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 September 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 ________________
Commission file number 1-9341
ICAD, INC.
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(Exact name of registrant as specified in its charter)
Delaware 02-0377419
- --------------------------------- ------------------------------------
(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 November 10, 2003 there were 27,415,773
shares outstanding of the issuer's Common Stock, $.01 par value.
2
ICAD, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002 4
Consolidated Statements of Operations for the
three and nine month periods ended September 30, 2003
and 2002 (unaudited) 5
Consolidated Statements of Cash Flows for the nine
month periods ended September 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 2 Changes in Securities and Use of Proceeds 17-18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
3
ICAD, INC.
Consolidated Balance Sheets
September 30, 2003 December 31, 2002
-------------------- --------------------
Assets (unaudited) (audited)
Current assets:
Cash and equivalents $ 587,879 $ 1,091,029
Trade accounts receivable, net of allowance for doubtful
accounts of $89,385 in 2003 and $40,000 in 2002 1,027,266 1,550,167
Inventory 531,402 390,349
Prepaid and other 177,713 85,120
------------ ------------
Total current assets 2,324,260 3,116,665
------------ ------------
Property and equipment:
Equipment 953,722 840,410
Leasehold improvements 21,250 8,051
Furniture and fixtures 35,569 22,271
------------ ------------
1,010,541 870,732
Less accumulated depreciation and amortization 666,583 579,545
------------ ------------
Net property and equipment 343,958 291,187
------------ ------------
Other assets:
Patents 94,643 --
Technology intangible 3,387,125 3,740,553
Distribution agreement -- 1,513,228
Goodwill 17,415,723 17,415,723
------------ ------------
Total other assets 20,897,491 22,669,504
------------ ------------
Total assets $ 23,565,709 $ 26,077,356
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,765,368 $ 2,232,262
Accrued interest 262,834 229,078
Accrued expenses 1,309,821 1,776,824
Convertible subordinated debentures 10,000 10,000
Current maturities of notes payable 69,048 65,526
------------ ------------
Total current liabilities 3,417,071 4,313,690
Loans payable to related party 2,930,000 200,000
Notes payable, less current maturities 56,155 108,390
------------ ------------
Total liabilities 6,403,226 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 27,397,899 in 2003
and 26,418,124 shares in 2002; outstanding
27,330,023 in 2003 and 26,350,248 shares in 2002 273,978 264,181
Additional paid-in capital 88,130,846 85,829,483
Accumulated deficit (70,292,163) (63,688,210)
Treasury stock, at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Total stockholders' equity 17,162,483 21,455,276
------------ ------------
Total liabilities and stockholders' equity $ 23,565,709 $ 26,077,356
============ ============
See accompanying notes to consolidated financial statements.
4
ICAD, INC.
Consolidated Statements of Operations
(unaudited)
Three Months Nine Months
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Sales $ 1,387,100 $ 1,286,966 $ 4,938,629 $ 2,839,199
Cost of Sales 731,607 559,079 2,233,775 4,596,838
------------ ------------ ------------ ------------
Gross Margin 655,493 727,887 2,704,854 (1,757,639)
------------ ------------ ------------ ------------
Operating expenses:
Engineering and product development 619,762 478,720 1,813,560 1,005,615
General and administrative 4,870,119 1,698,084 6,370,414 5,982,671
Marketing and sales 530,485 181,739 1,077,189 736,134
------------ ------------ ------------ ------------
Total operating expenses 6,020,366 2,358,543 9,261,163 7,724,420
------------ ------------ ------------ ------------
Loss from operations (5,364,873) (1,630,656) (6,556,309) (9,482,059)
Interest expense - net 30,494 10,009 47,644 39,238
------------ ------------ ------------ ------------
Net loss $ (5,395,367) $ (1,640,665) $ (6,603,953) $ (9,521,297)
Preferred dividend 37,316 37,316 110,733 110,732
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (5,432,683) $ (1,677,981) $ (6,714,686) $ (9,632,029)
============ ============ ============ ============
Net loss per share
Basic and diluted $ (0.20) $ (0.06) $ (0.25) $ (0.50)
Weighted average number of shares used
in computing loss per share
Basic and diluted 26,858,963 26,141,091 26,531,177 19,134,031
See accompanying notes to consolidated financial statements.
5
ICAD, INC.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Nine Months
September 30, 2003 September 30, 2002
------------------ ------------------
Cash flows from operating activities:
Net loss $(6,603,953) $ (9,521,297)
----------- ------------
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation 87,038 108,934
Amortization 428,385 155,455
Loss on disposal of assets 1,443,628 476,850
Compensation expense relative to issue of
stock at merger -- 2,800,000
Legal expense relative to issue of stock 23,377 --
Issuance of common stock for payment of legal settlement 750,000 --
Changes in operating assets and liabilities, net of effects from acquisition of
ISSI:
Accounts receivable 522,901 593,323
Inventory (141,053) 2,298,772
Prepaid and other (92,593) (16,342)
Accounts payable 933,106 200,776
Accrued expenses (543,980) 987,314
----------- ------------
Total adjustments 3,410,809 7,605,082
----------- ------------
Net cash used for operating activities (3,193,144) (1,916,215)
----------- ------------
Cash flows from investing activities:
Additions to patents, software development and other (100,000) --
Additions to property and equipment (139,809) (76,146)
Acquisition of ISSI, net of cash acquired -- 2,202,040
----------- ------------
Net cash provided by (used for) investing activities (239,809) 2,125,894
----------- ------------
Cash flows from financing activities:
Issuance of common stock for cash 248,516 118,158
Proceeds from investor -- 500,000
Proceeds of convertible note payable to principal
stockholders 2,730,000 750,000
Payment of demand note payable to principal
stockholders -- (500,000)
Payments of note payable (48,713) (45,430)
----------- ------------
Net cash provided by financing activities 2,929,803 822,728
----------- ------------
Increase (decrease) in cash and equivalents (503,150) 1,032,407
Cash and equivalents, beginning of period 1,091,029 495,360
----------- ------------
Cash and equivalents, end of period $ 587,879 $ 1,527,767
=========== ============
Supplemental disclosure of non-cash items from investing and financing
activities:
Conversion of loan to related party into
Common Stock $ -- $ 500,000
=========== ============
Issuance of common stock for settlement of liability $ 1,400,000 $ --
=========== ============
Accrued dividends on convertible preferred stock $ 110,733 $ 110,732
=========== ============
Fair market value of iCAD common stock and common
stock options issued to acquire 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)
September 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
$4,000,000. Outstanding advances are collateralized by substantially all
of the assets of the Company and bear interest at prime interest rate plus
2% with a minimum of 8%. 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 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 third quarter of
2003 the Company borrowed $2,100,000 pursuant to the Loan Agreement. At
September 30, 2003, $2,930,000 was outstanding under the Loan Agreement
and $1,070,000 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)
September 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. ("R2") and Shih-Ping Wang. The lawsuit alleged that
ISSI's MammoReader device infringed certain patents owned by plaintiff.
The complaint requested treble damages, but did not specify the amount of
damages sought. The complaint also sought 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.
In July 2003, the Company filed suit in the United States District Court
for the District of New Hampshire against R2 for infringement of certain
patents licensed by Company. The complaint requested treble damages, costs
and legal fees, but did not specify the amount of damages sought.
On September 8, 2003, the Company announced the settlement of all patent
infringement litigation with R2. Under the terms of the settlement, both
actions were dismissed with prejudice and iCAD was granted a non-exclusive
license to the patents named in the suit filed by R2. In connection with
the settlement of the suit, iCAD agreed to pay R2 an aggregate of
$1,250,000, of which $1,000,000 was paid in September 2003, with $250,000
deferred and payable in equal installments on a quarterly basis through
December, 2005. In addition, iCAD issued to R2 shares of iCAD Common Stock
valued at $750,000 and has filed a registration statement intended to
cover the resale of shares by R2. iCAD also agreed to certain continuing
royalties, which are based on the category and configuration of products
sold by iCAD. Further, iCAD granted R2 a partial credit against potential
future purchases by R2 of iCAD digitizers worth up to $2,500,000 over five
years to encourage R2 to purchase film digitizers manufactured by iCAD.
This partial credit was meant to provide a significant purchasing
advantage to R2, while maintaining a reasonable profit margin and creating
additional economies of scale for iCAD. Subsequently, R2 agreed to accept
an additional 75,000 share of iCAD Common Stock in satisfaction of any
royalties it otherwise would have been entitled to receive under the
settlement agreement.
(4) Exclusive Distribution Agreement
In the third quarter of 2003, the Company elected to take a one-time
write-off of the remaining asset of $1,443,628 attributable to its
distribution agreement with Instrumentarium Imaging, Inc.
("Instrumentarium"). This write-off came after assessing the performance
of Instrumentarium under the distribution agreement, and in light of the
Company's implementation of alternative distribution channels. While
Instrumentatium continues to offer the iCAD product line through the
fourth quarter of 2003 on a non-exclusive basis, newly established
distribution channels are expected by the Company to account for all of
the Company's CAD product revenue in the future.
8
ICAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2003
(5) 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.
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 79.4%; risk-free interest rate of 2.91%, 2.34% and
2.63% and expected live of 5 years. The weighted-average assumptions used
for grants in 2002 were: no dividends paid; expected volatility of 79%;
risk-free interest rate of 2.01%, 4.86% and 3.37% 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 nine month periods ended
September 30, 2003 and 2002 would have been as follows:
Three Months Nine Months
September 30, September 30,
--------------------------- ----------------------------
2003 2002 2003 2002
Net loss available to
common stockholders as reported $(5,432,683) $(1,677,981) $(6,714,686) $ (9,632,029)
Deduct: Total stock-based
employee compensation
determined under fair value
method for all awards, net
of related tax effects (34,084) (455,916) (196,487) (1,355,089)
----------- ----------- ----------- ------------
Pro forma net loss available to
common stockholders $(5,466,767) $(2,133,897) $(6,911,173) $(10,987,118)
=========== =========== =========== ============
Basic and diluted loss per share
As reported $ (.20) $ (.06) $ (.25) $ (.50)
Pro forma $ (.20) $ (.08) $ (.26) $ (.57)
9
ICAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2003
(6) New Accounting Pronouncements
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 did not 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 did not
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. In May 2003 the Company's
MammoReader(TM) was designated the top-rated CAD system for early breast cancer
detection by MD Buyline, an independent evaluator of medical capital equipment.
The Company's MammoReader product retained a top rating in MD Buyline's November
2003 report.
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. The Company recently received clearance from the U.S. Food and Drug
Administration to sell and market it's new iCAD iQ(TM) CAD system, designed
specifically for clinics that perform less than 20 mammography procedures per
day. Shipment of the iQ system is scheduled to begin during the
11
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 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 may be made 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 believes the impact of iCAD iQ systems that it expects to ship
during 2003 upon 2003 sales will be minimal, 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 begun to identify and develop new sales channels.
The Company recently announced that it was ending its reliance on
Instrumentarium as the sole distributor of the Company's MammoReader products.
The Company anticipates that Instrumentarium will no longer sell iCAD's products
by December 31, 2003, as the Company focuses on different distribution channels.
In October 2003, the Company entered into a distribution agreement with National
Imaging Resources (NIR), a leading medical sales and equipment organization,
that provides more than thirty NIR member resellers the opportunity to market,
sell and support iCAD's computer aided detection products. In November 2003, the
Company entered into an additional distribution agreement with Merry X-Ray
Corporation, a leading distributor of radiology equipment and products, with 38
Merry X-Ray branch offices in the U.S. The Company is continuing efforts to
expand its reseller network which the Company believes will improve sales levels
in future periods.
On November 7, 2003, iCAD entered into a two year, dual source purchasing
agreement for Computer Aided Detection for Mammography Equipment with the
purchasing company for Kaiser Permanente Kaiser Permanente is America's largest
not-for-profit health care organization serving 8.1 million members in 9 states
and the District of Columbia. The purchasing agreement generally requires the
129 Kaiser Permanente hospitals and facilities in nine states and the District
of Columbia that elect to purchase a Computer Aided Detection of breast cancer
system to purchase either an iCAD product or a product manufactured by one other
vendor. Each facility that elects to purchase a Computer Aided detection of
breast cancer system during the contract period will make an independent
purchasing decision on the CAD system that best suits its needs and environment.
Quarter Ended September 30, 2003 compared to Quarter Ended September 30, 2002
and Nine Months Ended September 30, 2003 compared to Nine Months Ended September
30, 2002
Sales. Sales of the Company's CAD and medical imaging products for the three
months ended September 30, 2003, totaled $1,387,100, a slight increase compared
with sales of medical imaging products of $1,286,966 in the quarter ended
September 30, 2002. Sales of the Company's CAD and medical imaging products for
the nine months ended September 30, 2003, totaled $4,938,629, compared with
sales of medical imaging products and total sales of $2,414,244 and $2,839,199,
respectively, in the nine month period ended September 30, 2002. This reflects
an increase of 105% in medical sales and 74% in total sales when compared with
the prior-year period. Sales of graphic arts and photographic
12
products totaled $424,955 in the nine month period ended September 30, 2002. The
Company exited the graphic arts and photographic products business in June 2002,
and there were no sales of such products in the nine months ended September 30,
2003.
In the third quarter 2003, Instrumentarium, which had been the exclusive
distributor of the Company's MammoReader(TM) computer aided detection products,
received orders for 14 MammoReader systems and shipped 15 MammoReader systems to
hospitals, women's health centers and mammography clinics. Depleting its own
stock of demonstration units, Instrumentarium purchased only four MammoReader
units from iCAD during the third quarter. Although the Company's relationship
with new resellers was just beginning in the third quarter, more sales were to
new resellers during this period than to Instrumentarium. While Instrumentarium
continues to offer the iCAD product line through the fourth quarter of 2003, on
a non-exclusive basis, the Company anticipates that newly established product
distribution channels will account for all of its CAD product revenues in future
periods. iCAD reports that, to date, approximately 87 MammoReader systems have
been sold and installed by Instrumentarium and by iCAD's new resellers.
Gross Margins. During the three month period ending September 30, 2003, gross
margins decreased to 47%, compared to 57% for the same period in 2002, as a
result of a high percentage of lower margin digitizer sales during the quarter,
and to temporary price promotions aimed at supporting the Company's former
exclusive CAD product distributor. For the nine month period ended September 30,
2003, gross margin improved to 55% compared to (62%) for the same period 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 nine month period of 2003
improved to 55%, compared to 38% for the nine month period ended September 30,
2002. The Company expects margins to improve as a result of increasing sales of
its higher margin CAD products.
Engineering and Product Development. Engineering and product development costs
for the three and nine month periods ended September 30, 2003 increased from
$478,720 and $1,005,615, in 2002 to $619,762 and $1,813,560, 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 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 for the three
month period ended September 30, 2003 increased by $3,172,035, from $1,698,084
in 2002 to $4,870,119 in 2003. The increase resulted from the write-off of
$1,443,628 associated with the Instrumentarium exclusive distribution agreement.
After assessing the performance of Instrumentarium in the third quarter, and in
light of the Company's implementation of alternative distribution channels, the
Company elected to take a one-time write-off, thereby eliminating the
distribution agreement as a depreciating asset. Additionally, during the third
quarter of 2003, the Company accounted for over
13
$2,702,000 in non-recurring expenses related to the settlement of R2 patent
infringement litigation and legal expenses. In the settlement agreement the
Company agreed to pay R2 an aggregate of $1,250,000, of which $1,000,000 was
paid in September 2003, with $250,000 deferred and payable in equal installments
on a quarterly basis through December, 2005. In addition, the Company issued to
R2 shares of iCAD Common Stock valued at $750,000. During this period the
Company recorded approximately $702,000 in legal and related expenses associated
with the R2 litigation. Since the Company's acquisition of ISSI in June 2002,
the Company has recorded approximately $1,857,000 in legal and related expenses
associated with the R2 litigation.
General and administrative expenses for the nine month period ended September
30, 2003 increased by $387,743, from $5,982,671 in 2002 to $6,370,414 in 2003.
The increase in expenses for the nine month period ended September 30, 2003,
related to the write-off of the distribution agreement with Instrumentarium and
the R2 settlement, were almost entirely offset by the $2,800,000 non-cash charge
associated with the acquisition of ISSI in June 2002, as well as a reversal in
the second quarter of 2003, of accrued settlement costs 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. See Part II, Item 1, Legal Proceedings.
Marketing and Sales Expenses. Marketing and sales expenses for the three and
nine month periods ended September 30, 2003 increased 192% and 46%,
respectively, from $181,739 and $736,134 in 2002 to $530,485 and $1,077,189,
respectively, in 2003. This increase is due primarily to the addition of sales
support personnel engaged to develop a broad reseller channel for sale of the
Company's CAD products, and advertising, direct mail, consulting, trade show and
promotional expenses incurred in the third quarter 2003. The Company expects
marketing and sales expenses to increase over the remainder of 2003 over the
comparable period of 2002, as it continues to develop a more comprehensive sales
and support capability and increase direct marketing and advertising activities.
The Company believes that additional marketing and advertising expenditures will
be required as additional competitors secure FDA approval and enter the market
for computer aided detection of breast cancer solutions.
Interest Expense. Net interest expense for the three and nine month periods
ended September 30, 2003 increased to $30,494 and $47,644, respectively, from
$10,009 and $39,238, respectively, in 2002. This increase is due primarily to
the increase in loan balances.
As a result of the foregoing, the Company recorded a net loss of $5,395,367 or
$0.20 per share for the three month period ended September 30, 2003 on sales of
$1,387,100 compared to a net loss of $1,640,665 or $0.06 per share for the same
period in 2002 on sales of $1,286,966. The loss for the nine months ended
September 30, 2003 was $6,603,953 or $0.25 per share on sales of $4,938,629
compared with a net loss of $9,521,297 or $0.50 per share on sales of $2,839,199
for the nine months ended September 30, 2002.
14
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 $4,000,000 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 $4,000,000. Outstanding
advances are collateralized by substantially all of the assets of the Company
and bear interest at prime interest rate plus 2% with a minimum of 8%. 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 third quarter of 2003 the Company borrowed $2,100,000 pursuant to the
Loan Agreement. At September 30, 2003, $2,930,000 was outstanding under the Loan
Agreement and $1,070,000 was available for future borrowings.
At September 30, 2003 the Company had current assets of $2,324,260, current
liabilities of $3,417,071 and working capital deficit of $1,092,811. The ratio
of current assets to current liabilities was 0.7:1
Net cash used for operating activities for the nine months ended September 30,
2003 was $3,193,144, compared to $1,916,215 for the same period in 2002. The
cash was used to fund the $6,603,953 loss from operations which included
$1,000,000 related to the R2 settlement. Investing activities for the 2003
period included the addition of $239,809 for tooling, computer equipment,
leasehold improvements and patents. Financing activities in the 2003 period
included the borrowing of $2,730,000 pursuant to the Loan Agreement with Mr.
Howard.
Subsequent Event
During the fourth of quarter 2003 the Company borrowed an additional $550,000
pursuant to the Loan Agreement with Mr. Howard. At November 10, 2003, $3,480,000
was outstanding under the Loan Agreement and $520,000 was available for future
borrowings. Although iCAD believes that Mr. Howard will lend it additional funds
beyond the $4 million limit of iCAD's current loan arrangement with him, in the
event that iCAD requires additional funds and is unable to obtain the funds from
Mr. Howard or elsewhere, it could adversely affect iCAD's operations and
financial condition.
New Accounting Pronouncements
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
did not have a material affect on the Company's financial position, results of
operations, or cash flows.
15
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
did not 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 September
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 September 30, 2003 there were no changes in the Company's internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
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.
16
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. ("R2")
and Shih-Ping Wang. The lawsuit alleged that ISSI's MammoReader device infringed
certain patents owned by plaintiff. The complaint requested treble damages, but
did not specify the amount of damages sought. The complaint also sought 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.
In July 2003, the Company filed suit in the United States District Court for the
District of New Hampshire against R2 for infringement of certain patents
licensed by Company. The complaint requested treble damages, costs and legal
fees, but did not specify the amount of damages sought.
On September 8, 2003, the Company announced the settlement of all patent
infringement litigation with R2. Under the terms of the settlement, both actions
were dismissed with prejudice and iCAD was granted a non-exclusive license to
the patents named in the suit filed by R2. In connection with the settlement of
the suit, iCAD agreed to pay R2 an aggregate of $1,250,000, of which $1,000,000
was paid in September 2003, with $250,000 deferred and payable in equal
installments on a quarterly basis through December, 2005. In addition, iCAD
issued to R2 shares of iCAD Common Stock valued at $750,000 and has filed a
registration statement intended to cover the resale of the shares by R2. iCAD
also agreed to certain continuing royalties, which are based on the category and
configuration of products sold by iCAD. Further, iCAD granted R2 a partial
credit against potential future purchases by R2 of iCAD digitizers worth up to
$2,500,000 over five years to encourage R2 to purchase film digitizers
manufactured by iCAD. This partial credit was meant to provide a significant
purchasing advantage to R2, while maintaining a reasonable profit margin and
creating additional economies of scale for iCAD. Subsequently, R2 agreed to
accept an additional 75,000 shares of iCAD Common Stock in satifaction of any
royalties it otherwise would have been entitled to receive under the settlement
agreement.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended September 30, 2003 the Company issued 250,954 shares of
its common stock as part of the settlement of its patent infringement litigation
with R2. The Company also issued 500,000 shares to its counsel in satisfaction
of certain legal and related expenses incurred by the Company in connection with
the litigation with R2. The foregoing shares of common stock were issued in
private transactions pursuant to the exemption from registration under Section
4(2) of the Securities Act of 1933 and/or Regulation D promulgated thereunder.
Item 4. Submission of Matters to a Vote of Security Holders
On September 23, 2003, the Company held an Annual Meeting of Stockholders at
which the following matters were voted on by the security holders of iCAD, Inc..
The results of the vote are as follows:
1. To elect two Class I directors to hold office until the Annual Meeting of
Stockholders to be held in 2006 and until their respective successors have been
duly elected and qualified;
17
Names of Nominees Number of Number of Number
Class I Votes For Votes Withheld Not Voted
- --------- --------- -------------- ---------
Brett Smith 20,501,836 406,953 6,752,159
Kevin Woods 20,873,159 35,630 6,752,159
2. Approval to adopt an amendment to the provision of the Company's Line of
Credit Agreement with the Company's Chairman of the Board, Robert Howard, to
amend the interest paid on advances under the agreement to bear interest at a
rate equal to 2% above the prime interest rate with a minimum of 8% and to
increase the line of credit to $4,000,000 and to extend the term of the
agreement, 20,137,940 votes FOR approval, 89,315 votes AGAINST approval,
2,679,659 ABSTENTIONS and 4,754,034 NOT VOTED.
3. Ratification of the appointment of BDO Seidman, LLP as the Company's
independent auditors for the fiscal year ending December 31, 2003, 22,884,671
votes FOR approval, 2,250 votes AGAINST approval, 17,993 ABSTENTIONS and
4,756,034 NOT VOTED.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
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 September 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 June 30, 2003.
18
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: November 14, 2003 By: /s/ W. Scott Parr
------------------------------ ---------------------------------
W. Scott Parr
Chief Executive Officer,
Director
Date: November 14, 2003 By: /s/ Annette L. Heroux
------------------------------ ---------------------------------
Annette L. Heroux
Chief Financial Officer,
Controller