$	(9,820,625	)

Basic and diluted net loss per common share	$	(0.65	)	$	(1.23	)

Weighted-average number of common shares outstanding		8,384,708			7,998,662

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.

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.

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 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.

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 $5.5 million and $9.8 million for the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013, we had total stockholders’ deficit of approximately $12.5 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.

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

Years Ended December 31, 2013 and 2012

We reported a net loss of $5.5 million or $(0.65) per share for the year ended December 31, 2013 as compared to a consolidated net loss of $9.8 million or $(1.23) per share for the year ended December 31, 2012. The decrease in net losses in 2013 resulted primarily from an increase in sales and an overall decrease in operating expenses.

The following presents a more detailed discussion of our operating results:

Product sales. For the years ended December 31, 2013 and 2012, we recorded sales of our products of $3.3 million and $2.4 million, respectively. The increase was primarily attributed to an increase in sales in North America of $0.4 million combined with an increase in distributor sales in Europe and Asia of $0.3 million and $0.1 million, respectively. Percentages of total sales by geographic region are as follows:

	Year Ended December 31,
	2013					2012
	Product Sales		Percent			Product Sales		Percent
	(in millions)					(in millions)

North America	$	0.9		27	%	$	0.5		23	%
Europe		1.3		41	%		1.0		39	%
Asia		0.7		23	%		0.6		25	%
Latin America		0.3		7	%		0.2		8	%
Australia		0.1		2	%		0.1		5	%
Total	$	3.3		100	%	$	2.4		100	%

Sales of our products for the quarter ended December 31, 2013 increased $0.4 million from $0.7 million for the quarter ended September 30, 2013 to $1.1 million for the quarter ended December 31, 2013. The increase was primarily due to increased sales to distributors in China and Brazil.

During the year ended December 31, 2012, we began a significant enhancement program to increase the speed and functionality of our VivaScope confocal imagers. We believe the sales of our existing products were negatively impacted during 2012 primarily because we informed our key distributors at the end of 2011 about the 2012 enhancement program. The 2012 enhancement program was substantially completed by September 31, 2012.

Cost of revenue. For the year ended December 31, 2013 and 2012, we incurred cost of revenue of $2.7 million and $2.4 million, respectively. As a percentage of product sales, cost of revenue was 80% and 99% for the years ended December 31, 2013 and 2012, respectively. The decrease in cost of sales as a percentage of product sales reflects a decrease in warranty repairs as well as decreased charges to increase our warranty reserves.

General and administrative expenses. General and administrative expenses consist primarily of salaries and benefits, professional fees, occupancy costs for our office, insurance costs and general corporate expenses, including those costs associated with being a public company. General and administrative expenses decreased $1.7 million from $4.0 million for the year ended December 31, 2012 to $2.3 million for the year ended December 31, 2013. The decrease resulted from decreases in professional fees of $0.5 million, related primarily to legal and audit fees, as well as a decrease in severance expenses since our reduction in force during 2012. For the years ended December 31, 2013 and 2012, general and administrative expenses included non-cash stock-based compensation expenses of $0.2 million and $1.0 million, respectively.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and benefits and general marketing expenses. Sales and marketing expenses decreased $0.1 million from $1.8 million for the year ended December 31, 2012 to $1.7 million for the year ended December 31, 2013. For the years ended December 31, 2013 and 2012, sales and marketing expenses included non-cash stock-based compensation expenses of $32,000 and $0.1 million, respectively.

Engineering, research and development expenses. Engineering, research and development expenses consist primarily of salaries and benefits and material costs used in the development of new products and product improvements. Engineering, research and development expenses decreased $2.3 million from $3.8 million for the year ended December 31, 2012 to $1.5 million for the year ended December 31, 2013. This decrease primarily resulted from a decrease in severance costs of $0.6 million, a decrease in stock-based compensation charges of $0.6 million and a $0.6 million decrease in consulting fees. For the years ended December 31, 2013 and 2012, engineering, research and development expenses included non-cash stock-based compensation expenses of approximately $0.1 and $0.7 million, respectively.

Interest expense. Interest expense increased $0.4 million from $0.4 million for the year ended December 31, 2012 to $0.8 million for the year ended December 31, 2013. The increase in interest expense was a result of the placement of our 2013 Term Loan in May 2013 in the amount of $5.0 million.

Gain (loss) on extinguishment of debt. We recorded a gain on extinguishment of debt of $0.1 million for the year ended December 31, 2013 for the favorable settlement of a promissory note payable, as compared to a loss on extinguishment of debt of $0.4 million during the prior year resulting from the conversion of debt in 2012 related to our 2011 initial public offering.

Fair value adjustment of warrants. For the years ended December 31, 2013 and 2012, we recognized income of $0.1 million and $0.6 million, 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 December 31, 2013, we had $2.3 million in current assets and $7.4 million in current liabilities, resulting in a working capital deficit of $5.1 million. As of December 31, 2012, we had $2.5 million in current assets and $3.1 million in current liabilities, respectively, resulting in a working capital deficit of $0.6 million. Our working capital decrease was a result of our current liabilities increasing from $3.1 million in 2012 to $7.4 million in 2013 as a result of the classification of our 2013 Term Loan as a current liability at December 31, 2013. The lender has agreed to convert the amounts due under this note into equity pending the raise of $6.0 million in funds (See “Term Loans” below for additional information.) 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.

We engaged R.F. Lafferty & Co., Inc. (“Lafferty”) to provide general investment banking services to us in March 2014, replacing H.C. Wainwright & Co., LLC (“H.C. Wainwright”) as our investment bankers. We have agreed to pay Lafferty a retainer for its services as well as to issue common stock, warrants to purchase common stock, a finder’s fee and a transaction fee upon the closing of a financing. See Note 17 - Subsequent Events under Item 8 of this Annual Report on Form 10-K for further information.

We anticipate to 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.

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:

●

the cost of development and growth of our VivaScope business;

●

the cost of commercialization activities of our products, and of our future product candidates, including marketing, sales and distribution costs;

●

the number and characteristics of any future product candidates we pursue or acquire;

●

the scope, progress, results and costs of researching and developing our future product candidates, and conducting clinical trials;

●

the timing of, and the costs involved in, maintaining and obtaining regulatory approvals for our existing products and future product candidates;

●

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;

●

our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;

●

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and

●

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 Year Ended December 31,
	2013			2012
Operating activities	$	(4,837,180	)	$	(7,704,665	)
Investing activities		(27,652	)		(79,493	)
Financing activities		4,724,894			3,814,464
Net decrease in cash and cash equivalents		(139,938	)		(3,969,694	)

Net cash used in operating activities. Cash used in operating activities was $4.8 million and $7.7 million for the years ended December 31, 2013 and 2012, respectively. The decrease in cash used in operating activities resulted primarily from the decrease in net loss of $4.3 million, offset by increased cash payments for expenses.

Net cash used in investing activities. Cash used in investing activities was approximately $28,000 and $0.1 million for the years ended December 31, 2013 and 2012, respectively, and represents the purchases of fixed assets during these periods.

Net cash provided by financing activities. Cash provided by financing activities was $4.7 million and $3.8 million for the years ended December 31, 2013 and 2012, respectively. The increase in 2013 resulted from the placement of the 2013 Term Loan for $5.0 million, as compared to the placement of the 2012 Term Loan for $7.0 million in 2012 which was partially used to repay existing debt of $3.4 million.

Term Loans. In July 2012, we borrowed $7.0 million from an affiliate pursuant to the 2012 Term Loan, which refinanced a previous loan in the amount of $3.0 million. The 2012 Term Loan bears interest at a rate of 7% per annum, payable quarterly commencing in July 2014 and is secured by all of our assets. The 2012 Term Loan contains customary affirmative and negative covenants, including covenants restricting the incurrence of debt, imposition of liens, the payment of dividends, and entering into affiliate transactions. The 2012 Term Loan also contains customary events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with covenants. If an event of default occurs and is continuing under the 2012 Term Loan, the entire outstanding balance may become immediately due and payable. In October 2013, we entered into a letter agreement with the holder of the 2012 Term Loan, pursuant to which 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.

In May 2013, we borrowed an additional $5.0 million from the same affiliate under the 2013 Term Loan. The 2013 Term Loan matures in November 2014 and may be prepaid at any time. The 2013 Term Loan bears interest at a rate of 7% per annum, payable upon maturity, and is secured by all of our assets. The 2013 Term Loan includes cross default provisions with the existing 2012 Term Loan. In October 2013, we entered into a letter agreement with the holder of the 2013 Term Loan, pursuant to which the parties agreed that upon the closing of an offering by us 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. 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.

Promissory Notes. As of December 31, 2012, two non-interest bearing promissory notes owed to non-affiliated lenders were outstanding totaling $0.4 million. In May 2013, the outstanding balance of one of the promissory notes was settled in full, resulting in a gain on extinguishment of debt of approximately $81,000 for the year ended December 31, 2013. As of December 31, 2013 the remaining promissory note totaled approximately $24,000 and was classified as a current liability.

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 December 31, 2013, we had accounts receivable of approximately $0.5 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 December 31, 2013, we had warrants to purchase up to 4,280,553 shares of our common stock outstanding at a weighted average exercise price of $3.17. In March 2014, warrants to purchase 1.4 million shares of our common stock at $1.00 per share were terminated when the Company ended its relationship with H.C. Wainwright.

Stock Options. At December 31, 2013, we had stock options outstanding to purchase 3,511,000 shares of our common stock at a weighted average exercise price of $1.39. In addition, 760,721 shares are available for issuance under our stock option plans upon the grant or issuance of awards.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of December 31, 2013 and as of the date of this report.

Recently Issued Accounting Pronouncements

In the normal course of business, management evaluates all new accounting pronouncements 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 pronouncements to have a material impact on our financial statements.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition, liquidity and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect amounts reported therein. The following lists our current accounting policies involving significant management judgment and provides a brief description of these policies:

Fair Value. Certain elements of our financial statements require us to make estimates regarding the fair market value of our common stock. In 2013 and 2012, the Company estimated fair market value of our common stock based largely on recent trading history and volume. Because the trading in our stock has been thin and sporadic, exclusive use of the most recent trading price could, at times yield an amount which was not the best indication of fair value.

Historically, we have used estimates of the fair value of our common stock at various dates for the purpose of:

●

Determining the fair value of our common stock on the date of grant of a stock-based compensation award to our employees and non-employees as one of the inputs into determining the grant date fair value of the award.

●

Determining the fair value of our common stock on the date of grant of a restricted stock award to determine the amount of compensation expense to be recorded over the requisite service period.

●

Determining the fair value of our common stock at each reporting period as an input into our model to value warrants classified as liabilities and to value warrants issued in payment of services.

Management has estimated the fair value of our common stock during 2012 and 2013 as follows:


Date of Valuation	Estimate of Fair V alue		Purpose
October 1, 2012	$	2.00	Grants of stock-based awards
November 8, 2012	$	2.00	Grants of stock-based awards
December 18, 2012	$	1.40	Issuance of common stock in a private transaction
February 27, 2013	$	1.41	Grants of stock-based awards
September 13, 2013	$	0.75	Grants of stock-based awards
November 7, 2013	$	1.00	Grants of stock-based awards

Stock-Based Compensation. We measure compensation cost for stock-based compensation at fair value and recognize compensation over the service period for awards expected to vest. The fair value of each restricted stock award is based on management’s estimate of the fair value of our common stock on the date of grant and is recognized as compensation expense using straight-line amortization over the requisite service period. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes pricing model and is recognized as compensation expense using straight-line amortization over the requisite service period.

Management has estimated the fair value of our stock option awards during 2012 and 2013 as follows:

Date of Valuation	Type of Stock-Based Award Granted	Weighted Average Estimate of Fair Value		Valuation Method
October 1, 2012	Stock option	$	1.23	Black-Scholes pricing model
November 8, 2012	Stock option	$	0.87	Black-Scholes pricing model
February 27, 2013	Stock option	$	0.60	Black-Scholes pricing model
February 27, 2013	Stock option	$	0.81	Black-Scholes pricing model
September 13, 2013	Stock option	$	0.45	Black-Scholes pricing model
November 7, 2013	Stock option	$	0.65	Black-Scholes pricing model

The determination of fair value using the Black-Scholes model requires a number of complex and subjective variables. Key assumptions in the Black-Scholes pricing model include the fair value of common stock, the expected term, expected volatility of the common stock, the risk-free interest rate, and estimated forfeitures. We determined the fair value of our common stock using a variety of factors, discussed above. The expected term is estimated by using the contractual term of the awards and the length of time for the recipient to exercise the awards. Management based expected volatilities on a volatility factor computed based on the historical equity volatilities of the common stock of public comparable firms. The risk-free interest rate was based on the implied yield available at the time the options were granted on U.S. Treasury zero coupon issues with a remaining term equal to the expected term of the option. Estimated forfeitures are based on management’s current expectations. The expected dividend yield is 0% for all periods presented, based upon our historical practice of not paying cash dividends on its common stock.

Stock Warrants. We account for warrants that are indexed to our own stock or separately traded, such as our warrants registered in our initial public offering, as a component of equity and record those amounts at estimated fair value computed at the date of grant. Certain other warrants, which were issued prior to our initial public offering, contain complex provisions which require estimates of fair value to appropriately record our potential liabilities. These warrants are treated as a liability and were initially recorded at estimated fair value computed at the date of grant and are adjusted to fair value at each reporting period. The fair value of warrants is derived using the Black-Scholes pricing model. The Company believes that the Black-Scholes pricing model results in a value that is not materially different from the value determined using a binomial pricing model. We review each warrant with complex provisions for triggering events at each reporting period and reclassify warrants from liabilities to stockholders’ equity as needed.

Income Taxes. We recognize income taxes under the asset and liability method. As such, deferred taxes are based on temporary differences, if any, between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts. The deferred taxes are determined using the enacted tax rates that are expected to apply when the temporary differences reverse. Income tax expense is based on taxes payable for the period plus the change during the period in deferred income taxes. Valuation allowances are established when it is more likely than not that the deferred tax assets will not be realized and the deferred tax assets are reduced to the amount expected to be realized.

Tax positions are recognized only when it is more likely than not (likelihood of greater than 50%) that the position would be sustained upon examination based solely on the technical merits of the position. Tax positions that meet the more likely than not threshold are measured using a probability- weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. We recognize accrued interest and penalties, if any, related to income tax liabilities as a component of income tax expense.

Revenue Recognition. We recognize revenue when evidence of an arrangement exists, title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectability is reasonable assured. When transactions include multiple deliverables, we apply the accounting guidance for multiple element arrangements to determine if those deliverables constitute separate units of accounting. Revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element. Each element’s allocated revenue is recognized when the revenue recognition criteria for that element have been met. Multiple element arrangements have not been material through December 31, 2013. When allocating arrangement consideration, fair value is generally determined by objective evidence, which is based on the price charged when each element is sold separately. All costs related to product shipment are recognized at time of shipment and included in cost of revenue. We do not provide for rights of return to customers on product sales.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

We are not required to provide the information required by this Item because we are a smaller reporting company.

Item 8.

Financial Statements and Supplementary Data

LUCID, INC.

FINANCIAL STATEMENT INDEX


	Page No.
Report of Independent Registered Public Accounting Firm	38
Financial Statements:
Balance Sheets as of December 31, 2013 and 2012	39
Statements of Operations for the Years Ended December 31, 2013 and 2012	40
Statements of Stockholders’ Deficit for the Years Ended December 31, 2013 and 2012	41
Statements of Cash Flows for the Years Ended December 31, 2013 and 2012	42
Notes to Financial Statements	43

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Lucid, Inc.

Rochester, New York

We have audited the accompanying balance sheets of Lucid, Inc. (the “Company”) as of December 31, 2013 and 2012 and the related statements of operations, changes in stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lucid, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company’s recurring losses from operations, deficit in equity, and projected need to raise additional capital to fund operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Marcum llp

Boston, Massachusetts

March 12, 2014

LUCID, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 2013 AND 2012


	2013			2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	786,509		$	926,447
Accounts receivable		499,667			559,336
Inventories - net		708,862			926,236
Prepaid expenses and other current assets		291,135			49,155
Total current assets		2,286,173			2,461,174

PROPERTY AND EQUIPMENT – Net		100,783			107,409

DEFERRED FINANCING COSTS – Net		4,906			6,128

OTHER ASSETS		15,893			15,991

TOTAL ASSETS	$	2,407,755		$	2,590,702

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt	$	23,500		$	379,311
Current portion of notes payable – related party		5,000,000			—
Accounts payable		536,460			955,514
Accrued expenses and other current liabilities		1,720,867			1,515,334
Current portion of deferred revenue		130,119			244,081
Total current liabilities		7,410,946			3,094,240

WARRANT LIABILITY		1,717			61,808

NOTES PAYABLE – RELATED PARTY - Net		6,757,848			6,698,386

OTHER LONG-TERM LIABILITIES		730,515			443,623

TOTAL LIABILITIES		14,901,026			10,298,057

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ DEFICIT:
Preferred Stock — par value $.05 per share; 10,000,000 authorized; none issued or outstanding		—			—
Common Stock — par value $.01 per share; 60,000,000 authorized; 8,507,374 issued and outstanding on December 31, 2013 and 2012		85,074			85,074
Additional paid-in capital		39,372,962			38,679,627
Accumulated deficit		(51,951,307	)		(46,472,056	)
TOTAL STOCKHOLDERS’ DEFICIT		(12,493,271	)		(7,707,355	)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	2,407,755		$	2,590,702

See accompanying notes to financial statements .

LUCID, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012


	2013			2012
REVENUES:	$	3,341,253		$	2,434,585

OPERATING EXPENSES:
Cost of revenue		2,687,397			2,401,729
General and administrative		2,305,264			4,025,245
Sales and marketing		1,670,041			1,809,434
Engineering, research and development		1,531,245			3,764,816
Total operating expenses		8,193,947			12,001,224

LOSS FROM OPERATIONS		(4,852,694	)		(9,566,639	)

OTHER (EXPENSE) INCOME:
Interest expense		(761,231	)		(362,069	)
Gain (loss) on extinguishment of debt		80,706			(422,435)
Fair value adjustment of warrants		63,034			594,949
Loss on impairment of long-lived assets		—			(50,285	)
Other		(9,066	)		(14,146	)

NET LOSS	$	(5,479,251	)	$	(9,820,625	)

BASIC AND DILUTED NET LOSS PER COMMON SHARE	$	(0.65	)	$	(1.23	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		8,384,708			7,998,662

See accompanying notes to financial statements.

LUCID, INC.

STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

							Additional
	Common Stock						Paid-In			Accumulated
	Shares			Amount			Capital			Deficit			Total
BALANCE—Jan. 1, 2012		7,840,477		$	78,405			35,907,806		$	(36,651,431	)	$	(665,220	)
Stock-based compensation		—			—			1,795,794			—			1,795,794
Stock option exercises		161,400			1,614			18,806			—			20,420
Issuance of common units		5,300			53			20,204			—			20,257
Issuance of common shares		296,933			2,969			573,899			—			576,868
Forfeiture of restricted stock		(18,500	)		(185	)		185			—			—
Reclassification of warrants to equity		54,600			546			30,277			—			30,823
Issuance of common stock upon placement of long-term debt, related party		167,164			1,672			332,656			—			334,328
Net loss								—			(9,820,625	)		(9,820,625	)
BALANCE—Dec. 31, 2012		8,507,374			85,074			38,679,627			(46,472,056	)		(7,707,355	)
Stock-based compensation		—			—			321,676			—			321,676
Issuance of warrants for services		—			—			374,702			—			374,702
Issuance of warrants in connection with anti-dilution adjustments		—			—			(2,943	)		—			(2,943	)
Dissolution of subsidiary		—			—			(100	)		—			(100	)
Net loss		—			—			—			(5,479,251	)		(5,479,251	)
BALANCE—Dec. 31, 2013		8,507,374		$	85,074		$	39,372,962		$	(51,951,307	)	$	(12,493,271)

See accompanying notes to financial statements.

LUCID, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012


	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,479,251	)	$	(9,820,625	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		35,499			41,687
Loss on disposal of fixed assets		—			3,890
Loss on impairment of long-lived assets		—			50,285
Stock-based compensation		321,676			1,795,794
Warrants issued for services		374,702			—
Fair value adjustment of warrants		(63,034	)		(594,949	)
(Gain) loss on extinguishment of debt		(80,706	)		422,435
Accretion of debt discount		59,464			138,640
Change in:
Accounts receivable		59,670			(169,442	)
Inventories		217,374			(196,361	)
Prepaid expenses and other current assets		(241,980	)		33,677
Other assets		—			(2,167	)
Accounts payable		(419,054	)		(438,249	)
Accrued expenses and other current liabilities		205,533			352,955
Other liabilities		172,927			677,765
Net cash used in operating activities		(4,837,180	)		(7,704,665	)

CASH FLOWS FROM INVESTING ACTIVITIES – Purchases of property and equipment		(27,652	)		(79,493	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable – related parties		5,000,000			6,652,284
Repayments of debt		(275,106	)		(3,448,078	)
Loan acquisition costs		—			(64,747	)
Issuance of common units		—			20,257
Issuance of common stock		—			654,748
Net cash provided by financing activities		4,724,894			3,814,464

NET DECREASE IN CASH		(139,938	)		(3,969,694	)

CASH – Beginning of year		926,447			4,896,141

CASH – End of year	$	786,509		$	926,447

SUPPLEMENTAL CASH FLOW DATA – Cash paid for interest	$	—		$	62,939

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of warrants in connection with anti-dilution adjustments	$	2,943		$	—
Refinance of loan acquisition costs with note payable	$	—		$	26,162
Refinance of debt discount with note payable	$	—		$	36,633

See accompanying notes to financial statements.

LUCID, INC.

NOTES TO FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

1. NATURE OF OPERATIONS

Lucid, Inc., operating as Caliber Imaging & Diagnostics, or Caliber I.D., (the “Company” or “Lucid”), is a medical device company that develops, manufactures, markets and sells point-of-care cellular imaging systems. The Company’s 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®, the Company’s 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, the Company’s platform imaging technology has the potential to significantly improve patient outcomes while simultaneously reducing costs. The Company sells its products in the United States and numerous foreign countries and is headquartered in Rochester, New York.

As a cost-saving measure, in January 2013, the Company dissolved its wholly-owned subsidiary Lucid International, Inc. The dissolution of Lucid International, Inc. did not have a significant impact on the Company’s financial position or results of operations. All information regarding periods prior to January 2013 were presented on a consolidated basis.

2. LIQUIDITY, CAPITAL RESOURCES AND MANAGEMENT PLANS

As of December 31, 2013, the Company had cash and cash equivalents of $0.8 million and a working capital deficit of $5.1 million. In 2013, cash used in operating activities totaled $4.8 million. As a result of its limited cash resources and working capital deficit, the Company is delinquent in paying a number of its creditors. Unless the Company obtains additional financing in the coming months, it will need to substantially curtail operations and may be unable to continue its business.

The Company engaged H.C. Wainwright & Co., LLC (“H.C. Wainwright”) in August 2013 to identify, originate and develop potential strategic partnerships, assist in merger and acquisition transactions and to raise capital. The Company terminated its engagement with H.C. Wainwright in March 2014 and hired R.F. Lafferty & Co., Inc. (“Lafferty”) to provide general investment banking services. See Note 17 - Subsequent Events for further information.

The Company anticipates to continue to generate losses for at least the next year as it develops and expands its products and offerings and seek to commercialize its products and expand its corporate infrastructure. The Company will continue to require significant amounts of additional capital to fund its operations, and such capital may not be available when it needs it on terms that it finds favorable, if at all. The Company is seeking to raise these funds as described above, though it 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, the Company’s ability to fund its operations, take advantage of opportunities, develop products and technologies, and otherwise respond to competitive pressures could be significantly delayed or limited, and the Company may need to downsize or halt its operations. Prevailing market conditions may not allow for such a fundraising or new investors may not be prepared to purchase the Company’s securities at prices that are greater than the current market price.

There can be no assurance that the Company will be successful in attracting alternative debt or equity financing. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates —The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, allowances for doubtful accounts, inventories, impairment of long-lived assets, accrued expenses, income taxes including the valuation allowance for deferred tax assets, valuation of warrants, and stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates.

Revenue Recognition —The Company recognizes revenue when evidence of an arrangement exists, title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectability is reasonable assured. When transactions include multiple deliverables, the Company applies the accounting guidance for multiple element arrangements to determine if those deliverables constitute separate units of accounting. Revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element. Each element’s allocated revenue is recognized when the revenue recognition criteria for that element have been met. Multiple element arrangements have not been material through December 31, 2013. When allocating arrangement consideration, fair value is generally determined by objective evidence, which is based on the price charged when each element is sold separately.

All costs related to product shipment are recognized at time of shipment and included in cost of revenue. The Company does not provide for rights of return to customers on product sales. 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.

Product Warranty —Medical devices sold are covered by a warranty for up to two years, for which estimated contractual warranty obligations are recorded as an expense at the time of shipment.

Concentrations of Credit Risk —Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains its cash in demand deposit and money market accounts at financial institutions. The cash balances are insured by the FDIC up to $250,000 per depositor with unlimited insurance for funds in noninterest-bearing transaction accounts through December 31, 2013. At times, the amounts in these accounts may exceed the federally insured limits. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk with respect to cash.

The Company provides credit in the normal course of business to the majority of its customers. Accounts for which no payments have been received for several months are considered delinquent and customary collection efforts are initiated. After all collection efforts are exhausted the account is written-off. Allowance for doubtful accounts is based on estimates of probable losses related to accounts receivable balances. At December 31, 2013 and 2012, management has determined that no allowance is required.

For the year ended December 31, 2013, the Company had sales of approximately $1.4 million and $0.5 million to two distributors, respectively. These two distributors accounted for 42% and 15%, respectively, of the Company’s revenues in 2013. For the year ended December 31, 2013, the Company had $0.4 million of accounts receivable related to two distributors and two customers, representing 84% of the Company’s total accounts receivable.

Cash and Cash Equivalents —The Company defines cash and cash equivalents as money market funds and other highly liquid investments with original maturities of 90 days or less. Cash and cash equivalents are stated at cost, which approximates fair value. Cash equivalents are subject to credit risk and are primarily maintained in a money market fund.

Inventories —Inventories are stated at the lower of cost, determined on a first-in, first-out (FIFO) method, or market. Excess, obsolete or expired inventory are adjusted to net realizable value, based primarily on how long the inventory has been held as well as the Company’s estimate of forecasted net sales of that product. A significant change in the timing or level of demand for our products may result in recording additional adjustments to the net realizable value of excess, obsolete or expired inventory in the future.

Property and Equipment —Property and equipment is stated at cost, less accumulated depreciation. Repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:

Computer hardware and software		2 - 3 years
Furniture and fixtures		5 years
Machinery and equipment		2 - 5 years
Office equipment		5 years
Vehicle		5 years

Impairment of Long-Lived Assets —The Company assesses the impairment of definite lived assets when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors that are considered in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets.

Recoverability potential is measured by comparing the carrying amount of the asset group to the asset group’s related total future undiscounted cash flows. If an asset group’s carrying value is not recoverable through its related cash flows, the asset group is considered to be impaired. Impairment is measured by comparing the asset group’s carrying amount to its fair value.

When it is determined that useful lives of assets are shorter than originally estimated, and there are sufficient cash flows to support the carrying value of the assets, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives. The Company recognized an impairment loss on long-lived assets of approximately $50,000 in 2012 and no impairment losses in 2013.

Deferred Financing Costs, Net —Deferred financing costs, net, represents amounts incurred in connection with the Company’s 2013 Term Loan and 2012 Term Loan. These amounts are amortized over the period from the date of issuance to the contractual maturity date or conversion date if earlier. The Company expensed deferred fees of approximately $1,000 and $8,000 for the years ended December 31, 2013 and 2012, respectively, which are included in depreciation and amortization in the statement of cash flows, and as interest expense within the statement of operations.

Fair Value Measurements —Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the assets or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 —Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2 —Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.

Level 3 —Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

The availability of observable inputs can vary and is affected by a wide variety of factors, including, the type of asset/liability, whether the asset/liability is established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.

In such cases, for disclosure purposes the appropriate level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are required to reflect those that market participants would use in pricing the asset or liability at the measurement date.

The Company’s cash equivalents are classified as Level I because they are valued using quoted market prices.

The Company considers warrants that are not indexed to the Company’s own stock to be classified as Level 3. The following table presents the change in Level 3 liabilities:

	2013			2012
Balance at January 1	$	61,808		$	687,580
Warrants issued for anti-dilution adjustment		2,943			—
Reclassification to equity		—			(30,823	)
Fair value adjustment		(63,034	)		(594,949	)

Balance at December 31	$	1,717		$	61,808

The fair value of these warrants is derived using the Black-Scholes pricing model using the same assumptions and methodology utilized in the valuation of common stock options described below. (See Note 13 -Equity for assumptions used to value warrants.)

The Company’s financial instruments consist principally of accounts receivable, accounts payable and debt. The Company believes the recorded values for accounts receivable and accounts payable approximate current values as of December 31, 2013 because of their nature and respective durations. Management estimates the carrying value of its debt instruments approximates fair value as of December 31, 2013. This estimate is based on acceptable valuation methodologies which use market data of similarly sized and situated debt issuers.

Engineering, Research and Development Costs —Engineering, research and development costs are expensed as incurred.

Stock-Based Compensation Plans —The Company measures compensation cost for stock awards at fair value and recognizes compensation over the service period for awards expected to vest. The fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model and straight-line amortization of compensation expense over the requisite service period of the grant. The determination of fair value using the Black-Scholes model requires a number of complex and subjective variables. Key assumptions in the Black-Scholes pricing model include the fair value of common stock, the expected term, expected volatility of the common stock, the risk-free interest rate, and estimated forfeitures. Management determined the fair value of the Company’s common stock largely on recent trading history and volumes on the OTCQB. The expected term is estimated by using the contractual term of the awards and the length of time for the recipient to exercise the awards. Management based expected volatilities on a volatility factor computed based on the historical equity volatilities of the common stock of public comparable firms. The risk-free interest rate was based on the implied yield available at the time the options were granted on U.S. Treasury zero coupon issues with a remaining term equal to the expected term of the option. Estimated forfeitures are based on management’s current expectations. The expected dividend yield is 0% for all periods presented, based upon the Company’s historical practice of not paying cash dividends on its common stock.

Warrants —The Company accounts for warrants issued that are indexed to the Company’s own stock as a component of equity and records the warrants at estimated fair value computed at the date of grant. Warrants issued that are not indexed to the Company’s own stock are treated as a liability and are initially recorded at estimated fair value computed at the date of grant. This liability is adjusted to fair value at each period presented. The fair value of warrants is derived using the Black-Scholes pricing model. The Company believes that the Black-Scholes pricing model results in a value that is not materially different from the value determined using a binomial pricing model.

Debt —When common stock has been issued together with debt, the Company allocates the proceeds between the debt and common stock based on the relative fair value of each financial instrument, resulting in a debt discount to be amortized to interest expense over the term of the debt.

Income Taxes —Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due and deferred taxes related primarily to differences between the financial statement and tax basis of assets and liabilities and operating loss and tax credit carryforwards measured by the enacted tax rates that are anticipated to be in effect in the respective jurisdiction when those differences reverse. The deferred tax provision generally represents the net change in the deferred tax assets and liabilities. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts that more likely than not will be realized.

The Company accounts for uncertain tax positions in accordance with Accounting Standards Codification (ASC) Topic 740 – Income Taxes . As such, tax positions are recognized only when it is more likely than not (likelihood of greater than 50%) that the position would be sustained upon examination based solely on the technical merits of the position. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. The Company recognizes accrued interest and penalties related to income tax liabilities as a component of income tax expense.

Net Loss Per Common Share —Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of dilutive common shares outstanding during the period. Dilutive common shares outstanding are calculated by adding to the weighted average number of common shares outstanding any potential (unissued) shares of common stock assuming conversion, exercise or issuance from the Company’s outstanding warrants, stock options and restricted stock. Since the Company reported a net loss attributable to common stockholders in the years ended December 31, 2013 and 2012, all potential common stock are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per common share would be reduced. Therefore, in periods when a loss is reported, the calculation of basic and dilutive loss per common share results in the same value. The Company’s nonvested restricted stockholders have the right to participate with common stockholders in dividends and unallocated earnings. Net losses are not allocated to the nonvested restricted stockholders. Therefore, when applicable, basic and diluted earnings per share are computed using the two-class method, under which the Company’s undistributed earnings are allocated to the common and vested restricted stockholders.

Recently Issued Accounting Pronouncements —In the normal course of business, Management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board, Securities and Exchange Commission, Emerging Issues Task Force, American Institute of Certified Public Accountants and other authoritative accounting bodies to determine the potential impact they may have on the Company’s Financial statements. Based upon this review, Management does not expect any of the recently issued accounting pronouncements to have a material impact on the Company’s financial statements.

Reclassifications —Certain immaterial reclassification adjustments have been made to the prior year financial statements to reclassify certain operating costs from General and administrative and Sales and marketing to Engineering, research and development in the accompanying statements of operations to conform to the current year presentation.

4. INVENTORIES

The components of inventories are as follows at December 31:

	2013			2012
Raw materials	$	426,996		$	659,149
Finished goods		288,068			334,026
Offsite demo equipment		125,669			96,566
Less inventory reserve		(131,871	)		(163,505	)
	$	708,862		$	926,236

Offsite demo equipment represents the cost of products physically located at customer locations, during an orientation period for which the Company retains title. As such, no depreciation expense has been recorded on these units. The Inventory reserve at December 31, 2013 includes amounts necessary to adjust the Company’s inventory and offsite demo equipment to net realizable value following the Company’s release of newly redesigned products in 2013.

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

The components of prepaid expenses and other current liabilities are as follows at December 31:

	2013		2012
Prepaid inventory	$	168,768	$	195
Other current assets		88,342		—
Prepaid expenses		34,025		48,960
	$	291,135	$	49,155

6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31:

	2013			2012
Machinery and equipment	$	402,889		$	407,039
Computer hardware and software		100,245			89,971
Leasehold improvements		46,891			46,891
Furniture and fixtures		29,484			29,484
Vehicle		18,680			18,680
Office equipment		3,869			3,869
		602,058			595,934
Less accumulated depreciation and amortization		(501,275	)		(488,525	)
	$	100,783		$	107,409

Depreciation expense totaled approximately $34,000 and $33,000 for the years ended December 31, 2013 and 2012, respectively.

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following at December 31:


	2013		2012
Compensation and benefits	$	679,556	$	635,039
Interest – related party		240,958		265,719
Product warranty liability		384,126		263,000
Other accrued expenses		259,206		211,130
Customer deposits		105,816		79,384
Rent		41,705		39,674
Professional fees		9,500		21,388
	$	1,720,867	$	1,515,334

In 2012, the Company and certain officers of the Company mutually agreed to terminate their employment relationships. At December 31, 2013 and 2012, the remaining severance was $0.6 million and $0.4 million, respectively, which is included in “Compensation and benefits” in the table above for the current portion of these liabilities.

Customer deposits represent advances paid to the Company by customers for the purchase of equipment.

8. NOTES PAYABLE—RELATED PARTIES

In July 2012, the Company borrowed $7.0 million from an affiliate of the Company pursuant to a Loan and Security Agreement (the “2012 Term Loan”). On October 7, 2013, the Company entered into a letter agreement modifying the 2012 Term Loan by (i) extending the maturity date by three years to July 5, 2020, (ii) providing that interest will be payable only on maturity, and (iii) providing that the events of default will only be nonpayment at maturity or the Company’s insolvency (the “Modification”). The 2012 Term Loan refinanced a previous loan, may be prepaid at any time subject to certain notice requirements, bears interest at a rate of 7% per annum and is secured by all of the Company’s assets. The Company had recorded accrued interest of $0.7 million and $0.3 million at December 31, 2013 and 2012, respectively, in connection with the 2012 Term Loan. As a result of the Modification, accrued interest on the 2012 Term Loan was classified as long-term at December 31, 2013 and is included in Other Long-Term Liabilities on the Company’s financial statements. In connection with the closing of the 2012 Term Loan, the Company issued 167,164 shares of the Company’s common stock to the affiliate. The Company allocated the debt proceeds between the debt and common stock based on the relative fair value of each financial instrument, resulting in a debt discount of $0.3 million which is being amortized to interest expense over the term of the loan. Debt discount was $(0.2) million and $(0.3) million at December 31, 2013 and 2012, respectively, and is included in Notes Payable – Related Party – net.

The 2012 Term Loan contains customary affirmative and negative covenants, including covenants restricting the incurrence of debt, imposition of liens, the payment of dividends, and entering into affiliate transactions. At December 31, 2013 the Company was in compliance with all covenants. The 2012 Term Loan, as modified by the Modification contains events of default consisting of nonpayment at maturity and the Company’s insolvency. If an event of default occurs and is continuing under the 2012 Term Loan, the entire outstanding balance may become immediately due and payable.

In May 2013, the Company borrowed an additional $5.0 million from the same affiliate of the Company under the 2013 Term Loan. The 2013 Term Loan matures in November 2014 and may be prepaid at any time. The 2013 Term Loan bears interest at a rate of 7% per annum, payable upon maturity and is secured by all of the Company’s assets. The Company had recorded accrued interest of approximately $0.2 million at December 31, 2013 in connection with the 2013 Term Loan. The 2013 Term Loan includes cross default provisions with the existing 2012 Term Loan. On October 7, 2013, the Company entered into a letter agreement with the holder of the 2013 Term Loan pursuant to which the holder agreed that upon closing of an offering by the Company in which it raises at least $6 million, all outstanding amounts of principal and interest under the 2013 Term Loan will convert into the Company’s common stock on the same terms as such shares sold to other investors in the offering. In exchange for this recapitalization, upon closing, the Company will issue to the holder warrants to purchase 150,000 shares of the Company’s common stock at an exercise price equal to the higher of $1.00 per share or the price paid by the other investors in this offering.

Interest expense on Notes Payable – Related Party totaled $0.7 million and $0.3 million for the years ended December 31, 2013 and 2012, respectively. Debt discount amortization of $0.1 million and approximately $33,000 was charged to interest expense for the years ended December 31, 2013 and 2012, respectively.

9. DEBT

As of December 31, 2012, promissory notes outstanding totaled $0.4 million on two notes which do not accrue interest. In May 2013, the outstanding balance of one of the promissory notes was settled in full, resulting in a gain on extinguishment of debt of approximately $81,000 for the year ended December 31, 2013.

As of December 31, 2013 the remaining promissory note totaled approximately $24,000 and was classified as a current liability.

10. INCOME TAXES

Because the Company has incurred net losses, and has provided a full valuation allowance against deferred tax assets, its tax provision is zero for the years ended December 31, 2013 and 2012.

The differences between income taxes computed using the statutory U.S. federal income tax rate and the provision (benefit) for income taxes were as follows:

	2013			2012
Pre-tax net loss	$	(5,479,251	)	$	(9,820,625	)
Amount computed using the Statutory U.S. federal rate	$	(1,862,946	)	$	(3,339,012	)
State taxes – net of federal benefit		(364,605	)		—
Increase (reduction) in taxes resulting from valuation allowance		1,942,560			3,186,987
Fair value adjustment of warrants		(21,432	)		(202,283	)
Interest on debt treated as equity		20,217			13,284
Stock-based compensation—ISO		39,056			131,221
Warrants		127,399			—
Other		119,751			209,803
Provision (benefit) for income taxes	$	—		$	—

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:

	2013			2012
Current deferred tax asset:
Compensation Reserves	$	203,937		$	302,196
Deferred revenue		—			—
Prepaid fees		47,565			56,523
Warranty reserve		134,482			89,420
Other		46,190			55,613
		432,174			503,752
Valuation allowance		(432,174	)		(503,752	)

Net current deferred tax asset	$	—		$	—

Noncurrent deferred tax asset:
Stock based compensation		1,733,564			1,613,248
Net operating loss		10,464,281			8,580,265
Other		10,949			1,143
		12,208,794			10,194,656
Valuation allowance		(12,208,794	)		(10,194,656	)
Net noncurrent deferred tax asset	$	—		$	—
Total	$	—		$	—

The Company has performed the required assessment of positive and negative evidence regarding the realization of deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred income tax assets and liabilities, estimates of projected future taxable income and tax planning strategies.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the Company’s historical net losses, management does not believe that it is more likely than not that the Company will realize the benefits of these deferred tax assets and, accordingly, a full valuation allowance has been recorded against the deferred tax assets as of December 31, 2013 and 2012.

As a result of certain realization requirements of ASC Topic 718, Compensation — Stock Compensation , the Company’s deferred tax assets at December 31, 2013 do not include approximately $0.5 million of excess tax benefits from the exercise of nonqualified options that are a component of the Company’s NOL carryovers. Equity will be increased by approximately $0.2 million if and when such deferred tax assets are ultimately realized for federal income tax purposes. The Company uses ordering pursuant to ASC Topic 740, Income Taxes , for purposes of determining when excess tax benefits have been realized.

The Company has federal and state net operating loss carryforwards of approximately $30 million to offset future taxable income which expire between 2014 and 2034. The Company has undergone several equity transactions which may have resulted in an ownership change or changes as defined by Internal Revenue Code Sec. 382. If an ownership change occurred, the use of the Company’s net operating losses (NOLs) may be limited. Because of the Company’s current tax loss position, the Company’s NOLs are not being utilized at this time. The Company will determine whether or not an ownership change has occurred under IRC Sec. 382 before utilizing its NOLs in the future. Also, any future equity raise by the Company may result in an ownership change which would also need to be analyzed under IRC Sec. 382.

As discussed in Note 3, the Company accounts for uncertain tax positions in accordance with ASC Topic 740. The amount of unrecognized tax benefits for uncertain tax positions as of December 31, 2013, was insignificant. Amounts related to uncertain tax positions that may change within the next 12 months are not expected to be material.

The Company files income tax returns with the U.S. government and various states. The Company is not presently under audit by the Internal Revenue Service or any state. The Company’s tax matters for 2006 through 2012 remain subject to examination by the respective federal and state tax authorities.

11. NET LOSS PER COMMON SHARE DATA

The following table sets forth the computation of basic and diluted net loss attributable to common stockholders per common share, as well as a reconciliation of the numerator and denominator used in the computation:


	Year Ended December 31,
	2013			2012
Net loss	$	(5,479,251	)	$	(9,820,625	)

Weighted-average common shares outstanding		8,384,708			7,998,662

Basic and diluted net loss per common share	$	(0.65	)	$	(1.23	)

The following equivalent shares were excluded from the calculation of diluted loss per share as their impact would have been anti-dilutive:

	Year Ended December 31,
	2013		2012
Options to purchase common stock		3,511,000		625,000
Warrants		4,280,553		1,981,661
Restricted stock		122,666		122,666

12. COMMITMENTS AND CONTINGENCIES

Leases – Rent expense was approximately $0.3 million for the years ended December 31, 2013 and 2012, under the terms of the Company’s lease agreements. Minimum future lease payments are as follows at December 31, 2013:


2014	$	134,513
2015		97,600
2016		99,552
2017		101,543
2018		103,574
Thereafter		231,422
	$	768,204

Minimum future lease payments in the chart above include a new lease agreement executed in March 2014 for the Company’s principal executive office which replaced a previous lease for the Company’s former principal executive office.

Product Warranty – Changes in the product warranty accrual for the year ended December 31, 2013 and 2012 were as follows:

	Year Ended December 31,
	2013			2012
Product warranty liability at beginning of period	$	263,000		$	140,000
Additions to warranty accrual (including changes in estimates)		269,211			385,625
Warranty expenses during the period		(148,085	)		(262,625	)
Product warranty liability at end of period	$	384,126		$	263,000

Legal Proceedings – The Company is not currently subject to any material legal proceedings, nor, to its knowledge, is any material legal proceeding threatened against it. From time to time, the Company may be a party to certain legal proceedings, incidental to the normal course of business. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its financial condition or results of operations.

13. EQUITY

Common Stock – The holders of our common stock are entitled to one vote for each share standing in the holder’s name,and holders vote together as a single class on all matters requiring the vote of the stockholders. Common stock holders have no preemptive, subscription or redemption rights. Subject to law and the provisions of our Certificate of Incorporation, our Board of Directors may declare dividends on our stock, payable upon such dates as the Board of Directors may designate. No dividend may be paid on common stock unless all declared but unpaid dividends, if any, on the Preferred Stock have been paid. Under Section 510 of the New York Business Corporation Law (“NYBCL”), the net assets of the corporation upon declaration or distribution of a dividend must remain at least equal to the amount of the corporation’s stated capital.

As part of a restructuring of the board of directors of the Company, five members resigned in February 2012. As a result, the individuals forfeited 18,500 shares of unvested restricted stock, in aggregate.

In December 2012, the Company’s Chairman and his spouse purchased 214,286 shares of common stock in a private transaction with the Company at a price of $1.40 per share.

Stock-Based Awards —In July 2012, the Board of Directors adopted, subject to stockholder approval at the next stockholder meeting, the 2012 Stock Option and Incentive Plan (“the 2012 Plan”). If approved by the stockholders, 1,775,000 shares of common stock will be available for issuance upon the grant or exercise of awards under the 2012 Plan. The 2012 Plan has a ten-year term and provides flexibility to the Executive Compensation Committee to use various equity-based incentive awards, including stock options (both incentive and non-qualified options), stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance shares, dividend equivalent rights and cash-based awards, as compensation tools to motivate the Company’s workforce. The maximum number of shares of common stock to be issued under the 2012 Plan is 2,030,221, which includes an additional 255,221 shares of common stock available for issuance upon grant or exercise of awards. The additional shares was based on January 1, 2013 and each January 1 thereafter, a number of shares of common stock equal to 3 percent of the number of shares of common stock outstanding on the prior December 31. The shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without any issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2012 Plan are added back to the shares of common stock available for issuance under the 2012 Incentive Plan. As of December 31, 2013, there were options for the purchase of up to 1,770,500 shares outstanding under the 2012 Plan, leaving 259,721 shares reserved for future grants.

In June of 2010, the Company’s stockholders approved a Stock Option Plan (the 2010 Plan), pursuant to which options including incentive and nonqualified options for its common stock and shares of restricted stock may be granted to employees, directors and consultants of the Company. The 2010 Plan also allows for stock awards to be granted a right to receive shares of stock in the future. The Company reserved 2,000,000 common shares for the 2010 Plan and at December 31, 2012, there were 501,000 shares reserved for future grants and 1,480,500 stock options outstanding. Under the terms of the awards, stock-based awards generally have 10-year contractual terms, equity grants for employees generally vest based on three years of continuous service and equity grants for directors and consultants vest over their respective remaining term as of the date of grant. The Company does not capitalize any expense related to the stock option awards.

The Company also has options and restricted stock outstanding under a Stock Option Plan approved by stockholders during 2007 (the 2007 Plan) and options to purchase common shares outstanding under a Stock Option Plan approved by stockholders during 2000 (the 2000 Plan). Under the terms of the awards under these two plans, equity grants for employees generally vest based on three years of continuous service and equity grants for directors and consultants vest over their respective remaining term as of the date of grant. As of December 31, 2013, options to purchase common shares of 102,500 and 157,500 were outstanding under the 2007 Plan and the 2000 Plan, respectively, with an additional 137,500 shares of restricted stock outstanding under the 2007 Plan. As of December 31, 2013, no shares were reserved for future grants under the 2007 Plan or the 2000 Plan.

On September 30, 2012, certain employees and directors of the Company voluntarily forfeited an aggregate of 625,000 stock options with a weighted average exercise price of $7.48. In October 2012, the Company issued approximately 55,000 shares of common stock (at a value of $2.00 per share) in an equal exchange for approximately 234,000 common stock warrants. The value of the exchanged warrants was determined using the Black-Scholes pricing model, with an assumed common stock value of $2.00 per share.

The Company recognizes the expense related to stock option awards on a straight-line basis over the service period. Stock-based compensation expense recognized in the statement of operations is as follows:

	Year Ended December 31,
	2013		2012
Cost of revenue	$	8,293	$	13,698
General and administrative		184,539		979,547
Sales and marketing		31,663		88,282
Engineering, research and development		97,181		714,267
	$	321,676	$	1,795,794

A summary of option activity under the Plans and changes during the periods ended are presented below:


	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2012		2,201,774		$	5.78
Granted		317,500			2.00
Exercised		(161,400	)		0.13
Forfeited or expired		(1,732,874	)		6.51
Outstanding at December 31, 2012		625,000		$	3.32
Granted		2,919,500			1.01
Exercised		—			—
Forfeited or expired		(33,500	)		3.89

Outstanding at December 31, 2013		3,511,000		$	1.39	8.8 years	$	—

Vested or expected to vest at December 31, 2013		3,440,780		$	1.39	8.8 years	$	—

Exercisable at December 31, 2013		523,333		$	3.38	4.1 years	$	—

There were no stock options exercised during the year ended December 31, 2013. The total intrinsic value of stock options exercised during the year ended December 31, 2012 was approximately $0.2 million.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2013:


	Options Outstanding				Options Exercisable
Exercise Price ($)	Number of Options	Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price	Number of Options	Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price
1.00 – 1.41	2,918,500	9.7 years	$	1.01	—	—	$	—
2.00 - 2.50	315,000	4.5 years	$	2.00	251,666	4.4 years	$	2.00
4.00 - 4.30	220,000	3.1 years	$	4.09	220,000	3.1 years	$	4.09
6.58	40,000	6.5 years	$	6.58	40,000	6.5 years	$	6.58
8.60 - 8.88	17,500	7.5 years	$	8.66	11,667	7.5 years	$	8.66
	3,511,000				523,333

The weighted-average grant date fair value of options granted during the year ended December 31, 2013 and 2012 was $0.46 and $2.00, respectively. The following assumptions were used to estimate the grant date fair value of options granted using the Black-Scholes option pricing model.


	2013	2012
Risk free interest rate	0.31% - 1.86%	0.31% - 0.94%
Expected dividend yield	0%	0%
Expected term (in years)	2.5 – 6.5	2.5 – 6.5
Expected volatility	70%	70%
Pre-vesting forfeiture rate	2%	2%

As of December 31, 2013 there was $1.3 million of total unrecognized compensation cost related to stock option arrangements granted under the Company’s plans. As of December 31, 2013, the unrecognized cost is expected to be recognized over a weighted average period of 9.5 years.

The Company determines fair value of its restricted stock based on the common stock value on the date of grant. The following table summarizes the Company’s restricted stock activity:

	Number of			Weighted-Average
	Shares			Fair Value

Nonvested at January 1, 2012		191,166		$	8.16
Granted		—		$	—
Vested		(50,000	)	$	7.62
Forfeited		(18,500	)	$	8.41

Nonvested at December 31, 2012		122,666		$	8.34
Granted		—		$	—
Vested		—		$	—
Forfeited		—		$	—

Nonvested at December 31, 2013		122,666		$	8.34

There was no intrinsic value of nonvested restricted stock as of December 31, 2013 and 2012. At December 31, 2013 there was approximately $0.1 million of total unrecognized compensation cost related to restricted stock granted under the Plan. As of December 31, 2013, the unrecognized cost is expected to be recognized over a weighted average period of 1.2 years. As of December 31, 2013, the Company had 137,500 shares of restricted stock outstanding.

Warrants - At December 31, 2013, there were warrants to purchase up to 4,280,553 shares of the Company’s common stock outstanding at a weighted average exercise price of $3.17.

In September 2013, the Company issued to a financial advisor common stock warrants to purchase up to 2,125,000 shares of the Company’s common stock, at an exercise price of $1.00 per share. These warrants expire in February 2019. The estimated fair value was computed using the Black-Scholes option pricing model with the following assumptions: an expected term of 5.5 years; a risk-free interest rate of 1.55%; a dividend yield of zero; and expected volatility of 70%. A portion of the warrant’s estimated fair value of $0.4 million was charged to general and administrative expenses during the third quarter of 2013 at which time one-third of the warrants became exercisable and non-forfeitable, in accordance with Accounting Standards Codification (“ASC”) 505-50 “Equity-Based Payments to Non-Employees.” The remaining unvested two-thirds of the warrants were forfeited and returned to the Company in March 2014, when the Company terminated its engagement with the advisor. See Note 17 – Subsequent Events for further information..

In December, 2013 the Company issued to a public relations firm common stock warrants to purchase up to 42,500 shares of the Company’s common stock, at an exercise price of $1.00 per share. These warrants expire in August 2016. The estimated fair value was computed using the Black-Scholes option pricing model with the following assumptions: an expected term of 2.50 years; a risk-free interest rate of 0.58%; a dividend yield of zero; and expected volatility of 70%. A portion of the warrant’s estimated fair value of approximately $2,000 was charged to general and administrative expenses during the year ended December 31, 2013. The warrants vest monthly during the term of the contract which expires in August 2014 at which time the warrants became exercisable and non-forfeitable, in accordance with Accounting Standards Codification (“ASC”) 505-50 “Equity-Based Payments to Non-Employees.”

During 2013, the Company issued warrants to purchase 132,583 shares of common stock as a result of anti-dilution adjustments triggered by the issuances of shares of common stock and warrants. The value at the date of issuance of $2,943 was recorded to reflect these additional warrants.

In October 2013, the holder of the 2013 Term Loan agreed that contingent upon the closing of an offering of at least $6.0 million to convert the 2013 Term Loan into the Company’s common stock on the same terms as such shares are sold to other investors in the offering. In exchange for this recapitalization, upon such closing, the Company will issue to the holder of the 2013 Term Loan warrants to purchase 150,000 shares of the Company’s common stock at an exercise price equal to the higher of $1.00 per share or the price paid by the other investors in an offering.

Under the terms of various agreements, the Company has issued warrants for the purchase of common shares. Warrants are exercisable at the grant date and generally expire 5 to 10 years from the date of the grant.

Changes in the status of outstanding warrants are summarized as follows:

					Warrants
					Weighted-
					Average
	Warrants				Exercise Price

Outstanding at January 1, 2012		2,219,546		$	5.84
Issued		5,300		$	5.04
Exercised		—		$	—
Expired		(9,166	)	$	6.30
Conversion to Common Stock		(234,019	)	$	6.77

Outstanding at January 1, 2013		1,981,661		$	5.75
Issued		2,167,500		$	1.00
Exercised		—		$	—
Expired		(1,191	)	$	6.30
Anti-dilution additional warrants issued		132,583		$	6.69

Outstanding at December 31, 2013		4,280,553		$	3.17

The following table summarizes information about common stock warrants outstanding at December 31, 2013:

		Warrants Outstanding
Exercise Price ($)		Number of Warrants	Weighted Average Remaining Contractual Life		Weighted Average Exercise Price
1.00		2,167,500	5.1 years		$	1.00
2.12 – 2.50		86,205	1.6 years	⁽¹⁾	$	2.30
4.00 – 5.04		1,384,911	2.9 years	⁽²⁾	$	4.98
6.30 – 6.50	⁽³⁾	500,048	1.9 years		$	6.50
7.12 – 9.22	⁽⁴⁾	141,889	1.9 years		$	7.35
		4,280,553

(1)

Weighted average remaining contractual life excludes 40,000 warrants with no expiration date.

(2)

Weighted average remaining contractual life excludes 35,261 warrants with no expiration date.

(3)

Includes 104,527 warrants issued as a result of anti-dilution adjustments triggered by the issuances of shares of common stock or warrants. This adjustment changed the range of exercise price from $6.30 – $8.22 to $6.30 - $6.50 and the weighted average exercise price from $8.22 to $6.50.

(4)

Includes 28,056 warrants issued as a result of anti-dilution adjustments triggered by the issuances of shares of common stock or warrants. This adjustment changed the range of exercise price from $9.04 – $10.14 to $7.12 - $9.22 and the weighted average exercise price from $9.17 to $7.35.

At the measurement date, the Company estimated the fair value of each warrant using the Black-Scholes option pricing model. The following assumptions were used:


	2013	2012
Risk free interest rate	0.58% - 1.55%	0.25% - 0.36%
Expected dividend yield	0%	0%
Expected term (in years)	2.5 – 5.5	2.0 - 3.0
Expected volatility	70%	70%

14. RETIREMENT PLAN

The Company sponsors a defined contribution plan. All contributions are at the discretion of the Company. No Company contributions were made during the years ended 2013 and 2012.

15. SEGMENT INFORMATION

The Company operates in one reportable segment—the research, development and sale of medical devices to diagnose skin cancer. The Company’s chief operating decision maker reviews financial information for the Company as a whole for purposes of allocating resources and evaluating financial performance. Substantially all long-lived assets of the Company are in the United States. Sales for each significant geographical area are as follows:

	Year Ended December 31,
	2013					2012
	Product Sales		Percent			Product Sales		Percent
	(in millions)					(in millions)

North America	$	0.9		27	%	$	0.5		23	%
Europe		1.3		41	%		1.0		39	%
Asia		0.7		23	%		0.6		25	%
Latin America		0.3		7	%		0.2		8	%
Australia		0.1		2	%		0.1		5	%
Total	$	3.3		100	%	$	2.4		100	%

16. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

A summary of selected quarterly financial information is as follows:

	Quarter Ended
	March 31,			June 30,			September 30,			December 31,
	2013			2013			2013			2013
Revenue	$	1,058,610		$	515,814		$	691,732		$	1,075,097
Cost of revenue		748,397			583,544			596,800			758,656
General and administrative		450,188			430,773			818,462			605,841
Sales and marketing		338,789			345,713			547,802			437,737
Engineering, research and development		454,825			340,023			356,594			379,803
Loss from Operations		(933,589	)		(1,184,239	)		(1,627,926	)		(1,106,940	)
Net Loss		(1,052,795	)		(1,272,027	)		(1,855,044	)		(1,299,385	)
Net loss per common share	$	(0.13	)	$	(0.15	)	$	(0.22	)	$	(0.16	)

	Quarter Ended
	March 31,			June 30,			September 30,			December 31,
	2012			2012			2012			2012
Revenue	$	317,809		$	571,749		$	413,509		$	1,131,518
Cost of revenue		495,297			611,649			644,619			1,124,568
General and administrative		1,388,400			1,176,185			1,001,123			(350,691	)
Sales and marketing		709,937			332,097			439,808			417,239
Engineering, research and development		776,897			1,103,691			1,211,142			919,262
Loss from Operations		(3,052,722	)		(2,651,873	)		(2,883,183	)		(978,861	)
Net Loss		(3,380,644	)		(2,338,538	)		(3,059,137	)		(1,042,306	)
Net loss per common share	$	(0.43	)	$	(0.30	)	$	(0.38	)	$	(0.13	)

17. SUBSEQUENT EVENTS

The Company has evaluated subsequent events after the balance sheet date through the date of filing of these financial statements with the Securities and Exchange Commission for appropriate accounting and disclosure and concluded that there were no subsequent events, other than that described below, requiring adjustment or disclosure in these financial statements.

In March 2014, the Company terminated its engagement with its financial advisor, 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 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.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2013. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of December 31, 2013 are not fully effective in providing reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosures. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system was designed to, in general, provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

In connection with the filing of our Annual Report on Form 10-K for the period ended December 31, 2013, the Company’s management, under the supervision of and with the participation of our chief executive officer and chief financial officer evaluated the effectiveness of our internal control over financial reporting as of December 31, 2013. Based on that evaluation, management concluded that our internal control over financial reporting was not fully effective. The senior management team and other key personnel perform monitoring and other key control activities to ensure the accuracy of the Company’s filings; however, these procedures are not fully documented or tested in a manner that supports a conclusion that these procedures are designed and operating effectively.

The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation, our management, including our chief executive officer and chief financial officer, concluded that our internal control environment was not fully effective. The senior management team and other key personnel perform monitoring and other key control activities to ensure the accuracy of the Company’s filings; however, these procedures are not fully documented or tested in a manner that supports a conclusion that these procedures are designed and operating effectively.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over our financial reporting as of December 31, 2013, the Company determined that our internal control environment was not fully effective due to the limited documentation of significant accounting policies, internal controls, management’s estimates and judgments and assessment of recent accounting pronouncements. Due to the size of the accounting department and the lack of financial resources of the company, the opportunities to document and test the internal control environment has been limited.

Management intends to remediate these weaknesses as soon as practicable after the Company’s financial position improves.

Changes in Internal Control Over Financial Reporting

As required by Rule 13a-15(f) of the Exchange Act, our management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our principal executive officer and principal financial officer concluded no such changes during the last fiscal quarter materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.

Other Information

On March 10, 2014, we entered into a Termination Agreement to terminate our engagement with our financial advisor, H.C. Wainwright. As a result of this termination, H.C. Wainwright forfeited and returned to us the unvested two-thirds of the warrant to purchase 2,125,000 shares of our common stock.

On March 10, 2014, we entered into a Letter Agreement to engage 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 funding, we have 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, we have 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, we will issue 100,000 shares of our 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 our directors, employees, stockholders or friends.

The description of terms and conditions of the agreement set forth above do not purport to be complete and are qualified in their entirety by the full text of the agreements which are attached hereto as Exhibits 10.28 and 10.29 and incorporated herein by reference.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The information required by this Item is incorporated by reference from the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the end of the Company’s fiscal year ended December 31, 2013 (the “Proxy Statement”).

Item 11.

Executive Compensation

The Information required by this Item is incorporated by reference from the Proxy Statement.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The Information required by this Item is incorporated by reference from the Proxy Statement.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

The Information required by this Item is incorporated by reference from the Proxy Statement.

Item 14.

Principal Accountant Fees and Services

The Information required by this Item is incorporated by reference from the Proxy Statement.

PART IV

Item 15.

Exhibits, Financial Statement Schedules


(a)(1)	The following Financial Statements, Notes thereto and Reports of Independent Registered Public Accounting Firms are set forth under Item 8:

	Report of Independent Registered Public Accounting Firm
	Balance Sheets
	Statements of Operations
	Statements of Stockholders’ Deficit
	Statements of Cash Flows
	Notes to Financial Statements

(a)(2)	Financial Statement Schedules

	All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or notes thereto.

(a)(3)	The following is a complete list of Exhibits filed or incorporated by reference as part of this report:

Exhibit No.	Description of Document

3.1	Restated Certificate of Incorporation of Lucid Inc., as filed with the New York Department of State on May 6, 2011 (Incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

3.2	Certificate of Amendment to Certificate of Incorporation of Lucid Inc., as filed with the New York Department of State on December 6, 2011 (Incorporated by reference to Exhibit 3.5 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

3.3	Amended and Restated Bylaws of Lucid, Inc., as adopted December 14, 2010 (Incorporated by reference to Exhibit 3.3 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.1	Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.2	Warrant to Purchase Convertible Preferred Stock, issued to the New York State Foundation for Science, Technology, and Innovation—Small Business Technology Investment Fund, as successor in interest by statute to New York Urban Development Corporation d/b/a Empire State Development—Small Business Technology Investment Fund, on February 1, 2007, as modified by the Second Modification and Extension Agreement, dated December 31, 2008 (Incorporated by reference to Exhibit 4.8 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.3	Form of Amended and Restated Common Stock Purchase Warrant—2007 (Incorporated by reference to Exhibit 4.9 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.4	Form of 2008 Common Stock Warrant (Incorporated by reference to Exhibit 4.10 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.5	Form of 2009 Common Stock Warrant (Incorporated by reference to Exhibit 4.11 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.6	Form of 2010/2011 Common Stock Warrant (Incorporated by reference to Exhibit 4.15 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.7	Common Stock Warrant Issued to Maxim Partners, LLC on November 15, 2010 (Incorporated by reference to Exhibit 4.16 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.8	Form of Stock Option Agreement under the Lucid, Inc. 2010 Long-Term Equity Incentive Plan (Incorporated by reference to Exhibit 4.18 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.9	Form of April 2007 Fixed Quantity Common Stock Warrant (Incorporated by reference to Exhibit 4.19 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.10	Form of August 2008 Fixed Price Common Stock Warrant (Incorporated by reference to Exhibit 4.20 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.11	Warrant to Purchase Stock, issued to Square 1 Bank on July 20, 2011 (Incorporated by reference to Exhibit 4.21 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.12	Common Stock Warrant issued to Maxim Partners, LLC on July 27, 2011 (Incorporated by reference to Exhibit 4.26 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.13	Form of November 2008 Fixed Price Common Stock Warrant (Incorporated by reference to Exhibit 4.27 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.14	Form of Warrant included in the Units (Incorporated by reference to Exhibit 4.29 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.15	Warrant Agreement, dated December 30, 2011, between Lucid, Inc. and American Stock Transfer & Trust Company, LLC, as warrant agent (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the SEC on January 4, 2012 (File No. 001-35379))

4.16	Form of Common Stock Purchase Warrant (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K/A filed with the SEC on October 3, 2013 (File No. 001-35379))

†10.1	Lucid, Inc. 2010 Long-Term Equity Incentive Plan (Incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.2	Lucid, Inc. 2007 Long-Term Equity Incentive Plan (Incorporated by reference to Exhibit 10.2 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.3	Lucid, Inc. Year 2000 Stock Option Plan (Incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.4	Lucid, Inc. 2012 Stock Option and Incentive Plan (Incorporated by reference to Exhibit 10.39 of the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2013 (File No. 001-35379))

10.5	Colocation License Agreement, by and between the Company and PAETEC Communications, Inc., dated September 4, 2007 (Incorporated by reference to Exhibit 10.4 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.6	Joint Venture Agreement, by and between the Company and Mavig Austria GmbH, an Austrian limited liability company, dated October 2006 (Incorporated by reference to Exhibit 10.5 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.7	Supply Agreement, by and between the Company and Mavig Austria GmbH, an Austrian limited liability company, dated December 2006, and letter amendment thereto, dated May 25, 2011 (Incorporated by reference to Exhibit 10.6 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.8	Form of Indemnification Agreement by and between the Company and its directors and executive officers (Incorporated by reference to Exhibit 10.8 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.9	Employment Agreement between the Company and Mr. Hone, dated October 1, 2012 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K/A filed with the SEC on October 5, 2012 (File No. 001-35379))

†10.10	Employment Agreement between the Company and Mr. Fox, dated January 11, 2011 (Incorporated by reference to Exhibit 10.23 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.11	Employment Agreement between the Company and Mr. Pulsifer, dated October 1, 2012 (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K/A filed with the SEC on October 5, 2012 (File No. 001-35379))

10.12	Form of Lucid, Inc. Employee Invention, Copyright, Proprietary Information and Conflicts of Interest Agreement (Incorporated by reference to Exhibit 10.26 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.13	Distributor Agreement, dated September 1, 2004, by and between the Company and Integral Corporation (Incorporated by reference to Exhibit 10.27 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.14	Distributor Agreement, dated February 8, 2008, by and between the Company and ConBio (China) Co., Ltd. (Incorporated by reference to Exhibit 10.28 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.15	Promissory Note, given by the Company in favor of Dale Crane, dated December 31, 2010 (Incorporated by reference to Exhibit 10.32 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.16	Agreement of Lease, dated August 18, 2011, by and between the Company, as Tenant, and 95 Methodist Hill Drive LLC, as Landlord (Incorporated by reference to Exhibit 10.33 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.17	Separation Agreement, Including Release and Waiver of Claims, dated January 30, 2012, between Lucid, Inc. and Marcy Davis-McHugh (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on February 3, 2012 (File No. 001-35379))

10.18	Secured Demand Promissory Note, dated as of May 7, 2012, issued by Lucid, Inc. to Northeast LCD Capital, LLC (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on May 11, 2012 (File No. 001-35379))

10.19	Security Agreement, dated as of May 7, 2012, by and between Lucid, Inc. and Northeast LCD Capital, LLC (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on May 11, 2012 (File No. 001-35379))

10.20	Guaranty, dated as of May 7, 2012, by L. Michael Hone in favor of Northeast LCD Capital, LLC (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on May 11, 2012 (File No. 001-35379))

10.21	Loan and Security Agreement, by and between the Company and Northeast LCD Capital, LLC dated July 5, 2012 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 11, 2012 (File No. 001-35379))

10.22	Subsequent Term Note, by and between the Company and Northeast LCD Capital, LLC dated May 20, 2013 (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 20, 2013 (File No. 001-35379))

10.23	Intercreditor and Participation Agreement, by and between the Company and Northeast LCD Capital, LLC dated May 20, 2013 (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 20, 2013 (File No. 001-35379))

10.24	Letter agreement dated as of October 7, 2013 by and between Caliber I.D. and Northeast LCD Capital, LLC (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 11, 2013 (File No. 001-35379))

†10.25	Separation Agreement by and between the Company and Martin Joyce, dated July 9, 2011 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2012 (File No. 001-35379))

†10.26	Resignation Agreement by and between the Company and Jay Eastman, effective September 30, 2012 (Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (File No. 001-35379))

10.27	Letter Agreement dated as of August 22, 2013 by and between the Company and H.C. Wainwright & Co., LLC (Incorporated by reference to Exhibit 1.1 of the Company’s Current Report on Form 8-K filed on August 27, 2013 (File No. 001-35379))

*10.28	Termination Agreement dated as of March 10, 2014 by and between the Company and H.C. Wainwright & Co., LLC

*10.29	Letter Agreement dated as of March 10, 2014 by and between the Company and R.F. Lafferty & Co., Inc.

14.1	Code of Ethics (Incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 5, 2012 (File No. 001-35379))

16.1	Letter from Deloitte & Touche LLP (Incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 30, 2012 (File No. 001-35379))

*23.1	Consent of Independent Registered Public Accounting Firm

24.1	Power of Attorney (included in signature page)

*31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


*31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

**32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

**32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

††101	The following material from Lucid Inc.’s Annual Report on Form 10-K, for the year ended December 31, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Balance Sheets; (ii) the Statements of Operations; (iii) the Statements of Stockholders’ Deficit; (iv) the Statements of Cash Flows; and (v) the Notes to Financial Statements.

Filed herewith.

Furnished herewith.

†

Management contract or compensatory plan or arrangement.

††

XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 12, 2014.


	LUCID, INC.

	By:	/s/ L. Michael Hone
		Name: L. Michael Hone
		Title: Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints each of L. Michael Hone and Richard J. Pulsifer such person’s true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that any said attorney-in-fact and agent, or any substitute or substitutes of any of them, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated.


SIGNATURE	TITLE	DATE

/s/ L. Michael Hone	Chief Executive Officer	March 12, 2014
L. Michael Hone	(Principal Executive Officer)

/s/ Richard J. Pulsifer	Chief Financial Officer	March 12, 2014
Richard J. Pulsifer	(Principal Financial and
	Accounting Officer)

/s/ William J. Shea	Chairman of the Board of Directors	March 12, 2014
William J. Shea

/s/ Brian Carty	Director	March 12, 2014
Brian Carty

/s/ Kevin M. Cronin	Director	March 12, 2014
Kevin M. Cronin

/s/ Rocco Maggiotto	Director	March 12, 2014
Rocco Maggiotto

/s/ Ruben King-Shaw, Jr.	Director	March 12, 2014
Ruben King-Shaw, Jr.

/s/ Daniel M. Siegel, M.D.	Director	March 12, 2014
Daniel M. Siegel, M.D.

/s/ Paul Stuka	Director	March 12, 2014
Paul Stuka

EXHIBIT INDEX

Exhibit No.		Description of Document

3.1		Restated Certificate of Incorporation of Lucid Inc., as filed with the New York Department of State on May 6, 2011 (Incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

3.2		Certificate of Amendment to Certificate of Incorporation of Lucid Inc., as filed with the New York Department of State on December 6, 2011 (Incorporated by reference to Exhibit 3.5 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

3.3		Amended and Restated Bylaws of Lucid, Inc., as adopted December 14, 2010 (Incorporated by reference to Exhibit 3.3 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.1		Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.2		Warrant to Purchase Convertible Preferred Stock, issued to the New York State Foundation for Science, Technology, and Innovation—Small Business Technology Investment Fund, as successor in interest by statute to New York Urban Development Corporation d/b/a Empire State Development—Small Business Technology Investment Fund, on February 1, 2007, as modified by the Second Modification and Extension Agreement, dated December 31, 2008 (Incorporated by reference to Exhibit 4.8 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.3		Form of Amended and Restated Common Stock Purchase Warrant—2007 (Incorporated by reference to Exhibit 4.9 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.4		Form of 2008 Common Stock Warrant (Incorporated by reference to Exhibit 4.10 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.5		Form of 2009 Common Stock Warrant (Incorporated by reference to Exhibit 4.11 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.6		Form of 2010/2011 Common Stock Warrant (Incorporated by reference to Exhibit 4.15 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.7		Common Stock Warrant Issued to Maxim Partners, LLC on November 15, 2010 (Incorporated by reference to Exhibit 4.16 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.8		Form of Stock Option Agreement under the Lucid, Inc. 2010 Long-Term Equity Incentive Plan (Incorporated by reference to Exhibit 4.18 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.9		Form of April 2007 Fixed Quantity Common Stock Warrant (Incorporated by reference to Exhibit 4.19 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.10		Form of August 2008 Fixed Price Common Stock Warrant (Incorporated by reference to Exhibit 4.20 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.11		Warrant to Purchase Stock, issued to Square 1 Bank on July 20, 2011 (Incorporated by reference to Exhibit 4.21 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.12		Common Stock Warrant issued to Maxim Partners, LLC on July 27, 2011 (Incorporated by reference to Exhibit 4.26 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.13		Form of November 2008 Fixed Price Common Stock Warrant (Incorporated by reference to Exhibit 4.27 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.14		Form of Warrant included in the Units (Incorporated by reference to Exhibit 4.29 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

4.15		Warrant Agreement, dated December 30, 2011, between Lucid, Inc. and American Stock Transfer & Trust Company, LLC, as warrant agent (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the SEC on January 4, 2012 (File No. 001-35379))

4.16		Form of Common Stock Purchase Warrant (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K/A filed with the SEC on October 3, 2013 (File No. 001-35379))

†10.1		Lucid, Inc. 2010 Long-Term Equity Incentive Plan (Incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.2		Lucid, Inc. 2007 Long-Term Equity Incentive Plan (Incorporated by reference to Exhibit 10.2 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.3		Lucid, Inc. Year 2000 Stock Option Plan (Incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.4		Lucid, Inc. 2012 Stock Option and Incentive Plan (Incorporated by reference to Exhibit 10.39 of the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2013 (File No. 001-35379))

10.5		Colocation License Agreement, by and between the Company and PAETEC Communications, Inc., dated September 4, 2007 (Incorporated by reference to Exhibit 10.4 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.6		Joint Venture Agreement, by and between the Company and Mavig Austria GmbH, an Austrian limited liability company, dated October 2006 (Incorporated by reference to Exhibit 10.5 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.7		Supply Agreement, by and between the Company and Mavig Austria GmbH, an Austrian limited liability company, dated December 2006, and letter amendment thereto, dated May 25, 2011 (Incorporated by reference to Exhibit 10.6 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.8		Form of Indemnification Agreement by and between the Company and its directors and executive officers (Incorporated by reference to Exhibit 10.8 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.9		Employment Agreement between the Company and Mr. Hone, dated October 1, 2012 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K/A filed with the SEC on October 5, 2012 (File No. 001-35379))

†10.10		Employment Agreement between the Company and Mr. Fox, dated January 11, 2011 (Incorporated by reference to Exhibit 10.23 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.11		Employment Agreement between the Company and Mr. Pulsifer, dated October 1, 2012 (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K/A filed with the SEC on October 5, 2012 (File No. 001-35379))

10.12		Form of Lucid, Inc. Employee Invention, Copyright, Proprietary Information and Conflicts of Interest Agreement (Incorporated by reference to Exhibit 10.26 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.13		Distributor Agreement, dated September 1, 2004, by and between the Company and Integral Corporation (Incorporated by reference to Exhibit 10.27 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.14		Distributor Agreement, dated February 8, 2008, by and between the Company and ConBio (China) Co., Ltd. (Incorporated by reference to Exhibit 10.28 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.15		Promissory Note, given by the Company in favor of Dale Crane, dated December 31, 2010 (Incorporated by reference to Exhibit 10.32 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

10.16		Agreement of Lease, dated August 18, 2011, by and between the Company, as Tenant, and 95 Methodist Hill Drive LLC, as Landlord (Incorporated by reference to Exhibit 10.33 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-173555))

†10.17		Separation Agreement, Including Release and Waiver of Claims, dated January 30, 2012, between Lucid, Inc. and Marcy Davis-McHugh (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on February 3, 2012 (File No. 001-35379))

10.18		Secured Demand Promissory Note, dated as of May 7, 2012, issued by Lucid, Inc. to Northeast LCD Capital, LLC (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on May 11, 2012 (File No. 001-35379))

10.19		Security Agreement, dated as of May 7, 2012, by and between Lucid, Inc. and Northeast LCD Capital, LLC (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on May 11, 2012 (File No. 001-35379))

10.20		Guaranty, dated as of May 7, 2012, by L. Michael Hone in favor of Northeast LCD Capital, LLC (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on May 11, 2012 (File No. 001-35379))

10.21		Loan and Security Agreement, by and between the Company and Northeast LCD Capital, LLC dated July 5, 2012 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 11, 2012 (File No. 001-35379))

10.22		Subsequent Term Note, by and between the Company and Northeast LCD Capital, LLC dated May 20, 2013 (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 20, 2013 (File No. 001-35379))

10.23		Intercreditor and Participation Agreement, by and between the Company and Northeast LCD Capital, LLC dated May 20, 2013 (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 20, 2013 (File No. 001-35379))

10.24		Letter agreement dated as of October 7, 2013 by and between Caliber I.D. and Northeast LCD Capital, LLC (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 11, 2013 (File No. 001-35379))

†10.25		Separation Agreement by and between the Company and Martin Joyce, dated July 9, 2011 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2012 (File No. 001-35379))

†10.26		Resignation Agreement by and between the Company and Jay Eastman, effective September 30, 2012 (Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (File No. 001-35379))

10.27		Letter Agreement dated as of August 22, 2013 by and between the Company and H.C. Wainwright & Co., LLC (Incorporated by reference to Exhibit 1.1 of the Company’s Current Report on Form 8-K filed on August 27, 2013 (File No. 001-35379))

*10.28		Termination Agreement dated as of March 10, 2014 by and between the Company and H.C. Wainwright & Co., LLC

*10.29		Letter Agreement dated as of March 10, 2014 by and between the Company and R.F. Lafferty & Co., Inc.

14.1		Code of Ethics (Incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 5, 2012 (File No. 001-35379))

16.1		Letter from Deloitte & Touche LLP (Incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 30, 2012 (File No. 001-35379))

*23.1		Consent of Independent Registered Public Accounting Firm

24.1		Power of Attorney (included in signature page)

*31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

**32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

**32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

††101		The following material from Lucid Inc.’s Annual Report on Form 10-K, for the year ended December 31, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Balance Sheets; (ii) the Statements of Operations; (iii) the Statements of Stockholders’ Deficit; (iv) the Statements of Cash Flows; and (v) the Notes to Financial Statements.

Filed herewith.

Furnished herewith.

†

Management contract or compensatory plan or arrangement.

††

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LCDX Caliber Imaging and Diagnostics Inc (CE)