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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9341
ICAD, INC.
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(Exact name of registrant as specified in its charter)
Delaware 02-0377419
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4 Townsend West, Suite 17, Nashua, NH 03063
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(603) 882-5200
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
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 requirement for the past 90 days. YES [X] NO [ ].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act) YES [ ] NO [X].
As of the close of business on August 11, 2003 there were 26,964,448
shares outstanding of the issuer's Common Stock, $.01 par value.
ICAD, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30, 2003
(unaudited) and December 31, 2002 4
Consolidated Statements of Operations for the
three and six month periods ended June 30, 2003
and 2002 (unaudited) 5
Consolidated Statements of Cash Flows for the six
month periods ended June 30, 2003 and 2002 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-10
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
Item 3 Quantitative and Qualitative Disclosures about Market Risk 16
Item 4 Controls and Procedures 16
PART II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
3
ICAD, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 DECEMBER 31, 2002
--------------------- ---------------------
ASSETS (unaudited) (audited)
Current assets:
Cash and equivalents $ 501,648 $ 1,091,029
Trade accounts receivable, net of allowance for doubtful
accounts of $75,500 in 2003 and $40,000 in 2002 1,171,940 1,550,167
Inventory 356,490 390,349
Prepaid and other 178,202 85,120
------------ ------------
Total current assets 2,208,280 3,116,665
------------ ------------
Property and equipment:
Equipment 892,472 840,410
Leasehold improvements 19,175 8,051
Furniture and fixtures 35,569 22,271
------------ ------------
947,216 870,732
Less accumulated depreciation and amortization 634,851 579,545
------------ ------------
Net property and equipment 312,365 291,187
------------ ------------
Other assets:
Patents 49,286 --
Technology intangible 3,611,520 3,740,553
Distribution agreement 1,461,028 1,513,228
Goodwill 17,415,723 17,415,723
------------ ------------
Total other assets 22,537,557 22,669,504
------------ ------------
Total assets $ 25,058,202 $ 26,077,356
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,498,173 $ 2,232,262
Accrued interest 236,432 229,078
Accrued expenses 1,095,514 1,776,824
Convertible subordinated debentures 10,000 10,000
Current maurities of notes payable 66,680 65,526
------------ ------------
Total current liabilities 3,906,799 4,313,690
Loans payable to related party 830,000 200,000
Notes payable, less current maturities 75,045 108,390
------------ ------------
Total liabilities 4,811,844 4,622,080
------------ ------------
Stockholders' equity:
Convertible preferred stock, $.01 par value:
authorized 1,000,000 shares; issued and outstanding
8,550 in 2003 and 2002, with the aggregated
liquidation value of $2,115,000 in 2002 and 2003,
plus 7% annual dividend 86 86
Common stock, $ .01 par value: authorized
50,000,000 shares; issued 26,487,324 in 2003
and 26,418,124 shares in 2002; outstanding
26,419,448 in 2003 and 26,350,248 share in 2002 264,873 264,181
Additional paid-in capital 85,828,459 85,829,483
Accumulated deficit (64,896,796) (63,688,210)
Treasury stock, at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Total stockholders' equity 20,246,358 21,455,276
------------ ------------
Total liabilities and stockholders' equity $ 25,058,202 $ 26,077,356
============ ============
See accompanying notes to consolidated financial statements.
4
ICAD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS SIX MONTHS
JUNE 30, JUNE 30,
-------------------------------- ---------------------------------
2003 2002 2003 2002
Sales $ 1,337,517 $ 776,600 $ 3,551,529 $ 1,552,233
Cost of Sales 592,583 3,442,347 1,502,168 4,037,759
------------ ------------ ------------ ------------
Gross Margin 744,934 (2,665,747) 2,049,361 (2,485,526)
------------ ------------ ------------ ------------
Operating expenses:
Engineering and product development 609,545 337,139 1,193,798 526,895
General and administrative 1,104,063 4,059,232 1,500,295 4,284,587
Marketing and sales 306,992 287,315 546,704 554,395
------------ ------------ ------------ ------------
Total operating expenses 2,020,600 4,683,686 3,240,797 5,365,877
------------ ------------ ------------ ------------
Loss from operations (1,275,666) (7,349,433) (1,191,436) (7,851,403)
Interest expense - net 9,478 10,077 17,150 29,229
------------ ------------ ------------ ------------
Net loss $ (1,285,144) $ (7,359,510) $ (1,208,586) $ (7,880,632)
Preferred dividend 36,912 36,911 73,417 73,416
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (1,322,056) $ (7,396,421) $ (1,282,003) $ (7,954,048)
============ ============ ============ ============
Net loss per share
Basic and diluted $ (0.05) $ (0.47) $ (0.05) $ (0.51)
Weighted average number of shares used
in computing loss per share
Basic and diluted 26,378,729 15,889,910 26,364,567 15,572,432
See accompanying notes to consolidated financial statements.
5
ICAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS SIX MONTHS
JUNE 30, 2003 JUNE 30,2002
----------------- -----------------
Cash flows from operating activities:
Net loss $ (1,208,586) $ (7,880,632)
------------ ------------
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation 55,306 82,238
Amortization 181,947 64,837
Loss on disposal of assets -- 417,005
Compensation expense relative to issue of
stock at merger -- 2,800,000
Changes in operating assets and liabilities, net
of effects from acquisition of ISSI:
Accounts receivable 378,227 469,500
Inventory 33,859 2,163,165
Prepaid and other (93,082) 606
Accounts payable 265,911 858,879
Accrued expenses (747,373) 589,596
------------ ------------
Total adjustments 74,795 7,445,826
------------ ------------
Net cash used for operating activities (1,133,791) (434,806)
------------ ------------
Cash flows from investing activities:
Additions to patents, software development and other (50,000) --
Additions to property and equipment (76,484) (56,103)
Acquisition of ISSI, net of cash acquired -- 2,202,040
------------ ------------
Net cash provided by (used for) investing activities (126,484) 2,145,937
------------ ------------
Cash flows from financing activities:
Issuance of common stock for cash 73,085 80,032
Proceeds of convertible note payable to principal
stockholders 630,000 750,000
Payment of demand note payable to principal
stockholders -- (500,000)
Payment of note payable (32,191) (30,022)
------------ ------------
Net cash provided by financing activities 670,894 300,010
------------ ------------
Increase (decrease) in cash and equivalents (589,381) 2,011,141
Cash and equivalents, beginning of period 1,091,029 495,360
------------ ------------
Cash and equivalents, end of period $ 501,648 $ 2,506,501
============ ============
Supplemental disclosure of non-cash items from
investing and financing activities:
Conversion of loan to related party into
Common Stock $ -- $ 500,000
============ ============
Accrued dividends on convertible preferred stock $ 73,417 $ 73,416
============ ============
Fair market value of icad common stock and common
stock options issued to acquired capital stock of ISSI $ -- $ 27,673,500
============ ============
Net tangible assets of ISSI acquired, excluding cash
acquired of $2,202,040 $ -- $ 406,433
============ ============
Fair market value of indentifiable intangible assets
acquired from ISSI $ -- $ 5,437,000
============ ============
See accompanying notes to consolidated financial statements.
6
ICAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2003
(1) ACCOUNTING POLICIES
In the opinion of management all adjustments and accruals (consisting
only of normal recurring adjustments), which are necessary for a fair
presentation of operating results are reflected in the accompanying
consolidated financial statements. Reference should be made to iCAD,
Inc.'s ("iCAD" or "Company") Annual Report on Form 10-K for the year
ended December 31, 2002 for a summary of significant accounting
policies. Interim period amounts are not necessarily indicative of the
results of operations for the full fiscal year.
(2) LOAN PAYABLE TO RELATED PARTY
The Company has a Revolving Loan and Security Agreement (the "Loan
Agreement") with Mr. Robert Howard, Chairman of the Board of Directors
of the Company, under which Mr. Howard has agreed to advance funds, or
to provide guarantees of advances made by third parties in an amount up
to $3,000,000. Outstanding advances are collateralized by substantially
all of the assets of the Company and bear interest at prime interest
rate plus 2%. Mr. Howard is entitled to convert outstanding advances
made by him under the Loan Agreement into shares of the Company's
common stock at any time based on the outstanding closing market price
of the Company's common stock at the lesser of the market price at the
time each advance is made or at the time of conversion. During the
second quarter of 2003 the Company borrowed $630,000 pursuant to the
Loan Agreement. At June 30, 2003, $830,000 was outstanding under the
Loan Agreement and $2,170,000 was available for future borrowings.
(3) LITIGATION
The Company has been dismissed from a complaint filed against the
Company in the United States District Court for the Eastern District of
Texas, entitled The Massachusetts Institute of Technology and
Electronics for Imaging, Inc. v. Abacus Software Inc. et al., Case No.
501CV344, The plaintiff claimed initially that the Company had
infringed a United States patent alleged to cover color reproduction
system technology through sale of certain Company products to customers
in the graphic arts/prepress and photographic markets. The Company has
no liability in this matter, and anticipates no further legal expenses
will be incurred with respect to this litigation. As a result, general
and administrative expenses incurred during the first quarter of 2003
were reduced by the reversal of the accrued settlement cost in the
amount of $383,000.
7
ICAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2003
(3) LITIGATION (continued)
On June 3, 2002, Intelligent Systems Software, Inc. ("ISSI") was sued
in United States District Court for the District of Delaware by R2
Technology, Inc. and Shih-Ping Wang. The lawsuit alleges that ISSI's
MammoReader device infringes certain patents owned by R2 Technology,
Inc. The complaint requests treble damages, but does not specify the
amount of damages sought. The complaint also seeks to enjoin ISSI from
further infringement. On July 11, 2002, subsequent to the acquisition
of ISSI by the Company, the plaintiffs amended their complaint to add
the Company and its subsidiary ISSI Acquisition Corp. as additional
parties. The Company believes the lawsuit is without merit and intends
to vigorously defend itself. The Company filed an initial answer to the
lawsuit, denying all claims and asserting a counterclaim challenging
the validity of the patents in question.
In patent litigation of this type, each party proposes "constructions"
or meanings for disputed terms of the patents-in-suit and the Court
"construes" or decides the meaning of the terms in dispute. R2
Technology, Inc. had proposed a set of generally broad definitions to
the Court, while the Company proposed more narrow constructions drawn
directly, in its view, from the patent specifications and prosecution
histories. Following briefing and a hearing, the Court entered an order
on April 30, 2003, adopting R2 Technology Inc.'s constructions. The
Company believes the constructions adopted by the Court could provide
advantages and disadvantages to each party on the issues of
infringement and invalidity as the litigation proceeds. A jury trial
has been scheduled for October of 2003.
(4) STOCK-BASED COMPENSATION
The Company accounts for its stock based compensation plans in
accordance with the provisions of APB Opinion 25, "Accounting for Stock
Issued to Employees," and complies with the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". Under APB Opinion 25, when the exercise price of the
Company's employee stock options equals the market price of the
exercise price of the underlying stock on the date of grant, no
compensation cost is recognized.
8
ICAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2003
(4) STOCK-BASED COMPENSATION (continued)
The Company estimates the fair value of each granting of options at the
grant date using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2003: no
dividends paid; expected volatility of 79.7%; risk-free interest rate
of 2.34% and 2.91% and expected live of 4 and 5 years. The
weighted-average assumptions used for grants in 2002 were: no dividends
paid; expected volatility of 78.3%; risk-free interest rate of 2.01%,
3.37% and 4.86% and expected live of 1 to 9 years.
Had compensation cost for the Company's option plans been determined
using the fair value method at the grant dates, the effect on the
Company's net loss and loss per share for the three and six month
periods ended June 30, 2003 and 2002 would have been as follows:
Three Months Six Months
June 30, June 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
Net loss available to
common stockholders as reported $(1,322,056) $(7,396,421) $(1,282,003) $(7,954,048)
Deduct: Total stock-based
employee compensation
determined under fair value
method for all awards, net
of related tax effects (92,780) (858,401) (162,403) (899,173)
Pro forma net loss available to
common stockholders $(1,414,836) $(8,254,822) $(1,444,406) $(8,853,221)
Basic and diluted loss per share
As reported $ (.05) $ (.47) $ (.05) $ (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma $ (.05) $ (.52) $ (.05) $ (.57)
- ------------------------------------------------------------------------------------------------------------------------------------
(5) NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, Emerging Issues Task Force ("EITF") issued EITF No.
00-21, "Revenue Arrangements with Multiple Deliverables". EITF 00-21
requires that consideration received in connection with arrangements
involving multiple revenue-generating activities be measured and
allocated to each separate unit of accounting in the arrangement.
Revenue recognition would be determined separately for each unit of
accounting within the arrangement. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF 00-21 is not expected to have a material
affect on the Company's financial position, results of operations, or
cash flows.
9
ICAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2003
(5) NEW ACCOUNTING PRONOUNCEMENTS (continued)
In May 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The changes in this Statement
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. This Statement is effective
for contracts entered into or modified after June 30, 2003. The
adoption of SFAS 149 is not expected to have a material affect on the
Company's financial position, results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances), because that instrument
represents an obligation. Many of those instruments were previously
classified as equity. The statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 is not expected to
have a material affect on the Company's financial position, results of
operations, or cash flows.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Certain information included in this Item 2 and elsewhere in this Form
10-Q that are not historical facts contain forward looking statements that
involve a number of known and unknown risks, uncertainties and other factors
that could cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievement
expressed or implied by such forward looking statements. These risks and
uncertainties include, but are not limited to, uncertainty of future sales
levels, protection of patents and other proprietary rights, the impact of supply
and manufacturing constraints or difficulties, product market acceptance,
possible technological obsolescence of products, increased competition,
litigation and/or government regulation, changes in Medicare reimbursement
policies, competitive factors, the effects of a decline in the economy in
markets served by the Company and other risks detailed in the Company's other
filings with the Securities and Exchange Commission. The words "believe",
"demonstrate", "intend", "expect", "estimate", "anticipate", "likely", "seek",
"should" and similar expressions identify forward-looking statements. Readers
are cautioned not to place undue reliance on those forward-looking statements,
which speak only as of the date the statement was made.
RESULTS OF OPERATIONS
OVERVIEW
On June 28, 2002, the Company completed the acquisition of ISSI pursuant to a
previously reported plan and agreement of merger. The Company acquired all of
the issued and outstanding capital stock of ISSI, a privately held company based
in Boca Raton, Florida. Consistent with the Company's intention to concentrate
its efforts after the merger in the imaging and scanning business on higher
margin medical and Computer Aided Detection (CAD) applications, the Company has
discontinued sales of its graphic arts and photographic product lines.
Early detection of breast cancer saves lives. The Company designs, develops,
manufactures and markets CAD imaging technology for mammography applications.
Computer-aided detection from iCAD, can detect 23% of breast cancers, an average
of 14 months earlier than screening mammography alone. iCAD offers the fastest
CAD system available, the only system to look for asymmetries, and the most
effective system available to detect breast masses.
Management believes that the iCAD system is the only CAD system designed on a
relational database platform, which can improve productivity and reduce
operating and capital costs at women's health centers by offering
computer-assisted detection as an integrated or integration-ready part of
current or anticipated informatics systems, digital imaging resources, and
workflows.
11
The Company recently announced it's new iCAD iQ(TM) CAD system, designed
specifically for clinics that perform less than 10 to 15 mammography procedures
per day. Shipment of the iQ system is scheduled to begin during the fourth
quarter of 2003. The Company believes that the iCAD iQ is a category-defining
CAD system, in the sense that it is the first product on the market that will
allow lower-volume clinics to provide CAD services to women on a cost-effect
basis. The iQ is simple to operate and self-training in nature, has been
designed to fit within the limited space requirement of smaller mammography
clinics, and will be priced about 30% below currently available CAD systems.
Furthermore, the iQ will be available to mammography facilities that cannot
afford the outright purchase of a CAD system, through a simple
`fee-per-procedure' program that the Company recently announced and branded
ClickCAD(TM). Under the ClickCAD program, the Company plans and expects to
install iCAD iQ(TM) systems in qualified mammography clinics at little or no
up-front capital cost. The clinics will then pay iCAD a fee approximating $6.50
for each CAD procedure performed, an amount that represents less than 35% of the
current standard $19.13 Federal reimbursement rate for CAD procedures. The
Company believes that this program will allow mammography clinics to improve the
health care delivered to women at risk, strengthen their marketing position in
attracting and keeping patients concerned about breast cancer, reduce the legal
risks associated with failure to detect early-stage cancers, and increase their
net revenues.
While the Company expects the impact of iCAD iQ system shipments upon 2003 sales
to be modest, it believes that the new product line should contribute to its
sales and shipments in future years. In support of this new product, the Company
has established an internal field sales support team that has already begun to
identify and develop a broad reseller channel for the iCAD iQ. Additionally,
this team is working with the Company's distributor, Instrumentarium Imaging,
Inc. ("Instrumentarium") to increase sales of its full-featured MammoReader(TM)
systems.
The Company also announced the addition of CAD product distribution
relationships in Canada, the United Kingdom, Korea, the Middle East, and Puerto
Rico during the second quarter of 2003.
QUARTER ENDED JUNE 30, 2003 COMPARED TO QUARTER ENDED JUNE 30, 2002 AND SIX
MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Sales. Sales of the Company's CAD and medical imaging products for the three
months ended June 30, 2003, totaled $1,337,517, compared with sales of medical
imaging products and total sales of $485,686 and $776,600, respectively, in the
quarter ended June 30, 2002. This reflects an increase of 175% in medical sales
and 72% in total sales when compared with the prior-year period. Sales of
graphic arts and photographic products totaled $290,914 in the second quarter of
2002. There were no sales of the Company's graphic arts and photographic
products during the second quarter of 2003 due to the exiting from these
products lines in fiscal 2002.
Sales of the Company's CAD and medical imaging products for the six months ended
June 30, 2003, totaled $3,551,529, compared with sales of medical imaging
products and total sales of $911,585 and
12
$1,552,233, respectively, in the first half of 2002. This reflects an increase
of 290% in medical sales and 129% in total sales when compared with the
corresponding period of the previous year. Sales of graphic arts and
photographic products totaled $640,648 for the six-month period ended June 30,
2002. For reasons noted above, there were no sales of graphic arts and
photographic products in the first half of 2003.
In the second quarter 2003, Instrumentarium, which has been the exclusive
distributor of the Company's MammoReader(TM) computer aided detection products,
received orders for a record 24 MammoReader systems and shipped a record 17
MammoReader systems to hospitals, women's health centers and mammography
clinics. iCAD reports that, to date, approximately 70 MammoReader systems have
been sold and installed by Instrumentarium. In May 2003 the MammoReader was
designated the top-rated CAD system for early breast cancer detection by MD
Buyline, an independent evaluator of medical capital equipment.
During the second quarter of 2003, in preparation of iCAD's release of new
products and the proposed acquisition of Instrumentarium by General Electric
Medical Systems, iCAD converted Instrumentarium from an exclusive, stocking
distributor to a non-stocking distributor. With the exception of demonstration
units, Instrumentarium's inventory of MammoReader products was substantially
depleted in partial fulfillment of new MammoReader purchase orders received by
Instrumentarium in the second quarter. This inventory depletion resulted in
reduced new product orders from Instrumentarium and overall sales by iCAD during
this period. The Company believes the change in its distribution arrangement
with Instrumentarium affords iCAD an opportunity to broaden its distribution
channels, with a focus on promotion of its new iQ products.
The Company anticipates that the proposed acquisition of Instrumentarium may
adversely impact Instrumentarium's performance as a distributor of the Company's
products, and may adversely impact the Company's sales during any period of
transition to alternative distribution channels and resellers. The Company is
currently taking action intended to reduce and manage any such adverse impact,
including identification of alternative resellers and distribution channels,
establishment of its own direct sales support and outside sales capabilities,
independent direct marketing, lead generation and management and increased brand
advertising. As Instrumentarium currently provides installation, customer
training, support and field service to MammoReader customers, iCAD has also
begun to establish its own direct or third party-based capabilities in these
areas. In the event that the distribution relationship with Instrumentarium is
reduced in scope or terminated in advance of the current August 15, 2004
termination date of its distribution agreement with Instrumentarium, the Company
may be required to show a diminished value in the asset value recorded for the
Distribution Agreement, and a charge to earnings would result in the period in
which such diminished value was determined.
Gross Margins. During the three and six month periods ending June 30, 2003,
gross margins improved to 56% and 58%, respectively, compared to (343%) and
(160%), for the same periods in 2002, as a result of increasing sales of higher
margin CAD products and write-offs of inventory recorded in the quarter ended
June 30, 2002. In the second quarter of 2002 the Company incurred a charge to
cost of sales consisting of a charge for an inventory reserve and a write-off of
prepaid royalty relating to its graphic arts and photographic products in the
amount of $2,837,196. If such write-offs are excluded, gross margins for the
second quarter of 2003 improved to 56% compared
13
to 22% in the prior-year quarter, while gross margins in the first half of 2003
improved to 58%, compared to 23% for the six month period ended June 30, 2002.
The Company expects margins to improve as a result of increasing sales of its
MammoReader(TM) systems for the computer assisted detection of breast cancer.
Engineering and Product Development. Engineering and product development costs
for the three and six month periods ended June 30, 2003 increased from $337,139
and $526,895, in 2002 to $609,545 and $1,193,798, respectively, in 2003. The
increase in engineering and product development costs results primarily from the
Company's addition, as a result of its acquisition of ISSI, of a software
technology development group to support its CAD products. Additionally, the
Company continues its development of its new Fulcrum(TM) medical film digitizer
product and its iCAD iQ(TM) CAD product. The Company expects engineering and
product development costs to increase for the remainder of 2003 over the
comparable period of 2002.
General and Administrative. General and administrative expenses in the three and
six month periods ended June 30, 2003 decreased by $2,955,169 and $2,784,292,
respectively, from $4,059,232 and $4,284,587 in 2002 to $1,104,063 and
$1,500,295, respectively, in 2003. The decrease in general and administrative
expenses resulted primarily from a one-time, $2,800,000 non-cash accounting
charge associated with the placement of $2,000,000 in restricted common stock by
ISSI immediately prior to the successful acquisition of ISSI by iCAD in June
2002, as well as a reversal of the accrued settlement cost in the amount of
$383,000 in connection with the dismissal of the Company as a defendant in the
action brought by The Massachusetts Institute of Technology and Electronics for
Imaging. Inc.. Excluding the non-cash accounting charge and other expenses
recorded in the second quarter of 2002, such as non-recurring severance benefits
and other expenses associated with reductions of staff made possible by the
merger of ISSI and the Company, a write-off of fixed assets relating to its
graphic arts and photographic product lines, an increase in provision for
doubtful accounts, general and administrative expenses would have resulted in an
increase due primarily from the increase in legal fees related to the ongoing
patent infringement litigation with R2 Technology, Inc.. Since the Company's
acquisition of Intelligent Systems Software, Inc. in June 2002, iCAD has
recorded $1,155,274 in legal and related expenses associated with the R2
litigation. Approximately $612,900 of such legal expenses were recorded during
the second quarter of 2003. See Part II, Item 1, Legal Proceedings.
Marketing and Sales Expenses. Marketing and sales expenses for the three months
ended June 30, 2003 increased slightly from $287,315 in 2002 to $306,992 in 2003
due primarily to the addition of sales support personnel engaged to develop a
broad reseller channel for sale of the Company's new iCAD iQ product. Marketing
and sales expenses for the six months ended June 30, 2003 decreased slightly
from $554,395 in 2002 to $546,704 for the comparable period in 2003. This
decrease is due primarily to the reduction in expenses related to the Company's
traditional graphic arts and FotoFunnel lines due to the termination of sales of
these products in fiscal 2002. The Company expects marketing and sales expenses
to increase over the remainder of 2003 over the comparable period of 2002, as it
continues to add staff to develop a more comprehensive internal sales and
support capability and increase direct marketing and advertising activities.
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Interest Expense. Net interest expense for the three and six month periods ended
June 30, 2003 decreased to $9,478 and $17,150, respectively, from $10,077 and
$29,229, respectively, in 2002. This decrease is due primarily to a decrease in
loan balances and interest rates.
As a result of the foregoing, the Company recorded a net loss of $1,285,144 or
$0.05 per share for the three month period ended June 30, 2003 on sales of
$1,337,517 compared to a net loss of $7,359,510 or $0.47 per share from the same
period in 2002 on sales of $776,600. The loss for the six months ended June 30,
2003 was $1,208,586 or $0.05 per share on sales of $3,551,529 compared with a
net loss of $7,880,632 or $0.51 per share on sales of $1,552,233 for the six
months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to generate cash adequate to meet its requirements depends
primarily on operating cash flow and the availability of a $3,000,000 credit
line under the Loan Agreement with its Chairman, Mr. Robert Howard.
The Company has a "Loan Agreement" with its Chairman, Mr. Robert Howard, under
which Mr. Howard has agreed to advance funds, or to provide guarantees of
advances made by third parties in an amount up to $3,000,000. Outstanding
advances are collateralized by substantially all of the assets of the Company
and bear interest at prime interest rate plus 2%. Mr. Howard is entitled to
convert outstanding advances made by him under the Loan Agreement into shares of
the Company's common stock at any time based on the outstanding closing market
price of the Company's common stock at the lesser of the market price at the
time each advance is made or at the time of conversion. During the second
quarter of 2003 the Company borrowed $630,000 pursuant to the Loan Agreement. At
June 30, 2003, $830,000 was outstanding under the Loan Agreement and $2,170,000
was available for future borrowings.
At June 30, 2003 the Company had current assets of $2,208,280, current
liabilities of $3,906,799 and working capital deficit of $1,698,519. The ratio
of current assets to current liabilities was 0.6:1
SUBSEQUENT EVENT During the third of quarter 2003 the Company borrowed an
additional $600,000 pursuant to the Loan Agreement. At August 1, 2003,
$1,430,000 was outstanding under the Loan Agreement and $1,570,000 was available
for future borrowings.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, Emerging Issues Task Force ("EITF") issued EITF No. 00-21,
"Revenue Arrangements with Multiple Deliverables". EITF 00-21 requires that
consideration received in connection with arrangements involving multiple
revenue-generating activities be measured and allocated to each separate unit of
accounting in the arrangement. Revenue recognition would be determined
separately for each unit of accounting within the arrangement. EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption
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of EITF 00-21 is not expected to have a material affect on the Company's
financial position, results of operations, or cash flows.
In May 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." This Statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. The changes in this Statement
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. This Statement is effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS 149
is not expected to have a material affect on the Company's financial position,
results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances), because that instrument
represents an obligation. Many of those instruments were previously classified
as equity. The statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS No. 150
is not expected to have a material affect on the Company's financial position,
results of operations, or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation
of the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of the Company's
disclosure controls and procedures as of the end of the quarter ended June 30,
2003. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to provide reasonable
assurance that that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. In addition, during the
quarter ended June 30, 2003 there were no significant changes in the Company's
internal controls or in other factors that could significantly affect the
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been dismissed from a complaint filed against the Company in the
United States District Court for the Eastern District of Texas, entitled The
Massachusetts Institute of Technology and Electronics for Imaging, Inc. v.
Abacus Software Inc. et al., Case No. 501CV344, The plaintiff claimed initially
that the Company had infringed a United States patent alleged to cover color
reproduction system technology through sale of certain Company products to
customers in the graphic arts/prepress and photographic markets. The Company has
no liability in this matter, and anticipates no further legal expenses will be
incurred with respect to this litigation. As a result, general and
administrative expenses incurred during the first quarter of 2003 were reduced
by the reversal of the accrued settlement cost in the amount of $383,000.
On June 3, 2002, Intelligent Systems Software, Inc. ("ISSI") was sued in United
States District Court for the District of Delaware by R2 Technology, Inc. and
Shih-Ping Wang. The lawsuit alleges that ISSI's MammoReader device infringes
certain patents owned by R2 Technology, Inc. The complaint requests treble
damages, but does not specify the amount of damages sought. The complaint also
seeks to enjoin ISSI from further infringement. On July 11, 2002, subsequent to
the acquisition of ISSI by the Company, the plaintiffs amended their complaint
to add the Company and its subsidiary ISSI Acquisition Corp. as additional
parties. The Company believes the lawsuit is without merit and intends to
vigorously defend itself. The Company filed an initial answer to the lawsuit,
denying all claims and asserting a counterclaim challenging the validity of the
patents in question.
In patent litigation of this type, each party proposes "constructions" or
meanings for disputed terms of the patents-in-suit and the Court "construes" or
decides the meaning of the terms in dispute. R2 Technology, Inc. had proposed a
set of generally broad definitions to the Court, while the Company proposed more
narrow constructions drawn directly, in its view, from the patent specifications
and prosecution histories. Following briefing and a hearing, the Court entered
an order on April 30, 2003, adopting R2 Technology Inc.'s constructions. The
Company believes the constructions adopted by the Court could provide advantages
and disadvantages to each party on the issues of infringement and invalidity as
the litigation proceeds. A jury trial has been scheduled for October of 2003.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Exclusive License Agreement between Scanis, Inc. and the Registrant dated April 22, 2003.
Portions of this document have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment of the omitted portions.
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.
(b) During the quarter ended June 30, 2003 a Form 8-K was furnished
under item 9 and 12, to report the issuance of a press release announcing iCAD's
financial results for the quarter ended March 31, 2003.
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Signatures
Pursuant to the requirements 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.
iCAD, Inc.
----------------
(Registrant)
Date: August 14, 2003 By: /s/ W. Scott Parr
---------------------------- ----------------------------------
W. Scott Parr
Chief Executive Officer,
Director
Date: August 14, 2003 By: /s/ Annette L. Heroux
---------------------------- ----------------------------------
Annette L. Heroux
Chief Financial Officer, Controller
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