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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
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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
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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 of
incorporation or organization) Identification No.)
4 Townsend West, Suite 17, Nashua, New Hampshire 03063
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 882-5200
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Title of Class
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Common Stock, $.01 par value
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 as
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. YES X NO___.
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) YES NO X .
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The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price for the registrant's Common Stock on
June 30, 2003 was $31,858,033.
As of March 18, 2004, the registrant had 33,776,933 shares of Common Stock
outstanding.
2
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
Certain information included in this report on Form 10-K 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 this report and in the Company's other filings with the Securities
and Exchange Commission. The words "believe", "demonstrate", "intend", "expect",
"estimate", "anticipate", "likely", "seek" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made.
PART I
ITEM 1. BUSINESS.
GENERAL
iCAD(TM), Inc. ("iCAD" or the "Company") was incorporated in 1984 in the State
of Delaware, as Howtek, Inc., and has sold and supported over 20,000 high
quality, professional graphic arts, photographic and medical imaging systems
worldwide. In 2001, iCAD elected to concentrate on its medical imaging and
women's health businesses with an objective of expanding this business through
increased product offerings. This goal was advanced in June 2002 with the
acquisition of Intelligent Systems Software, Inc. ("ISSI"), a software company
offering computer aided detection ("CAD") systems for breast cancer.
Subsequently, on December 31, 2003, the Company merged with and acquired Qualia
Computing, Inc., a privately held company based in Beavercreek Ohio, and its
subsidiaries, including CADx Systems, Inc. (together "CADx"), bringing together
two of the three companies approved by the US Food and Drug Administration (FDA)
to market computer aided detection of breast cancer solutions in the United
States.
iCAD develops, engineers, manufactures and markets computer aided detection
(CAD) products for the early detection of breast cancer and other health-care
related applications. Early detection of breast cancer can save lives and often
permits less costly, less invasive and less disfiguring cancer treatment options
than when the cancer is detected at a later stage. Computer aided detection from
iCAD can detect up to 25% of breast cancers an average of 14 months earlier than
screening mammography alone.
iCAD is the only independent, integrated digitizer hardware and CAD software
company offering computer aided detection of breast cancer solutions. As such,
we are able to reduce costs at each step in the CAD product design, production
and assembly process. We believe our vertical integration of CAD and hardware
development results in better integration of software and film digitizer
components, lower production costs and reduced administrative overhead. These
factors have allowed us to progressively enhance our CAD product line, while
reducing the costs of our CAD products to many customers and allowing more women
to realize the benefits inherent in the early detection of breast cancer.
3
The Company's CAD systems include proprietary software technology together with
standard computer and display equipment. CAD systems for the film-based
mammography market also include a radiographic film digitizer manufactured by
the Company. iCAD also manufactures medical film digitizers for a variety of
medical imaging and other applications. The Company manufactures and promotes
the Company's film digitizer products to third party customers. The Company
believes that iCAD's experience in providing film digitizers and software for
medical picture archiving and communications (PACS) and telemedicine
applications contributes to the successful integration of the Company's CAD
products into networked and digital mammography environments. The Company's
headquarters and its production and assembly facilities are located in southern
New Hampshire.
MERGER WITH QUALIA AND CADX AND SUBSEQUENT EVENTS
On December 31, 2003, the Company completed the acquisition of CADx. This merger
brings together two of the three companies approved by the FDA to market
computer aided detection of breast cancer solutions in the United States. To
complete the merger, iCAD issued 4,300,000 shares of its common stock,
representing approximately 13% of the outstanding shares of iCAD common stock
after the merger. Additionally, iCAD paid $1,550,000 in cash and executed a
36-month secured promissory note in the amount of $4,500,000 to purchase Qualia
shares that were owned by two institutional investors.
Integration of the acquired companies is substantially complete. During the
first quarter of 2004 the Company assessed the opportunities to achieve
post-merger operating economies, and identified cost-reduction opportunities in
light of its distribution and product plans. As a result of this analysis
management determined that operating expenses could be substantially reduced
without detracting from the Company's ability to increase sales and focus on
future products and markets. Cost-reduction actions taken by iCAD in the first
quarter of 2004 included the closure of offices in Tampa, Florida and San
Rafael, California; reductions in staffing effective March 31, 2004 of 39 of 110
previous full and part-time employees, and the reduction of duplication in
marketing, administrative and other activities. As a result of these
cost-reduction actions, the Company will report certain non-recurring severance
and office closure expenses in the quarter ending March 31, 2004.
Unless otherwise indicated or unless the context requires otherwise, the
references to "iCAD", "we", "us", "our" or "combined companies", refer to the
combined entities, iCAD, CADx Systems, Inc. and Qualia Computing, Inc., and its
subsidiaries and references to "CADx" includes Qualia Computing, Inc. and its
subsidiaries.
4
MARKET AND MARKET SHARE
Computer Assisted Detection is used to provide physicians with support in
detecting breast cancer at an early stage. There is a need for devices that
facilitate the early detection of breast cancer and other forms of cancer. For
most cancers, the earlier treatment is rendered, the greater the likelihood of
successfully managing the cancer. Some studies show that if breast cancer is
detected while still localized and before metastasis spread, the five-year
survival rate is 96.8% or better. If the cancer spreads regionally before
treatment, the survival rate drops to around 75.9%. If there is distant
metastasis, the survival rate drops to around 20.6%.
A primary method of detecting breast cancer is through mammography screening.
Mammography is a radiographic examination of a breast. The American Cancer
Society recommends that women undergo annual mammogram examinations beginning at
age 40. Approximately 5 million additional women in the United States will be
entering the annual mammography screening category within the next 5 years. A
problem in this process, that the Company's CAD products seek to address, is
that in routine screening of mammography films an estimated 20% or more (some
reports suggest up to 30%) of identifiable breast cancers are missed as a result
of radiologist oversight. In general, CAD as an adjunct to mammography screening
is now reimbursable in the United States under federal and most third party
insurance programs, providing economic support for the acquisition of CAD
products by women's health care providers.
In the United States, approximately 9,200 facilities are accredited to provide
mammography screening. To date, the Company estimates that approximately 1,500
CAD systems have been sold into this market. Our combined companies account for
approximately 340 of these systems, including approximately 240 systems sold
during 2003. The Company believes its market share is increasing. During the
fourth quarter of 2003, on a combined basis, the Company sold a total of
approximately 115 CAD systems, excluding systems sold to new resellers for
demonstration purposes and systems sold from the stock of iCAD, Inc.'s previous
distributor. The Company believes its sales represented the majority of all
computer aided detection of breast cancer systems sold during the fourth quarter
of 2003, which would make iCAD, for the first time, the market leader in terms
of unit shipments.
The Company believes that the large majority of CAD systems sold to date have
been sold to "early adopters", including academic institutions and customers
with comparatively higher case volumes, a group that it estimates comprises less
than one-third of the overall potential market for its products. The Company's
Second Look(R) 200 system (formerly the iCAD iQ(TM) model), introduced in
December 2003, is designed to provide a solution for the balance of the market,
where lower case volumes require a lower cost, easy to use CAD solution
Full Field Digital Mammography ("FFDM") systems, which eliminate the film used
in conventional mammographic X-Rays, are now available from several vendors.
These systems are expected to increase as a percentage of the installed base of
mammography systems, as more clinics and women's health centers implement more
fully digital imaging workflows. CAD technology, including the Company's, is
applicable to mammographic images acquired through Digital Mammography systems.
To date, the Company has sold 70 CAD solutions for digital mammography through
its OEM partners and it believes that iCAD is the current sales leader in this
part of the market.
5
The Company's Howtek(TM) medical digitizer products are used in the Company's
CAD systems, and marketed to third parties for use in the computer aided
detection market, in teleradiology and in medical image storage and management
networks known as Picture Archiving and Communications Systems, or "PACS".
Teleradiology is the practice of digitally transmitting medical x-ray images to
another location for analysis, consultation or diagnostic interpretation. The
Company's digitizers are used in this process to convert radiographic film to
digital form, for transmission, communication or storage.
ICAD COMPUTER AIDED DETECTION TECHNOLOGY AND PRODUCTS
The Company's computer aided detection systems operate by analyzing multiple
features and characteristics of a screening or diagnostic mammogram to
recognize, identify and "mark" those combinations of features that may represent
cancer. The system then presents the radiologist with a computerized "Second
Look", or second opinion, helping to reduce overlooked cancers by 23%-28%. This
analysis is accomplished by iCAD's cancer detection software, which encapsulates
the knowledge from thousands of mammography cases that were presented during the
product's development to "learn" the important distinguishing characteristics of
cancerous versus normal tissue.
iCAD's cancer detection software is developed using its proprietary QUALIA
INSIGHT(TM) software development platform and technology. The Qualia Insight
platform includes tools and programming structures that support and enhance the
rapid creation and testing of computer solutions, which learn from and apply
existing examples of a condition like breast cancer to support the review and
decision of professionals seeking to identify that condition in practical
medical applications. The Company believes that use of its Qualia Insight
platform offers several key benefits over CAD products currently offered by its
competitors, including reduced development time for initial software releases,
reduced development time and increased opportunity for continuous product
improvements and reduced development time and increased opportunity to apply
core computer aided detection technology to CAD for lung and colon cancers and
other applications.
iCAD and CADx have been responsible for a range of innovations in CAD products,
including:
o the first system offering a clear upgrade path from film-based to digital
mammography workflows
o the first and only CAD system to search for and mark clinical asymmetries
o the first system to offer printed CAD results
o the first free-standing, eye-level radiologist review station
o the ability to choose between soft copy and printed CAD results
o the first system to offer multiple radiologist viewing stations
o the first system to support up to twelve films in a patient study
o the first system to report above each image the number of marks made by
the CAD system
o the first and only system that provides integration of relational database
technologies to ensure patient history tracking and enhance integration
with other information systems.
6
Other innovations incorporated into the Company's CAD products include the first
use of bar code labels to improve workflow and reduce errors in case tracking;
the first system to use the facility's own barcodes to identify and link to CAD
results; the first system to integrate with a Mammography Information System,
the first CAD system to offer an HL-7 interface to the medical facility's
information system; the first CAD system supporting open architecture,
standardized protocols and accessible data interfaces; the ability to share
digitizers between CAD and medical PACS systems; and the first and only dual
digitizer CAD system. iCAD also delivered the first digitizer designed for
mammography and women's health applications; the first and only support for
distributed patient databases, allowing remote scanning and remote access to
patient information and test results; the first and only support for remote
patient entry; the first bi-directional support for hospital and mammography
information systems; the first leveraged operating lease for CAD systems; and
the first fully-featured CAD system available at a price under $70,000.
The most recent version of the Company's cancer detection software, SECOND LOOK
6.0, was approved by the FDA in October 2003, with up to 96.2 percent overall
cancer detection sensitivity. Specificity, a measure of the number of marks
created that do not represent an actual cancer, was as low as 1.6 False
Positives (FP) per case. Increasingly, potential purchasers are considering
marker rate in their buying decision. The performance of the Company's Second
Look 6.0 cancer detection software represents a substantial reduction in markers
over its previous cancer detection software, and compares favorably with the
marking performance of its competitors. The innovative design of iCAD's software
allows it to operate at multiple sensitivity points, providing the Radiologist
with a selectable range of detection sensitivity and specificity appropriate to
their clinical setting. In certain of iCAD's products, Second Look 6.0 provides
the user with a choice of three operating points, one with higher sensitivity,
another with lower false marks, and a median selection that optimizes
sensitivity and specificity.
Under the leadership of Dr. Steven Rogers, Qualia's founder and iCAD's Chief
Scientist, the Company's technologies are also being applied to the early
detection of breast cancer using ultrasound; the early detection of lung cancer
utilizing low-dose spiral Computed Tomography (CT) and the early detection of
colon cancer utilizing CT. With support provided through the FY2004 Defense
Appropriations Bill, iCAD has begun collaboration with the Walter Reed Army
Medical Center and the Windber Research Institute in Windber, PA, to develop and
evaluate 3D CAD technology for breast imaging based on existing CAD and pattern
analysis techniques for conventional mammograms. One objective of this research
project is to use ultrasound imaging to reduce biopsies which prove to be
unnecessary. Research programs in cardiovascular disease applications are also
in the planning stages.
The Company has applied for over 46 patents relating to many aspects of CAD,
cancer detection and medical digitizer design. To date, the Company has been
granted 12 patents, including general method patents it believes relate to a
broad portfolio of potential medical applications for CAD.
7
PRODUCTS
The Company believes that the Second Look brand has the greatest brand equity
and recognition of any iCAD brand in the CAD market. For this reason, it has
combined its iQ, MammoReader and Second Look products into one "Second Look(R)"
branded line of CAD devices. In doing so, the Company believes it has created
the broadest and most comprehensive line of CAD products available from any
company, and associated it with a single well recognized and appropriate model
brand. Case capacity, work flow, user interface, upgradeability, digital
extensions and price are among the benefits used to distinguish Second Look
models. Primary product descriptions are as follow:
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iCAD Model(1) Suggested
(Previous Cases/ Retail
Designation) Day Selected Benefits Price
- --------------------------------------------------------------------------------------------
Second Look(R)200 Up to Our economical solution for lower volume, value $69,950
(iCAD iQ) 20 oriented customers.
o Fully Automatic workflow and processing
o Compact, easy to use and easy to maintain.
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Second Look 400 Up to Our modular, extensible, network-ready solution for $99,950
(MammoReader) 80 value-oriented customers.
o Network options include immediate HL-7
hospital information system interface;
bi-directional PenRad, MRS and MagView
mammography information system interfaces;
fully compliant DICOM file-save capability
o Open platform Hub and spoke CAD architecture
o Distributed case entry, case processing and
case reading allows physicians to network
between offices
o Multiple case-entry options
o Unsorted, continuous film-feed reduces errors
o Support for bar-coded workflows for
productivity
o Asymmetry included as indicator of potential
cancers
o Optional Radiologist review stations available
- --------------------------------------------------------------------------------------------
- --------
(1) Specific designations subject to change
8
Second Look 500 Up to Our clinically advanced solution for customers $139,950
(Second Look) 80 seeking the best detection performance available,
with immediate support for digital mammography.
o Immediate availability of Second Look 6.0
cancer detection software for superior clinical
performance
o Selectable operating points adjust sensitivity
and marking rate
o Immediate, clear and cost effective upgrade
path to support digital mammography
o Operator-friendly graphical user interface
o Simplified film loading
o Use of existing bar code labels provides
patient record continuity
o Support for up to 12 films per patient ID
ensures all films are on one record number
o "Stat" case sequencing provides immediate
availability for selected cases
o Optional Radiologist review stations
o Current accessories include PenRad, MRS and
MagView mammography information system interfaces;
o Fully compliant DICOM file-save capability
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Second Look 402 Up to Our high case load, uptime assurance $149,950
300 solution for high-case volume .
o Dual film digitizers increase throughput and
reduce critical downtime.
o Network options include immediate HL-7
hospital information system interface;
bi-directional PenRad, MRS and MagView
mammography information system interfaces;
fully compliant DICOM file-save capability
o Support for Digital Mammography planned
o Asymmetry included as indicator of potential
cancers
o Optional Radiologist review stations available
o Support for bar-coded workflows
o Multiple case-entry options
o Unsorted, continuous film-feed reduces errors
o Open platform Hub and spoke CAD supported
o Distributed case entry, case processing and
case reading
- --------------------------------------------------------------------------------------------
Second Look Digital Varies Our solution for Digital Mammography. $120,000
by o Integrated computer aided detection for General
Digital Electric Medical Systems Senographe Digital
System Mammography System; available from GE Medical
Systems.
o Integrated computer aided detection for Fischer
Imaging Corporation full-field Digital
Mammography System; available from Fischer
Imaging Corporation
o Support for additional digital mammography
systems planned.
- --------------------------------------------------------------------------------------------
9
- --------------------------------------------------------------------------------------------
Second Look AD Up to Our combined digital and film-based CAD solution. $330,000
150 o Combines benefits of Second Look 500 and Second
mixed Look Digital.
film o Available from OEM as a complete solution and as
& an upgrade to select, existing Second Look
digital solutions.
- --------------------------------------------------------------------------------------------
MultiRAD(TM) N/A Radiographic film digitizer for $14,995 -
Digitizer OEM, CAD, Picture Archiving and
Communications (PACS) and telemedicine $19,995
applications.
- --------------------------------------------------------------------------------------------
Fulcrum(TM)Digitizer N/A Radiographic film digitizer for OEM and CAD $21,995
applications.
- --------------------------------------------------------------------------------------------
MARKETING & SALES
MARKETING
The Company competes aggressively in three definable divisions of the computer
aided detection market. In the high end part of the market, which accounts for
most CAD purchases, to date, its Second Look 500 and dual digitizer CAD
solutions are marketed on the basis of clinical superiority, productivity and
value. New product models are planned to further address the demands and
requirements of this market. The Company's competitor in this sector,
historically the brand and market leader by virtue of a substantially longer
period in the market and a substantially greater investment in advertising,
marketing, and promotion, has in many cases been selected by a CAD purchaser
without considering any alternatives. By coupling broader and more effective
product distribution with improved marketing, including effective communication
of the message that iCAD now offers more CAD alternatives than any other vendor,
the Company believes it can substantially improve its market share in this
division.
The Company's first Second Look advertising, supported by complementary trade
show participation, began in February 2004. One of the benefits of the merger is
that the Company has increased its advertising and marketing efforts, while
reducing overall the previous aggregate marketing budgets of the companies.
Samples of the Company's advertising can be found on its website at
www.icadmed.com. Information in its website is not part of this report.
In the lower case volume division of the CAD market, where price and ease of use
are key buying factors, the Company believes it is well positioned with the
introduction of its iCAD iQ (now renamed Second Look 200) computer aided
detection product. The Company's objective is to secure a leading market share
in this newer market area.
iCAD believes that the Second Look 200 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-effective basis. The Second
Look 200 is simple to operate and self-training in nature, has been designed to
fit within the limited space requirements of smaller mammography clinics, and is
priced below currently available CAD systems. Commencing in the second quarter
of 2004, the Company expects to undertake targeted advertising and marketing
aimed specifically at promotion of Second Look 200 sales.
10
Furthermore, as early as the second quarter of 2004, the Second Look 200 will 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 has already announced and branded ClickCAD(TM). Under the ClickCAD
program, the Company plans and expects to install Second Look 200 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.
The Company has gained current sales leadership in the digital mammography
division of the CAD market through an OEM sales relationship with General
Electric Medical Systems and a new OEM sales relationship with Fischer Imaging
Corporation. The Company's objective in this market sector is to provide
exceptional support and service to its OEM customers and their end users, while
continuing to expand product offerings and OEM sales channels.
SALES
Effective February 1, 2004, the Company consolidated its full-line sales
channels to best promote and support its broad Second Look product line. iCAD
Second Look products are now distributed nationally, on a non-exclusive basis,
by SourceOne HealthCare Technologies, Inc., and by additional independent
resellers, including members of the National Imaging Resellers (NIR) dealer
group and Merry X-Ray Corporation. Overall, some 200 field sales personnel are
now available to represent and promote iCAD products in the United States.
SourceOne Healthcare Technologies, Inc. is the largest distributor of healthcare
imaging equipment, supplies, accessories and services in the United States, and
a supplier to all major medical group purchasing organizations, or GPOs.
Previously, SourceOne was the primary sales channel for CAD products offered by
R2 Technologies, Inc., the Company's competitor. Overall, SourceOne has sold and
installed some 400 CAD systems for all of the companies that it has acted as a
distributor, representing 25%-35% of all film-based CAD systems sold and
installed in the United States, to date.
To effectively support iCAD's expanded field sales presence, the Company has
consolidated its field sales teams into nine geographic regions, each with a
locally-based Regional Sales Manager responsible for all reseller and OEM sales
activities in his or her region.
The Company maintains a National Accounts Sales Manager to work with and support
group purchasing activities and accounts, including iCAD's current relationships
with Kaiser Permanente, Premier; Healthcare Services of New England; Radiology
Partners, Inc.; MAGNET, Inc.; HealthTrust Purchasing; CareCore; and Consorta,
Inc.
11
The Company's Second Look 200 system was introduced to the market in limited
quantities at the end of 2003 and will be more broadly available beginning in
the second quarter of 2004. Because the Second Look 200 system is designed to
meet the needs of a broad population of lower-case-volume clinics, the Company
has established a separate category of resellers, including many Merry X-Ray
sales offices that will focus exclusively on promotion of the 200 product and
its associated ClickCAD marketing program. The Company expects that SourceOne,
with its well-developed direct marketing and telemarketing capabilities, will
make an effective contribution to the 200 and ClickCAD promotional and sales
achievements.
The Company is currently upgrading the Second Look 200 model to include the new
Second Look 6.0 cancer detection software, which improves cancer detection and
reduces marking of areas that are not cancers. The Company believes this
software upgrade is particularly valuable in lower-volume and fee-for-service
applications, because the reduced marker rate will make training and use of the
Second Look 200 easier. Expanded promotion of the Second Look 200 system and
introduction of the ClickCAD fee per procedure program will follow this
near-term product upgrade.
During the fourth quarter of 2003, CADx Systems' began distribution of products
for digital mammography through General Electric Medical Systems and Fischer
Imaging Corporation. The Company expects to continue to market such products
through its existing OEM relationships, and iCAD's objective is to secure
additional OEM relationships that can contribute to the sales growth in 2004.
COMPETITION
The Company currently faces direct competition from R2 Technology, Inc., which
received FDA approval to market its CAD systems for use in mammography screening
and diagnostics substantially before iCAD. Historically, R2 has been considered
the market leader. As a result of the Company's recent merger with Qualia and
its CADx subsidiaries, the Company believes that iCAD now offers the broadest
range of CAD solutions available, with performance equivalent or superior to its
competitor's. With greatly expanded sales and distribution channels, the Company
believes it is increasingly well positioned to compete with R2.
Kodak, Inc. has recently announced that it has received an approvable letter
from the FDA that is the precursor to receipt from the FDA of approval for it to
market a mammography CAD solution. The Company also expects that other potential
manufacturers will receive FDA approval to market competing CAD products in the
near future.
RISK FACTORS
THE COMPANY'S BUSINESS IS SUBJECT TO A NUMBER OF RISKS INCLUDING THE RISKS SET
FORTH BELOW.
THE COMPANY HAS INCURRED SIGNIFICANT LOSSES AND THERE CAN BE NO ASSURANCE THAT
THE COMPANY WILL BE ABLE TO ACHIEVE PROFITABILITY.
12
As of December 31, 2003, the Company has incurred losses in excess of $70
million in the aggregate since its inception, including a net loss of
approximately $8.5 million during the year ended December 31, 2003. There can be
no assurance that the Company will be able to achieve profitability.
THE COMPANY'S MEDICAL DIGITIZER BUSINESS HAS BEEN ADVERSELY AFFECTED BY THE
COMPANY'S ACQUISITION AND COMMERCIALIZATION OF A CAD PRODUCT LINE.
Prior to acquisition of a CAD product line, the Company promoted its medical
digitizer line to a variety of current and prospective customers offering or
seeking to offer their own CAD products. With the acquisition of a CAD product
line, the Company has entered into a competitive or potentially competitive
position with respect to such current and prospective customers, which has, in
some cases, led current and prospective customers to seek alternative suppliers
of medical digitizers. The Company's sales and marketing efforts, moreover, have
concentrated on CAD products during 2002 and 2003, and the Company has limited
development and support of its medical digitizer product channels during this
time. There can be no assurance that the Company's sales and marketing efforts
will result in increased sales of CAD products or that sales of the Company's
medical digitizer products will not continue to decline.
THE COMPANY MAY NEED ADDITIONAL FINANCING TO IMPLEMENT ITS STRATEGY AND EXPAND
ITS BUSINESS.
The Company may need additional debt or equity financing to pursue its strategy
and increase sales in the medical markets. Any financing that the Company needs
may not be available at all and, if available, may not be available on terms
that are acceptable to the Company. The failure to obtain financing on a timely
basis, or on economically favorable terms, could prevent the Company from
continuing its strategy or from responding to changing business or economic
conditions, and could cause the Company to experience difficulty in withstanding
adverse operating results or competing effectively.
BECAUSE A PORTION OF THE COMPANY'S SALES ARE OUTSIDE THE UNITED STATES, THE
COMPANY IS SUBJECT TO ADDITIONAL RISKS, INCLUDING DEVALUATIONS OF FOREIGN
CURRENCIES, INSTABILITY IN KEY GEOGRAPHIC MARKETS, TARIFFS AND OTHER TRADE
BARRIERS WHICH ARE NOT WITHIN THE COMPANY'S CONTROL.
The Company's international sales subject the Company to the risk of loss in the
event of devaluation of foreign currencies in which sales are made between the
time of contract and payment. The Company does not enter into currency hedging
transactions. In addition, the Company's international sales would be adversely
affected by political, social or economic instability or the imposition of
tariffs and other trade barriers in the geographic markets in which it sells its
products.
BECAUSE THE COMPANY FACES INTENSE COMPETITION FOR ITS PRODUCTS, PRICE
DISCOUNTING OFTEN OCCURS AND MAY ADVERSELY AFFECT THE COMPANY'S OPERATING
RESULTS.
13
The Company competes with a variety of companies for sales of its medical
imaging products. As a result, discounting among manufacturers and distributors
of the Company's products is intense. Increased price discounting could
adversely effect the Company's gross margins and operating results. The Company
cannot give any assurance that it will be able to effectively compete in the
future or that it will not be required to discount its products to increase
sales.
THE COMPANY'S PRODUCTS MAY BECOME OBSOLETE.
The Company's ability to compete effectively will depend, in large part, on its
ability to offer state of the art products. The Company's competitors might
develop and sell new products that are technically superior to the Company's
current product line that could result in the Company's inability to sell
existing products or its inability to sell its products without offering a
significant discount. The Company cannot give any assurance that its products
will not become obsolete in the future or that it will be able to upgrade its
product line or introduce new products if required.
THE COMPANY DEPENDS UPON A LIMITED NUMBER OF SUPPLIERS AND MANUFACTURERS FOR ITS
PRODUCTS, AND CERTAIN COMPONENTS IN ITS PRODUCTS MAY BE AVAILABLE FROM A SOLE OR
LIMITED NUMBER OF SUPPLIERS.
The Company's products are generally either manufactured and assembled for it by
a sole manufacturer, by a limited number of manufacturers or assembled by the
Company from supplies it obtains from a limited number of suppliers. Critical
components required to manufacture these products, whether by outside
manufacturers or directly, may be available from a sole or limited number of
component suppliers. The Company generally does not have long-term arrangements
with any of its manufacturers or suppliers. The loss of a sole or key
manufacturer or supplier would impair the Company's ability to deliver products
to customers in a timely manner and would adversely affect the Company's sales
and operating results. The Company's business would be harmed if any of its
manufacturers or suppliers could not meet the Company's quality and performance
specifications and quantity and timing requirements.
14
PROVISIONS OF THE COMPANY'S CORPORATE CHARTER DOCUMENTS AND DELAWARE LAW COULD
DELAY OR PREVENT A CHANGE OF CONTROL.
The Company's certificate of incorporation authorizes the board of directors to
issue up to 1,000,000 shares of preferred stock. The preferred stock may be
issued in one or more series, the terms of which may be determined at the time
of issuance by the Company's s board of directors, without further action by
stockholders, and may include, among other things, voting rights (including the
right to vote as a series on particular matters), preferences as to dividends
and liquidation, conversion and redemption rights, and sinking fund provisions.
There are two series of preferred stock currently outstanding which have
dividend and liquidation preferences over the Company's common stock. In
addition, specific rights granted to future holders of preferred stock could be
used to restrict the Company's ability to merge with, or sell its assets to a
third party. The ability of the Company's board of directors to issue preferred
stock could discourage, delay, or prevent a takeover of the Company thereby
preserving control by the current stockholders.
As a Delaware corporation, the Company is subject to the General Corporation Law
of the State of Delaware, including Section 203, an anti-takeover law enacted in
1988. In general, Section 203 restricts the ability of a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder. Subject to exceptions, an
interested stockholder is a person who, together with affiliates and associates,
owns, or within three years did own, 15% or more of a corporation's voting
stock. As a result of the application of Section 203, potential acquirers may be
discouraged from attempting to acquire the Company, thereby possibly depriving
its stockholders of acquisition opportunities to sell or otherwise dispose of
its stock at above-market prices typical of acquisitions.
THE PRICE OF THE COMPANY'S COMMON STOCK COULD BE VOLATILE.
The Company's common stock is quoted on the NASDAQ SmallCap Market which has
experienced, and is likely to experience in the future, significant price and
volume fluctuations which could adversely affect the market price of the
Company's common stock without regard to the operating performance. In addition,
the trading price of the Company's common stock could be subject to significant
fluctuations in response to actual or anticipated variations in the Company's
quarterly operating results announcements by the Company or its competitors,
factors affecting the medical imaging industry generally, changes in national or
regional economic conditions, changes in securities analysts' estimates for the
Company's competitors' or industry's future performance or general market
conditions. The market price of the Company's common stock could also be
affected by general market price declines or market volatility in the future or
future declines or volatility in the prices of stocks for companies in the
Company's industry.
THE COMPANY IS SUBJECT TO EXTENSIVE REGULATION WITH POTENTIALLY SIGNIFICANT
COSTS FOR COMPLIANCE.
The iCAD system for computer aided detection of breast cancer is a medical
device subject to extensive regulation by the FDA under the Federal Food, Drug,
and Cosmetic Act. The FDA's regulations govern, among other things, product
development, product testing, product labeling, product storage, pre-market
clearance or approval, advertising and promotion, and sales and distribution.
Unanticipated changes in existing regulatory requirements or adoption of new
requirements could, following the merger, adversely affect the Company's
business, financial condition and results of operations.
15
The FDA's Quality System Regulation requires that the Company's manufacturing
operations follow elaborate design, testing, control, documentation and other
quality assurance procedures during the manufacturing process. The Company is
subject to FDA regulations covering labeling regulations, adverse event
reporting, and the FDA's general prohibition against promoting products for
unapproved or off-label uses.
The Company's manufacturing facilities are subject to periodic unannounced
inspections by the FDA and corresponding state agencies and international
regulatory authorities for compliance with extensive regulatory requirements.
Although the Company believes its manufacturing facilities are currently in
compliance with applicable requirements, there can be no assurance that the FDA,
following an inspection of these manufacturing facilities, would determine that
they are in full compliance. The Company's failure to fully comply with
applicable regulations could result in the issuance of warning letters,
non-approvals, suspensions of existing approvals, civil penalties and criminal
fines, product seizures and recalls, operating restrictions, injunctions, and
criminal prosecution.
In order to market and sell its CAD products in certain countries outside of the
United States the Company must obtain and maintain regulatory approvals and
comply with the regulations of those countries. These regulations, including the
requirements for approvals, and the time required for regulatory review, vary
from country to country. Obtaining and maintaining foreign regulatory approvals
is an expensive and time consuming process. The Company cannot be certain that
it will be able to obtain the necessary regulatory approvals timely or at all in
any foreign country in which it plans to market its CAD products, and if the
Company fails to receive such approvals, its ability to generate revenue may be
significantly diminished.
THE COMPANY MAY NOT BE ABLE TO OBTAIN REGULATORY APPROVAL FOR ANY OF THE OTHER
PRODUCTS THAT IT MAY CONSIDER DEVELOPING.
The Company has received FDA approvals only for its currently offered iCAD
products. Before the Company is able to commercialize any other product, the
Company must obtain regulatory approvals for each indicated use for that
product. The process for satisfying these regulatory requirements is lengthy and
will require the Company to comply with complex standards for research and
development, testing, manufacturing, quality control, labeling, and promotion of
products.
THE COMPANY'S PRODUCTS MAY BE RECALLED EVEN AFTER THEY HAVE RECEIVED FDA
APPROVAL OR CLEARANCE.
16
If the safety or efficacy of the Company's products is called into question, the
FDA and similar governmental authorities in other countries may require the
Company to recall its products. This is true even if a Company product received
approval or clearance by the FDA or a similar governmental body. Such a recall
could be the result of component failures, manufacturing errors or design
defects, including defects in labeling. Such a recall would divert the focus of
the Company's management and its financial resources and could materially and
adversely affect its reputation with customers.
REFORMS IN REIMBURSEMENT PROCEDURES BY MEDICARE OR OTHER THIRD-PARTIES MAY
ADVERSELY AFFECT THE COMPANY'S BUSINESS.
In the United States, Medicare and a number of commercial third-party payers
provide reimbursements for the use of CAD in connection with mammography
screening and diagnostics. In the future, however, these reimbursements may be
unavailable or inadequate due to changes in applicable legislation or
regulations, changes in attitudes toward the use of mammograms for broad
screening to detect breast cancer or due to changes in the reimbursement
policies of third-party payers. As a result, healthcare providers may be
unwilling to purchase the Company's CAD products or any of the Company's future
products, which could significantly harm the Company's business, financial
condition and operating results.
Acceptance of the Company's products outside of the United States depends, in
part, upon the availability of similar reimbursements in the markets in which
the Company intends to focus its international marketing activities.
Reimbursements and health insurance systems in markets outside of the United
States vary from country to country. If the Company is unable to qualify its
products for reimbursement outside of the United States, the Company may not be
able to gain international market acceptance for its products.
There is no guaranty that any of the products which the Company contemplates
developing will become eligible for reimbursements or health insurance coverage
in the United States or abroad at favorable rates or even at all or maintain
eligibility.
THE SALES CYCLE FOR THE COMPANY'S PRODUCTS IS LENGTHY AND UNPREDICTABLE AND ITS
QUARTERLY RESULTS WILL BE UNPREDICTABLE.
Many of the customers of the Company's medical imaging products are
institutional organizations, such as hospitals, with significant purchasing
power and cyclical ordering practices. Although the Company's CAD system is
currently less expensive than the devices of its competitors, the purchase of
the iCAD CAD system requires a material capital expenditure that will likely
require approval of the Company's customers' senior management and result in a
lengthy sales and purchase order cycle. Consequently, the Company may be unable
to accurately estimate its manufacturing and support requirements. The Company's
larger institutional customers may also demand discounted prices on the
Company's products. As a result, the Company's actual sales may differ
significantly from its estimated sales and the Company may incorrectly allocate
its resources. If the Company is unable to accurately project sales and allocate
corresponding resources, it may incur substantial fluctuations in its operating
results for any given quarter.
17
Even if the Company is able to achieve profitability in future fiscal periods,
it may occur in a quarter with concentrated revenue. In that case, the Company
would expect reduced revenue in the following quarter or quarters, and possibly
a quarterly loss or quarterly losses. As a result, stockholders may not be able
to rely upon the Company's operating results in any particular period as an
indication of future performance.
THE MEDICAL EQUIPMENT INDUSTRY IS LITIGIOUS, AND THE COMPANY HAS BEEN AND MAY BE
SUED AGAIN FOR ALLEGEDLY VIOLATING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
The medical technology industry is characterized by a substantial amount of
litigation and related administrative proceedings regarding patents and
intellectual property rights. In addition, major medical device companies have
used litigation against emerging growth companies as a means of gaining a
competitive advantage.
From time to time, the Company may learn of allegations or threats from third
parties drawing its attention to their patent rights. There may be patent rights
of which the Company is presently unaware. The Company anticipates that the
costs associated with its legal defense against claims of patent infringement by
a competitor in the CAD industry will have a material and adverse effect on its
financial condition during the period of the litigation.
Should third parties file patent applications or be issued patents claiming
technology also claimed by the Company in pending applications, the Company may
be required to participate in interference proceedings in the U.S. Patent and
Trademark Office to determine the relative priorities of its inventions and the
third parties' inventions. The Company could also be required to participate in
interference proceedings involving any patents which may be issued to the
Company and pending applications of another entity. An adverse outcome in an
interference proceeding could require the Company to cease using the technology
or to license rights from prevailing third parties.
The Company is also aware of third parties whose business involves the use of
CAD systems. Certain of these parties have issued patents or pending patent
applications on technology that they may assert against the Company. Third
parties may claim the Company is using their patented inventions and may go to
court to stop the Company from engaging in its normal operations and activities.
These lawsuits are expensive to defend and conduct and would also consume and
divert the time and attention of the Company's management. A court may decide
that the Company is infringing a third party's patents and may order it to cease
the infringing activity. The court could also order the Company to pay damages
for the infringement. These damages could be substantial and could harm the
Company's business, financial condition and operating results.
If the Company is unable to obtain any necessary license following a
determination of infringement or an adverse determination in litigation or in
interference or other administrative proceedings, the Company would have to
redesign its products to avoid infringing a third party's patent and could
temporarily or permanently have to discontinue manufacturing and selling some of
its products. If this were to occur, it would negatively impact future revenue
and would have a material adverse effect on the Company's business, financial
condition and results of operations.
18
THE COMPANY MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS AND,
CONSEQUENTLY, THE COMPANY'S COMPETITORS MAY BENEFIT FROM THE COMPANY'S EFFORTS
AND COMPETE DIRECTLY AGAINST THE COMPANY.
Presently, patent applications have been filed for aspects of the proprietary
technology employed by the Company in its CAD and medical digitizer products.
The Company's patent applications, or any patents which may be issued to it, may
be challenged, invalidated or circumvented by third parties. Any patent
ultimately issued to the Company may not be in a form that will be beneficial to
the Company. To the extent the Company is unable to adequately protect any of
the intellectual property used in connection with its current or any future
products, competitors may take advantage of the situation and produce competing
products, which could harm the Company's competitive position and ultimately
harm its operating results.
The Company also relies on a combination of copyright, trade secret and
trademark laws, and nondisclosure, confidentiality agreements and other
contractual restrictions to protect its proprietary technology. However, these
legal means afford only limited protection and may not adequately protect the
Company's rights or permit it to gain or keep any competitive advantage. The
Company may not be able to prevent the unauthorized disclosure or
misappropriation of its technical knowledge or other trade secrets by employees.
If that were to occur, the Company's proprietary technologies and software
applications would lose value and the Company's business, results or operations
and financial condition could be materially adversely affected.
Adverse events could undermine the Company's efforts to protect its intellectual
property. The Company's competitors may be able to develop competing
technologies or products that do not infringe any of the Company's intellectual
property rights. Even if a competitor infringes the Company's intellectual
property rights, the Company may be unable to bring, or prevail in, a suit to
protect its rights.
Furthermore, the laws of some foreign countries may not adequately protect the
Company's intellectual property rights. As a result of all of these factors, the
Company's efforts to protect its intellectual property may not be adequate, and
the Company's competitors may independently develop similar competing
technologies or products, duplicate the Company's products, or design around the
Company's intellectual property rights. This would harm the Company's
competitive position, decrease its market share, or otherwise harm its business.
THE COMPANY MAY BE UNABLE TO SECURE LICENSES FOR ANY TECHNOLOGY WHICH MAY BE
NECESSARY TO IMPROVE CURRENT OR FUTURE PRODUCTS.
It is likely that the technology underlying the Company's existing and planned
products may be fundamentally improved and that the resulting technology may be
owned by third parties. As a result, the Company may be required to obtain
licenses to this new technology to improve its current or future products. The
cost of licensing such technology may significantly increase the unit cost of
its products.
19
The Company may be unable to obtain favorable terms for licenses for this new
technology or, alternatively, the owners of the technology may refuse to license
it to the Company in order to maintain their own competitive advantage. In
either case, the Company's products may not be competitive with the products
manufactured by others. Even if the Company were able to obtain rights to a
third party's patented intellectual property, these rights may be non-exclusive,
thereby giving the Company's competitors access to the same intellectual
property.
SOME STUDIES HAVE QUESTIONED THE EFFICACY OF USING MAMMOGRAPHY AS A METHOD TO
REDUCE MORTALITY. IF MAMMOGRAPHY PROVES TO BE LESS EFFECTIVE, THE COMPANY'S
BUSINESS WOULD BE SERIOUSLY HARMED. IN ADDITION, COMPETING TECHNOLOGIES COULD
REPLACE MAMMOGRAPHY AS THE PREFERRED METHOD FOR SCREENING FOR BREAST CANCER.
The Company is aware that the efficacy of screening mammography to reduce
mortality has been questioned in several publications. Even if unproven, this
could lead to a reduction in the use of mammography as a tool to detect breast
cancer in the United States and abroad. If mammography is ultimately proven to
be ineffective, or if recommendations for regular mammograms were eliminated or
reduced, the Company's business would certainly be seriously harmed.
The Company is also aware of companies that are developing alternatives to
traditional breast cancer detection, including refractive light, thermal
technologies, breast ultrasound, magnetic resonance imaging and non-imaging
tests.
THE COMPANY MAY BE EXPOSED TO SIGNIFICANT PRODUCT LIABILITY FOR WHICH THE
COMPANY MAY NOT BE ABLE TO PROCURE SUFFICIENT INSURANCE COVERAGE.
The Company's business exposes it to potential product liability risks which are
inherent in the testing, manufacturing, marketing and sale of medical imaging
devices. If available at all, product liability insurance for the medical device
industry generally is expensive. Currently, the Company has liability insurance
coverage which it deems appropriate for its current stage of development. No
assurance can be given that this level of coverage will be adequate or that
adequate insurance coverage will be available in sufficient amounts or at a
reasonable cost in the future, or that a product liability claim would not have
a material adverse effect on the Company.
THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT ITS CURRENT BUSINESS MODEL
OR EFFECTIVELY MANAGE ITS GROWTH.
The Company only commenced generating revenue from the sale of its first CAD
product in 2002. Sales of the Company's products may not generate sufficient
cash to support the Company's future operations. There can be no assurance that
adequate funds for the Company's operations, whether from the Company's
revenues, financial markets, collaborative or other arrangements with corporate
partners, if any, or from other sources, will be available when needed or on
terms attractive to the Company. The inability to obtain sufficient funds may
require the Company to delay, scale back or eliminate some or all of its
development activities, clinical studies and/or regulatory activities or to
license third parties to commercialize products or technologies that the Company
would otherwise seek to develop itself. No assurance can be given that any
future technologies or products that may be developed by the Company will be
successfully developed, commercialized or accepted by the marketplace or that
sufficient revenues will be realized to support operations or future research
and development programs.
20
To address these risks, the Company must, among other things, establish,
maintain and increase its relationships with radiologists and other members of
the health care industry, implement and successfully execute the Company's
business and marketing strategies, respond to competitive developments, and
attract, retain and motivate qualified personnel. There can be no assurance that
the Company will be successful in addressing such risks, and the failure to do
so could have a material adverse effect on the Company's business, financial
condition and results of operations.
THE COMPANY'S FUTURE PROSPECTS DEPEND ON ITS ABILITY TO RETAIN CURRENT KEY
EMPLOYEES AND ATTRACT ADDITIONAL QUALIFIED PERSONNEL.
The Company's success depends in large part on the abilities and continued
service of the Company's executive officers and other key employees. The Company
may not be able to retain the services of its executive officers and other key
employees. The loss of executive officers or other key personnel could have a
material adverse effect on the Company.
In addition, in order to support the Company's continued growth, the Company
will be required to effectively recruit, develop and retain additional qualified
personnel. If the Company is unable to attract and retain additional necessary
personnel, it could delay or hinder the Company's plans for growth. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to successfully attract, assimilate or retain sufficiently
qualified personnel. The failure to retain and attract necessary personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations.
SOME OF THE COMPANY'S COMPETITORS HAVE SIGNIFICANTLY GREATER RESOURCES AND MAY
PREVENT THE COMPANY FROM ACHIEVING OR MAINTAINING SIGNIFICANT MARKET SHARE. AS
THE MARKET FOR CAD GROWS, COMPETITION FOR MAMMOGRAPHY PRODUCTS WILL LIKELY
INCREASE.
The medical equipment market is highly competitive and changes rapidly.
Competitors in this market are highly sensitive to the introduction of new
products and competitors. Other well known medical imaging equipment
manufacturers have explored the possibility of introducing their own versions of
CAD products into the market. Because many of these companies have significantly
greater resources than the Company has, they may be able to respond more quickly
to the evolving and emerging technologies in the market and they may be better
suited to respond the changing needs of their customers. The financial strength
of many of these companies may enable them to develop their own proprietary CAD
products or acquire the Company's competitors to bring competing products to
market more quickly. Additionally, some of these companies benefit from name
recognition, established relationships with healthcare professionals,
diversified product lines, established distribution channels, and greater
product development, manufacturing, and sales and marketing resources.
The Company currently faces direct competition from R2 Technology, Inc., which
received FDA approval to market its CAD systems for use in mammography screening
and diagnostics substantially before iCAD. The Company expects that as the
market for CAD grows, other competitors may seek to introduce CAD products
priced even lower than the Company. Customers seeking a low-cost CAD solution
may prefer a competitor's lower-priced product to the Company's and may result
in pricing cutting by the Company which will reduce its profit margin.
21
GOVERNMENT REGULATION
The Company is subject to extensive regulation with potentially significant
costs for compliance. The iCAD system for computer aided detection of breast
cancer is a medical device subject to extensive regulation by the FDA under the
Federal Food, Drug, and Cosmetic Act. The FDA's regulations govern, among other
things, product development, product testing, product labeling, product storage,
pre-market clearance or approval, advertising and promotion, and sales and
distribution. Unanticipated changes in existing regulatory requirements or
adoption of new requirements could adversely affect the Company's business,
financial condition and results of operations.
The FDA's Quality System Regulation requires that the Company's manufacturing
operations follow elaborate design, testing, control, documentation and other
quality assurance procedures during the manufacturing process. The Company is
subject to FDA regulations covering labeling regulations, adverse event
reporting, and the FDA's general prohibition against promoting products for
unapproved or off-label uses.
The Company's manufacturing facilities are subject to periodic unannounced
inspections by the FDA and corresponding state agencies and international
regulatory authorities for compliance with extensive regulatory requirements.
Although the Company believes its manufacturing facilities are currently in
compliance with applicable requirements, there can be no assurance that the FDA,
following an inspection of these manufacturing facilities, would determine that
they are in full compliance. The Company's failure to fully comply with
applicable regulations could result in the issuance of warning letters,
non-approvals, suspensions of existing approvals, civil penalties and criminal
fines, product seizures and recalls, operating restrictions, injunctions, and
criminal prosecution.
In order to market and sell its CAD products in certain countries outside of the
United States the Company must obtain and maintain regulatory approvals and
comply with the regulations of those countries. These regulations, including the
requirements for approvals, and the time required for regulatory review, vary
from country to country. Obtaining and maintaining foreign regulatory approvals
is an expensive and time consuming process. The Company cannot be certain that
it will be able to obtain the necessary regulatory approvals timely or at all in
any foreign country in which it plans to market its CAD products, and if the
Company fails to receive such approvals, its ability to generate revenue may be
significantly diminished.
The Company may not be able to obtain regulatory approval for any of the other
products that it has considered developing. The Company has received FDA
approvals only for its currently offered iCAD products. Before the Company is
able to commercialize any other product, the Company must obtain regulatory
approvals for each indicated use for that product. The process for satisfying
these regulatory requirements is lengthy and will require the Company to comply
with complex standards for research and development, testing, manufacturing,
quality control, labeling, and promotion of products.
22
The Company's products may be recalled even after it has received FDA approval
or clearance. If the safety or efficacy of the Company's products are called
into question, the FDA and similar governmental authorities in other countries
may require the Company to recall its products. This is true even if the Company
has previously received approval or clearance by the FDA or a similar
governmental body. Such a recall could be the result of component failures,
manufacturing errors or design defects, including defects in labeling. Such a
recall would divert the focus of the Company's management and its financial
resources and could materially and adversely affect its reputation with
customers.
SOURCES AND AVAILABILITY OF MATERIALS
The Company depends upon a limited number of suppliers and manufacturers for its
products, and certain components in its products may be available from a sole or
limited number of suppliers. The Company's products are generally either
manufactured and assembled for it by a sole manufacturer, by a limited number of
manufacturers or assembled by the Company from supplies it obtains from a
limited number of suppliers. Critical components required to manufacture these
products, whether by outside manufacturers or directly, may be available from a
sole or limited number of component suppliers. The Company generally does not
have long-term arrangements with any of its manufacturers or suppliers. The loss
of a sole or key manufacturer or supplier would impair the Company's ability to
deliver products to customers in a timely manner and would adversely affect the
Company's sales and operating results. The Company's business would be harmed if
any of its manufacturers or suppliers could not meet the Company's quality and
performance specifications and quantity and timing requirements.
PATENTS AND LICENSES
The Company has several patents covering its CAD and scanner technologies in the
United States and certain foreign countries. These patents help the Company
maintain a proprietary position in these markets, but because of the pace of
innovation in that market it is difficult to determine the overall importance of
these patents to the Company.
The Company has current patent applications pending domestically and
internationally, and plans to file additional domestic and foreign applications
when it believes such protection will benefit the Company. These patent
applications relate to computer aided detection technology and to digitizer
technology. There is no assurance that additional patents will be obtained
either in the United States or in foreign countries or that existing or future
patents or copyrights will provide substantial protection or commercial benefit
to the Company.
23
To date, iCAD has applied for over 44 patents relating to current and future
medical applications for iCAD's technology and products. The Company has been
granted 14 patents, including a broad set of claims covering the combination
computer analysis of mammography data and a human analysis of that same data in
breast cancer detection, and extensions of the same concept from mammography to
other medical imaging applications.
There is rapid technological development in the Company's markets with
concurrent extensive patent filings and a rapid rate of issuance of new patents.
Although the Company believes that its technologies have been independently
developed and do not infringe the patents or intellectual property rights of
others, certain components of the Company's products could infringe patents,
either existing or which may be issued in the future, in which event the Company
may be required to modify its designs or obtain a license. No assurance can be
given that the Company will be able to do so in a timely manner or upon
acceptable terms and conditions; and the failure to do either of the foregoing
could have a material adverse effect upon the Company's business.
In February 2003 iCAD secured a patent license to United States, Canadian, and
Japanese patents owned by Scanis, Inc., which relate broadly to computer aided
detection of breast cancer. Rights to a European patent application covering
similar inventions are also included. In conjunction with the patent license to
iCAD, scanis entered into a multi-year, exclusive digitizer supply agreement
with iCAD's wholly owned subsidiary, Howtek Devices Corporation. In
consideration for the patent license from Scanis, Inc. the Company granted
discounts to scanis with respect to future purchases of the Company's digitizer
products.
In addition to protecting its technology and products by seeking patent
protection when deemed appropriate, the Company also relies on trade secrets,
proprietary know how and continuing technological innovation to develop and
maintain its competitive position. The Company requires all of its employees to
execute confidentiality agreements. Insofar as the Company relies on
confidentiality agreements, there is no assurance that others will not
independently develop similar technology or that the Company's confidentiality
agreements will not be breached.
All key officers and employees have agreed to assign to the Company certain
technical and other information and patent rights, if any, acquired by them
during their employment with the Company and after any termination of their
employment with the Company (if such information or rights arose out of
information obtained by them during their employment).
MAJOR CUSTOMERS
During the years ended December 31, 2003 and 2002 the Company had sales of
$2,921,535 and $2,631,709, or 45% and 53% of sales, respectively, to
Instrumentarium Imaging, Inc. and an accounts receivable balance of $156,003 and
$1,190,990, respectively, due from this customer at December 31, 2003 and 2002.
The Company did not have any major customers in 2001.
24
MANUFACTURING, CUSTOMER SUPPORT AND SERVICE
The Company's New Hampshire facility is certified as a medical manufacturing
facility by the FDA and complements three experienced contract manufacturing
resources (two in New England and one in Colorado) that the Company uses to
manufacture and assemble its products. The Company has manufactured complex
professional or medical products, directly and through contract, since 1986.
As part of the acquisition of CADx, iCAD will provide an increasing range of
customer support resources through its 24-hour on-line web site and a
centralized customer help desk, which deals with customer questions and issues,
manages return-to-factory service requests, and dispatches and monitors field
service operations from 8AM to 8PM EST on business days. The Company has
centralized its front-line customer help service in its Ohio office, taking
advantage of the existing, sophisticated phone and information systems available
there.
ENGINEERING AND PRODUCT DEVELOPMENT
The Company spent $2,384,057, $1,626,001, and $751,467 on research and
development activities during the years ended December, 2003, 2002 and 2001,
respectively. The research and development expenses for 2003 are primarily
attributed to the development of the Company's new Second Look 200 (formerly the
iCAD iQ(TM) model), the Company's Fulcrum medical film digitizer and software
development to support its CAD products.
EMPLOYEES
On March 1, 2004 the Company had 110 full and part-time employees. As a result
of planned cost-reduction measures designed to improve the Company's operating
results, implemented during the first quarter of 2004 and taking effect March
31, 2004, the Company expects to have reduced its workforce on such date to 71
full and part-time employees. None of the Company's employees are represented by
labor organizations and the Company is not aware of any activities seeking such
organization. The Company considers its relations with employees to be good.
BACKLOG
The dollar amount of the Company's backlog, and orders believed to be firm, as
of December 31, 2003 was approximately $863,000 as compared to approximately
$338,000 on the corresponding date in 2002. Approximately $755,000 of the
backlog, and orders believed to be firm, is as a result of the merger with CADx.
25
ENVIRONMENTAL PROTECTION
Compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had a material effect
upon the capital expenditures, earnings (losses) and competitive position of the
Company.
FINANCIAL GEOGRAPHIC INFORMATION
The Company's sales are made to U.S. distributors, dealers and to foreign
distributors of computer and related products. Total export sales were $289,000
or 4% of total sales in 2003, $301,000 or 6% of total sales in 2002 and $944,000
or 20% of total sales in 2001.
The Company's principal concentration of export sales was in Australia, which
accounted for 35% of the Company's export sales in 2003 and 2001, with Europe
accounting for 26% of the Company's export sales in 2002. The balance of the
export sales was into Canada and the Far East.
26
ITEM 2. PROPERTIES
The Company's principal executive office is located at 4 Townsend West, Suite
17, Nashua, New Hampshire. The facility consists of approximately 9,000 square
feet of manufacturing, research and development and office space and is leased
by the Company pursuant to a lease which expires December 31, 2006 at an annual
rent of approximately $69,000.
The Company leases a facility for its software research and development group
located at 4902 Eisenhower Blvd, Suite 185, Tampa, Florida. The facility
consists of approximately 2,670 square feet of research and development and
office space and is leased by the Company pursuant to a lease, which expires
July 31, 2007 at an annual rent of approximately $53,000. Additionally, the
Company is required to pay real estate taxes and provide insurance.
In addition, as a result of its acquisition of CADx on December 31, 2003, the
Company leases a facility for its software research and development, customer
service and administrative offices located at 2689 Commons Blvd, Suite 100,
Beavercreek, Ohio. The facility consists of approximately 26,000 square feet of
research and development and office space and is leased by the Company pursuant
to a lease, which expires December, 2010 at an annual rate of approximately
$416,000. Additionally, the Company is required to provide insurance and to pay
real estate taxes, utilities, common area maintenance, cleaning and security.
The lease amount increases annually throughout the life of the lease. The lease
may be renewed for two additional terms of five years each.
If the Company is required to seek additional or replacement facilities, it
believes there are adequate facilities available at commercially reasonable
rates.
ITEM 3. LEGAL PROCEEDINGS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ SmallCap Market under the
symbol "ICAD". The following table sets forth the range of high and low sale
prices for each quarterly period during 2003 and 2002.
Fiscal year ended High Low
---- ---
December 31, 2003
- -----------------
First Quarter $2.490 $1.400
Second Quarter 2.440 1.630
Third Quarter 3.300 1.920
Fourth Quarter 6.610 2.510
Fiscal year ended
December 31, 2002
First Quarter $3.500 $1.420
Second Quarter 3.250 2.010
Third Quarter 3.170 .950
Fourth Quarter 2.800 1.030
As of March 18, 2004 there were 348 holders of record of the Company's Common
Stock. In addition, the Company believes that there are in excess of 700 holders
of the Common Stock whose shares are held in "street name".
The Company has not paid any cash dividends on its Common Stock to date, and the
Company does not contemplate payment of cash dividends in the foreseeable
future. Future dividend policy will depend on the Company's earnings, capital
requirements, financial condition, and other factors considered relevant to the
Company's Board of Directors. There are no non-statutory restrictions on the
Company's present or future ability to pay dividends. The Company currently has
two outstanding Series of Preferred Stock that have dividend rights that are
senior to holders of Common Stock.
In connection with the December 31, 2003 acquisition by iCAD, Inc. of Qualia
Computing, Inc. and its subsidiaries, including CADx Systems, Inc., iCAD issued
to certain of the holders of the common stock, $.00001 par value of Qualia
Computing, Inc., an aggregate of 4.3 million shares of iCAD common stock for
their outstanding shares of Qualia Computing, Inc. held by them immediately
prior to the Merger. The iCAD shares were issued in reliance on the exemptions
from registration under Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.
See Item 7 Liquidity and Capital Resources for certain information regarding
sales of the equity securities in a private placement on November 24, 2003,
which sales were made pursuant to Section 4(2) and Regulation D of the
Securities Act of 1933.
See Item 12 for certain information with respect to the Company's equity
compensation plans in effect at December 31, 2003.
28
ITEM 6. SELECTED FINANCIAL DATA
SELECTED STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Sales $ 6,520,306 $ 5,000,184 $ 4,835,297 $ 7,793,517 $ 6,663,230
Gross margin 3,578,643 (161,459) 898,891 1,900,027 1,594,124
Total operating expenses (11,662,396) (9,208,664) (3,439,557) (3,595,661) (3,789,306)
Loss from operations (8,083,753) (9,370,123) (2,540,666) (1,695,634) (2,195,182)
Interest expense - net (114,655) (48,167) (80,105) (132,014) (1,801,646)
Net loss (8,198,408) (9,418,290) (2,620,771) (1,827,648) (3,996,828)
Net loss available to common stockholders (8,342,666) (9,566,340) (2,775,821) (2,896,520) (3,996,828)
Net loss per share (0.31) (0.46) (0.20) (0.22) (0.32)
Weighted average shares outstanding
basic and diluted 26,958,324 20,928,397 13,950,119 13,373,086 12,660,613
SELECTED BALANCE SHEET DATA
AS OF DECEMBER 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total current assets $11,115,003 $ 3,116,665 $ 3,586,602 $ 5,082,016 $ 4,457,910
Total assets 62,662,136 26,077,356 4,161,125 5,945,928 5,696,609
Total current liabilities 7,705,351 4,313,690 2,003,807 2,143,873 2,019,340
Loans payable to related parties, including
current portion 3,630,000 200,000 500,000 1,400,000 1,140,000
Note payable, including current portion 4,608,390 173,916 178,870 -- --
Convertible Subordinated Debentures,
including current portion 10,000 10,000 10,000 117,000 117,000
Stockholders' equity 47,895,630 21,455,276 2,039,557 2,902,055 2,920,269
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In May 2002, the SEC proposed disclosure rules that would require registrants to
include in Management's Discussion and Analysis a separate section regarding the
application of critical accounting policies that discloses the critical
accounting estimates that are made by a registrant in applying its accounting
policies and information concerning the initial adoption of certain accounting
policies that have a material impact on a registrant's financial presentation.
Note 1 of the Notes to the Consolidated Financial Statements includes a summary
of the significant accounting policies and methods used in the preparation of
our Consolidated Financial Statements. The following is a brief discussion of
the more significant accounting policies and methods used by the Company.
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require the Company to make
estimates and assumptions. On an on-going basis, the Company evaluates its
estimates related to the allowance for doubtful accounts, inventory and warranty
reserves and the estimated useful lives of its fixed and identifiable intangible
assets. Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions and may have a material effect on financial
information.
Revenue is recognized when products are shipped to customers, provided that
there are no uncertainties regarding customer acceptance, there is persuasive
evidence of an arrangement, the sales price is fixed or determinable and
collection of the related receivable is probable.
Long-lived assets, such as intangible assets, other than goodwill, and property
and equipment, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets are written
down to fair value. Goodwill is not amortized and is evaluated for impairment at
least annually.
Accounts receivable are customer obligations due under normal trade terms. The
Company performs continuing credit evaluations of its customers' financial
condition and generally does not require collateral. Senior management reviews
accounts receivable on a periodic basis to determine if any receivables will
potentially be uncollectible. The Company includes any accounts receivable
balances that are determined to be uncollectible, along with a general reserve,
in its overall allowance for doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
30
RESULTS OF OPERATIONS
OVERVIEW
iCAD(TM), Inc. ("iCAD" or the "Company") was incorporated in 1984 in the State
of Delaware, as Howtek, Inc., and has sold and supported over 20,000 high
quality, professional graphic arts, photographic and medical imaging systems
worldwide. In 2001, iCAD elected to concentrate on its medical imaging and
women's health businesses with an objective of expanding this business through
increased product offerings. This goal was advanced in June 2002 with the
acquisition of Intelligent Systems Software, Inc. ("ISSI"), a software company
offering computer aided detection ("CAD") systems for breast cancer.
Subsequently, on December 31, 2003, the Company merged with and acquired CADx
Systems, Inc. and its parent company Qualia Computing, Inc. (together "CADx"),
bringing together two of the three companies approved by the US Food and Drug
Administration (FDA) to market computer aided detection of breast cancer
solutions in the United States.
iCAD develops, engineers, manufactures and markets computer aided detection
(CAD) products for the early detection of breast cancer and other health-care
related applications. Early detection of breast cancer can save lives and often
permits less costly, less invasive and less disfiguring cancer treatment options
than when the cancer is detected at a later stage. Computer aided detection from
iCAD can detect 25% of breast cancers, an average of 14 months earlier than
screening mammography alone.
iCAD is the only independent, integrated digitizer hardware and CAD software
company offering computer aided detection solutions. As such, we are able to
reduce costs at each step in the CAD product design, production and assembly
process. We believe our vertical integration of CAD and hardware development
results in better integration of software and film digitizer components, lower
production costs and reduced administrative overhead. These factors have allowed
us to progressively enhance our CAD product line, while reducing the costs of
our CAD products to many customers and allowing more women to realize the
benefits inherent in the early detection of breast cancer.
The Company's CAD systems include proprietary software technology together with
standard computer and display equipment. CAD systems for the film-based
mammography market also include a radiographic film digitizer manufactured by
the Company. iCAD also manufactures medical film digitizers for a variety of
medical imaging and other applications. The Company believes that iCAD's
experience in providing film digitizers and software for medical picture
archiving and communications (PACS) and telemedicine applications contributes to
the successful integration of the Company's CAD products into networked and
digital mammography environments. The Company's headquarters and its production
and assembly facilities are located in southern New Hampshire.
31
MERGER WITH QUALIA AND CADX
On December 31, 2003, the Company completed the acquisition of Qualia Computing,
Inc., a privately held company based in Beavercreek, Ohio, and its subsidiaries,
including CADx Systems, Inc. (together "CADx"). This merger brings together two
of the three companies approved by the US Food and Drug Administration (FDA) to
market computer aided detection of breast cancer solutions in the United States.
The Company's objective in the acquisition of CADx was to achieve profitability
and support accelerated development of future business and product opportunities
in the medical imaging field. Since completion of the merger, iCAD has executed
a methodical, step-by-step plan to increase revenues by consolidating sales
channels and defining an industry-leading continuum of CAD products. The Company
has also taken steps to reduce projected operating costs by approximately $4
million on an annualized basis. For these reasons, the Company does not believe
that iCAD's reported results for the fourth quarter or full year 2003 are
indicative of the Company's future prospects or financial results. Additional
unaudited information on the combined financial performance of the combined
companies for 2003 can be found in the Company's current report on form 8-K for
the event dated February 24, 2004, which information and form 8-K is not
incorporated in, or part of, this annual report.
To complete the merger, iCAD issued 4,300,000 shares of its common stock in
exchange for all outstanding shares of Qualia Computing Inc. and CADx Systems,
Inc. This represents approximately 13% of the outstanding shares of iCAD common
stock after the merger. Additionally, iCAD paid $1,550,000 in cash and executed
a 36-month secured promissory note in the amount of $4,500,000 to purchase
Qualia shares that were owned by two institutional investors.
SUBSEQUENT REDUCTIONS IN OPERATING EXPENSES
Operating expenses for the combined companies substantially exceeded those of
iCAD alone. During the first quarter of 2004 the Company assessed the
opportunities to achieve post-merger operating economies, and identified
cost-reduction opportunities in light of its distribution and product plans. As
a result of this analysis management determined that operating expenses could be
substantially reduced without detracting from the Company's ability to increase
sales and focus on future products and markets. Cost-reduction actions taken by
iCAD in the first quarter of 2004 included the closure of offices in Tampa,
Florida and San Rafael, California; reductions in staffing effective March 31,
2004 of 39 of 110 previous full and part-time employees, and the reduction of
duplication in marketing, administrative and other activities. As a result of
these cost-reduction actions, the Company will report certain non-recurring
severance and office closure expenses in the quarter ending March 31, 2004.
During the first quarter of 2004, the Company anticipates operating expenses,
excluding non-recurring severance and office closure expenses, of between $4.8
million to $5.1 million. Based on cost reduction measures implemented in the
first quarter of 2004, and on current assumptions regarding expected revenues,
product and channel mix, the Company anticipates incurring operating expenses of
between $3.9 million to $4.2 million for the quarter ending June 30, 2004. Of
total projected operating expenses for this period, approximately 36% is
expected to represent research, development and engineering expenses,
approximately 31% is expected to represent sales and marketing expense
(including sales commissions) and approximately 33% is expected to represent
administrative and finance expenses. The Company's objective is to maintain
operating expenses at relatively constant quarterly dollar levels through the
third and fourth quarters of 2004, while achieving reductions in each expense
category as a percentage of increasing sales. Actual results will differ.
32
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Sales. Sales of the Company's CAD and medical imaging products for the year
ended December 31, 2003 were $6,520,306, compared with sales of medical imaging
products and total sales for the year ended December 31, 2002 of $4,288,628 and
$5,000,184, respectively. This reflects an increase of 52% in medical sales and
30% in total sales from period to period. Sales increased in 2003 as a result of
the addition of the CAD product line through acquisition of ISSI in June 2002.
The Company believes that sales will increase in future periods as a result of
its merger with CADx and the combination of its iQ, MammoReader and Second Look
products into one "Second Look(R)" branded line of CAD devices. In doing so, the
Company believes it has created the broadest and most comprehensive line of CAD
products available from any company, and associated it with a single well
recognized and appropriate model brand.
Additionally, in the first quarter of 2004, the Company consolidated its
full-line sales channels as part of its efforts to best promote and support its
broad Second Look product line. iCAD Second Look products are now distributed
nationally, on a non-exclusive basis, by SourceOne HealthCare Technologies, and
by additional independent resellers, including members of the National Imaging
Resellers (NIR) dealer group and Merry X-Ray Corporation. Overall, some 200
field sales personnel are now available to represent and promote iCAD products
in the United States.
During the first quarter of 2004, multiple changes in sales channels, sales
management and organization, product naming, positioning and marketing have been
implemented. In connection with the consolidation of sales channels and product
lines, the Company has combined iCAD's IQ, MammoReader and Second Look products
into one `Second Look(R)'-branded line of CAD solutions. As a result, the
Company believes iCAD has created the broadest and most comprehensive line of
CAD products available in the industry and associated it with a single,
well-recognized and appropriate model brand.
In anticipation of these changes in channels and product positioning, iCAD
deferred key elements of its business plan prior to the merger, and this
negatively impacted sales during the fourth quarter of 2003. In particular, iCAD
suspended the development and training of an independent reseller network and
deferred the launch of its lower-priced iCAD iQ product (now the Second Look
200) and its fee-per-service ClickCAD marketing initiative. These actions will
also cause first quarter 2004 sales of the merged companies to trail the
combined sales of the two companies during the fourth quarter of 2003. However,
the Company expects sales growth to resume in the second quarter, and full year
2004 sales should substantially exceed the combined revenues of iCAD and CADx
($16.8 million) in 2003.
Factors that are expected to play a significant role in future sales growth and
profitability include the following:
o Increased promotion and sale of the Company's Second Look 200
system, which offers a CAD solution to lower-case-volume clinics;
33
o Expansion of the products promoted by CADx' former distributor to
include the full line of iCAD products, including the Second Look
200;
o Increased sales contributions by independent resellers identified by
iCAD prior to the merger, and
o Promotion of iCAD's new ClickCAD fee-per-service marketing program.
Gross Margin. Gross margin as a percentage of sales, for the year ended December
31, 2003, improved to 55% compared to (3%) 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 relating to its graphic arts and photographic products in
the amount of $2,369,539. If such write-offs are excluded, gross margins as a
percentage of sales, for the year ended December 31, 2003, improved to 55%
compared to 49% for the year ended December 31, 2002.
Although there can be no assurance of its future gross margin rate, the Company
expects that future increases in gross margin as a percentage of sales will be
achieved as a result of increasing sales of its higher margin CAD products and
as production and other economies of scale resulting from the merger are
realized. By applying its manufacturing experience and using existing supplier
relationships, we expect to reduce component and manufacturing costs associated
with the former CADx product line during 2004, with some associated cost savings
expected in the manufacturing of previous iCAD products.
Engineering and Product Development. Engineering and product development costs
for the year ended December 31, 2002 increased from $1,626,001 in 2002 to
$2,384,057 in 2003. The increase in engineering and product development costs
resulted primarily from the Company's addition, as a result of its acquisition
of ISSI in June 2002, of the software technology development group to support
its CAD products. Additionally, the increase is attributed to the development of
the Company's new Second Look 200 (formerly the iCAD iQ(TM) model) and tHe
Fulcrum medical film digitizer. With the completion of the merger with CADx on
December 31, 2003, the Company expects that engineering and product development
costs will increase in absolute terms in 2004 compared to 2003, as the Company
invests in new product development. Over the course of 2004, the Company expects
engineering and product development costs will decline as a percentage of sales,
as sales increase.
Under the leadership of Dr. Steven Rogers, Qualia's founder and iCAD's Chief
Scientist, the Company's technologies are also being applied to the early
detection of breast cancer using ultrasound; the early detection of lung cancer
utilizing low-dose spiral Computed Tomography (CT) and the early detection of
colon cancer utilizing CT. With support provided through the FY2004 Defense
Appropriations Bill, iCAD has begun collaboration with the Walter Reed Army
Medical Center and the Windber Research Institute in Windber, PA, to develop and
evaluate 3D CAD technology for breast imaging based on existing CAD and pattern
analysis techniques for conventional mammograms. One objective of this research
project is to use ultrasound imaging to reduce biopsies which prove to be
unnecessary. Research programs in cardiovascular disease applications are also
in the planning stages
34
General and Administrative. General and administrative expenses for the year
ended December 31, 2003 increased by $844,645, from $6,595,076 in 2002 to
$7,439,721 in 2003. The increase resulted from a write-off of $1,443,628
attributable to its distribution agreement with Instrumentarium Imaging, Inc.,
("Instrumentarium"), which it assumed as part of the ISSI acquisition in 2002.
This write-off came after assessing the performance of Instrumentarium in the
third quarter 2003, 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 $2,702,000 in
non-recurring expenses related to the settlement of R2 patent infringement
litigation and legal expenses. In the settlement agreement with R2 the Company
agreed to the following:
o A payment of $1,250,000 by the Company to R2, of which $1,000,000 was
paid in September 2003 with the remaining deferred and payable in equal
installments on a quarterly basis through December 2005.
o The Company issued to R2 shares of iCAD Common Stock valued at
$750,000.
o The Company also agreed to pay R2 certain continuing royalties, which
were to be based on the category and configuration of products sold by
iCAD. Subsequent to the settlement, R2 agreed to accept an additional
75,000 shares of iCAD Common Stock valued at $466,200 in full
satisfaction of any royalties it otherwise would have been entitled
to receive under the settlement agreement.
o 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. The Company is not able
to estimate the volume of future purchases by R2, if any. Any discount
from future purchases will be recognized at the time of sale of products
to R2
During 2003 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 for 2002 included a $2,800,000 non-cash charge associated with
the acquisition of ISSI, and accrued settlement costs of $383,000 for an action
brought against the Company by The Massachusetts Institute of Technology and
Electronics for Imaging, Inc ("MITEI"). Both of these charges were non-recurring
in 2003. The action brought by MITEI against the Company was dismissed in the
second quarter of 2003 and the accrual of $383,00 was reversed.
Marketing and Sales. Marketing and sales expenses for the year ended December
31, 2003 increased 86% from $987,587 in 2002 to $1,838,618 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 and fourth quarter of 2003. The Company expects marketing
and sales expenses to increase in absolute terms during 2004 over 2003, as it
continues to develop a more comprehensive sales and support capability and
increase direct marketing and advertising activities. The Company expects
marketing and sales expenses to decline as a percentage of sales over this
period.
Interest Expense. Net interest for the year ended December 31, 2003 increased
138% from $48,167 in 2002 to $114,655 in 2003. This increase is due primarily to
an increase in loan balances.
35
Profit (Loss). As a result of the foregoing, the Company recorded a net loss of
$8,198,408 or $0.31 per share for the year ended December 31, 2003 on sales of
$6,520,306 compared to a net loss of $9,418,290 or $0.46 per share in 2002 on
sales of $5,000,184.
iCAD will report a net loss in the first quarter of 2004, before new
contributions to sales become effective, and before implemented reductions in
operating expenses are realized. As the year 2004 progresses, the Company
expects sales levels to increase, and operating expenses to be reduced from
first quarter 2004 levels.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Sales. Sales for the year ended December 31, 2002 were $5,000,184, compared with
sales of $4,835,297 for the year ended December 31, 2001. Sales increased during
the third and fourth quarter of 2002 as a result of the addition of the CAD
product line through acquisition of ISSI on June 28, 2002. CAD sales, which
began upon the acquisition of ISSI, were $2,628,135 (53% of sales) for the year
ended December 31, 2002. The shift in the Company's business focus, from graphic
arts and photographic product lines to CAD imaging and medical digitizer
products, was largely responsible for the reduced overall sales during the first
and second quarters of 2002. Sales related to discontinued products totaled
$711,556 for the year ended December 31, 2002.
Gross Margin. Gross margin for the year ended December 31, 2002 decreased as a
result of the write-offs of inventory relating to graphic arts and photographic
products in the amount of $2,369,539. Before the write-offs, gross margin for
the year ended December 31, 2002 increased to 49% from 19% in 2001, as a result
of reduced production overhead and indirect production expenses and sales of its
CAD and medical imaging products which had higher margins than the Company's
graphic arts products.
During the first quarter of 2003, iCAD initiated reduced, promotional pricing
for group purchasers and existing customers of its distributor, Instrumentarium
Imaging, Inc. and for customers of PenRad, Inc., a developer and vendor of
mammography information systems. This pricing was intended to help provide the
Company with information on the price elasticity of the CAD systems market, and
to assist the Company in determining pricing for future products while promoting
current sales. These factors were significant in determining how the Company
could best exploit its comparative advantage in manufacturing costs. Products
sold under this promotional and market analysis program reflected reduced
transfer prices and reduced gross margins.
Engineering and Product Development. Engineering and product development costs
for the year ended December 31, 2002 increased from $751,467 in 2001 to
$1,626,001 in 2002. The increase in engineering and product development costs
resulted 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 continued its development of its Fulcrum medical film
digitizer product and utilization of outside and contract engineering resources.
36
General and Administrative. General and administrative expenses increased from
$1,124,710 in 2001 to $6,595,076 in 2002. The increase 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
the Company. Pursuant to the acquisition agreement between the two companies,
the sale of securities increased working capital and funded the promotion of the
MammoReader product. Additional increases in general and administrative expenses
in 2002 reflected non-recurring severance benefits and other expenses associated
with reductions of staff resulting from the combination of ISSI and Howtek in
the amount of $884,000, a write-off of fixed assets, including test equipment
and software development costs, relating to the Company's graphic arts and
photographic product lines totaling $417,004 and an accrued litigation cost of
$383,000 in connection with the complaint filed against the Company by The
Massachusetts Institute of Technology and Electronics for Imaging, Inc.
Marketing and Sales. Marketing and sales expenses for the year ended December
31, 2002 decreased 37% from $1,563,380 in 2001 to $987,587 in 2002. This
decrease was due primarily to the reduction of personnel, promotional and trade
show expenses related to the Company's traditional graphic arts and FotoFunnel
lines.
Interest Expense. Net interest for the year ended December 31, 2002 decreased
40%, from $80,105 in 2001 to $48,167 in 2002. This decrease was due primarily to
a decrease in loan balances and interest rates.
As a result of the foregoing, the Company recorded a net loss of $9,418,290 or
$0.46 per share for the year ended December 31, 2002 on sales of $5,000,184
compared to a net loss of $2,620,771 or $0.20 per share in 2001 on sales of
$4,835,297.
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, of which
$370,000 was available at December 31, 2003. The Company's current operating and
financial projections and plans indicate that current liquidity and capital
resources are sufficient to support and sustain operations through 2004. If
sales or cash collections are reduced from current expectations, or if expenses
and cash requirements are increased, the Company may require additional
financing. Historically, the Company has secured additional cash through
additional extensions of credit by its Chairman, and believes such extensions,
if required, are available.
During 2003, the Company used $4,666,558 in cash from operations compared to
$2,255,709 in 2002. The cash used in 2003 resulted primarily from the net loss
of $8,408,590, offset partially by non-cash stock compensation, loss on disposal
of assets, and depreciation and amortization totaling $3,648,565.
During 2003, the Company used $1,468,194 in cash for investing activities
compared to cash generated of $2,051,978 in 2002. The majority of the decrease
in 2003 related to the cash used in the acquisition of CADx, to purchase Qualia
shares owned by two institutional investors totaling $1,550,000. In 2002, the
increase in cash related to the net cash acquired through the acquisition of
ISSI totaling $2,202,040.
37
The Company does not anticipate any substantial capital purchases during 2004.
Working capital increased $4,606,677 to $3,409,652 at December 31, 2003 from a
deficit of $1,197,025 at December 31, 2002. The ratio of current assets to
current liabilities at December 31, 2003 and 2002 was 1.4 and .7, respectively.
These increases are due primarily to the private placement to institutional
investors and the acquisition of CADx.
On November 24, 2003, the Company sold 1,260,000 shares of its common stock for
$5.00 per share in a private placement to institutional investors. The Company
also issued to such investors' additional investment rights to purchase up to an
additional 315,000 shares of its common stock at $5.00 per share. The net
proceeds to the Company for the 1,260,000 shares sold were approximately
$5,919,000. A total of 90,000 shares of the Company's common stock were issued
in connection with the additional investment rights in 2004. The remaining
shares expired unexercised. The net proceeds to the Company for the 90,000
shares sold were approximately $425,000. Ladenburg Thalmann & Co. Inc. served as
placement agent for these transactions for which it received compensation in the
amount of approximately $404,000 and a five year warrant to purchase 67,200
shares of the Company's Common Stock at $5.00 per share.
On December 31, 2003, the Company completed the acquisition of CADx in exchange
for 4,300,000 shares of iCAD's common stock to certain stockholders of Qualia
Computing, Inc. Additonally, iCAD paid $1,550,000 in cash and executed a
36-month secured promissory note in the amount of $4,500,000 to purchase Qualia
shares that were owned by two institutional investors.
The following table summarizes, for the periods presented, the Company's future
estimated cash payment under existing contractual obligations.
- -------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by period
- -------------------------------------------------------------------------------------------------
Total Less than 1-3 years 3-5 years More than
1 year 5 years
- -------------------------------------------------------------------------------------------------
Long-Term Debt Obligations $ 8,238,390 $1,233,390 $7,005,000 $ - $ -
- -------------------------------------------------------------------------------------------------
Lease Obligations $ 3,503,442 $ 520,047 $1,088,577 $ 936,106 $ 958,712
- -------------------------------------------------------------------------------------------------
Total Contractual Obligations $11,741,832 $1,753,437 $8,093,577 $ 936,106 $ 958,712
- -------------------------------------------------------------------------------------------------
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, Rescission of FASB Statements SFAS Nos. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. SFAS No. 145 rescinds Statement No.
4, Reporting Gains and Losses from Extinguishments of Debt, and an amendment of
that Statement, FASB Statement No. 64 Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS No. 145 also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. SFAS No. 145 amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provision of SFAS No.145 related to the rescission of Statement No. 4 shall be
applied in fiscal year beginning after May 15, 2002. The provisions of SFAS No.
145 related to Statement No. 13 should be for transactions occurring after May
15, 2002. Early application of the provisions of this Statement is encouraged.
The adoption of SFAS No. 145 did not have any effect on the Company's financial
statements.
38
In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated with
Exit or Disposal Activities. This statement superseded EITF No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity. Under this statement, a liability or a cost associated with a disposal
or exit activity is recognized at fair value when the liability is incurred
rather than at the date of an entity's commitment to an exit plan as required
under EITF 94-3. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
adoption permitted. The adoption of SFAS No. 146 did not have a significant
impact on the Company's financial statements.
In November 2002, the Emerging Issues Task Force ("EITF") reached consensus on
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Revenue
arrangements with multiple deliverables include arrangements which provide for
the delivery or performance of multiple products, services and/or rights to use
assets where performance may occur at different points in time or over different
periods of time. EITF Issue No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
the guidance under this consensus did not have an impact on the Company's
financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation ("FIN") No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which will significantly change current
practice in the accounting for, and disclosure of, guarantees. FIN No. 45
requires that a guarantor recognize, at the inception of certain types of
guarantees, a liability of the obligation undertaken in issuing the guarantee at
fair value. The interpretation also requires significant new disclosures in the
financial statements of the guarantor about its obligations under certain
guarantees. The Company is required to apply the disclosure provisions of FIN
No. 45 in its financial statements as of December 31, 2002. The accounting
provisions of FIN No. 45 are applicable for guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN No. 45 did not have a
material effect on the Company's financial statements and it does not expect the
accounting provisions of this interpretation to have a material impact on its
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, ("FIN No. 46")" which requires all variable interest entities ("VIEs")
to be consolidated by the primary beneficiary. The primary beneficiary is the
entity that holds the majority of the beneficial interests in the VIE. In
addition, the interpretation expands disclosure requirements for both variable
interest entities that are consolidated, as well as VIEs from which the entity
is the holder of a significant amount of the beneficial interests, but not the
majority. The disclosure requirements of this interpretation are effective for
all financial statements issued after January 31, 2003. The consolidation
requirements of this interpretation are effective for all periods beginning
after June 15, 2003. The Company does not have any VIEs, therefore the adoption
of this interpretation did not have any effect on its results of operations or
financial condition.
39
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected include mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003 and must be applied to
existing financial instruments effective June 29, 2003. The adoption of this
statement did not have a material effect on the Company's results of operations
or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Financial Statements and Schedule attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in reaching a reasonable level of assurance that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time period specified in the Securities and
Exchange Commission's rules and forms.
The principal executive officer and principal financial officer also conducted
an evaluation of internal control over financial reporting ("Internal Control")
to determine whether any changes in Internal Control occurred during the quarter
ended December 31, 2003 that have materially affected or which are reasonably
likely to materially affect Internal Control. Based on that evaluation, there
has been no such change during the quarter ended December 31, 2003.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
NAME AGE POSITION SINCE
- ---- --- -------- -----
Robert Howard # 80 Chairman of the Board, and Director 1984
W. Scott Parr # 52 President, Chief Executive Officer,
and Director 1998
Annette Heroux 47 Vice President of Finance, Chief Financial
Officer 1999
James Harlan* 52 Director 2000
Brett Smith+ 34 Director 2000
Maha Sallam* 37 Executive Vice President, Director 2002
Elliot Sussman* 52 Director 2002
Steven Rogers+ 50 Chief Scientific Officer, Director 2004
+ Class I Director, current term expires in 2006
* Class II Director, current term expires in 2004
# Class III Director, current term expires in 2005
The Company's Certificate of Incorporation provides that the Company's Board of
Directors is divided into three classes (Class I, Class II and Class III). At
each Annual Meeting of stockholders, directors constituting one class are
elected for a three-year term.
Mr. Kevin Woods resigned his position as director in March 2004, to permit the
Company to elect an additional independent director to the Company's Board of
Directors.
Under the terms of the amended and restated plan and agreement of merger, Steven
Rogers, Qualia's founder and iCAD's Chief Scientist, was appointed to serve as a
member of the Board of Directors of iCAD upon completion of the merger. Mr.
Rogers was appointed by the Board of Directors to serve as a Class I director of
iCAD, with a term expiring at the 2006 iCAD annual meeting of stockholders. In
addition, under the amended and restated plan and agreement of merger, iCAD and
Steven Rogers will appoint to iCAD's Board a mutually acceptable individual who
qualifies as an "independent director" under NASDAQ's corporate governance
rules. The independent director will be nominated to serve as a Class III
director of iCAD, with a term expiring at the 2005 iCAD meeting of stockholders.
Robert Howard, the founder and Chairman of the Board of Directors of the
Company, was the inventor of the first impact dot matrix printer. Mr. Howard was
Chief Executive Officer of the Company from its establishment in 1984 until
December of 1993. He was the founder, and from 1969 to April 1980 he served as
President and Chairman of the Board, of Centronics Data Computer Corp.
("Centronics"), a manufacturer of a variety of computer printers. He resigned
from Centronics' board of directors in 1983. From April 1980 until 1983, Mr.
Howard was principally engaged in the management of his investments. Commencing
in mid-1982, Mr. Howard, doing business as R.H. Research, developed the ink jet
technology upon which the Company was initially based. Mr. Howard contributed
this technology, without compensation, to the Company. Mr. Howard was Chairman
of the Board of Presstek, Inc. ("Presstek"), a public company which has
developed proprietary imaging and consumables technologies for the printing and
graphic arts industries from June 1988 to September 1998 and served as Chairman
Emeritus of the Board from September 1998 to December 2000.
41
W. Scott Parr joined the Company in January 1998 as President and Chief
Executive Officer. He was appointed to the Company's Board of Directors in
February 1998. Prior to joining iCAD, Mr. Parr served as Divisional Director and
a member of the Board of Directors of SABi International Ventures, Inc. where he
was responsible for restructuring and upgrading certain U.S. companies owned by
foreign and venture investors. From 1995 to 1997 Mr. Parr was Chief Executive
Officer, General Counsel and Director of Allied Logic Corporation, a start-up
venture specializing in proprietary molding and manufacturing technologies. From
1990 to 1995 Mr. Parr was General Counsel and a Director of LaserMaster
Technologies, Inc.
Annette Heroux joined the Company in October 1987 as Accounting Manager and was
named Controller in October 1998 and Vice President of Finance, Chief Financial
Officer in July 1999. Prior to joining the company, from 1980 to 1987, Ms.
Heroux served as Finance and Administration Manager of Laurier, Inc., a
semiconductor equipment manufacturer, where she was responsible for the
financial reporting and administrative functions. From 1978 to 1980 Ms. Heroux
was Accounting Manager for Hoodkroft Nursing Center, a skilled nursing facility,
where she was responsible for patient insurance and financial records.
James Harlan has been the Executive Vice President and Chief Financial Officer
of HNG Storage Company, a natural gas storage, development and operations
company since 1998. From 1991 to 1997 Mr. Harlan served as General Manager and
Chief Financial Officer of Pacific Resources Group where he was responsible for
the planning and financial development of various manufacturing and distribution
businesses in Asia. He also served as operations research and planning analyst
for the White House Office of Energy Policy and Planning from 1977 to 1978, the
Department of Energy from 1978 to 1981, and U.S. Synthetic Fuels Corporation
from 1981 to 1984.
Brett Smith, the son of Mrs. Kit Howard, the wife of the Company's Chairman, has
been the Chairman and Chief Executive Officer of ei3 Corporation, a provider of
technology services to manufacturing companies utilizing advanced frame relay
and internet technologies. Prior to joining ei3, from 1996 to 1999, Mr. Smith
was a member of the restructuring team for Delta V Technologies, a subsidiary of
Presstek, where he served as Director of Business Development. From 1995 to 1996
Mr. Smith worked for the Asia Times newspaper start-up team in Hong Kong. He
began his career as an analyst, from 1992 to 1994, at Susquehanna Investment
Group.
Maha Sallam has been the Executive Vice President for the Company since June
2002. From 1997 until the acquisition of ISSI in June 2002, Dr. Sallam served as
Director and Vice President of Regulatory Affairs and Clinical Testing and
Secretary of ISSI. She was one of ISSI's founders and has over fourteen years of
industry and research experience in image analysis including a doctoral
dissertation, conference presentations and several publications on the automated
analysis of digital mammograms.
42
Elliot Sussman is currently President and Chief Executive Officer of Lehigh
Valley Hospital and Health Network, a position he has held since 1993. Dr.
Sussman is the Leonard Parker Pool Professor of Health Systems Management,
Professor of Medicine, and Professor of Health Evaluation Sciences at
Pennsylvania State University's College of Medicine. Dr. Sussman served as a
Fellow in General Medicine and a Robert Wood Johnson Clinical Scholar at the
University of Pennsylvania, and trained as a resident at the Hospital of the
University of Pennsylvania.
Steven Rogers is the Company's Chief Scientific Officer. From 1997 until the
acquisition of CADx on December 31, 2003, Dr. Rogers served as Chairman of the
Board, Chief Executive Officer and President of Qualia, and the President of
Qualia Financial Services, LLC since September 2002. Prior to joining Qualia,
from 1984 to 1996 Dr. Rogers worked as a Professor of Electrical Engineering at
the Air Force Institute of Technology. During his time in the U.S. Air Force
designing smart weapons, Dr. Rogers published more than 200 technical papers in
the areas of neural networks, pattern recognition, and optical processing and
several textbooks including Introduction to Biological and Artificial Neural
Networks for Pattern Recognition. Dr. Rogers is a Fellow of the IEEE and SPIE.
After leaving the Air Force in 1996, Dr. Rogers served as the Director of
Cognitive Systems at the Battelle Memorial Institute. Dr. Rogers left Battelle
in 1999 to devote his full attention to Qualia.
The Company has an audit committee of the Board of Directors ("Audit Committee")
consisting of Messrs. Harlan, Smith and Sussman. Each member of the Audit
Committee is an "independent director" under the rules of the National
Association of Securities Dealers, Inc ("NASD") and the Company's Board has
determined that James Harlan is the Audit Committee's financial expert under
applicable SEC rules and NASD Marketplace Rules.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than 10 percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on the Company's review of copies of such forms received by the
Company, the Company believes that during the year ended December 31, 2003, all
filing requirements applicable to all officers, directors, and greater than 10%
beneficial stockholders were complied with, except that: (i) Mr. Howard failed
to timely file Form 4s to report additional loans made to the Company pursuant
to the Convertible Revolving Promissory Note that is convertible into a total of
543,526 shares of the Company's common stock during the period from April, 2003
through August 1, 2003.
43
Code of Business Conduct and Ethics
In light of the acquisition of CADx, the Company is in the process of developing
a comprehensive Code of Business Conduct and Ethics to cover all of the
employees of the combined companies. Copies of the Code of Business Conduct and
Ethics, which is expected to be adopted by May 1, 2004, can be obtained, when
available, upon written request, addressed to:
iCAD, Inc.
4 Townsend West
Nashua, NH 03063
Attention: Corporate Secretary
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides information on the compensation provided by the
Company during fiscal years 2003, 2002 and 2001 to the persons serving as the
Company's Chief Executive Officer during fiscal 2003 and the Company's most
highly compensated executive officers serving at the end of the 2003 fiscal year
("the Named Persons"). Included in this list are only those executive officers
whose total annual salary and bonus exceeded $100,000 during the 2003 fiscal
year.
SUMMARY COMPENSATION TABLE
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) OPTION(#)
--------------------------- ---- --------- ----------
W. Scott Parr
President, Chief Executive Officer, Director..... 2003 191,600 -0-
2002 173,762 125,000
2001 145,669 4,000
Maha Y. Sallam
Executive Vice President, Director............... 2003 132,489 -0-
2002 95,380 156,250
Annette L. Heroux
Vice President of Finance,
Chief Financial Officer 2003 111,814 -0-
2002 96,949 65,183
2001 85,639 3,000
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted by the Company to the Named Person in 2003.
44
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding the exercise of stock
options during the Company's last completed fiscal year by each of the Named
Persons and the fiscal year-end value of unexercised options.
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT IN-THE MONEY
SHARES FY-END (#) OPTIONS AT
ACQUIRED ON VALUE EXERCISABLE/ FY-END($) (1)
NAME EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
- --------------------- ------------ -------- ---------------- -------------------
W. Scott Parr (2) 0 0 531,518 / -0- 2,075,312 / -0-
Maha Y. Sallam (2) 0 0 156,250 / -0- 431,000 / -0-
Annette L. Heroux (2) 18,400 $89,352 100,645 / 13,455 356,197 / 50,187
(1) Based upon the closing price of the Common Stock on December 31, 2003, of
$5.28 per share.
(2) Options granted pursuant to the Company's merger and 1993, 2001 and 2002
Stock Option Plans.
The Company does not have any employment agreements with its executive officers
or key employees.
SEPARATION AGREEMENTS WITH FORMER OFFICERS
In September 2002, the Company entered into a Separation Agreement with each of
W. Kip Speyer, the former Chief Executive Officer of iCAD and Gregory J. Stepic,
the former Vice President of Finance of iCAD. The Separation Agreements
acknowledged the resignations of each of Messrs. Speyer and Stepic and provided
for severance payments to Messrs. Speyer and Stepic of $500,000 and $148,000,
respectively, in lieu of any severance payments to which they may have been
entitled to under their employment agreements. The severance payments, less any
required withholding by the Company, are payable to Mr. Speyer in equal
installments over a 30 month period and to Mr. Stepic in equal installments over
a 12 month period, in each case subject to the right to accelerate payments upon
the sale of the outstanding stock of the Company or upon a sale by the Company
of substantially all of its assets. Under the Separation Agreements, each of
Messrs. Speyer and Stepic was entitled to retain his outstanding options of the
Company which remain exercisable in accordance with their respective terms.
Also, pursuant to the Separation Agreements Messrs. Speyer and Stepic each
agreed to remain bound by the confidentiality and non-competition provisions of
their employment agreements for the periods set for in the employment
agreements.
45
COMPENSATION OF DIRECTORS
The Company does not pay cash compensation to members of its board of directors
for their services as board members. The Company does reimburse members of the
board for out-of-pocket expenses incurred for attendance at board and board
committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There is no Compensation Committee or other committee of the Company's Board of
Directors performing similar functions. The person who performed the equivalent
function in 2003 was Robert Howard, Chairman of the Board under the direction of
the Board of Directors. W. Scott Parr, Chief Executive Officer and a director,
participated in discussions with Mr. Howard during the past completed fiscal
year in his capacity as an executive officer in connection with executive
officer compensation. During 2003 none of the executive officers of the Company
served on the Board of Directors or Compensation Committee of any other entity.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the Common Stock,
Series A and Series B Convertible Preferred Stock of the Company owned on March
18, 2004, by (i) each person who is known to the Company to own beneficially
more than 5% of the outstanding shares of the Company's Common Stock (ii) each
executive officer named in the Summary Compensation Table, (iii) each director
of the Company, and (iv) all current executive officers and directors as a
group. The table also provides information regarding beneficial owners of more
than 5% of the outstanding shares of the Company's Series A and Series B
Convertible Preferred Stock. Unless otherwise indicated below, the address of
each beneficial owner is c/o iCAD, Inc. 4 Townsend West, Suit 17, Nashua, New
Hampshire 03063.
Number of Shares
Name and Address of Title Beneficially Percentage
Beneficial Owner of Class Owned (1) (2) of Class
---------------- -------- ---------------- ----------
Robert Howard Common 6,277,999(3) 17.9%
145 East 57th Street
New York, New York 10022
Maha Sallam Common 2,322,520(4) 6.8%
4902 Eisenhower Blvd.
Tampa, FL 33634
Donald Chapman Common 1,950,706(5) 5.6%
8650 South Ocean Drive
Jenson Beach, FL 34957 Preferred Series A 4,600 74.8%
Preferred Series B 680 52.9%
W. Kip Speyer Common 1,818,000(6) 5.3%
10361 Parkstone Way
Boca Raton, FL 33498
Steven Rogers Common 1,000,754 3.0%
2689 Commons Blvd.
Beavercreek, OH 45431
W. Scott Parr Common 661,468(7) 1.9%
Preferred Series A 550 8.9%
Preferred Series B 50 3.9%
46
Edgar Ball Preferred Series B 200 15.6%
PO Box 560726
Rockledge, FL 32956
John McCormick Preferred Series A 1,000 16.3%
11340 SW Aventine Circus
Portland, OR 97219
Dr. Herschel Sklaroff Preferred Series B 100 7.8%
1185 Park Avenue
New York, NY 10128
John Westerfield Preferred Series B 100 7.8%
4522 SW Bimini Circle N.
Palm City, FL 34990
James Harlan Common 131,000(8) *
Brett Smith Common 47,507(9) *
Preferred Series B 20 1.6%
Dr. Elliot Sussman Common 18,000(10) *
Annette Heroux Common 105,645(11) *
All current executive officers and Common 10,564,893(3),(4), & 29.3%
directors as a group (8 persons) (7) through (11)
Preferred Series A 550 8.9%
Preferred Series B 70 5.4%
- ---------
* Less than one percent
1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 18, 2004, upon the
exercise of options, warrants or rights; through the conversion of a
security; pursuant to the power to revoke a trust, discretionary account
or similar arrangement; or pursuant to the automatic termination of a
trust, discretionary account or similar arrangement. Each beneficial
owner's percentage ownership is determined by assuming that the options or
other rights to acquire beneficial ownership as described above, that are
held by such person (but not those held by any other person) and which are
exercisable within 60 days from March 18, 2004, have been exercised.
2) Unless otherwise noted, the Company believes that the persons referred to
in the table have sole voting and investment power with respect to all
shares reflected as beneficially owned by them.
3) Includes options to purchase 10,000 shares of the Company's Common Stock
at $1.72 per share. Also, includes 20,000 shares beneficially owned by Mr.
Howard's wife.
4) Includes 183,625 shares owned by Dr. Sallam's husband. Also includes
options to purchase 56,250 shares of the Company's Common Stock at $0.80
per share and 100,000 shares at $3.49 per share.
5) Includes 28,000 shares owned by Mr. Chapman's wife, 460,000 shares of
Common Stock issuable upon conversion of 4,600 shares of Series A
Convertible Preferred Stock and 340,000 shares of Common Stock issuable
upon conversion of 680 shares of Series B Convertible Preferred Stock
owned by Mr. Chapman.
47
6) Includes options to purchase 75,000 shares of the Company's Common Stock
at $0.80 per share and 550,000 shares at $3.49 per share.
7) Includes 11,000 shares owned by Mr. Parr's wife. Also includes options to
purchase 275,268 shares of the Company's Common Stock at $1.13 per share,
125,000 shares at $0.81 per share, 2,250 shares at $1.00 per share, 4,000
shares at $0.95 per share, 25,000 shares at $1.75 per share and 100,000
shares at $2.69 per share, 55,000 shares of Common Stock issuable upon
conversion of 550 shares of Series A Convertible Preferred Stock and
25,000 shares of Common Stock issuable upon conversion of 50 shares of
Series B Convertible Preferred Stock owned by Mr. Parr.
8) Includes options to purchase 25,000 shares of the Company's Common Stock
at $1.75 per share and 25,000 shares at $1.55 per share.
9) Includes options to purchase 25,000 shares of the Company's Common Stock
at $3.00 per share and 6,667 shares at $1.55 per share. Also, includes
10,000 shares of Common Stock issuable upon conversion of 20 shares of
Series B Convertible Preferred Stock.
10) Includes options to purchase 15,000 shares of the Company's Common Stock
at $1.55 per share.
11) Includes options to purchase 6,600 shares of the Company's Common Stock at
$0.81 per share, 3,000 shares at $0.95 per share, 23,317 shares at $1.13
per share, 6,728 shares at $1.55 per share, 1,000 shares at $1.72 per
share, 35,000 shares at $1.75 per share and 25,000 shares at $2.69 per
share.
48
EQUITY COMPENSATION PLAN
The following table provides certain information with respect to all of the
Company's equity compensation plans in effect as of December 31, 2003.
Number of securities
remaining available for
Number of securities to Weighted-average issuance under equity
be issued upon exercise exercise price of compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
-------------------------------------------------------------------------
Plan Category:
- -------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders: 3,688,551 $2.08 69,612
- -------------------------------------------------------------------------------------------------------
Equity compensation 124,200 $4.58 -0-
plans not approved by
security holders (1):
- -------------------------------------------------------------------------------------------------------
Total 3,812,751 $2.17 69,612
- -------------------------------------------------------------------------------------------------------
(1) Represents the aggregate number of shares of common stock issuable upon
exercise of individual arrangements with option and warrant holders. These
options and warrants are five years in duration, expire at various dates
between December 31, 2004 and February 28, 2007, contain anti-dilution
provisions providing for adjustments of the exercise price under certain
circumstances and have termination provisions similar to options granted
under stockholder approved plans. See Note 8 of Notes to the Consolidated
Financial Statements for a description of the Company's Stock Option Plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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. The Loan Agreement
expires January 4, 2005, subject to extension by the parties. 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.
In 2003 the Company borrowed $3,430,000 pursuant to the Loan Agreement. As of
December 31, 2003, $3,630,000 was owed by the Company and the Company had
$370,000 available for future borrowings under the Loan Agreement.
49
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT FEES. The aggregate fees billed by BDO Seidman, LLP for professional
services rendered for the audit of the Company's annual financial statements for
the years ended December 31, 2003 and 2002, the review of the financial
statements included in the Company's Forms 10-QSB and consents issued in
connection with the Company's filings on Form SB-2 for 2003 and 2002 totaled
$71,550 and $61,956, respectively.
AUDIT-RELATED FEES. The aggregate fees billed by BDO Seidman, LLP for assurance
and related services that are reasonably related to the performance of the audit
or review of the Company's financial statements, for the years ended December
31, 2003 and 2002, and are not disclosed in the paragraph captions "Audit Fees"
above, were $46,323 and $50,550, respectively. These charges were in relation to
the Company's acquisitions and Form 8-K filing.
TAX FEES. The aggregate fees billed by BDO Seidman, LLP for professional
services rendered for tax compliance, for the years ended December 31, 2003 and
2002, were none and none, respectively. The aggregate fees billed by BDO
Seidman, LLP for professional services rendered for tax advice and tax planning,
for the years ended December 31, 2003 and 2002, were none and none,
respectively.
ALL OTHER FEES. The aggregate fees billed by BDO Seidman, LLP for products and
services, other than the services described in the paragraphs captions "Audit
Fees", "Audit-Related Fees", and "Tax Fees" above for the years ended December
31, 2003 and 2002, were none and none, respectively.
The Audit Committee has established its pre-approval policies and procedures,
pursuant to which the Audit Committee approved the foregoing audit services
provided by BDO Seidman, LLP in 2003. Consistent with the Audit Committee's
responsibility for engaging the Company's independent auditors, all audit and
permitted non-audit services require pre-approval by the Audit Committee. The
full Audit Committee approves proposed services and fee estimates for these
services. The Audit Committee chairperson or their designee has been designated
by the Audit Committee to approve any services arising during the year that were
not pre-approved by the Audit Committee. Services approved by the Audit
Committee chairperson are communicated to the full Audit Committee at its next
regular meeting and the Audit Committee reviews services and fees for the fiscal
year at each such meeting. Pursuant to these procedures, the Audit Committee
approved the foregoing audit services provided by BDO Seidman, LLP.
50
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
a) The following documents are filed as part of this Annual
Report on Form 10-K:
i. Financial Statements - See Index on page 56.
ii. Financial Statement Schedule - See Index on page
56. All other schedules for which provision is made
in the applicable accounting regulations of the
Securities and Exchange Commission are not required
under the related instructions or are not
applicable and, therefore, have been omitted.
iii. Exhibits - the following documents are filed as
exhibits to this Annual Report on Form 10-K:
2(a) Plan and Agreement of Merger dated February 15,
2002, by and among the Registrant, ISSI Acquisition
Corp. and Intelligent Systems Software, Inc., Maha
Sallam, Kevin Woods and W. Kip Speyer.
[incorporated by reference to Annex A of the
Company's proxy statement/prospectus dated May 24,
2002 contained in the Registrant's Registration
Statement on Form S-4, File No.
333-86454]
2(b) Amended and Restated Plan and Agreement of Merger
dated as of December 15, 2003 among the Registrant,
Qualia Computing, Inc., Qualia Acquisition Corp.,
Steven K. Rogers, Thomas E. Shoup and James
Corbett.[Incorporated by reference to Exhibit 2(a)
to the Registrant's Current Report on Form 8-K for
the event dated December 31, 2003]
3(a) Certificate of Incorporation of the Registrant
filed with the Secretary of State of the State of
Delaware on February 24, 1984 [incorporated by
reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-18 (Commission
File No. 2-94097 NY), filed on October 31, 1984]
3(b) Certificate of Amendment of Certificate of
Incorporation of the Registrant, filed with the
Secretary of State of the State of Delaware on May
31, 1984 [incorporated by reference to Exhibit
3.1(a) to the Registrant's Registration Statement
on Form S-18 (Commission File No. 2-94097-NY),
filed on October 31, 1984]
51
3(c) Certificate of Amendment of Certificate of
Incorporation of the Registrant filed with the
Secretary of State of the State of Delaware on
August 22, 1984 [incorporated by reference to
Exhibit 3.1(b) to the Registrant's Registration
Statement on Form S-18 (Commission File No.
2-94097-NY), filed on October 31, 1984].
3(d) Certificate of Amendment of Certificate of
Incorporation of the Registrant filed with the
Secretary of State of the State of Delaware on
October 22, 1987 [incorporated by reference to
Exhibit 3(d) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988].
3(e) Certificate of Amendment of Certificate of
Incorporation of the Registrant filed with the
Secretary of State of the State of Delaware on
September 28, 1999 [incorporated by reference to
Exhibit 3(d) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001].
3(f) Certificate of Amendment of Certificate of
Incorporation of the Registrant filed with the
Secretary of State of the State of Delaware on June
28, 2002 [incorporated by reference to Exhibit 3.1
of the Registrant's Quarterly report on Form 10-Q
for the quarter ended June 30, 2002].
3(g) By-laws of Registrant [incorporated by reference to
Exhibit 3.2 to the Registrant's Registration
Statement on Form S-18 (Commission File No.
2-94097-NY), filed on October 31, 1984].
10(a) Revolving Loan and Security Agreement, and
Convertible Revolving Credit Promissory Note
between Robert Howard and Registrant dated October
26, 1987 (the "Loan Agreement") [incorporated by
reference to Exhibit 10 to the Registrant's Report
on Form 10-Q for the quarter ended September 30,
1987].
10(b) Letter Agreement dated June 28, 2002, amending the
Revolving Loan and Security Agreement, and
Convertible Revolving Credit Promissory Note
between Robert Howard and Registrant dated October
26, 1987.
10(c) Form of Secured Demand Notes between the Registrant
and Mr. Robert Howard. [incorporated by reference
to Exhibit 10(e) to the Registrant's Report on Form
10-K for the year ended December 31, 1998].
10(d) Form of Security Agreements between the Registrant
and Mr. Robert Howard [incorporated by reference to
Exhibit 10(f) to the Registrant's Report on Form
10-K for the year ended December 31, 1998].
52
10(e) Certificate of Designation of 7% Series A
Convertible Preferred Stock dated December 22,
1999. [incorporated by reference to Exhibit 10(i)
to the Registrant's Report on Form 10-K for the
year ended December 31, 1999].
10(f) Certificate of Designation of 7% Series B
Convertible Preferred Stock dated October 16, 2000
[incorporated by reference to Exhibit 10(j) to the
Registrant's Report on Form 10-K for the year ended
December 31, 2000].
10(g) Separation agreement dated September 24, 2002
between the Registrant and W. Kip Speyer
[incorporated by reference to Exhibit 10.1 to the
Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 2002].*
10(h) Separation agreement dated September 30, 2002
between the Registrant and Gregory J. Stepic
[incorporated by reference to Exhibit 10.2 to the
Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 2002].*
10(i) 1993 Stock Option Plan [incorporated by reference
to Exhibit A to the Registrant's proxy statement on
Schedule 14-A filed with the Securities and
Exchange Commission on August 24, 1999].*
10(j) 2001 Stock Option Plan [incorporated by reference
to Annex A of the Registrant's proxy statement on
Schedule 14-A filed with the Securities and
Exchange Commission on June 29, 2001].*
10(k) 2002 Stock Option Plan [incorporated by reference
to Annex F to the Registrant's Registration
Statement on Form S-4 (File No.
333-86454)].*
10(l) Exclusive Distribution Agreement between
Intelligent Systems Software, Inc. and
Instrumentarium Imaging, Inc., dated August 15,
2001 [incorporated by reference to Exhibit 10(l) to
the Registrant's Report on Form 10-K for the year
ended December
31, 2002]. **
10(m) License Agreement between Scanis, Inc. and the
Registrant dated February 18, 2003. [incorporated
by reference to Exhibit 10(m) to the Registrant's
Report on Form 10-K for the year ended December 31,
2002].**
53
21 Subsidiaries
23 Consent of BDO Seidman, LLP.
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.
- ----------
* Denotes a management compensation plan or arrangement.
** Portions of these documents were omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment of the omitted portions.
(b) During the quarter ended December 31, 2003 the Company filed a Form 8-K
under Item 5 to report the November 2003 closing of private placement of
its securities to certain institutional investors. The Company also
furnished an 8-K under Item 12 to report its earnings for the quarter ended
September 30, 2003.
(c) Exhibits - See (a) iii above.
(d) Financial Statement Schedule - See (a) ii above.
54
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.
ICAD, INC.
Date: March 30, 2004
By: /s/ W. Scott Parr
-----------------------------------------
W. Scott Parr
President, Chief Executive Officer, Director
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 and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert Howard Chairman of the
- ---------------------- Board, Director March 30, 2004
Robert Howard
/s/ W. Scott Parr President, Chief Executive
- ---------------------- Officer, Director (Principal
W. Scott Parr Executive Officer) March 30, 2004
/s/ Annette Heroux Vice President of Finance,
- ---------------------- Chief Financial Officer
Annette Heroux (Principal Accounting Officer) March 30, 2004
/s/ James Harlan Director March 30, 2004
- ----------------------
James Harlan
/s/ Maha Sallam Director March 30, 2004
- ----------------------
Maha Sallam
/s/ Brett Smith Director March 30, 2004
- ----------------------
Brett Smith
/s/ Elliot Sussman Director March 30, 2004
- ----------------------
Elliot Sussman
/s/ Steven Rogers Director March 30, 2004
- ----------------------
Steven Rogers
55
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Certified Public Accountants 57
Consolidated Balance Sheets
As of December 31, 2003 and 2002 58
Consolidated Statements of Operations
For the years ended December 31, 2003,
2002 and 2001 59
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2003,
2002 and 2001 60
Consolidated Statements of Cash Flows
For the years ended December 31, 2003,
2002 and 2001 61
Notes to Consolidated Financial Statements 62-89
Schedule II - Valuation and Qualifying
Accounts and Reserves 90
56
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
iCAD, Inc.
Nashua, New Hampshire
We have audited the accompanying consolidated balance sheets of iCAD, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2003. We have also
audited the financial statement schedule listed in the accompanying index. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICAD, INC. and
subsidiaries at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO SEIDMAN, LLP
- ----------------------
Boston, Massachusetts
February 27, 2004
57
ICAD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
------------- -------------
2003 2002
------------- -------------
Assets
Current assets:
Cash and equivalents $ 5,101,051 $ 1,091,029
Trade accounts receivable, net of allowance for doubtful
accounts of $105,000 in 2003 and $40,000 in 2002 3,343,296 1,550,167
Inventory 2,123,642 390,349
Prepaid and other current assets 547,014 85,120
------------- -------------
Total current assets 11,115,003 3,116,665
------------- -------------
Property and equipment:
Equipment 1,825,147 840,410
Leasehold improvements 26,489 8,051
Furniture and fixtures 133,562 22,271
------------- -------------
1,985,198 870,732
Less accumulated depreciation and amortization 717,635 579,545
------------- -------------
Net property and equipment 1,267,563 291,187
------------- -------------
Other assets:
Patents, net of accumulated amortization 379,178 --
Technology intangibles, net of accumulated amortization 5,580,172 3,740,553
Tradename, Distribution agreements and other,
net of accumulated amortization 1,115,000 1,513,228
Goodwill 43,205,220 17,415,723
------------- -------------
Total other assets 50,279,570 22,669,504
------------- -------------
Total assets $ 62,662,136 $ 26,077,356
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,979,488 $ 2,232,262
Accrued interest 333,652 229,078
Accrued expenses 2,204,976 1,776,824
Convertible subordinated debentures 10,000 10,000
Current maturities of notes payable 1,233,390 65,526
------------- -------------
Total current liabilities 7,761,506 4,313,690
Loans payable to related party 3,630,000 200,000
Notes payable, less current maturities 3,375,000 108,390
------------- -------------
Total liabilities 14,766,506 4,622,080
------------- -------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $ .01 par value: authorized
1,000,000 shares; issued and outstanding
7,435 in 2003 and 8,550 in 2002, with the aggregate
liquidation value of $1,257,500 in 2003 and $1,415,000
in 2002, plus 7% annual dividend 74 86
Common stock, $ .01 par value: authorized
50,000,000 shares; issued 33,704,809 in 2003
and 26,418,124 shares in 2002; outstanding
33,636,933 in 2003 and 26,350,248 shares in 2002 337,048 264,181
Additional paid-in capital 120,395,390 85,829,483
Accumulated deficit (71,886,618) (63,688,210)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------- -------------
Total Stockholders' equity 47,895,630 21,455,276
------------- -------------
Total liabilities and stockholders' equity $ 62,662,136 $ 26,077,356
============= =============
See accompanying notes to consolidated financial statements.
58
ICAD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Sales $ 6,520,306 $ 5,000,184 $ 4,835,297
Cost of sales 2,941,663 5,161,643 3,936,406
------------ ------------ ------------
Gross margin 3,578,643 (161,459) 898,891
------------ ------------ ------------
Operating expenses:
Engineering and product development 2,384,057 1,626,001 751,467
General and administrative 7,439,721 6,595,076 1,124,710
Marketing and sales 1,838,618 987,587 1,563,380
------------ ------------ ------------
Total operating expenses 11,662,396 9,208,664 3,439,557
------------ ------------ ------------
Loss from operations (8,083,753) (9,370,123) (2,540,666)
Interest expense - net (includes $102,555, $26,761
and $114,952, respectively, to related parties) (114,655) (48,167) (80,105)
------------ ------------ ------------
Net loss (8,198,408) (9,418,290) (2,620,771)
Preferred dividends 144,258 148,050 155,050
------------ ------------ ------------
Net loss available to common stockholders $ (8,342,666) $ (9,566,340) $ (2,775,821)
============ ============ ============
Net loss per share
Basic and diluted $ (0.31) $ (0.46) $ (0.20)
Weighted average number of shares used in
computing loss per share
Basic and diluted 26,958,324 20,928,397 13,950,119
See accompanying notes to consolidated financial statements.
59
ICAD, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Preferred Stock Common Stock
------------------------- -------------------------- Additional
Number of Number of Paid-in Accumulated
Shares Issued Par Value Shares Issued Par Value Capital Deficit
------------- --------- ------------- ---------- ------------- -------------
Balance at December 31, 2000 9,550 $ 96 13,588,126 $ 135,881 $ 55,365,491 $ (51,649,149)
Issuance of common stock pursuant
to incentive stock option plan -- -- 118,832 1,188 151,071 --
Issuance of common stock relative
to conversion of loan payable to
related parties -- -- 1,432,910 14,329 1,591,364 --
Issuance of common stock for payment
of dividends to investors -- -- 101,965 1,020 154,351 --
Preferred stock dividends -- -- -- -- (155,050) --
Net loss -- -- -- -- -- (2,620,771)
---------- --------- ------------- ---------- ------------- -------------
Balance at December 31, 2001 9,550 96 15,241,833 152,418 57,107,227 (54,269,920)
Issuance of common stock pursuant
to incentive stock option plan -- -- 150,454 1,505 159,004 --
Issuance of common stock relative
to conversion of loan payable to
related parties -- -- 215,517 2,155 497,845 --
Issuance of common stock relative to
conversion of preferred stock (1,000) (10) 100,000 1,000 (990) --
Issuance of common stock to investor -- -- 250,000 2,500 497,500 --
Issuance of common stock relative to
merger -- -- 10,400,000 104,000 27,569,500 --
Issuance of common stock for payment
of dividends to investors -- -- 60,320 603 147,447 --
Preferred stock dividends -- -- -- -- (148,050) --
Net loss -- -- -- -- -- (9,418,290)
---------- --------- ------------- ---------- ------------- -------------
Balance at December 31, 2002 8,550 86 26,418,124 264,181 85,829,483 (63,688,210)
Issuance of common stock pursuant
to incentive stock option plan -- -- 616,640 6,166 855,134 --
Issuance of common stock relative
to payment of accounts payable -- -- 600,000 6,000 2,015,600 --
Issuance of common stock relative to
conversion of preferred stock (1,115) (11) 157,500 1,575 (1,564) --
Issuance of common stock in connection
with legal settlement -- -- 325,954 3,260 1,212,940 --
Issuance of common stock relative to
merger -- -- 4,300,000 43,000 24,467,000 --
Issuance of common stock relative to
private offering -- -- 1,260,000 12,600 5,906,400 --
Issuance of stock options in payment
for legal services -- -- -- -- 23,377 --
Compensation expense related to the
extension of director stock options -- -- -- -- 87,285 --
Issuance of common stock for payment
of dividends to investors -- -- 26,591 266 143,992 --
Preferred stock dividends -- -- -- -- (144,258) --
Net loss -- -- -- -- -- (8,198,408)
---------- --------- ------------- ---------- ------------- -------------
Balance at December 31, 2003 7,435 $ 74 33,704,809 337,048 $ 120,395,390 $ (71,886,618)
========== ========= ============= ========== ============= =============
Treasury Stockholders'
Stock Equity
----------- -------------
Balance at December 31, 2000 $ (950,264) $ 2,902,055
Issuance of common stock pursuant
to incentive stock option plan -- 152,259
Issuance of common stock relative
to conversion of loan payable to
related parties -- 1,605,693
Issuance of common stock for payment
of dividends to investors -- 155,371
Preferred stock dividends -- (155,050)
Net loss -- (2,620,771)
----------- -------------
Balance at December 31, 2001 (950,264) 2,039,557
Issuance of common stock pursuant
to incentive stock option plan -- 160,509
Issuance of common stock relative
to conversion of loan payable to
related parties -- 500,000
Issuance of common stock relative to
conversion of preferred stock -- --
Issuance of common stock to investor -- 500,000
Issuance of common stock relative to
merger -- 27,673,500
Issuance of common stock for payment
of dividends to investors -- 148,050
Preferred stock dividends -- (148,050)
Net loss -- (9,418,290)
----------- -------------
Balance at December 31, 2002 (950,264) 21,455,276
Issuance of common stock pursuant
to incentive stock option plan -- 861,300
Issuance of common stock relative
to payment of accounts payable -- 2,021,600
Issuance of common stock relative to
conversion of preferred stock -- --
Issuance of common stock in connection
with legal settlement -- 1,216,200
Issuance of common stock relative to
merger -- 24,510,000
Issuance of common stock relative to
private offering -- 5,919,000
Issuance of stock options in payment
for legal services -- 23,377
Compensation expense related to the
extension of director stock options -- 87,285
Issuance of common stock for payment
of dividends to investors -- 144,258
Preferred stock dividends -- (144,258)
Net loss -- (8,198,408)
----------- -------------
Balance at December 31, 2003 $ (950,264) $ 47,895,630
=========== =============
See accompanying notes to consolidated financial statements.
60
ICAD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (8,198,408) $ (9,418,290) $ (2,620,771)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation 138,090 143,809 242,335
Amortization 529,803 246,072 243,804
Loss on disposal of assets 1,443,628 473,350 --
Issuance of common stock for payment of legal settlement 1,216,200 -- --
Legal expense relative to issue of stock options and warrants 23,377 -- --
Compensation expense relative to extension of stock options 87,285 -- --
Compensation expense relative to issue of stock at merger -- 2,800,000 --
Changes in operating assets and liabilities (exclusive of acquisitions):
Accounts receivable 685,960 (167,262) 391,368
Inventory (275,657) 2,207,149 79,913
Prepaid and other current assets (52,957) 4,026 74,722
Accounts payable 360,073 905,624 80,161
Accrued interest 104,574 25,779 114,045
Accrued expenses (728,526) 524,034 17,633
------------ ------------ ------------
Total adjustments 3,531,850 7,162,581 1,243,981
------------ ------------ ------------
Net cash used by operating activities (4,666,558) (2,255,709) (1,376,790)
------------ ------------ ------------
Cash flows from investing activities:
Additions to patents, technology and other (264,225) -- (111,168)
Additions to property and equipment (100,000) (150,062) (85,582)
Acquisitions, net of cash acquired (1,103,969) 2,202,040 --
------------ ------------ ------------
Net cash provided (used) by investing activities (1,468,194) 2,051,978 (196,750)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of common stock for cash 6,780,300 160,509 152,259
Proceeds from investor 3,430,000 500,000 --
Proceeds of convertible note payable to principal stockholder -- 750,000 480,000
Proceeds of note payable -- -- 193,492
Payment of demand note payable to principal stockholder -- (550,000) (80,000)
Payment of note payable (65,526) (61,109) (14,622)
Payment of convertible subordinated debentures -- -- (107,000)
------------ ------------ ------------
Net cash provided by financing activities 10,144,774 799,400 624,129
------------ ------------ ------------
Increase (decrease) in cash and equivalents 4,010,022 595,669 (949,411)
Cash and equivalents, beginning of year 1,091,029 495,360 1,444,771
------------ ------------ ------------
Cash and equivalents, end of year $ 5,101,051 $ 1,091,029 $ 495,360
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 1,965 $ 983 $ 10,530
============ ============ ============
Non-cash items from financing activities:
Conversion of loans and accrued interest payable
to related parties into Common Stock $ -- $ 500,000 $ 1,605,693
============ ============ ============
Conversion of accounts payable into related
party loan payable $ -- $ -- $ 150,000
============ ============ ============
Conversion of accounts payable into Common Stock $ 2,021,600 $ -- $ --
============ ============ ============
Dividends payable with Common Stock $ 144,258 $ 148,050 $ 155,371
============ ============ ============
Fair market value of iCAD common stock and common
stock options issued to acquire capital stock of Qualia & ISSI $ 24,510,000 $ 27,673,500 $ --
============ ============ ============
Net tangible assets of Qualia and ISSI acquired, excluding cash
acquired of $446,031 and $2,202,040, respectively $ 1,317,092 $ 406,433 $ --
============ ============ ============
Fair market value of identifiable intangible assets
acquired from Qualia & ISSI, respectively $ 3,694,000 $ 5,437,000 $ --
============ ============ ============
See accompanying notes to consolidated financial statements.
61
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS AND USE OF ESTIMATES
iCAD, Inc. and its subsidiaries (the "Company") designs, develops,
manufactures and markets Computer Aided Detection (CAD) technology
for mammography applications and medical film digitizers. The Company
considers itself a single reportable business segment. The Company
sells its products throughout the world through various distributors,
resellers and systems integrators. See Note 10 for geographical and
major customer information.
The preparation of financial statements in conformity with generally
accepted accounting principles 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
revenues and expenses during the reporting period. Actual results
could differ from those estimates. Many of the Company's estimates
and assumptions used in the preparation of the financial statements
relate to the Company's products, which are subject to rapid
technological change. It is reasonably possible that changes may
occur in the near term that would affect management's estimates with
respect to inventories, equipment, software development costs and
intangible assets.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries that were acquired during
2002 and 2003, Howtek Devices Corporation, ISSI Acquisition, Inc.,
Qualia Acquisition Corporation, CADx Systems, Inc., CADx Medical
Systems Inc., CADx Systems Ltd. and CADx Medical SARL. Any material
intercompany transactions and balances have been eliminated in
consolidation. In the fourth quarter of 2003 the Howtek Devices
Corporation and ISSI Acquisition, Inc., subsidiaries were dissolved
and merged into iCAD, Inc.
(c) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are customer obligations due under normal trade
terms. The Company performs continuing credit evaluations of its
customers' financial condition and generally does not require
collateral.
Senior management reviews accounts receivable on a periodic basis to
determine if any receivables will potentially be uncollectible. The
Company includes any accounts receivable balances that are determined
to be uncollectible, along with a general reserve, in its overall
allowance for doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written off against the
allowance. Based on the information available to the Company, it
believes the allowance for doubtful accounts as of December 31, 2003
is adequate. However, actual write-offs might exceed the recorded
allowance.
62
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(d) INVENTORY
Inventory is valued at the lower of cost or market value, with cost
determined by the first-in, first-out method. At December 31,
inventory consisted of raw material and finished goods of
approximately $129,000 and $1,995,000, respectively, for 2003 and raw
material and finished goods of approximately $161,000 and $229,000,
respectively, for 2002.
During the quarter ended June 30, 2002, the Company wrote down
inventory related to its discontinued graphic arts and photographic
product lines to its estimated salvage value of zero. The write down
for the year ended December 31, 2002 totaled approximately
$2,370,000.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the various
classes of assets (ranging from 3 to 5 years).
(f) PATENTS
The costs for patents are being amortized over the estimated useful
life of the respective assets using the straight-line method. Patents
related to discontinued product lines with net book values totaling
$10,086 were written off during 2002.
(g) SOFTWARE DEVELOPMENT COSTS
Software development costs for application software and application
software enhancements were capitalized subsequent to the
establishment of their technological feasibility (as defined in
Statement of Financial Accounting Standards No. 86). The Company
capitalized $101,875 of internally developed and externally purchased
software costs during fiscal 2001. No amounts were capitalized during
2002 and 2003.
The capitalized software balances were presented net of accumulated
amortization. Capitalized software costs were amortized using the
straight-line method over their estimated economic lives (36 months).
All software developments costs, which related to discontinued
product lines, with net book values totaling $170,202, were written
off during 2002. As of December 31, 2003 software development costs
was zero.
(h) REVENUE RECOGNITION
Revenue is recognized when products are shipped to customers,
provided that there are no uncertainties regarding customer
acceptance, there is persuasive evidence of an arrangement, the sales
price is fixed or determinable and collection of the related
receivable is probable.
63
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(i) COST OF SALES
Cost of sales consists of the costs of products purchased for resale,
any associated inbound and outbound freight and duty, any costs
associated with manufacturing, warehousing, material movement and
inspection, amortization of any license rights, and amortization of
capitalized software.
(j) WARRANTY COSTS
The Company's products are generally under warranty against defects
in material and workmanship from a 90 day to 2 year period, depending
on the product. The Company established a Warranty reserve in the
amount of $100,000 in 2003. Warranty costs were not material in any
prior periods presented.
(k) ENGINEERING AND PRODUCT DEVELOPMENT
These costs relate to research and development costs which are
expensed as incurred, except for amounts related to software
development costs incurred after the establishment of technological
feasibility (see (g) above) which are capitalized.
(l) NET LOSS PER COMMON SHARE
Net loss per common share has been computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per
Share".
(m) CASH FLOW INFORMATION
For purposes of reporting cash flows, the Company defines cash and
equivalents as all bank transaction accounts, certificates of
deposit, money market funds and deposits, and other money market
instruments maturing in less than 90 days, which are unrestricted as
to withdrawal.
(n) INCOME TAXES
The Company follows the liability method under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"). The primary objectives of
accounting for taxes under SFAS 109 are to (a) recognize the amount
of tax payable for the current year and (b) recognize the amount of
deferred tax liability or asset for the future tax consequences of
events that have been reflected in the Company's financial statements
or tax returns.
64
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(o) LONG LIVED ASSETS
Long-lived assets, such as intangible assets, other than goodwill,
and property and equipment, are evaluated for impairment when events
or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated undiscounted
future cash flows from the use of these assets. When any such
impairment exists, the related assets are written down to fair value.
Intangible assets subject to amortization consists primarily of
patents, technology intangibles, trade name and distribution
agreements purchased in the acquisition of ISSI in June, 2002 and
CADx in December, 2003 (See Note 2). These assets are amortized on a
straight-line basis over their estimated useful lives of 2 to 10
years.
For the years ended December 31,
-------------- ------------ --------------------
Weighted Average
2003 2002 Useful Life
-------------- ------------ --------------------
-------------- ------------ --------------------
Gross carrying amount:
Patents $ 389,178 - 5 years
Technology $ 6,160,822 $3,871,000 10 years
Trade name $ 248,000 - 10 years
Distribution agreements $ 867,000 $1,566,000 2-3 years
-------------- ------------
-------------- ------------
Total intangible assets $ 7,665,000 $5,437,000
Accumulated amortization
Patent $ 10,000 -
Technology $ 580,650 $ 130,447
Trade name - -
Distribution agreements - $ 52,772
-------------- ------------
-------------- ------------
Total Accumulated $ 590,650 $ 183,219
amortization:
-------------- ------------
Intangible assets, net $ 7,074,350 $5,253,781
============== ============
Amortization expense related to intangible assets was $530,000,
$246,000 and $244,000 for the years ended December 31, 2003, 2002,
and 2001, respectively. Estimated amortization of our intangible
assets for the next five fiscal years is as follows including
amortization expense related to intangibles from our acquisitions of
ISSI in 2002 and CADx in 2003:
65
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(o) LONG LIVED ASSETS (continued)
Estimated amortization expense
For the year ended December 31, 2004 $1,003,000
For the year ended December 31, 2005 1,003,000
For the year ended December 31, 2006 870,000
For the year ended December 31, 2007 670,000
For the year ended December 31, 2008 645,000
In the third quarter of 2003, the Company recorded a one-time write-off
of $1,443,628 for the remaining asset, net of accumulated amortization,
attributable to its distribution agreement with Instrumentarium, which
the Company assumed as part of the ISSI acquisition. 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. This charge is included in general
and administrative expenses.
(p) GOODWILL
In June 2001, the Financial Accounting Standards Board issued SFAS
No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
companies to use the purchase method of accounting for all business
combinations initiated after June 30, 2001, and establishes specific
criteria for the recognition of intangible assets separately from
goodwill. SFAS 142 supersedes APB Opinion No. 17, "Intangible
Assets", and addresses the accounting for acquired goodwill and
intangible assets. Goodwill and indefinite-lived intangible assets
will no longer be amortized and will be tested for impairment at
least annually.
Goodwill arose in connection with the ISSI acquisition in June 2002
and with CADx at December 31, 2003. See Note 2.
66
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(q) STOCK-BASED COMPENSATION
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock
option plans. Under APB Opinion 25, when the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation cost is
recognized.
The Company provides proforma disclosures of compensation expense
under the fair value method of SFAS No. 123, "Accounting for
Stock-Based Compensation," and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". 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 80.8%; risk-free interest rates of
2.91%, 2.34%, 2.63%, 2.60%, 3.06% and 3.34%; and expected lives of 4
to 5 years. The weighted-average assumptions used for grants in 2002
were: no dividends paid; expected volatility of 80.3%; risk-free
interest rates of 2.01%, 4.86%, 3.37%, 1.79% and 1.56%; and expected
lives of 1 and 9 years. The weighted-average assumptions used for
grants in 2001 were: no dividends paid; expected volatility of 75.9%;
risk-free interest rates of 4.78% and 3.87%; and expected lives of 1
to 4 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 years ended December
31, 2003, 2002 and 2001 would have been as follows:
2003 2002 2001
------------ ------------ ------------
Net loss available to common
stockholders as reported $ (8,342,666) $ (9,566,340) $ (2,775,821)
Add: Stock-based employee
compensation expense
included in reported net
income -- -- --
Deduct: Total stock-based
employee compensation
determined under fair value
method for all awards (204,455) (1,820,855) (142,210)
------------ ------------ ------------
Pro forma net loss $ (8,547,121) $(11,387,195) $ (2,918,031)
============ ============ ============
Basic and diluted loss per share
As reported $(.31) $(.46) $(.20)
Pro forma $(.32) $(.54) $(.21)
67
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(r) ADVERTISING
The Company expenses advertising costs as incurred. Advertising
expense for the years ended December 31, 2003, 2002 and 2001 was
$250,000, $125,000 and $151,000, respectively.
(s) RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 145, Rescission of FASB Statements SFAS Nos. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections.
SFAS No. 145 rescinds Statement No. 4, Reporting Gains and Losses
from Extinguishments of Debt, and an amendment of that Statement,
FASB Statement No. 64 Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS No. 145 also rescinds FASB Statement
No. 44, Accounting for Intangible Assets of Motor Carriers. SFAS No.
145 amends FASB Statement No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provision of SFAS No.145 related to the rescission of
Statement No. 4 shall be applied in fiscal year beginning after May
15, 2002. The provisions of SFAS No. 145 related to Statement No. 13
should be for transactions occurring after May 15, 2002. Early
application of the provisions of this Statement is encouraged. The
adoption of SFAS No. 145 did not have any effect on the Company's
financial statements.
In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities. This statement
superseded EITF No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. Under this
statement, a liability or a cost associated with a disposal or exit
activity is recognized at fair value when the liability is incurred
rather than at the date of an entity's commitment to an exit plan as
required under EITF 94-3. The provisions of this statement are
effective for exit or disposal activities that are initiated after
December 31, 2002, with early adoption permitted. The adoption of
SFAS No. 146 did not have a significant impact on the Company's
financial statements.
In November 2002, the Emerging Issues Task Force ("EITF") reached
consensus on Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. Revenue arrangements with multiple deliverables include
arrangements which provide for the delivery or performance of
multiple products, services and/or rights to use assets where
performance may occur at different points in time or over different
periods of time. EITF Issue No. 00-21 is effective for revenue
68
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(s) RECENTLY ISSUED ACCOUNTING STANDARDS (continued)
arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of the guidance under this consensus did not have
an impact on the Company's financial position, results of operations
or cash flows.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, which will
significantly change current practice in the accounting for, and
disclosure of, guarantees. FIN No. 45 requires that a guarantor
recognize, at the inception of certain types of guarantees, a
liability of the obligation undertaken in issuing the guarantee at
fair value. The interpretation also requires significant new
disclosures in the financial statements of the guarantor about its
obligations under certain guarantees. The Company is required to
apply the disclosure provisions of FIN No. 45 in its financial
statements as of December 31, 2002. The accounting provisions of FIN
No. 45 are applicable for guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN No. 45 did not
have a material effect on the Company's financial statements and it
does not expect the accounting provisions of this interpretation to
have a material impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51, ("FIN No. 46")" which requires
all variable interest entities ("VIEs") to be consolidated by the
primary beneficiary. The primary beneficiary is the entity that holds
the majority of the beneficial interests in the VIE. In addition, the
interpretation expands disclosure requirements for both variable
interest entities that are consolidated, as well as VIEs from which
the entity is the holder of a significant amount of the beneficial
interests, but not the majority. The disclosure requirements of this
interpretation are effective for all financial statements issued
after January 31, 2003. The consolidation requirements of this
interpretation are effective for all periods beginning after June 15,
2003. The Company does not have any VIEs, therefore the adoption of
this interpretation did not have any effect on its results of
operations or financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 requires that certain financial instruments,
which under previous guidance were accounted for as equity, must now
be accounted for as liabilities. The financial instruments affected
include mandatorily redeemable stock, certain financial instruments
that require or may require the issuer to buy back some of its shares
in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003 and
must be applied to existing financial instruments effective June 29,
2003. The adoption of this statement did not have a material effect
on the Company's results of operations or financial condition.
69
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(2) ACQUISITIONS
(a) ACQUISITION OF CADx
On December 31, 2003, the Company completed the acquisition of CADx.
This merger brings together two of the three companies approved by
the FDA to market computer aided detection of breast cancer solutions
in the United States. To complete the merger, iCAD issued a total of
4,300,000 shares of its common stock, representing approximately 13%
of the outstanding shares of iCAD common stock after the merger. The
value of the Company's Common Stock issued was based upon a per share
value of $5.70, equal to the closing price on November 28, 2003, the
day the acquisition was announced. Additionally, iCAD paid $1,550,000
in cash and executed a 36-month secured promissory note in the amount
of $4,500,000 to purchase Qualia shares that were owned by two
institutional investors. The acquisition was accounted for as a
purchase on December 31, 2003, and accordingly, the operations of
CADx are not included in the consolidated financial statements but
will commence on January 1, 2004. The purchase price has been
allocated to net assets acquired based upon an appraisal of their
fair values, but the allocation is subject to further adjustment.
The following is a summary of the estimated fair values of the assets
acquired and liabilities assumed as of the date of acquisition:
Current assets $ 4,791,693
Property and equipment 850,241
Identifiable intangible assets 3,694,000
Goodwill 25,789,497
Current liabilities (3,878,811)
-----------
Purchase price $31,246,620
===========
The goodwill of $25,789,497 is not expected to be deductible for
income tax purposes.
The unaudited proforma operating results for the Company, assuming
the acquisition of CADx occurred as of January 1, 2003, are as
follows:
Years ended December 31, 2003
---------------------------------------------------------------------
Sales $ 16,219,443
Loss from operations $( 14,553,691)
Net loss $(15,087,642)
Net loss per share:
Basic and diluted $(0.57)
70
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(2) ACQUISITIONS (continued)
(b) ACQUISITION OF ISSI
On June 28, 2002, the Company completed the acquisition of
Intelligent Systems Software, Inc. ("ISSI") pursuant to a 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. The Company initiated the merger with the
intention of improving its competitive position in the CAD market
place for products of the combined companies. In the merger, the
Company issued a total of 10,400,000 shares of its common stock to
the ISSI stockholders, including 2,000,000 shares of the Company's
common stock which were issued to a corporation owned by the Chairman
of the Company, Mr. Robert Howard, in exchange for shares of ISSI
Common Stock purchased by the corporation immediately prior to the
merger, as approved by the Company's shareholders and in accordance
with the provisions of the merger agreement. The value of the
Company's Common Stock issued was based upon a per share value of
$3.20, equal to the closing price on February 19, 2002, the day the
acquisition was announced. In connection with the 2,000,000 shares
issued to the corporation owned by Mr. Howard, the Company recorded
compensation expense of $2,800,000, which represented the amount that
the fair market value of iCAD common shares issued exceeded the
consideration paid for ISSI common stock. The acquisition was
accounted for as a purchase, and accordingly, the operations of ISSI
are included in the consolidated financial statements since the
effective date, the close of business on June 28, 2002 through
December 31, 2002. The purchase price has been allocated to net
assets acquired based upon an appraisal of their fair values.
Following is a summary of the estimated fair values of the assets
acquired and liabilities assumed as of the date of acquisition:
Current assets $ 3,180,347
Property and equipment 246,613
Identifiable intangible assets 5,437,000
Goodwill 17,415,723
Current liabilities (762,332)
Notes payable (56,155)
-----------
Purchase price $25,461,196
===========
The goodwill of $17,415,723 is not deductible for income tax
purposes.
71
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(2) ACQUISITIONS (continued)
(b) ACQUISITION OF ISSI (continued)
The unaudited proforma operating results for the Company, assuming
the acquisition of ISSI occurred as of January 1, 2002, are as
follows:
Year ended December 31, 2002
------------------------------------------------
Sales $ 6,246,432
Loss from operations $ (9,991,795)
Net loss $(10,039,962)
Net loss per share:
Basic and diluted $(0.39)
(3) RESTRUCTURING CHARGES
(a) DISCONTINUED PRODUCT LINES
During the second quarter of 2002, the Company implemented a plan
whereby it would no longer support its graphic arts and photographic
product lines and would concentrate its efforts in the medical
imaging and CAD business. In connection therewith, the Company wrote
off all inventories, fixed assets and intangible assets related to
the discontinued product lines down to their estimated salvage
values. Accordingly, during 2002 the Company recorded charges for the
write off of inventory of approximately $2,370,000, fixed assets of
approximately $237,000 and intangible assets of approximately
$180,000.
During the fourth quarter of 2002, the Company concluded the
licensing and divestiture of the discontinued product lines. The
license agreement provided for the sale of all tangible and
intangible assets related to the product lines. Total consideration
of $188,117 was paid through the assumption of certain liabilities of
the Company and is included in the cost of sales in the accompanying
consolidated statements of operations for the year ended December 31,
2002. In accordance with the licensing agreement any sales by the
licensee will result in royalty revenue to the Company. Royalty
revenues are earned as a flat fee for each unit sold by the licensee.
No royalty revenue was received in 2003.
72
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(3) RESTRUCTURING CHARGES (continued)
(b) CLOSURE OF BOCA RATON OFFICE
During the third quarter of 2002, the Company's first quarter of
combined operations, iCAD's management and directors evaluated the
Company's organization and operations to identify and eliminate
redundancies and inefficiencies created through the merger of Howtek
and ISSI. As a consequence, the Company negotiated the resignations
of three members of senior management, and took action to close the
Company's office in Boca Raton, Florida in 2003 resulting in a one
time charge of $884,000. Charges recorded in connection with
separation agreements negotiated with its former Chief Executive
Officer and Vice President of Finance totaled approximately $790,000.
The cost of closing the Boca Raton office totaled approximately
$94,000 and represented remaining amounts due under the
non-cancelable operating lease for the facility. The total charge is
included in general and administrative expenses in the accompanying
consolidated statement of operations. As of December 31, 2002
approximately $110,000 of severance and closing costs were paid and
charged against the liability. Severance and closing costs accrued as
of December 31, 2002 totaled approximately $774,000, with $449,000
paid in 2003 and expected payments of $269,000 and $56,000 for 2004
and 2005, respectively.
(4) RELATED PARTY TRANSACTIONS
(a) LOAN PAYABLE TO PRINCIPAL STOCKHOLDER
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. The Loan Agreement expires
January 4, 2005, subject to extension by the parties. 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 first quarter of 2002, Mr. Howard converted $500,000 of
advances made under the Loan Agreement into 215,517 shares of
restricted common stock of the Company. In the second quarter of 2002
the Company borrowed $250,000 and in November 2002 the Company repaid
Mr. Howard $50,000 pursuant to the Loan Agreement. In 2003 the
Company borrowed $3,430,000 pursuant to the Loan Agreement.
73
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(4) RELATED PARTY TRANSACTIONS (continued)
(a) LOAN PAYABLE TO PRINCIPAL STOCKHOLDER (continued)
As of December 31, 2003, $3,630,000 was owed by the Company and the
Company had $370,000 available for future borrowings under the Loan
Agreement.
The Company had Secured Demand Notes and Security Agreements (the
"Notes") owed to Mr. Robert Howard, totaling $500,000 as of December
31, 2001. The principal of these Notes was due and payable in full,
together with interest accrued and any penalties provided for, on
demand. Under the terms of the Notes the Company agreed to pay
interest at the lower rate of (a) 12% per annum, compounded monthly
or (b) the maximum rate permitted by applicable law. Payment of the
Notes was secured by a security interest in certain assets of the
Company. In March 2002 the Company repaid the principal balance due
in the amount of $500,000 and the Notes were discharged.
(b) PREMISES LEASE AND OTHER EXPENSES
The Company conducted its operations in premises owned by Mr. Robert
Howard, pursuant to a lease, which expired January 31, 2003. As of
December 31, 2002, future minimum lease payments under this lease are
$6,542 for 2003. The Company was required to pay real estate taxes,
provide insurance and maintain the premises.
Total rent paid under this lease for each of the years ended December
31, 2002 and 2001 was $78,500.
In January 2003, the Company relocated its principal executive
offices. See Note 11 (a) of the Notes to Consolidated Financial
Statements.
(5) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2003 and
2002:
2003 2002
---------- ----------
Accrued office closure and related costs $ -- $ 774,332
Accrued litigation -- 383,000
Accrued legal settlement 250,000 --
Accrued salary and related expenses 1,273,559 178,127
Accrued warranty expense 100,000 --
Other accrued expenses 364,917 441,365
Unearned revenue 216,500 --
---------- ----------
$2,204,976 $1,776,824
========== ==========
74
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(6) CONVERTIBLE SUBORDINATED DEBENTURES
The Company has a 9% Convertible Subordinated Debentures (the
"Debentures"), which became due December 1, 2001. Interest on the
Debentures was payable semi-annually on June 1 and December 1. The
Debentures were convertible into common stock of the Company at the
conversion price of $19.00 per share, subject to adjustment in
certain events. On December 31, 1998, the Company and the Trustee of
the Debentures entered into a Second Supplemental Indenture (the
"Agreement"). The purpose of the Agreement was to reduce the
conversion price for the Debentures from $19.00 per share to $1.00
per share, subject to adjustment as set forth in the Indenture,
during the period from December 31, 1998 through March 23, 1999.
Under the Agreement, $2,064,000 were converted into 2,064,000 shares
of Common Stock, at the conversion price of $1.00 per share. In
December 2001, $107,000 of its Debentures were presented for payment.
As of December 31, 2002 and 2003 the Company's outstanding balance on
its Debentures was $10,000.
(7) NOTES PAYABLE
On December 31, 2003, the Company completed the acquisition of CADx.
To complete the merger, the Company executed a secured promissory
note in the amount of $4,500,000 issued in favor of CADx Canada which
is payable over 36 months and bears interest at the rate per annum
equal to the greater of (i) 6.25% or (iii) the prime rate plus 1%.
The note is secured by the assets of iCAD. Maturity of the note
payable is as follows:
Year ending Principal
2004 $1,125,000
2005 1,500,000
2006 1,500,000
2007 375,000
In connection with the acquisition of ISSI, the Company assumed two
convertible promissory notes payable with an original principal
amount totaling $56,155. The Company is required to make quarterly
interest payments on the outstanding principal balance at a rate of
7% per annum. The convertible promissory notes payable mature in
November 2004 at which time any outstanding principal balance is due.
The convertible promissory notes payable give the holder the right at
any time to convert the then outstanding principal and any accrued
interest balances into share of common stock based on the conversion
rate of $0.89 per share of the Company's common stock.
During 2001 the Company entered into a financing agreement with a
supplier to purchase $193,492 of components, pursuant to a note
payable (the "Note"). Principal on the Note is payable over 36 months
starting October 1, 2001. Under the terms of the Note the Company
agreed to pay interest at a fixed rate of 7% per annum. As of
December 31, 2003, the Company owed $52,235 pursuant to the Note.
Principal monthly payments are due through September 2004.
75
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) STOCKHOLDERS' EQUITY
(a) PREFERRED STOCK
7% Series A Convertible Preferred Stock. On December 22, 1999 the
Company, pursuant to the authority of the Company's Board of
Directors, adopted a resolution creating a series of preferred stock
designated as 7.0% Series A Convertible Preferred Stock (the "Series
A Preferred Stock"). The number of shares initially constituting the
Series A Preferred Stock was 10,000, par value $.01 per share, which
may be decreased (but not increased) by the Board of Directors
without a vote of stockholders, provided, however, that such number
may not be decreased below the number of then outstanding shares of
Series A Preferred Stock. The holders of the shares of Series A
Preferred Stock shall vote together with the Common Stock as a single
class on all actions to be voted on by the stockholders of the
Company. Each share of Series A Preferred Stock shall entitle the
holder thereof to such number of votes per share on each such action
as shall equal the number of whole shares of Common Stock into which
each share of Series A Preferred Stock is then convertible. The
holders shall be entitled to notice of any stockholder's meeting in
accordance with the By-Laws of the Company. Each share of Series A
Preferred Stock is convertible into that number of shares of Common
Stock determined by dividing the aggregate liquidation preference of
the number of shares of Series A Preferred Stock being converted by
$1.00 (the "Conversion Rate"). The Conversion Rate shall be subject
to appropriate adjustment by stock split, dividend or similar
division of the Common Stock or reverse split or similar combinations
of the Common Stock prior to conversion. The Company may at any time
after the date of issuance, at the option of the Board of Directors,
redeem in whole or in part the Series A Preferred Stock by paying
cash equal to $100 per share together with any accrued and unpaid
dividends (the "Redemption Price"). The Redemption Price shall be
subject to appropriate adjustment by the Board of Directors of
similar division of shares of Series A Preferred Stock or reverse
split or similar combination of the Series A Preferred Stock. In the
event the Company shall liquidate, dissolve or wind up, no
distribution shall be made to the holders of shares of Common Stock
unless, prior thereto the holders of shares of Series A Preferred
Stock shall have received $100 per share (as adjusted for any stock
dividends, combinations or splits) plus all declared or accumulated
but unpaid dividends. The holders of shares of Series A Preferred
Stock, in preference to the holders of shares of Common Stock, shall
be entitled to receive cumulative dividends of $7.00 per annum per
share, payable annually, subject to appropriate adjustment by the
Board of Directors of the Company in the event of any stock split,
dividend or similar division of shares of Series A Preferred.
Dividends are payable annually, in arrears, on the last day of
December in each year.
On April 12, 2000, the Company sold, in private transactions, a total
of 2,250 shares of its 7% Series A Preferred Stock ($.01 per share
par value), at $100 per share, consisting of 1,000 shares to an
unrelated party, 1,000 shares to Dr. Lawrence Howard, son of the
Company's Chairman, Mr. Robert Howard, and 250 shares to Mr. W. Scott
Parr, the Company's President, Chief Executive Officer, for gross
proceeds of $225,000.
76
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
8) STOCKHOLDERS' EQUITY (continued)
(a) PREFERRED STOCK (continued)
In 2003, Dr. Lawrence Howard converted 1,000 shares of the Company's
Series A Preferred Stock into 100,000 shares the Company's Common
Stock.
7% Series B Convertible Preferred Stock. On October 19, 2000 the
Company, pursuant to the authority of the Company's Board of
Directors, adopted a resolution creating a series of preferred stock
designated as 7.0% Series B Convertible Preferred Stock (the "Series
B Preferred Stock"). The number of shares initially constituting the
Series B Preferred Stock was 2,000, par value $.01 per share, which
may be decreased (but not increased) by the Board of Directors
without a vote of stockholders, provided, however, that such number
may not be decreased below the number of then outstanding shares of
Series B Preferred Stock. The holders of the shares of Series B
Preferred Stock have no voting rights other than is required by law.
Each share of Series B Preferred Stock is convertible into that
number of shares of Common Stock determined by dividing the aggregate
liquidation preference of the number of shares of Series B Preferred
Stock being converted by $2.00 (the "Conversion Rate"). The
Conversion Rate shall be subject to appropriate adjustment by stock
split, dividend or similar division of the Common Stock or reverse
split or similar combinations of the Common Stock prior to
conversion. The Company may at any time after the date of issuance,
at the option of the Board of Directors, redeem in whole or in part
the Series B Preferred Stock by paying cash equal to $1,000 per share
together with any accrued and unpaid dividends (the "Redemption
Price"). The Redemption Price shall be subject to appropriate
adjustment by the Board of Directors of similar division of shares of
Series B Preferred Stock or reverse split or similar combination of
the Series B Preferred Stock. In the event the Company shall
liquidate, dissolve or wind up, no distribution shall be made to the
holders of shares of Common Stock unless, prior thereto, the holders
of shares of Series B Preferred Stock shall have received $1,000 per
share (as adjusted for any stock dividends, combinations or splits)
plus all declared or accumulated but unpaid dividends. The holders of
shares of Series B Preferred Stock, in preference to the holders of
shares of Common Stock, shall be entitled to receive cumulative
dividends of $70.00 per annum per share, payable annually, subject to
appropriate adjustment by the Board of Directors of the Company in
the event of any stock split, dividend or similar division of shares
of Series B Preferred. Dividends are payable annually, in arrears, on
the last day of December in each year.
In October 2000 the Company sold, in private transactions, a total of
1,400 shares of its 7% Series B Preferred Stock ($.01 per share par
value), at $1,000 per share, consisting of 1,350 shares to unrelated
parties, and 50 shares to Mr. W. Scott Parr, for gross proceeds of
$1,400,000.
77
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) STOCKHOLDERS' EQUITY (continued)
(a) PREFERRED STOCK (continued)
The 1,400 shares of 7% Series B Preferred Stock were issued with a
conversion price below the Company's Common Stock quoted value and as
a result accreted dividends of $996,283 were recorded and included in
the net loss per share calculation for the year ended December 31,
2000. In 2003, 115 shares of the Company's Series B Preferred Stock
were converted by unrelated parties into 57,500 shares the Company's
Common Stock.
(b) STOCK OPTIONS
The Company has four stock option plans, which are described as
follows:
The Howtek, Inc. 1993 Stock Option Plan" ("The 1993 Plan").
-----------------------------------------------------------
The 1993 Plan (the "Plan") was adopted in November 1993. The Plan
provides for the granting of non-qualifying and incentive stock
options to employees and other persons to purchase up to an aggregate
of 1,625,000 shares of the Company's common stock. The purchase price
of each share for which an option is granted shall be at the
discretion of the Board of Directors or the Committee appointed by
the Board of Directors provided that the purchase price of each share
for which an incentive option is granted shall not be less than the
fair market value of the Company's common stock on the date of grant,
except for options granted to 10% holders for whom the exercise price
shall not be less than 110% of the market price. Incentive options
granted under the Plan vest 100% over periods extending from six
months to five years from the date of grant and expire ten years
after the date of grant, except for 10% holders whose options shall
expire five years after the date of grant. Non-qualifying options
granted under the Plan are generally exercisable over a ten-year
period, vesting 1/3 each on the first, second, and third
anniversaries of the date of grant. No new options can be granted
under this plan.
The Howtek, Inc. 2001 Stock Option Plan, ("The 2001 Plan").
-----------------------------------------------------------
The 2001 Plan was adopted in August 2001, at the Annual Meeting of
Stockholders at which the Stockholders voted to replace the 1993
plan, which had no further stock available for grant. The 2001 Plan
provides for the granting of non-qualifying and incentive stock
options to employees and other persons to purchase up to an aggregate
of 1,200,000 shares of the Company's common stock. The purchase price
of each share for which an option is granted shall be at the
discretion of the Board of Directors or the Committee appointed by
the Board of Directors provided that the purchase price of each share
for which an incentive option is granted shall not be less than the
fair market value of the Company's common stock on the date of grant,
except for options granted to 10% holders for whom the exercise price
shall not be less than 110% of the market price.
78
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) STOCKHOLDERS' EQUITY (continued)
(b) STOCK OPTIONS (continued)
Incentive options granted under the 2001 Plan vest 100% over periods
extending from six months to five years from the date of grant and
expire ten years after the date of grant, except for 10% holders
whose options shall expire five years after the date of grant.
Non-qualifying options granted under the 2001 Plan are generally
exercisable over a ten year period, vesting 1/3 each on the first,
second, and third anniversaries of the date of grant.
The Howtek, Inc. 2002 Stock Option Plan, ("The 2002 Plan").
-----------------------------------------------------------
The 2002 Plan was adopted in June 2002, at the Annual Meeting of
Stockholders. The 2002 Plan provides for the granting of
non-qualifying and incentive stock options to employees and other
persons to purchase up to an aggregate of 500,000 shares of the
Company's common stock. The purchase price of each share for which an
option is granted shall be at the discretion of the Board of
Directors or the Committee appointed by the Board of Directors
provided that the purchase price of each share for which an incentive
option is granted shall not be less than the fair market value of the
Company's common stock on the date of grant, except for options
granted to 10% holders for whom the exercise price shall not be less
than 110% of the market price. Incentive options granted under the
2002 Plan vest 100% over periods extending from six months to five
years from the date of grant and expire ten years after the date of
grant, except for 10% holders whose options shall expire five years
after the date of grant. Non-qualifying options granted under the
2002 Plan are generally exercisable over a ten year period.
Intelligent Systems Software 2001 Stock Option Plan
----------------------------------------------------
In connection with iCAD's acquisition of Intelligent Systems
Software, Inc. in June 2002, iCAD assumed options granted under
Intelligent Systems Software's 2001 Stock Option Plan to purchase
400,000 shares of Intelligent Systems Software's common stock, which
options were converted upon such acquisition into the right to
purchase 500,000 shares of iCAD's common stock in accordance with the
terms and conditions set forth in such 2001 Stock Option Plan.
79
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) STOCKHOLDERS' EQUITY (continued)
(b) STOCK OPTIONS (continued)
A summary of stock option (incentive and non-qualifying) activity is
as follows:
Option Price range Weighted
Shares per share Average
---------------------------------------
Outstanding, January 1, 2001 1,425,489 $ .81-$1.81 $1.31
Granted 197,000 $ .95-$3.00 $1.21
Exercised (118,832) $ .81-$1.72 $1.28
Cancelled (27,068) $ .81-$1.75 $1.42
---------------------------------------
Outstanding, December 31, 2001 1,476,589 $ .81-$3.00 $1.28
Granted 2,483,445 $ .80-$3.49 $2.42
Exercised (150,454) $ .80-$1.75 $1.07
Cancelled (34,832) $1.72-$3.49 $2.24
---------------------------------------
Outstanding, December 31, 2002 3,774,748 $ .80-$3.49 $2.04
Granted 911,500 $1.64-$4.91 $2.09
Exercised (616,640) $ .80-$3.49 $1.40
Cancelled (381,057) $ .81-$3.49 $2.41
---------------------------------------
Outstanding, December 31, 2003 3,688,551 $ .80-$4.91 $2.12
=======================================
Exercisable at year-end
2001 1,078,641 $ .81-$3.00 $1.27
2002 2,976,918 $ .80-$3.49 $2.05
2003 2,598,682 $ .80-$3.49 $2.19
Available for future grants
2003 69,612
The weighted-average fair value of options granted during the year
was $1.25 per option for 2003, $1.49 per option for 2002 and $0.61
per option for 2001.
The weighted-average remaining contractual life of stock options
outstanding for all plans at December 31, 2003 was 7.7 years.
80
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) STOCKHOLDERS' EQUITY (continued)
(b) STOCK OPTIONS (continued)
The following table summarizes information about stock options
outstanding at December 31, 2003:
$.80 $1.00 $1.50
to to to
Range of Exercise Prices: $.95 $1.13 $4.91
---------------------------
Outstanding options:
Number outstanding at December 31, 2003 563,934 327,390 2,797,227
Weighted average remaining contractual life (years) 6.6 4.3 8.3
Weighted average exercise price $.83 $1.13 $2.50
Exercisable options:
Number outstanding at December 31, 2003 523,934 327,390 1,747,358
Weighted average remaining contractual life (years) 6.5 4.3 7.9
Weighted average exercise price $.82 $1.13 $2.80
(c) EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standards No.
128, "Earnings per Share", which requires the presentation of both
basic and diluted earning per share on the face of the Statements of
Operations. Conversion of the subordinated debentures and other
convertible debt and preferred stock and assumed exercise of options
and warrants are not included in the calculation of diluted loss per
share since the effect would be antidilutive. Accordingly, basic and
diluted net loss per share do not differ for any period presented.
The following table summarizes the common stock equivalent of
securities that were outstanding as of December 31, 2003, 2002 and
2001, but not included in the calculation of diluted net loss per
share because such shares are antidilutive:
2003 2002 2001
--------- --------- ---------
Stock options 3,688,551 3,774,748 1,476,589
Stock warrants 124,200 57,000 57,000
Convertible Revolving Promissory Note 1,261,136 80,000 --
Convertible Series A Preferred Stock 615,000 715,000 815,000
Convertible Series B Preferred Stock 642,500 700,000 700,000
81
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) STOCKHOLDERS' EQUITY (continued)
(d) PRIVATE PLACEMENT
On November 24, 2003, the Company sold 1,260,000 shares of its common
stock for $5.00 per share in a private placement to institutional
investors. The Company also issued to such investors' additional
investment rights to purchase up to an additional 315,000 shares of
its common stock at $5.00 per share. The net proceeds to the Company
for the 1,260,000 shares sold were approximately $5,919,000. A total
of 90,000 shares of the Company's common stock were issued in
connection with the additional investment rights in 2004. The
remaining shares expired unexercised. The net proceeds to the Company
for the 90,000 shares sold were approximately $425,000. Ladenburg
Thalmann & Co. Inc. served as placement agent for these transactions
for which it received compensation in the amount of approximately
$404,000 and a five year warrant to purchase 67,200 shares of the
Company's Common Stock at $5.00 per share.
(e) STOCK SUBSCRIPTION WARRANTS
On November 24, 2003 the Company issued a common stock purchase
warrant (the "2003 Warrant") to Ladenburg Thalmann & Co., Inc. (the
"Agent"), that served as a placement agent for the private placement
transaction. The warrants were issued for placement services, for
which the Agent received a five-year warrant. The 2003 Warrant
entitles the Agent to purchase from the Company up to 67,200 shares
of the Company's common stock at $5.00 per share. The Agent may
exercise the Warrant at any time or from time to time on or prior to
November 24, 2008.
During 2000 the Company issued a common stock purchase warrant (the
"New Warrant") to the company (the "Supplier") responsible for
software development of certain of the Company's software, as part of
its development agreement entered into in 2000. The New Warrant
entitles the Supplier to purchase from the Company up to 7,000 shares
of the Company's common stock at $3.00 per share. The Supplier may
exercise the New Warrant at any time or from time to time on or prior
to February 28, 2005. The Company estimated the fair value of the New
Warrant at the date of issue to be $12,818 using the Black-Scholes
option-pricing model. The value of the New Warrant was expensed in
2000.
In December, 1999 the Company issued a common stock purchase warrant
(the "Warrant") to the company (the "Manufacturer") responsible for
the assembly of the Company's MultiRAD(TM) medical film digitizer, as
part of its manufacturing agreement. The Warrant entitles the
Manufacturer to purchase from the Company up to 50,000 shares of the
Company's common stock at $2.50 per share. The Manufacturer may
exercise the Warrant at any time or from time to time on or prior to
December 31, 2004. The Company estimated the fair value of the
Warrant at the date of issue to be $54,000 using the Black-Scholes
option-pricing model. Accordingly, the value of the Warrant was
expensed over the two year period of the agreement.
82
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) STOCKHOLDERS' EQUITY (continued)
(e) STOCK SUBSCRIPTION WARRANTS (continud)
At December 31, 2003 there are 124,200 warrants outstanding that are
exercisable at the following prices:
Warrants Exercise Price
-------------------- ----------------
67,200 $5.00
7,000 $3.00
50,000 $2.50
No warrants were exercised in 2001, 2002 or 2003.
(9) INCOME TAXES
As a result of the 2003, 2002 and 2001 losses, no income tax expense
was incurred for these years.
Deferred income taxes reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations.
Deferred tax liabilities (assets) are comprised of the following at
December 31:
2003 2002
------------ ------------
Inventory (Section 263A) $ (86,000) $ (393,000)
Inventory reserves (39,000) (24,000)
Receivable reserves (36,000) (14,000)
Other accruals (24,000) (24,000)
Accumulated depreciation 353,000 9,000
Acquisition related intangibles 3,494,000 2,102,000
Tax credits (2,530,000) (2,459,000)
NOL carry forward (13,927,000) (14,351,000)
------------ ------------
Gross deferred tax asset (12,795,000) (15,154,000)
Deferred tax assets valuation allowance $ 12,795,000 $ 15,154,000
------------ ------------
Net deferred tax assets $ -0- $ -0-
============ ============
As of December 31, 2003, the Company has net operating loss
carryforwards totaling approximately $43,800,000. The amount of the
net operating loss carryforwards, which may be utilized in any future
period, may be subject to certain limitations based upon changes in
the ownership of the Company's common stock. The following is a
breakdown of the net operating loss expiration period:
83
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(9) INCOME TAXES (continued)
Expiration date Amount of remaining NOL
--------------- -----------------------
2004 4,200,000
2005 2,200,000
2006 2,200,000
2007 300,000
2008 600,000
2009 100,000
2010 4,000,000
2011 4,400,000
2012 2,300,000
2018 3,600,000
2019 2,200,000
2020 1,400,000
2021 2,100,000
2022 5,800,000
2023 8,400,000
In addition the Company has available tax credit carryforwards
(adjusted to reflect provisions of the Tax Reform Act of 1986) of
approximately $2,530,000, which are available to offset future
taxable income and income tax liabilities, when earned or incurred.
These amounts expire in various years through 2023.
(10) SALES INFORMATION
(a) GEOGRAPHIC INFORMATION
The Company's sales are made to U.S. distributors, dealers and to
foreign distributors of computer and related products. Total export
sales were $288,708 or 4% of total sales in 2003, $301,000 or 6% of
total sales in 2002 and $944,000 or 20% of total sales in 2001.
The Company's principal concentration of export sales was in
Australia, which accounted for 35% of the Company's export sales in
2003 and 2001, with Europe accounting for 26% of the Company's export
sales in 2002. The balance of the export sales was into Canada
and the Far East.
As of December 31, 2003 and 2002 the Company had outstanding
receivables of $65,079 and $15,000, respectively, from distributors
of its products who are located outside of the United States.
84
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(10) SALES INFORMATION (continued)
(b) MAJOR CUSTOMERS
During the years ended December 31, 2003 and 2002 the Company had
sales of $2,921,535 and $2,631,709, or 45% and 53% of sales,
respectively, to Instrumentarium Imaging, Inc. and an accounts
receivable balance of $156,003 and $1,190,990, respectively, due from
this customer at December 31, 2003 and 2002. The Company did not have
any major customers in 2001.
(c) PRODUCT INFORMATION
The Company's revenues by product line are as follows:
For the year ended December 31, 2003 2002 2001
---------- ---------- ----------
CAD $4,229,622 $2,628,135 $ --
Medical imaging 2,290,684 1,660,493 2,315,738
FotoFunnel -- 274,169 988,199
Graphic arts -- 437,387 1,531,360
---------- ---------- ----------
Total $6,520,306 $5,000,184 $4,835,297
========== ========== ==========
(11) COMMITMENTS AND CONTINGENCIES
(a) LEASE OBLIGATIONS
As of December 31, 2003, the Company had three lease obligations
related to its facilities. The Company's principal executive office
is located in Nashua, New Hampshire. The facility consists of
manufacturing, research and development and office space and is
leased by the Company pursuant to a lease which expires December 31,
2006 at an annual rent of approximately $69,200.
The Company leases a facility for its software research and
development group in Tampa, Florida. The facility consists of
research and development and office space and is leased by the
Company pursuant to a lease, which expires July 31, 2007 at an annual
rent of approximately $53,000. Additionally, the Company is required
to pay real estate taxes and provide insurance.
85
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(11) Commitments and Contingencies (continued)
(a) LEASE OBLIGATIONS (continued)
In addition, as a result of its acquisition of CADx on December 31,
2003, the Company leases a facility for its software research and
development, customer service and administrative offices located in
Beavercreek, Ohio. The facility consists of research and development
and office space and is leased by the Company pursuant to a lease,
which expires December, 2010 at an annual rate of approximately
$416,000. Additionally, the Company is required to pay real estate
taxes, utilities, common area maintenance, cleaning, security and
provide insurance. The lease amount increases annually throughout the
life of the lease. The lease may be renewed for two additional terms
of five years each.
Rental expense for all leases for the years ended December 31, 2003,
2002 and 2001 was $125,797, $198,429 and $78,500, respectively.
Future minimum rental payments due under these agreements as of
December 31, 2003 are approximately as follows:
Fiscal Year Amount
----------- ----------
2004 $ 520,000
2005 536,000
2006 552,000
2007 478,000
2008 459,000
2009 472,000
2010 486,000
----------
$3,503,000
==========
86
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(11) COMMITMENTS AND CONTINGENCIES (continued)
(b) 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.
On June 3, 2002, ISSI was sued in United States District Court for
the District of Delaware by R2 Technology, Inc. and Shih-Ping Wang.
The lawsuit alleged that ISSI's MammoReader device infringes certain
patents owned by the 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 the 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 250,954 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 is
not accounted for in the Company's financial statements as it was
meant to provide a significant purchasing advantage to R2, while
maintaining a reasonable profit margin and creating additional
87
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(11) COMMITMENTS AND CONTINGENCIES (continued)
(b) LITIGATION (continued)
economies of scale for iCAD. In November 2003, R2 agreed to accept an
additional 75,000 shares of iCAD Common Stock valued at $466,200, in
satisfaction of any royalties it otherwise would have been entitled
to receive under the settlement agreement. The value of the Company's
Common Stock issued was based upon a per share value of $6.216, equal
to the closing price on November 18, 2003, the date of the agreement.
These charges are included in general and administrative expenses.
(12) FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash and
equivalents, accounts receivable, accounts payable, accrued expenses,
loan payable to related parties, notes payable and convertible
debentures and other convertible debt approximated fair value as of
December 31, 2003 and 2002, due to either short maturity or terms
similar to those available to similar companies in the open market.
(13) QUARTERLY FINANCIAL DATA (unaudited)
Net Gross Net (Loss)
2003 sales profit income (loss) per share
---- ----------- ----------- ------------- ---------
First quarter $ 2,214,012 $ 1,304,427 $ 76,558 $ 0.00
Second quarter $ 1,337,517 $ 744,934 $(1,285,144) $ (0.05)
Third quarter $ 1,387,100 $ 655,493 $(5,395,367) $ (0.20)
Fourth quarter $ 1,581,677 $ 873,789 $(1,594,455) $ (0.06)
2002
----
First quarter $ 775,633 $ 180,221 $ (521,122) $ (0.04)
Second quarter $ 776,600 $(2,665,747) $(7,359,510) $ (0.47)
Third quarter $ 1,286,966 $ 727,887 $(1,640,665) $ (0.06)
Fourth quarter $ 2,160,985 $ 1,596,180 $ 103,007 $ 0.00
The 2003 totals above are reflective of the Company's decision, in
the third quarter of 2003, to write-off $1,443,628 attributable to
its distribution agreement with Instrumentarium. This write-off came
after assessing the performance of Instrumentarium in the third
quarter 2003, 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,
88
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(13) QUARTERLY FINANCIAL DATA (unaudited) (continued)
the Company accounted for over $2,702,000 in non-recurring
expenses related to the settlement of R2 patent infringement
litigation and legal expenses. In addition, the Company issued to R2
shares of iCAD Common Stock valued at $750,000. In the fourth quarter
2003, R2 agreed to accept an additional 75,000 shares valued at
$466,200 of iCAD Common Stock in satisfaction of any royalties it
otherwise would have been entitled to receive under the settlement
agreement. During this period the Company recorded approximately
$702,000 in legal and related expenses associated with the R2
litigation.
The 2002 totals are reflective of the Company's decision in the
second quarter of 2002 to no longer support its graphic arts and
photographic product lines. In connection with the discontinuance,
the Company recorded charges related to the write off of inventory,
fixed assets and intangible assets related to those product lines.
Total charges incurred during the second quarter of 2002 related to
the write off amounted to $2,786,540. Results for the third and
fourth quarters of 2002 include the operations of ISSI which was
acquired on June 28, 2002. During the fourth quarter of 2002, the
Company recorded sales of $188,177 related to the licensing and
divestiture of discontinued product lines.
(14) SUBSEQUENT EVENTS
On December 31, 2003, the Dompany completed the acquisition of CADx.
Integration of the acquired companies is substantially complete.
Operating expenses for the combined icad and CADx companies
substantially exceeded those of iCAD alone. During the first quarter
of 2004 the Company assessed the opportunities to achieve post-merger
operating economies, and identified cost-reduction opportunities in
light of its distribution and product plans. As a result of this
analysis management determined that operating expenses could be
substantially reduced without detracting from the Company's ability
to increase sales and focus on future products and markets.
Cost-reduction actions taken by iCAD in the first quarter of 2004
included the closure of offices in Tampa, Florida and San Rafael,
California; reductions in staffing effective March 31, 2004 of 39 of
110 previous full and part-time employees, and the reduction of
duplication in marketing, administrative and other activities. As a
result of these cost-reduction actions, the Company will report
certain non-recurring severance and office closure expenses in the
quarter ending March 31, 2004.
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ICAD, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts and Reserves
Col. A Col. B Col. C Col. D Col. E
- ------------------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning Cost and at end
Description of Year Expenses Deductions of Year
- ------------------------------------------------------------------------------------------
Year End December 31, 2003:
Allowance for Doubtful Accounts $ 40,000 $ 100,134 $ 35,134 (1) $ 105,000
Inventory Reserve $ 70,000 $ 10,572 $ (34,428)(2) $ 115,000
Year End December 31, 2002:
Allowance for Doubtful Accounts $ 165,000 $ 26,560 $ 151,560 (1) $ 40,000
Inventory Reserve $ 700,000 $2,622,151 $3,252,151 (2) $ 70,000
Year End December 31, 2001:
Allowance for Doubtful Accounts $ 255,999 $ 50,845 $ 141,844 (1) $ 165,000
Inventory Reserve $ 361,931 $ 379,285 $ 41,216 (2) $ 700,000
(1) Represents the amount of accounts charged off.
(2) Represents inventory written off and disposed of.
90