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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to ________________
Commission file number 1-9341
ICAD, INC.
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(Exact name of registrant as specified in its charter)
Delaware 02-0377419
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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
------------------------------
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 [ ].
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 [X] NO [ ].
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, 2004 was $86,272,571.
As of March 1, 2005, the registrant had 36,351,627 shares of Common Stock
outstanding.
Documents Incorporated by Reference: None
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 systems for breast cancer. Subsequently, on
December 31, 2003, the Company 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.
Our website is www.icadmed.com. We make available, free of charge, at this
website our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ("Exchange
Act"), as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the United States Securities and Exchange
Commission ("SEC"). The information on the website listed above, is not and
should not be considered part of this annual report on Form 10-K and is not
incorporated by reference in this document. Unless the context otherwise
requires, the terms "iCAD," "Company," "we," "our" and "us" means iCAD, Inc. and
its consolidated subsidiaries.
3
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. CAD products 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.
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 and telemedicine applications
contributes to the successful integration of the Company's CAD products into
networked and digital mammography environments. The Company's headquarters is
located in southern New Hampshire.
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. An American Cancer Society study showed 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.
4
In the United States, approximately 9,100 facilities are accredited to provide
mammography screening. To date, the Company estimates that approximately 2,300
CAD systems have been sold into this market. iCAD and CADx account for
approximately 800 of these systems, including approximately 465 systems sold by
the Company during 2004. During the fourth quarter of 2004, the Company sold a
total of approximately 144 CAD systems. The Company believes its sales
represented the majority of all computer aided detection of breast cancer
systems sold during the fourth quarter of 2004, which would make iCAD 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 higher case volume film-based mammography providers, 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 which entered commercial
promotion in the third quarter of 2004, 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. The Company believes that the initial market response to
the Second Look 200 and ClickCAD product has been favorable as demonstrated by
the Company having shipped approximately 120 such systems in the second half of
2004.
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 FFDM systems. In 2004 30% of
the Company's sales, by revenue, were made for use with digital mammographic
systems through its OEM partners and the Company believes that it is the current
sales leader in this part of the market.
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 ("PACS"). Sales
in this product area declined from 2003 to 2004, and are expected to continue to
decline as a result of a shift in the focus of the Company's digitizer and
hardware support activities to enhancement of the Company's own products for
early detection of cancer.
iCAD COMPUTER AIDED DETECTION TECHNOLOGY AND PRODUCTS
The Company's CAD 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 an estimated 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.
5
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.
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 data format 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 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 FY 2004 and FY 2005 Defense
Appropriations Bills, 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.
6
PRODUCTS
Primary product descriptions as of the first quarter of 2005 are as follows:
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Cases/ Suggested
iCAD Model(1) Day Selected Benefits Retail Price
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Second Look(R) 200 Up to 20 Our stand-alone economical solution for lower volume, value oriented $69,950
customers seeking printed CAD results.
o Fully Automatic workflow and processing
o Compact, easy to use and easy to maintain.
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Second Look 300(2) Up to 80 Our modular, extensible, network-ready solution for value-oriented $79,950
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 Multiple case-entry options
o Unsorted, continuous film-feed reduces errors
o Support for bar-coded workflows for productivity
o Optional Radiologist review stations available
o Optional ClearLook(TM)image characterization package
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(1) Specific designations subject to change
(2) The Second Look 300, announced in the fourth quarter of 2004, is expected
to ship commercially in the first quarter of 2005. It replaces the Second
Look 400 and Second Look 402 products, which have been discontinued.
7
- -------------------------- ---------- ----------------------------------------------------------------------- ---------------
Cases/ Suggested
iCAD Model(1) Day Selected Benefits Retail Price
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Second Look 500(3) Up to 80 Our clinically advanced solution for customers seeking the best $139,950
(Second Look) detection performance available, with immediate support for digital
mammography.
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 Optional ClearLook(TM) image characterization package
o Current accessories include PenRad, MRS and MagView mammography
information system interfaces;
o Fully compliant DICOM file-save capability
o Optional CADStream(TM) MRI analysis using the same workstation(4)
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Second Look 700(5) Up to 80 Our newest generation clinically advanced solution for customers $139,950
seeking the best detection performance available, with immediate
support for digital mammography.
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 Optional ClearLook(TM) image characterization package
o Current accessories include PenRad, MRS and MagView mammography
information system interfaces;
o Fully compliant DICOM file-save capability
o Optional CADStream(TM) MRI analysis using the same workstation(6)
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- ----------
(3) The Company expects to replace the Second Look 500 product with the Second
Look 700 product in the first quarter of 2005.
(4) In this configuration the product is referred to as the Second Look 500M.
8
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Cases/ Suggested
iCAD Model(1) Day Selected Benefits Retail Price
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Second Look Digital Varies Our solution for Digital Mammography. $Price
by
Digital o Integrated computer aided detection for General Electric established
System Healthcare Senographe Digital Mammography System; available from by OEM
GE Healthcare.
o Integrated computer aided detection for Fischer Imaging Corporation
full-field Digital Mammography System; available from Fischer
Imaging Corporation
o Integrated computer aided detection for Hologic, Inc. Digital
Mammography System; available from Hologic, Inc.
o Support for additional digital mammography systems planned.
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MultiRAD(TM) Digitizer N/A Radiographic film digitizer for OEM, CAD, Picture Archiving and $14,995-
Communications (PACS) and telemedicine applications. $19,995
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Fulcrum(TM) Digitizer N/A Radiographic film digitizer for OEM and CAD applications. $21,995
- -------------------------- ---------- ----------------------------------------------------------------------- ---------------
MARKETING & SALES
MARKETING
The Company competes aggressively in three definable divisions of the CAD
market. In the higher case volume, film-based part of the market, its Second
Look 500 and Second Look 700 CAD solutions are marketed on the basis of clinical
superiority, productivity and value. 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 that it has improved its market share in this division.
In the lower case volume, film-based division of the CAD market, where price and
ease of use are key buying factors, the Company believes it is well positioned
with its Second Look 200 product and its announced introduction of its Second
Look 300 system which has DICOM networking capabilities. The Company has secured
a leading market share in this 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 allows 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, and has been designed
to fit within the limited space requirements of smaller mammography clinics.
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(5) The Second Look 700 is expected to begin shipping in the first quarter of
2005, at which time it will supersede and replace the Second Look 500
product.
(6) In this configuration the product is referred to as the Second Look 700M.
9
The Second Look 200 is also 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 branded ClickCAD(TM). Under the
ClickCAD program, the Company installs Second Look 200 systems in qualified
mammography clinics at little or no up-front capital cost. The clinics then pay
iCAD a fee approximating $8.00 for each CAD procedure performed, an amount that
represents less than half of the current standard $19.13 Federal reimbursement
rate for CAD procedures. The Company believes that its ClickCAD program allows
budget-constrained 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 believes that it has gained current sales leadership in the digital
mammography division of the CAD market through OEM sales relationships with
General Electric Medical Systems and Fischer Imaging Corporation, and new OEM
sales relationships with Hologic, Inc., Siemens Medical Systems and with IMS
Giotto. 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
iCAD Second Look products are now distributed nationally, on a non-exclusive
basis, by SourceOne HealthCare Technologies, Inc., by Fusion Sales Partners, and
by additional independent resellers. In the first quarter of 2005, Hologic, Inc.
began promotion of the Company's Second Look 200 product on a private label
basis.
SourceOne Healthcare Technologies, Inc. ("SourceOne") 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. SourceOne was previously 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 Strategic Accounts
Sales Manager to work with and support OEM sales activities.
Internationally, the Company markets its products for digital mammography
through its OEM partners. With the introduction of the Second Look 200 and the
announcement and pending shipment of the Second Look 300, the Company believes
it now offers the first affordable film-based solutions for characteristically
price sensitive international markets, and has begun development of distribution
relationships for these products in selected international territories.
10
COMPETITION
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.
The Company currently faces direct competition from R2 Technology, Inc. which
has received FDA approval to market its CAD systems for use in mammography
screening and diagnostics and in lung cancer detection. Kodak, Inc. has recently
received FDA approval for it to market a mammography CAD solution. Other vendors
and competitors may market this competing Kodak product now that it has received
FDA approval. Medicsight Inc. has received FDA approval to market certain
computer assisted reading products which could compete with the Company's
current and future computer aided detection products. 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 operates in a changing environment that involves numerous known and
unknown risks and uncertainties that could materially adversely affect its
operations. The following highlights some of the factors that have affected,
and/or in the future could affect, its operations.
THE COMPANY HAS INCURRED SIGNIFICANT LOSSES SINCE INCEPTION AND THERE CAN BE NO
ASSURANCE THAT THE COMPANY WILL BE ABLE TO ACHIEVE AND SUSTAIN FUTURE
PROFITABILITY.
The Company has incurred significant losses since its inception, much of which
were attributable to the Company's former business lines. The Company incurred a
net loss of approximately $828 thousand during the year ended December 31, 2004.
There can be no assurance that the Company will be able to achieve
profitability. The Company believes that it has sufficient resources to continue
to operate and has made no adjustment to the Company's carrying values.
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 prospective customers, which has, in some cases,
led prospective customers to seek alternative suppliers of medical digitizers.
Moreover, since June 2002 the Company's development, engineering, and sales and
marketing efforts have concentrated on CAD products and the Company has limited
development and support of its medical digitizer product channels during this
time. Sales of the Company's medical digitizer products have declined
significantly from 2003 to 2004, and such sales are expected to continue to
decline in 2005.
11
THE COMPANY MAY NEED ADDITIONAL FINANCING TO IMPLEMENT ITS STRATEGY AND EXPAND
ITS BUSINESS.
The Company may need additional debt or equity financing beyond any amounts
generally available to iCAD to pursue its strategy and increase sales in the
medical markets or to finance its business. Any additional 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 any
additional 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.
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 affect 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 develop and introduce new products if required.
12
THERE MAY BE INSUFFICIENT DEMAND FOR NEW PRODUCTS CURRENTLY BEING DEVELOPED BY
THE COMPANY.
The Company's ability to grow depends in part on introduction of new products
applying pattern recognition technologies to recognition and detection of lung
cancer, colon cancer and other medical image interpretation applications. No
current market exists for such products, and even if the Company markets such
products in the future the demand for any such products may develop slowly, if
at all. No private insurance or governmental reimbursements are currently
authorized for procedures utilizing the Company's planned lung cancer detection
and colon cancer detection products, and such reimbursements may not become
available. The absence of insurance or reimbursements may significantly reduce
demand for iCAD's planned products.
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.
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 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. In addition, the Company's certificate of incorporation provides
for the classification of the Company's board of directors into three classes,
as nearly equal in number as possible. One class of directors is elected at each
annual meeting to serve a term of three years. At least two annual meetings of
stockholders, instead of one, will be required to effect a change in a majority
of the Company's board of directors. The ability of the Company's board of
directors to issue preferred stock and the classification of the Company's board
of directors into three separate classes, could discourage, delay, or prevent a
takeover of the Company, thereby preserving control by the current stockholders.
13
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 HAS BEEN AND COULD CONTINUE TO BE
VOLATILE.
The Company's common stock is quoted on the NASDAQ SmallCap Market and 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.
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.
14
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 CAD
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 OR
OTHER GOVERNMENTAL APPROVAL OR CLEARANCE.
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.
CHANGES 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.
15
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, even if iCAD
promotes such products at reduced margins in an effort to achieve sales.
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 ARE 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 film based CAD
systems are currently less expensive than the devices of its competitors, the
purchase of an 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.
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.
Historically, a very high percentage of the Company's quarterly sales are made
during the final month of each quarter, and often during the final weeks or days
of the quarter. If any weather, natural disaster or other event interfered with,
impeded or delayed completion of sales and shipments at the end of a quarter,
the Company would be materially and adversely affected. For these reasons, among
others, the Company is unable to determine quarterly performance, or to
anticipate shortfalls or overachievement of quarterly plans and projections with
any assurance in advance of completion of each quarter.
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 software and device
companies have used litigation against emerging growth companies as a means of
gaining a competitive advantage.
16
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.
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.
17
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.
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.
18
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 operations. 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'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.
19
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 and lung cancer detection. Kodak, Inc. has recently received FDA
approval for it to market a mammography CAD solution. Other vendors and
competitors may market this competing Kodak product now that it has received FDA
approval. Medicsight Inc., has received FDA approval to market certain computer
assisted reading products which could compete with the Company's current and
future computer aided detection products. The Company also expects that other
potential manufacturers will receive FDA approval to market competing CAD
products in the future. We expect that as the market for CAD grows, other
competitors may seek to introduce CAD products priced even lower than the
Company's. Customers seeking a low-cost CAD solution may prefer a competitor's
lower-priced product to iCAD's and may result in price cutting by iCAD which
will reduce the Company's profit margin.
FUTURE SALES OF SHARES OF THE COMPANY'S COMMON STOCK COULD AFFECT THE MARKET
PRICE OF ITS COMMON STOCK AND ITS ABILITY TO RAISE ADDITIONAL CAPITAL.
The Company has previously issued a substantial number of shares of common
stock, which are eligible for resale under Rule 144 of the Securities Act, and
may become freely tradable. In addition, shares of the Company's common stock
issuable upon exercise of its outstanding convertible preferred stock and a
substantial portion of the shares of common stock issuable upon conversion of
its convertible debt are also eligible for sale under Rule 144. The Company has
also registered for resale a substantial number of shares of common stock held
by certain stockholders, including shares that are not currently eligible to be
sold under Rule 144. The Company has also registered shares that are issuable
upon the exercise of options and warrants. If holders of options or warrants
choose to exercise their purchase rights and sell shares of common stock in the
public market, or if holders of currently restricted common stock or common
stock issuable upon conversion of the Company's preferred stock or convertible
debt choose to sell such shares of common stock in the public market under Rule
144 or otherwise, or attempt to publicly sell such shares all at once or in a
short time period, the prevailing market price for the Company's common stock
may decline. Future public sales of shares of common stock may adversely affect
the market price of the Company's common stock or its future ability to raise
capital by offering equity securities.
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.
20
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.
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.
21
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 17 patents covering its CAD and scanner technologies in the
United States, which expire from December 2019 through October 2024. These
patents help the Company maintain a proprietary position in these markets, but
because of the pace of innovation in these fields it is difficult to determine
the overall importance of these patents to the Company. These patents include a
broad set of claims covering the combination of a computer analysis of
mammography data with a human analysis of that same data in breast cancer
detection. Additional claims have been granted for extensions of the same
concept from mammography to other medical imaging applications.
The Company has 23 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 current and future uses of iCAD's computer aided
detection and digitizer technologies and products. 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.
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.
22
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 a subsidiary of iCAD. In consideration for the Patent License from Scanis,
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 year ended December 31, 2004 the Company had sales of $6,871,412 and
$4,983,683, or 29% and 21% of sales, to SourceOne Healthcare and General
Electric Medical Systems, Inc., respectively. These were the Company's two major
customers in 2004 with accounts receivable balances of $1,849,791 and $12,090,
respectively, due from these customers at December 31, 2004. For 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.
MANUFACTURING, CUSTOMER SUPPORT AND SERVICE
The Company's New Hampshire facility is certified as a medical manufacturing
facility by the FDA and complements two experienced contract manufacturing
resources 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.
The Company provides 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.
23
ENGINEERING AND PRODUCT DEVELOPMENT
The Company spent $4,832,842, $2,384,057, and $1,626,001 on research and
development activities during the years ended December, 2004, 2003 and 2002,
respectively. The research and development expenses for 2004 are primarily
attributed to the development of the Company's Second Look 200, the Company's
Fulcrum medical film digitizer, software development to support its CAD products
and development of the Company's CAD software for CT Lung and CT Colon.
EMPLOYEES
On March 1, 2005 the Company had 72 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, 2004 was approximately $22,000 as compared to approximately
$863,000 on the corresponding date in 2003, of which approximately $755,000 of
the backlog was a result of the merger with CADx. The reduction in backlog
primarily reflects the improvement of the Company's ability in 2004 to promptly
ship product after receipt of orders.
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 and dealers, and to foreign
distributors of computer and related products. Total export sales were
approximately $1,331,000 or 6% of total sales in 2004, $289,000 or 4% of total
sales in 2003 and $301,000 or 6% of total sales in 2002.
The Company's principal concentration of export sales was in Europe, which
accounted for 78% of the Company's export sales in 2004, 23% in 2003 and 26% in
2002, with Australia accounting for 11% of the Company's export sales in 2004,
35% in 2003 and 17% in 2002. The balance of the export sales in 2004 was into
Mexico, Jordan, Guam and Canada.
24
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 $61,000. Additionally, the Company is required to pay
utilities and provide insurance.
The Company leases a facility for its software research and development group
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 in
December 2010 at an annual rate of approximately $445,000. Additionally, the
Company is required to pay 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.
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
25
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 2004 and 2003.
Fiscal year ended High Low
December 31, 2004 ------- ------
- -----------------
First Quarter $ 5.890 $3.050
Second Quarter 4.540 3.140
Third Quarter 4.000 3.100
Fourth Quarter 5.290 2.490
Fiscal year ended
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
As of March 1, 2005 there were 353 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.
See Item 12 for certain information with respect to the Company's equity
compensation plans in effect at December 31, 2004.
26
ITEM 6. SELECTED FINANCIAL DATA
Selected Statement of Operations Data
Year Ended December 31,
-----------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Sales $ 23,308,462 $ 6,520,306 $ 5,000,184 $ 4,835,297 $ 7,793,517
Gross margin 16,775,166 3,578,643 (161,459) 898,891 1,900,027
Total operating expenses (17,042,385) (11,662,396) (9,208,664) (3,439,557) (3,595,661)
Loss from operations (267,219) (8,083,753) (9,370,123) (2,540,666) (1,695,634)
Interest expense - net (561,044) (114,655) (48,167) (80,105) (132,014)
Net loss (828,263) (8,198,408) (9,418,290) (2,620,771) (1,827,648)
Net loss available to common stockholders (961,263) (8,342,666) (9,566,340) (2,775,821) (2,896,520)
Net loss per share (0.03) (0.31) (0.46) (0.20) (0.22)
Weighted average shares outstanding
basic and diluted 34,057,775 26,958,324 20,928,397 13,950,119 13,373,086
Selected Balance Sheet Data
As of December 31,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Total current assets $14,289,588 $11,115,003 $ 3,116,665 $ 3,586,602 $ 5,082,016
Total assets 65,136,107 62,662,136 26,077,356 4,161,125 5,945,928
Total current liabilities 5,990,562 7,761,506 4,313,690 2,003,807 2,143,873
Loans payable to related parties, including
current portion 300,000 3,630,000 200,000 500,000 1,400,000
Note payable, including current portion 3,375,000 4,608,390 173,916 178,870 --
Convertible Subordinated Debentures,
including current portion -- 10,000 10,000 10,000 117,000
Stockholders' equity 56,970,545 47,895,630 21,455,276 2,039,557 2,902,055
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW
iCAD develops, engineers, manufactures and markets computer aided detection
(CAD) products for the early detection of breast cancer and other healthcare
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.
On December 31, 2003, iCAD merged with and acquired CADx. This merger brought
together two of the three companies with approval from the FDA to market
computer aided systems for the earlier detection of breast cancer. This
acquisition gives iCAD, what it believes to be, the broadest line of CAD systems
for detection of breast cancer, including the leading CAD solution for the
growing digital mammography market. In addition, the acquisition expanded the
Company's distribution channels, which contributed to immediate growth in sales,
and expanded the Company's new product development group, which the Company
believes will accelerate its entry into additional markets.
Following the acquisition of CADx, iCAD consolidated and positioned its current
products, and reorganized and greatly expanded its sales channels. During 2004,
the Company introduced and aggressively marketed and promoted its new,
lower-cost Second Look 200(TM) solutions for the early detection of breast
cancer, and its ClickCAD(TM) fee-per-procedure programs that seek to make CAD
technology affordable and accessible to smaller volume mammography clinics and
all women at risk of breast cancer.
As a result of the Company's acquisition of CADx, the Company entered the first
quarter of 2004 with the operating expenses and cost structure of two companies,
which are reflected in the first quarter loss. The Company reduced operating
expenses from $5.3 million in the first quarter of 2004 to approximately $3.8
million in each of the second and third quarters of 2004, in part through a
reduction in personnel from 110 at the beginning of the first quarter of 2004 to
approximately 70 at the beginning of the second quarter of 2004. In the fourth
quarter 2004, operating expenses increased slightly to $4 million primarily due
to the increase in trade show and advertising expenses.
iCAD is the only independent, integrated digitizer hardware and CAD software
company offering computer aided detection solutions for the detection of breast
cancer and other healthcare related applications. As such, the Company is able
to reduce costs at each step in the CAD product design, production and assembly
process. The Company believes that its 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 iCAD to enhance its CAD product line, while reducing the
costs of the Company's CAD products to many customers and allowing more women to
realize the benefits inherent in the early detection of breast cancer.
28
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 and telemedicine applications contributes to the
successful integration of the Company's CAD products into networked and digital
mammography environments. The Company's headquarters are located in southern New
Hampshire, with contract manufacturing facilities in New Hampshire and
Connecticut.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Sales. Sales of the Company's CAD and medical imaging products for the year
ended December 31, 2004 were $23,308,462, compared with sales of CAD and medical
imaging products for the year ended December 31, 2003 of $6,520,306. The sales
increase during 2004 was due in large part to contributions from acquired CADx
products and sales channels, which are not included in 2003 results. During 2004
iCAD concentrated its distribution development efforts on SourceOne Healthcare,
Inc. (CADx' national distributor prior to iCAD's acquisition of CADx), and on
selected complementary independent resellers.
During the first quarter of 2004, and as a result of its acquisition of CADx,
multiple changes in its sales channels, sales management and organization,
product naming, positioning and marketing were implemented. In connection with
the consolidation of sales channels and product lines, the Company believes iCAD
created the broadest and most comprehensive line of CAD products available in
the industry and associated it with a single, well-recognized model brand
"Second Look(R)".
In 2004 the Company believes that it has completed the transformation of iCAD
from a manufacturer of printing and photo scanning equipment with limited growth
opportunities, to a growing world leader in the much larger market for early
detection of cancer solutions.
Factors that the Company expects will play a significant role in its potential
sales growth and potential for profitability include the following:
o Sales of early cancer detection products for film-based mammography
by and through additional resellers;
o Sales of additional products, especially the Company's lower price
Second Look 200(TM) CAD breast cancer detection system;
o Contribution from a fee per service program, which the Company calls
ClickCAD(TM), and actively began promoting in the fourth quarter of
2004;
o Sales of cancer detection products for digital mammography by and
through additional OEM channels previously announced by the Company;
29
Gross Margin. Gross margin as a percentage of sales, for the year ended December
31, 2004, improved to 72% compared to 55% for the same period in 2003. The
increase in gross margin was primarily due to increases in sales of higher
margin products for digital mammography. Although there can be no assurance of
its future gross margin rate, the Company expects that continued sales of its
higher margin CAD products and increasing production economies and economies of
scale resulting from the merger with CADx will support gross margins at
comparable levels to those experienced in 2004. The Company further believes
that increasing sales of products for digital mammography can contribute to
increasing gross margins over time because these products are primarily software
in nature and therefore, have lower cost than certain of the Company's prior
products which had higher cost hardware components.
Engineering and Product Development. Engineering and product development costs
for the year ended December 31, 2004 increased to $4,832,842 from $2,384,057 in
2003. The increase in engineering and product development costs primarily
results from the Company's addition, as a result of its acquisition of CADx, of
a software technology development group to support its CAD products and new
product development. The Company also redirected a portion of its research and
engineering resources to accelerate the delivery of new iCAD products, such as
applying iCAD's core CAD and clinical decision support technologies to
additional medical applications. Additionally, during the first quarter of 2004
the Company took action following its merger with CADx to reduce its workforce
and close its office and software development group located in Tampa, Florida.
In connection with these measures, the Company incurred approximately $280,000
in non-recurring engineering severance benefits and office closure expenses.
Over the course of 2005, the Company expects engineering and product development
costs to decline as a percentage of sales, as sales are expected to increase at
a greater rate than product development costs.
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 FY 2004 and FY 2005 Defense
Appropriations Bills, 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.
General and Administrative. General and administrative expenses for the year
ended December 31, 2004 decreased by $2,313,611 or 31%, from $7,439,721 in 2003
to $5,126,110 in 2004. The decrease primarily results from the following
non-recurring expenses recorded in 2003. During the third quarter of 2003 the
Company recorded a one-time write off in the amount of $1,443,628 attributable
to its distribution agreement with Instrumentarium Imaging, Inc.,
("Instrumentarium"), which it assumed as part of the Company's acquisition of
Intelligent Systems Software, Inc. in June 2002. This write-off came after
assessing the performance of Instrumentarium and in light of the Company's
implementation of alternative distribution channels, 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 Technology patent infringement
litigation and related legal expenses.
30
Excluding the 2003 write offs and non-recurring expenses, general and
administrative expenses increased in 2004 due to increases in salaries,
administrative costs and amortization of intangible assets of approximately
$1,550,000, resulting from the Company's acquisition of CADx. Additional
increases in general and administrative expenses, reflects approximately $50,000
in non-recurring severance benefits and other expenses associated with
reductions of staff, in the first quarter of 2004, made possible by the
combination of CADx and iCAD, a write-off of fixed assets relating to the
closure of the iCAD office in Tampa, Florida and approximately $200,000 in
consulting and accounting costs associated with the Company's compliance with
Section 404 of the Sarbanes-Oxley Act of 2002. The Company expects that overall
general and administrative expenses will decline in 2005 as a percentage of
sales, as sales are expected to increase at a greater rate than general and
administrative expenses.
Marketing and Sales. Marketing and sales expenses increased from $1,838,618 in
2003 to $7,083,433 in 2004. The increase in marketing and sales expenses
primarily results from the Company's addition, as a result of its acquisition of
CADx, of sales, marketing and service organizations to support its CAD products
and distribution channels. The Company took action following the merger to
reduce its workforce, close its office in San Rafael, California, and eliminate
duplication in marketing and other activities. The Company incurred
approximately $200,000 in non-recurring marketing and sales severance benefits
and office closure expenses in the first quarter of 2004. During the fourth
quarter of 2004 the Company increased marketing and advertising expenses
associated with trade show participation and increased advertising of new and
existing products. In general, the Company expects marketing and sales expenses
to decline in 2005 as a percentage of sales, as sales are expected to increase
at a greater rate than marketing and sales expenses.
Interest Expense. Net interest for the year ended December 31, 2004 increased
from $114,655 in 2003 to $561,044 in 2004. This increase is primarily due to the
addition, as a result of iCAD's acquisition of CADx, of a 36-month secured
promissory note in the amount of $4,500,000 to purchase CADx shares that were
owned by two institutional investors.
Net (Loss). As a result of the foregoing, the Company recorded a net loss of
($828,263) or ($0.03) per share for the year ended December 31, 2004 compared to
a net loss of ($8,198,408) or ($0.31) per share in 2003.
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. Sales increased in 2003 as a result of the addition of
the CAD product line through acquisition of ISSI in June 2002.
31
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.
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 expected that engineering and product development
costs would increase in absolute terms in 2004 compared to 2003.
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 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 Technology 250,954 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
32
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 had 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 $383,000 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 was 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.
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 was due primarily
to an increase in loan balances.
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.
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 $5,000,000 credit
line under the Loan Agreement with its Chairman, Mr. Robert Howard, of which
$4,700,000 was available at December 31, 2004. The Loan Agreement expires
January 4, 2006, 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%, (8% at December
31, 2004). During the fourth quarter of 2004 the Company received funds through
the sales of 1,872,222 shares of its common stock for $4.50 per share in a
private placement to institutional investors. A portion of the proceeds of this
offering was used to repay $3,330,000 that the Company had previously borrowed
from Mr. Howard pursuant to the Loan Agreement. 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 2005. If
sales or cash collections are reduced from current expectations, or if expenses
and cash requirements are increased, the Company may require additional
financing.
33
Working capital increased $4,945,529 to $8,299,026 at December 31, 2004 from
$3,353,497 at December 31, 2003. The ratio of current assets to current
liabilities at December 31, 2004 and 2003 was 2.4 and 1.4, respectively. These
increases are primarily due to the private placement to institutional investors
completed by the Company in December 2004.
Net cash used for operating activities for the year ended December 31, 2004 was
$1,950,038 compared to $4,666,558 at December 31, 2003. The cash used in 2004
resulted primarily from the changes in accounts receivable, inventory and
accounts payable as a result of the increase in sales. The net cash used in
investing activities for the year ended December 31, 2004 was $472,638 compared
to $1,468,194 in 2003. The cash used in investing activities included the
addition of $347,680 for tooling, computer equipment, and leasehold
improvements. Net cash provided by financing activities in the year ended
December 31, 2004 was $5,329,788 compared to $10,144,774 in 2003. The cash
provided by financing activities in 2004 was due to the net proceed of
approximately $418,000 from the sale of 90,000 shares of the Company's common
stock for $5.00 per share upon the exercise of certain investment rights that
were granted to institutional investors in November 2003 in connection with the
Company's private placement and net proceed of approximately $8,325,000 from the
sale of 1,872,222 shares of the Company's common stock for $4.50 per share in
December 2004 as described below. Additionally, approximately $1,098,000 was due
to the issuance of common stock relating to exercise of stock options and
warrants, offset by $4,563,000 in payments of notes payable.
On December 24, 2004, the Company sold 1,872,222 shares of its common stock for
$4.50 per share in a private placement to institutional investors. The net
proceeds to the Company for the 1,872,222 shares sold were approximately
$8,325,000. In connection with these transactions the Company issued warrants to
purchase 936,111 shares of the Company's common stock. The warrants are
exercisable for a period of five years from the closing of the offering at an
exercise price of $5.50 per share.
In the fourth quarter of 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. In February 2004, a total of 90,000 shares of the Company's common
stock were issued in connection with the exercise of certain additional
investment rights issued in 2003. The remaining investment rights expired
unexercised. The net proceeds to the Company for the 90,000 shares sold were
approximately $418,000. 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. 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.
34
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
- -------------------------------------- -------------------------------------------------------------------------------
Less than 1 More than
Total year 1-3 years 3-5 years 5 years
- -------------------------------------- ---------------- -------------- --------------- --------------- ---------------
Long-Term Debt Obligations $ 3,675,000 $ 1,500,000 $ 2,175,000 $ -- $ --
- -------------------------------------- ---------------- -------------- --------------- --------------- ---------------
Lease Obligations $ 2,983,396 $ 536,070 $ 1,030,097 $ 930,789 $ 486,440
- -------------------------------------- ---------------- -------------- --------------- --------------- ---------------
Total Contractual Obligations $ 6,658,396 $ 2,036,070 $ 3,205,097 $ 930,789 $ 486,440
- -------------------------------------- ---------------- -------------- --------------- --------------- ---------------
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) revised SFAS
No. 123 (SFAS No. 123R) which requires the measurement of the cost of employee
services received in exchange for an award of an equity instrument based on the
grant-date fair value of the award. The measured cost is to be recognized over
the period during which an employee is required to provide service in exchange
for the award, usually the vesting period. The provisions of this statement are
effective for all employee equity awards granted on or after July 1, 2005 and to
any unvested awards outstanding as of July 1, 2005. Retrospective application is
permitted. The adoption of this statement is expected to have a material adverse
impact on the Company's results of operations. The Company is currently
assessing the transition method it will use upon adoption.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets", which eliminates the exception of fair value measurement for
non-monetary exchanges of similar productive assets in existing accounting
literature and replaces it with an exception for exchanges that do not have
commercial substance. SFAS No. 153 specifies that a non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of SFAS No. 153
are effective for non-monetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Adoption of this statement is not expected to
have a material impact on the Company's financial position and results of
operations.
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.
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure 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 ("Exchange Act") is
recorded, processed, summarized and reported within the time period specified in
the Securities and Exchange Commission's rules and forms.
Management's Report on Internal Control Over Financial Reporting.
The Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer, is
responsible for the preparation and integrity of the Company's Consolidated
Financial Statements, establishing and maintaining adequate internal control
over financial reporting (as defined in Exchange Act Rule 13a-(f)) for the
Company and all related information appearing in this Annual Report on Form
10-K.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The Company employed the Internal Control-Integrated Framework founded by the
Committee of Sponsoring Organizations of the Treadway Commission to evaluate the
effectiveness of the Company's internal control over financial reporting.
Management of iCAD, Inc. has assessed the Company's internal control over
financial reporting to be effective as of the end of December 31, 2004.
The assessment of the Company's management of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004 has been
audited by BDO Seidman LLP, an independent registered public accounting firm, as
stated in its report which is included below.
Changes in Internal Control Over Financial Reporting.
The Company's principal executive officer and principal financial officer also
conducted an evaluation of the Company's internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f)) to determine whether any
changes in internal control over financial reporting occurred during the quarter
ended December 31, 2004, that have materially affected or which are reasonably
likely to materially affect internal control over financial reporting. Based on
that evaluation, there has been no such change during such period.
36
To the Board of Directors and Stockholders of ICAD, Inc.
Nashua, New Hampshire
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting appearing under
Item 9A of iCAD, Inc's. Annual Report on Form 10-k for the fiscal year ended
December 31, 2004, that iCAD, Inc. and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control - Integrated Framework issued by COSO. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control - Integrated Framework issued by COSO.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2004 of the Company and our
report dated March 14, 2005 expressed an unqualified opinion on those financial
statements.
/s/BDO Seidman, LLP
Boston, Massachusetts
March 14, 2005
37
ITEM 9B. OTHER INFORMATION
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Name Age Position Since
- ----------------- --- ------------------------------------------ ------
Robert Howard # 81 Chairman of the Board, and Director 1984
W. Scott Parr # 53 President, Chief Executive Officer,
and Director 1998
Annette Heroux 48 Vice President of Finance, Chief Financial
Officer 1999
James Harlan* 53 Director 2000
Maha Sallam* 38 Executive Vice President, Director 2002
Elliot Sussman* 53 Director 2002
George Farley+ 66 Director 2004
Herschel Sklaroff+ 69 Director 2004
Rachel Brem# 46 Director 2004
Thomas Shoup 53 Chief of Staff 2004
John DeBiase 45 Vice President of Sales & Marketing 2005
Samuel Ronci 60 Vice President of Operations 2005
+ Class I Director, current term expires in 2006
* Class II Director, current term expires in 2007
# 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.
38
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 of Presstek from September 1998 to December 2000. Mr.
Howard is Chairman of the Board of Ionatron, Inc. ("Ionatron") a public company
involved in the development and marketing of directed energy weapon technology
products.
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. Mr. Harlan is a director of Ionatron.
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.
39
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.
George Farley, a Certified Public Accountant, is currently a financial
consultant, a position he has held since August 1999. From November 1997 to
August 1999 Mr. Farley served as Chief Financial Officer and Director for Talk
America, Inc (formerly Talk.com, Inc.). He previously held the position as
National Director, Managing Partner of BDO Seidman, LLP, where he specialized in
Capital Formation and Mergers and Acquisitions. In addition to his service as
director at Talk America, he has held directorships at Preserver Insurance
Group, Acorn Holding Corp., and is currently a director of Ionatron.
Dr. Herschel Sklaroff has been in private practice since 1966 and is currently
involved in the establishment of the new Diagnostic and Preventive Medical
Center at The Mount Sinai Hospital where he will serve as Associate Director.
Dr. Sklaroff served his internship, medical residency and residency in
Cardiology at The Mount Sinai Hospital of New York City where he was Chief
Resident. Dr. Sklaroff served, from 1980 to 1990 as Chief of Medical
Consultation Services, and from 1978 to 1990 as Chief of General Medicine, both
at The Mount Sinai Hospital.
Dr. Rachel Brem is currently the Director of Breast Imaging and Intervention,
Professor of Radiology and the Vice-Chairman in the Department of Radiology at
The George Washington University Medical Center, positions she has held since
2000. From 1991 to 1999 Dr. Brem was the Director of Breast Imaging at the John
Hopkins Medical Center. Dr. Brem's research includes Minimally Invasive Breast
Biopsy, New Technologies for the Earlier Diagnosis of breast cancer including
Computer Aided Detection, as well as Nuclear Medicine Imaging of the Breast and
Electrical Impedance Imaging of the Breast.
Thomas Shoup has been the Chief of Staff for the Company since December 2003.
Mr. Shoup joined the Company with the acquisition of Qualia Computing, Inc.,
where he had served as Chief Operating Officer since December 2000. From 1996 to
2000 Mr. Shoup was President and COO of CAD CAM Inc., where he grew the company
and negotiated the sale of this privately held business to a Canadian public
enterprise. From 1985 to 1996 Mr. Shoup served as Base Civil Engineer for the US
Air Force's largest continental installation, Wright-Patterson AFB, responsible
over 20 million square feet of scientific, engineering and logistical facilities
and a workforce in excess of 1,000 personnel.
John DeBiase the Company's Vice President of Sales & Marketing joined the
Company in December 2003 with the acquisition of Qualia Computing, Inc., where
he had served as Sales Manager since the beginning of December 2003. From 2000
until December 2003, Mr. DeBiase was President of Imaging Financial Solutions, a
sales and distribution consulting company. From 1995 to 2000 Mr. DeBiase served
as General Manager and Sales Vice-President of Physician Sales and Services'
Diagnostic Imaging division, a national distributor of medical supplies.
40
Samuel Ronci the Company's Vice President of Operations joined the Company in
December 2004. From 2000 to December 2004, Mr. Ronci was Vice President of
Development for Elicon Multimedia, a web based company that promotes corporate
presentations, to include web presentations, trade shows and product promotions.
From 1987 to 2000 Mr. Ronci was President of Ronci Medical which later became
Ronci Surgical, a Division of Minnesota Scientific Inc. Ronci Medical designed
patient positioning equipment for various Arthroscopic surgical procedures.
The Company has an audit committee of the Board of Directors ("Audit Committee")
consisting of Messrs. Harlan, Farley and Sussman. Each member of the Audit
Committee is an "independent director" under the rules of the NASD and the
Company's Board has determined that James Harlan is the Audit Committee's
financial expert under applicable rules of the Securities and Exchange
Commission ("SEC") and NASD Marketplace Rules.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Exchange Act 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 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, 2004, all
filing requirements applicable to all officers, directors, and greater than 10%
beneficial stockholders were timely complied with except that Form 3's for
Messrs. Farley and Sklaroff and Ms. Brem were filed late; a Form 4 by Mr.
Skalroff to report five sales of an aggregate of 6,081 shares of the Company's
common stock was filed several days late; a Form 4 for Mr. Rogers with respect
to 14 transactions relating to sales of an aggregate of 20,000 shares of the
Company's common stock was filed one day late and late Form 4's were filed with
respect to grants of employee stock options to Mr. Corbett and Rogers in
February 2004 .
Code of Business Conduct and Ethics
The Company developed and adopted a comprehensive Code of Business Conduct and
Ethics to cover all employees. Copies of the Code of Business Conduct and Ethics
can be obtained, without charge, upon written request, addressed to:
iCAD, Inc.
4 Townsend West
Nashua, NH 03063
Attention: Corporate Secretary
41
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides information on the compensation provided by the
Company during fiscal years 2004, 2003 and 2002 to the persons serving as the
Company's Chief Executive Officer during fiscal 2004 and the Company's most
highly compensated executive officers serving at the end of the 2004 fiscal year
("the Named Persons"). Included in this list are only those executive officers
whose total annual salary and bonus exceeded $100,000 during the 2004 fiscal
year.
SUMMARY COMPENSATION TABLE
Securities
Underlying
Name and Principal Position Year Salary($) Option(#)
- --------------------------------------------------- ---- --------- ----------
W. Scott Parr
President, Chief Executive Officer, Director ..... 2004 214,108 -0-
2003 191,600 -0-
2002 173,762 125,000
Maha Sallam
Executive Vice President, Director ............... 2004 125,000 -0-
2003 132,489 -0-
Annette Heroux
Vice President of Finance, Chief Financial Officer 2004 129,269 -0-
2003 111,814 -0-
2002 96,949 65,183
Steven Rogers (1)
Chief Scientific Officer ......................... 2004 268,108 110,092
James Corbett (1)
Chief Commercial Officer ......................... 2004 242,144 110,092
Peter Farrell (1)
EVP Sales and Marketing .......................... 2004 233,745 80,000
Thomas Shoup
Chief of Staff ................................... 2004 221,823 80,000
(1) Messrs. Rogers, Corbett and Farrell joined the Company with the acquisition
of Qualia Computing, Inc. in December 2003 and served as Executive Officers of
iCAD until their resignations in the first quarter of 2005.
42
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock options
granted by the Company to the Named Persons in 2004.
Individual Grants Potential
----------------------------- Realizable Value at
Number of Percent of Assumed Annual
Securities Total Options Rates of Stock
underlying Granted to Exercise of Price Appreciation
Options Employees Base Price Expiration for Option Term (2)
Name Granted(1) in Fiscal Year ($/Sh) Date 5%($) 10%($)
- -------------- ---------- -------------- ---------- ----------- ------- --------
Steven Rogers 110,092 8% 5.28 02/23/2014 365,567 926,420
James Corbett 110,092 8% 5.28 02/23/2014 365,567 926,420
Peter Farrell 80,000 6% 5.28 02/23/2014 265,645 673,200
Thomas Shoup 80,000 6% 5.28 02/23/2014 265,645 673,200
- ----------
(1) All of the foregoing options vest in installments at various times between
February 23, 2005 and February 23, 2008.
(2) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the
compounded rates specified over the term of the options. These numbers do
not take into account provisions of options providing for termination of
the option following termination of employment or non transferability of
the options and do not make any provision for taxes associated with
exercise. Because actual gains will depend upon, among other things,
future performance of the Common Stock, there can be no assurance that the
amounts reflected in this table will be achieved.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding the exercise of stock
options during the Company's last completed fiscal year by each of the Named
Persons and the fiscal year-end value of unexercised options.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the Money
Options at Options at
Shares FY-End (#) FY-End($) (1)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
- ----------------- ----------- -------- ------------------- -------------------
W. Scott Parr 0 0 531,518 / -0- 1,644,783 / -0-
Maha Y. Sallam 0 0 156,250 / -0- 304,438 / -0-
Annette L. Heroux 0 0 107,373 / 6,727 294,321 / 19,643
Steven Rogers 0 0 -0- / 110,092 -0- / -0-
James Corbett 0 0 -0- / 110,092 -0- / -0-
Peter Farrell 0 0 -0- / 80,000 -0- / -0-
Thomas Shoup 0 0 -0- / 80,000 -0- / -0-
- ----------
(1) Based upon the closing price of the Common Stock on December 31, 2004, of
$4.47 per share.
The Company does not have any employment agreements with its executive officers.
43
SEPARATION AGREEMENT WITH FORMER OFFICER
On February 16, 2005, the Company entered into a separation agreement and
release with Dr. Steven K. Rogers (the "Agreement") in connection with Dr.
Rogers' resignation as Chief Scientific Officer and Director of the Company. Dr.
Rogers was formerly President and Chief Executive Officer of Qualia Computing,
Inc., a company acquired by the Company in December, 2003. Pursuant to the
Agreement, the Company and Dr. Rogers agreed to negotiate a consulting agreement
(the "Consulting Agreement") under which Dr. Rogers is expected to serve as the
Company's Chief Consulting Scientist. The Consulting Agreement is expected to
provide for a one-year term which may be terminated upon 30 days written notice
by (i) Dr. Rogers for any reason or (ii) the Company for just and reasonable
cause. The Company expects to engage Dr. Rogers for three-quarters of his time
during the first six months of the term and to pay Dr. Rogers $11,875 per month
during this period. The Company expects to engage Dr. Rogers for two-thirds of
his time during the subsequent six months of the term and to pay Dr. Rogers
$10,555 per month during this period. During the period of the Consulting
Agreement and for a period of two years thereafter, Dr. Rogers has reaffirmed
his previous agreements not to compete with the Company, not to solicit
employees of the Company, and not to disclose confidential information of the
Company. The Company and Dr. Rogers indicated the change in roles would permit
Dr. Rogers to commit a portion of his time to academic activities and research
unrelated to the Company's business.
Subsequent to Dr. Rogers' resignation from the Company, Dr. Rogers sold
474,550 shares of common stock of the Company held by him, and Dr. Rogers has
agreed to sell 486,204 shares of common stock of the Company held by him,
representing the remainder of shares of the stock of the Company owned by him,
to a purchaser or purchasers agreed to by the Company. The Company has agreed to
file a registration statement covering the resale of such shares by the
purchaser or purchasers.
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
The Compensation Committee of the Board of Directors is responsible for, among
other things, assisting the Board in overseeing the Company's executive
compensation strategy and reviewing and approving the compensation of the
Company's executive officers. The current members of the Compensation Committee
are: Elliot Sussman, Chairperson; Rachel Brem; and James Harlan.
During 2004 none of the executive officers of the Company served on the Board of
Directors or Compensation Committee of any other entity.
44
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
1, 2005, 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 Named
Person (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,
Suite 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 4,971,720 (3) 13.6%
145 East 57th Street
New York, New York 10022
Maha Sallam Common 2,053,570 (4) 5.6%
Donald Chapman Common 1,874,697 (5) 5.0%
8650 South Ocean Drive Preferred Series A 4,600 74.8%
Jenson Beach, FL 34957 Preferred Series B 680 52.9%
Steven Rogers Common 853,777 (6) 2.3%
W. Scott Parr Common 656,812 (7) 1.8%
Preferred Series A 550 8.9%
Preferred Series B 50 3.9%
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 Common 66,533 (8) *
1185 Park Avenue Preferred Series B 100 7.8%
New York, NY 10128
John Westerfield Preferred Series B 100 7.8%
4522 SW Bimini Circle N.
Palm City, FL 34990
Dr. Rachel Brem Common 15,000 (9) *
George Farley Common 15,000 (10) *
James Harlan Common 156,000 (11) *
Dr. Elliot Sussman Common 33,000 (12) *
James Corbett Common 27,523 (13) *
Peter Farrell Common 20,000 (14) *
Annette Heroux Common 112,373 (15) *
Thomas Shoup Common 227,069 (16) *
All current executive officers Common 8,321,327 (3), (4), & 22.2%
and directors as a group (6) through (16)
(12 persons)
Preferred Series A 550 8.9%
Preferred Series B 150 11.7%
- ----------
* Less than one percent
45
1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 1, 2005, 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 1, 2005, 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 and 15,000 shares at $2.76 per share, 54,557 shares of
the Company's Common Stock pursuant to Convertible notes issued to Mr.
Howard pursuant to the Loan Agreement with the Company and 20,000 shares
beneficially owned by Mr. Howard's wife.
4) Includes options to purchase 56,250 shares of the Company's Common Stock
at $0.80 per share, 100,000 shares at $3.49 per share and also includes
183,625 shares beneficially owned by Dr. Sallam's husband.
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.
6) Includes options to purchase 27,523 shares of the Company's Common Stock
at $5.28 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 15,000 shares of the Company's Common Stock
at $3.35 per share. Also, includes 50,000 shares of Common Stock issuable
upon conversion of 100 shares of Series B Convertible Preferred Stock.
9) Includes options to purchase 15,000 shares of the Company's Common Stock
at $3.35 per share.
46
10) Includes options to purchase 15,000 shares of the Company's Common Stock
at $3.35 per share.
11) Includes options to purchase 25,000 shares of the Company's Common Stock
at $1.75 per share and 50,000 shares at $1.55 per share.
12) Includes options to purchase 15,000 shares of the Company's Common Stock
at $1.55 per share.
13) Includes options to purchase 27,523 shares of the Company's Common Stock
at $5.28 per share.
14) Includes options to purchase 20,000 shares of the Company's Common Stock
at $5.28 per share.
15) 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, 13,456 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.
16) Includes options to purchase 20,000 shares of the Company's Common Stock
at $5.28 per share.
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, 2004.
Number of securities
remaining available for
Number of securities to be Weighted-average issuance under equity
issued upon exercise of exercise price of compensation plans (excluding
outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
-------------------------- ------------------- -----------------------------
Plan Category:
- ------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders: 3,914,511 $3.04 1,036,612
- ------------------------------------------------------------------------------------------------------------------
Equity compensation plans not 1,010,311 $5.54 -0-
approved by security holders
(1):
- ------------------------------------------------------------------------------------------------------------------
Total 4,924,822 $3.55 1,036,612
- ------------------------------------------------------------------------------------------------------------------
47
(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 February 28, 2005 and November 24, 2008, 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 $5,000,000. The Loan Agreement
expires January 4, 2006, 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%, (8% at
December 31, 2004). 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 December 2004 the Company repaid Mr. Howard $3,330,000 pursuant to the Loan
Agreement. As of December 31, 2004, $300,000 was owed by the Company to Mr.
Howard and the Company had $4,700,000 available for future borrowings under the
Loan Agreement.
On February 16, 2005, the Company entered into a separation agreement and
release with Dr. Steven K. Rogers in connection with Dr. Rogers' resignation as
Chief Scientific Officer and Director of the Company. Dr. Rogers was formerly
President and Chief Executive Officer of Qualia Computing, Inc., a company
acquired by the Company in December, 2003. See Item 11. Executive Compensation -
Separation Agreement with Former Officer
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, 2004 and 2003, 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 2004 and 2003 totaled
$155,297 and $71,550, 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, 2004 and 2003, and are not disclosed in the paragraph captions "Audit Fees"
above, were $24,000 and $46,323, respectively.
48
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 2004. 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 pre-approves proposed services and fee estimates for these
services. The Audit Committee chairperson or their designee has been designated
by the Audit Committee to pre-approve any services arising during the year that
were not pre-approved by the Audit Committee. Services pre-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
pre-approved the foregoing audit services provided by BDO Seidman, LLP.
No tax fees or other fees were paid to BDO Seidman, LLP for the years ended
December 31, 2004 and 2003
49
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, AND SCHEDULES
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
i. Financial Statements - See Index on page 54.
ii. Financial Statement Schedule - See Index on page 54. 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]
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].
50
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 [incorporated by reference to Exhibit 10(b)
to the Registrant's Report on Form 10-K for the year ended
December 31, 2002].
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].
51
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) 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(i) 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(j) 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(k) Addendum No. 16, extending the Revolving Loan and Security
Agreement, and Convertible Revolving Credit Promissory Note
between Robert Howard and Registrant dated October 26, 1987.
10(l) 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].**
10(m) 2004 Stock Incentive Plan [incorporated by reference to
Exhibit B to the Registrant's definitive proxy statement on
Schedule 14A filed with the SEC on May 28, 2004].*
10(n) Form of Option Agreement under the Registrant's 2001 Stock
Option Plan [incorporated by reference to Exhibit 10.1 to the
Registrant's quarterly report on Form 10-Q for the quarter
ended September 30, 2004].*
52
10(o) Form of Option Agreement under the Registrant's 2002 Stock
Option Plan [incorporated by reference to Exhibit 10.2 to the
Registrant's quarterly report on Form 10-Q for the quarter
ended September 30, 2004].*
10(p) Form of Option Agreement under the Registrant's 2004 Stock
Incentive Plan [incorporated by reference to Exhibit 10.3 to
the Registrant's quarterly report on Form 10-Q for the quarter
ended September 30, 2004].*
10(q) Form of warrant issued to investors in connection with the
Registrant's December 15, 2004 private financing.
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) Exhibits - See (a) iii above.
(c) Financial Statement Schedule - See (a) ii above.
53
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 15, 2005
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 15, 2005
Robert Howard
/s/ W. Scott Parr President, Chief Executive
- --------------------------------- Officer, Director (Principal March 15, 2005
W. Scott Parr Executive Officer)
/s/ Annette Heroux Vice President of Finance,
- --------------------------------- Chief Financial Officer
Annette Heroux (Principal Accounting Officer) March 15, 2005
/s/ James Harlan Director March 15, 2005
- ---------------------------------
James Harlan
/s/ Maha Sallam Director March 15, 2005
- ---------------------------------
Maha Sallam
/s/ Elliot Sussman Director March 15, 2005
- ---------------------------------
Elliot Sussman
/s/ George Farley Director March 15, 2005
- ---------------------------------
George Farley
/s/ Herschel Sklaroff Director March 15, 2005
- ---------------------------------
Herschel Skalroff
/s/ Rachel Brem Director March 15, 2005
- ---------------------------------
Rachel Brem
54
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Registered Public Accounting Firm 55
Consolidated Balance Sheets
As of December 31, 2004 and 2003 56
Consolidated Statements of Operations
For the years ended December 31, 2004, 2003 and 2002 57
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2004, 2003 and 2002 58
Consolidated Statements of Cash Flows
For the years ended December 31, 2004, 2003 and 2002 59
Notes to Consolidated Financial Statements 60-84
Schedule II - Valuation and Qualifying Accounts and Reserves 85
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of iCAD, Inc.,
Nashua, New Hampshire
We have audited the accompanying consolidated balance sheets of iCAD, Inc. and
subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2004. 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 the financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements 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 as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31,2004 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.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 14, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
BDO Seidman, LLP
Boston, Massachusetts
March 14, 2005
56
iCAD, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
------------- -------------
Assets 2004 2003
------------- -------------
Current assets:
Cash and cash equivalents $ 8,008,163 $ 5,101,051
Trade accounts receivable, net of allowance for doubtful
accounts of $450,000 in 2004 and $105,000 in 2003 5,006,333 3,343,296
Inventory 1,013,806 2,123,642
Prepaid and other current assets 261,286 547,014
------------- -------------
Total current assets 14,289,588 11,115,003
------------- -------------
Property and equipment:
Equipment 2,078,306 1,825,147
Leasehold improvements 37,904 26,489
Furniture and fixtures 135,544 133,562
------------- -------------
2,251,754 1,985,198
Less accumulated depreciation and amortization 944,121 717,635
------------- -------------
Net property and equipment 1,307,633 1,267,563
------------- -------------
Other assets:
Patents, net of accumulated amortization 302,644 379,178
Technology intangibles, net of accumulated amortization 4,964,090 5,580,172
Tradename, distribution agreements and other,
net of accumulated amortization 756,867 1,115,000
Goodwill 43,515,285 43,205,220
------------- -------------
Total other assets 49,538,886 50,279,570
------------- -------------
Total assets $ 65,136,107 $ 62,662,136
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,006,500 $ 3,979,488
Accrued interest 671,154 333,652
Accrued salaries and other expenses 1,373,191 1,988,476
Deferred revenue 439,717 216,500
Convertible subordinated debentures -- 10,000
Current maturities of notes payable 1,500,000 1,233,390
------------- -------------
Total current liabilities 5,990,562 7,761,506
Loans payable to related party 300,000 3,630,000
Notes payable, less current maturities 1,875,000 3,375,000
------------- -------------
Total liabilities 8,165,562 14,766,506
------------- -------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $ .01 par value: authorized
1,000,000 shares; issued and outstanding
7,435 in 2004 and 2003, with the aggregate liquidation value
of $1,257,500 in 2004 and 2003, plus 7% annual dividend 74 74
Common stock, $ .01 par value: authorized
50,000,000 shares; issued 36,410,170 in 2004
and 33,704,809 shares in 2003; outstanding
36,342,294 in 2004 and 33,636,933 shares in 2003 364,101 337,048
Additional paid-in capital 130,271,515 120,395,390
Accumulated deficit (72,714,881) (71,886,618)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------- -------------
Total Stockholders' equity 56,970,545 47,895,630
------------- -------------
Total liabilities and stockholders' equity $ 65,136,107 $ 62,662,136
============= =============
See accompanying notes to consolidated financial statements.
57
iCAD, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Sales $ 23,308,462 $ 6,520,306 $ 5,000,184
Cost of sales 6,533,296 2,941,663 5,161,643
------------ ------------ ------------
Gross margin 16,775,166 3,578,643 (161,459)
------------ ------------ ------------
Operating expenses:
Engineering and product development 4,832,842 2,384,057 1,626,001
General and administrative 5,126,110 7,439,721 6,595,076
Marketing and sales 7,083,433 1,838,618 987,587
------------ ------------ ------------
Total operating expenses 17,042,385 11,662,396 9,208,664
------------ ------------ ------------
Loss from operations (267,219) (8,083,753) (9,370,123)
Interest expense - net (includes $287,840, $102,555
and $26,761, respectively, to related parties) (561,044) (114,655) (48,167)
------------ ------------ ------------
Net loss (828,263) (8,198,408) (9,418,290)
Preferred dividends 133,000 144,258 148,050
------------ ------------ ------------
Net loss available to common stockholders $ (961,263) $ (8,342,666) $ (9,566,340)
============ ============ ============
Net loss per share
Basic and diluted $ (0.03) $ (0.31) $ (0.46)
Weighted average number of shares used in
computing loss per share
Basic and diluted 34,057,775 26,958,324 20,928,397
See accompanying notes to consolidated financial statements.
58
iCAD, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Preferred Stock Common Stock
------------------------ ------------------------ Additional
Number of Number of Paid-in Accumulated Treasury Stockholders'
Shares Issued Par Value Shares Issued Par Value Capital Deficit Stock Equity
------------- --------- ------------- --------- ------------ ------------ --------- ------------
Balance at December 31, 2001 9,550 $ 96 15,241,833 $ 152,418 $57,107,227 $(54,269,920) $(950,264) $ 2,039,557
Issuance of common stock
pursuant to incentive stock
option plan -- -- 150,454 1,505 159,004 -- -- 160,509
Issuance of common stock
relative to conversion of
loan payable to related
parties -- -- 215,517 2,155 497,845 -- -- 500,000
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 -- -- 500,000
Issuance of common stock
relative to merger -- -- 10,400,000 104,000 27,569,500 -- -- 27,673,500
Issuance of common stock for
payment of dividends to
investors -- -- 60,320 603 147,447 -- -- 148,050
Preferred stock dividends -- -- -- -- (148,050) -- -- (148,050)
Net loss -- -- -- -- -- (9,418,290) -- (9,418,290)
------------- --------- ------------- --------- ------------ ------------ --------- ------------
Balance at December 31, 2002 8,550 86 26,418,124 264,181 85,829,483 (63,688,210) (950,264) 21,455,276
Issuance of common stock
pursuant to incentive stock
option plan -- -- 616,640 6,166 855,134 -- -- 861,300
Issuance of common stock
relative to payment of
accounts payable -- -- 600,000 6,000 2,015,600 -- -- 2,021,600
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 -- -- 1,216,200
Issuance of common stock
relative to merger -- -- 4,300,000 43,000 24,467,000 -- -- 24,510,000
Issuance of common stock
relative to private offering -- -- 1,260,000 12,600 5,906,400 -- -- 5,919,000
Issuance of stock options in
payment for legal services -- -- -- -- 23,377 -- -- 23,377
Compensation expense related
to the extension of director
stock options -- -- -- -- 87,285 -- -- 87,285
Issuance of common stock for
payment of dividends to
investors -- -- 26,591 266 143,992 -- -- 144,258
Preferred stock dividends -- -- -- -- (144,258) -- -- (144,258)
Net loss -- -- -- -- -- (8,198,408) -- (8,198,408)
------------- --------- ------------- --------- ------------ ------------ --------- ------------
Balance at December 31, 2003 7,435 74 33,704,809 337,048 120,395,390 (71,886,618) (950,264) 47,895,630
Issuance of common stock
pursuant to incentive stock
option plan -- -- 593,574 5,936 966,654 -- -- 972,590
Issuance of common stock
pursuant to exercise of
warrants -- -- 50,000 500 124,500 -- -- 125,000
Issuance of common stock
relative to conversion of
loan payable to investor -- -- 70,612 706 61,432 -- -- 62,138
Issuance of common stock
relative to private offerings -- -- 1,962,222 19,622 8,723,828 -- -- 8,743,450
Issuance of common stock for
payment of dividends to
investors -- -- 28,953 289 132,711 -- -- 133,000
Preferred stock dividends -- -- -- -- (133,000) -- -- (133,000)
Net loss -- -- -- -- -- (828,263) -- (828,263)
------------- --------- ------------- --------- ------------ ------------ --------- ------------
Balance at December 31, 2004 7,435 $ 74 36,410,170 364,101 $130,271,515 $(72,714,881) $(950,264) $ 56,970,545
============= ========= ============= ========= ============ ============ ========= ============
See accompanying notes to consolidated financial statements.
59
iCAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (828,263) $ (8,198,408) $ (9,418,290)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 286,500 138,090 143,809
Amortization 1,052,195 529,803 246,072
Loss on disposal of assets 21,110 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 --
Stock based compensation expense relative to extension of stock options -- 87,285 --
Stock based compensation expense relative to issue of stock at merger -- -- 2,800,000
Changes in operating assets and liabilities:
Accounts receivable (1,749,590) 685,960 (167,262)
Inventory 1,109,836 (275,657) 2,207,149
Prepaid and other current assets 185,728 (52,957) 4,026
Accounts payable (1,972,988) 143,573 905,624
Accrued interest 337,502 104,574 25,779
Accrued expenses (615,285) (728,526) 524,034
Deferred revenue 223,217 216,500 --
------------ ------------ ------------
Total adjustments (1,121,775) 3,531,850 7,162,581
------------ ------------ ------------
Net cash used by operating activities (1,950,038) (4,666,558) (2,255,709)
------------ ------------ ------------
Cash flows from investing activities:
Additions to patents, technology and other (1,446) (264,225) --
Additions to property and equipment (347,680) (100,000) (150,062)
Acquisitions, net of cash acquired (123,512) (1,103,969) 2,202,040
------------ ------------ ------------
Net cash provided (used) by investing activities (472,638) (1,468,194) 2,051,978
------------ ------------ ------------
Cash flows from financing activities:
Issuance of common stock for cash 9,903,178 6,780,300 160,509
Proceeds from investor -- 3,430,000 500,000
Proceeds of notes payable to principal stockholder -- -- 750,000
Payment of notes payable to principal stockholder (3,330,000) -- (550,000)
Payment of note payable (1,233,390) (65,526) (61,109)
Payment of convertible subordinated debentures (10,000) -- --
------------ ------------ ------------
Net cash provided by financing activities 5,329,788 10,144,774 799,400
------------ ------------ ------------
Increase in cash and equivalents 2,907,112 4,010,022 595,669
Cash and equivalents, beginning of year 5,101,051 1,091,029 495,360
------------ ------------ ------------
Cash and equivalents, end of year $ 8,008,163 $ 5,101,051 $ 1,091,029
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 240,030 $ 1,965 $ 983
============ ============ ============
Non-cash items from financing activities:
Conversion of loans and accrued interest payable
to related parties into Common Stock $ -- $ -- $ 500,000
============ ============ ============
Conversion of accounts payable into Common Stock $ -- $ 2,021,600 $ --
============ ============ ============
Dividends payable with Common Stock $ 133,000 $ 144,258 $ 148,050
============ ============ ============
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.
60
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 in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of 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 inventory,
equipment 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 2003, 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.
(c) Cash Flow Information
For purposes of reporting cash flows, the Company defines cash and cash
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.
61
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(d) 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 other convertible debt
approximated fair value as of December 31, 2004 and 2003.
(e) 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, 2004 is adequate. However, actual
write-offs might exceed the recorded allowance.
(f) 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 $194,000 and
$820,000, respectively, for 2004, and raw material and finished goods of
approximately $129,000 and $1,995,000, respectively, for 2003.
(g) 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).
(h) 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.
62
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(h) Long Lived Assets (continued)
Intangible assets subject to amortization consist 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
2004 2003 Useful Life
---------- ---------- ---------
Gross carrying amount:
Patents $ 390,624 $ 389,178 5 years
Technology 6,160,822 6,160,822 10 years
Trade name 248,000 248,000 10 years
Distribution agreements 867,000 867,000 2-3 years
---------- ----------
Total intangible assets $7,666,446 $7,665,000
Accumulated amortization
Patent 87,980 10,000
Technology 1,196,732 580,650
Trade name 24,800 --
Distribution agreements 333,333 --
---------- ----------
Total Accumulated
amortization $1,642,845 $ 590,650
---------- ----------
Intangible assets, net $6,023,601 $7,074,350
========== ==========
Amortization expense related to intangible assets was approximately
$1,052,000, $530,000 and $246,000 for the years ended December 31, 2004,
2003, and 2002, 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:
Estimated amortization expense
For the years ended December 31:
2005 $1,052,000
2006 909,000
2007 699,000
2008 699,000
2009 641,000
63
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(h) Long Lived Assets (continued)
In the third quarter of 2003, the Company recorded a 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 2003 general and
administrative expenses.
(i) Goodwill
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets". 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 addresses the accounting for acquired
goodwill and intangible assets. Goodwill and indefinite-lived intangible
assets are no longer amortized and are 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.
(j) 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.
(k) 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
equipment.
(l) 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
$150,000 in 2004 and $100,000 in 2003.
64
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(m) Engineering and Product Development Costs
These costs relate to research and development efforts which are expensed
as incurred.
(n) Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
for the years ended December 31, 2004, 2003 and 2002 was $620,000,
$250,000 and $125,000, respectively.
(o) Net Loss Per Common Share
Net loss per common share has been computed in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share".
(p) Earnings per Share
The Company follows SFAS 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, 2004, 2003 and 2002, but not included
in the calculation of diluted net loss per share because such shares are
antidilutive:
2004 2003 2002
--------- --------- ---------
Stock options 3,914,511 3,688,551 3,774,748
Stock warrants 1,010,311 124,200 57,000
Convertible Revolving Promissory Note 54,557 1,261,136 80,000
Convertible Series A Preferred Stock 615,000 615,000 715,000
Convertible Series B Preferred Stock 642,500 642,500 700,000
(q) Income Taxes
The Company follows the liability method under SFAS No. 109, "Accounting
for Income Taxes". 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.
65
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(r) Stock-Based Compensation
The Company applies the Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock option plans. Under APB Opinion No. 25,
when the number of shares and exercise price of the Company's employee
stock options are fixed and the exercise price equals the market price of
the underlying stock on the date of grant, no compensation cost is
recognized provided vesting is based solely on the passage of time.
The Company provides proforma disclosures of compensation expense under
the fair value method of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by 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 2004: no dividends paid on common shares;
expected volatility of 78.9%; risk-free interest rates of 3.03%, 3.10%,
3.72%, 3.26%, 2.89% and 3.25%; and expected lives of 3 to 4 years. The
weighted-average assumptions used for grants in 2003 were: no dividends
paid on common shares; 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 and 5 years. The weighted-average assumptions used for grants in 2002
were: no dividends paid on common shares; 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 to 9 years.
Had compensation cost for the Company's option plans been determined using
the fair value method at the grant dates, the effect on the Company's net
loss and loss per share for the years ended December 31, 2004, 2003 and
2002 would have been as follows:
2004 2003 2002
----------- ----------- ------------
Net loss available to common
stockholders as reported $( 961,263) $(8,342,666) $( 9,566,340)
Deduct: Total stock-based
employee compensation
determined under fair value
method for all awards (439,458) (204,455) (1,820,855)
----------- ----------- ------------
Pro forma net loss $(1,400,721) $(8,547,121) $(11,387,195)
=========== =========== ============
Basic and diluted loss per share
As reported $ (.03) $ (.31) $ (.46)
Pro forma $ (.04) $ (.32) $ (.54)
66
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(s) Recently Issued Accounting Standards
In December 2004, the FASB revised SFAS No. 123 (SFAS No. 123R) which
requires the measurement of the cost of employee services received in
exchange for an award of an equity instrument based on the grant-date fair
value of the award. The measured cost is to be recognized over the period
during which an employee is required to provide service in exchange for
the award, usually the vesting period. The provisions of this statement
are effective for all employee equity awards granted on or after July 1,
2005 and to any unvested awards outstanding as of July 1, 2005.
Retrospective application is permitted. The adoption of this statement is
expected to have a material adverse impact on the Company's results of
operations. The Company is currently assessing the transition method it
will use upon adoption.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets", which eliminates the exception of fair value measurement for
non-monetary exchanges of similar productive assets in existing accounting
literature and replaces it with an exception for exchanges that do not
have commercial substance. SFAS No. 153 specifies that a non-monetary
exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. The
provisions of SFAS No. 153 are effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Adoption of
this statement is not expected to have a material impact on the Company's
financial position and results of operations.
(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 included in the consolidated financial statements commencing on
January 1, 2004. The purchase price has been allocated to net assets
acquired based upon an independent appraisal of their fair values.
67
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(2) Acquisitions (continued)
(a) Acquisition of CADx (continued)
Following is a summary of the 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 26,099,562
Current liabilities (3,878,811)
-----------
Purchase price $31,556,685
===========
The unaudited proforma operating results for the Company, assuming the
acquisition of CADx occurred as of January 1, 2003, are as follows:
Year 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)
(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
68
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(2) Acquisitions (continued)
(b) Acquisition of ISSI (continued)
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. The purchase price has been allocated to net assets
acquired based upon an appraisal of their fair values.
Following is a summary of the 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 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 of inventory of approximately
$2,370,000 and of fixed and intangible assets of approximately $417,000,
included in the cost of sales and general and administration expenses,
respectively, in the accompanying consolidated statements of operation for
the year ended December 31, 2002.
69
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(3) Restructuring Charges (continued)
(a) Discontinued product lines (continued)
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 or 2004.
(b) Closure of Tampa Office
During the first quarter of 2004, the Company took action following its
merger with CADx to reduce its workforce and close its office and software
development group located in Tampa, Florida. In connection with these
measures, the Company incurred approximately $280,000 in non-recurring
engineering severance benefits and office closure expenses with
approximately $180,000 due under the non-cancelable operating lease for
the facility. The total charge is included in engineering and product
development costs in the accompanying 2004 consolidated statement of
operations. As of December 31, 2004 approximately $139,000 of severance
and closing costs were paid and charged against the liability. Remaining
facility closing cost accrued as of December 31, 2004 was approximately
$141,000, and expected payments of $54,000, $55,000 and $32,000 are due in
2005, 2006 and 2007, respectively.
(c) 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 2002
consolidated statement of operations.
70
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(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
$5,000,000. The Loan Agreement expires January 4, 2006, 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%, (8% at December 31, 2004). 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 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. The Company then borrowed $250,000 in the second
quarter and, in November 2002 the Company repaid Mr. Howard $50,000 for a
net repayment amount of $200,000 in 2002 pursuant to the Loan Agreement.
At December 31, 2002, $200,000 was owed by the Company under the Loan
Agreement.
During 2003 the Company borrowed $3,430,000 and in December 2004, the
Company repaid Mr. Howard $3,330,000 pursuant to the Loan Agreement. As of
December 31, 2004, $300,000 was owed by the Company and the Company had
$4,700,000 available for future borrowings under the Loan Agreement.
(b) Premises Lease and Other Expenses
In January 2003, the Company relocated its principal executive offices.
See Note 11 (a) of the Notes to Consolidated Financial Statements.
Prior to its relocation the Company conducted its operations in premises
owned by Mr. Robert Howard, pursuant to a lease, which expired January 31,
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, 2003 and 2002 was $6,542 and $78,500.
71
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(5) Accrued Expenses
Accrued expenses consist of the following at December 31, 2004 and 2003:
2004 2003
---------- ----------
Accrued restructuring $ 140,945 $ --
Accrued legal settlement 142,856 250,000
Accrued salary and related expenses 555,800 1,273,559
Accrued warranty expense 150,000 100,000
Other accrued expenses 383,590 364,917
---------- ----------
$1,373.191 $1,988,476
========== ==========
(6) Convertible Subordinated Debentures
The Company had 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. During 2004, the remaining $10,000 of the Company's Debentures
were presented for payment. As of December 31, 2004 and 2003 the Company's
outstanding balance on its Debentures was $0 and $10,000, respectively.
(7) Notes Payable
To complete the acquisition of CADx (see Note 2), the Company executed a
secured promissory note in the amount of $4,500,000 to purchase Qualia's
shares, issued in favor of CADx Canada which is payable in quarterly
installments over a 3 year period commencing April 2004 and bears interest
at the rate per annum equal to the greater of (i) 6.25% or (iii) the prime
rate plus 1%, (6.25% at December 31, 2004). The note is secured by the
assets of iCAD. Scheduled maturity of the note payable at December 31,
2004 is as follows:
Year ending Principal
2005 1,500,000
2006 1,500,000
2007 375,000
------------
Total $3,375,000
72
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(7) Notes Payable (continued)
In connection with the acquisition of ISSI, the Company assumed two
convertible promissory notes payable with an original principal amounts
totaling $56,155. The Company was required to make quarterly interest
payments on the outstanding principal balance at a rate of 7% per annum.
The convertible promissory notes gave the holder the right, at any time,
to convert the outstanding principal balance and any accrued interest
balance into shares of common stock based on the conversion rate of $0.88
per share of the Company's common stock. In 2004, the holder converted
$56,155 and accrued interest due under the promissory notes into 70,612
shares of common stock of the Company. As of December 31, 2004 and 2003,
the Company owed $0 and $56,155 pursuant to the promissory notes.
During 2001 the Company entered into a financing agreement with a supplier
to purchase $193,492 of components, pursuant to a note agreement (the
"Note"), payable over 36 months starting October 1, 2001 with the interest
at a fixed rate of 7% per annum. As of December 31, 2004 and 2003, the
Company owed $0 and $52,235 pursuant to the Note.
(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
73
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(a) Preferred Stock (continued)
"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 $7.00 per annum per
share, payable annually, subject to appropriate adjustment by the Board of
Directors of the Company in the event of any stock split, dividend or
similar division of shares of Series A Preferred. Dividends are payable
annually, in arrears, on the last day of December in each year.
In December 1999 the Company sold, in private transactions, a total of
6,900 shares of its 7% Series A Preferred Stock ($.01 per share par
value), at $100 per share, consisting of 6,600 shares to unrelated
parties, and 300 shares to Mr. W. Scott Parr, for gross proceeds of
$690,000. On April 12, 2000, the Company sold, in private transactions, a
total of 2,250 shares of its 7% Series A Preferred Stock ($.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.
In 2000 and 2002, 2,000 shares of the Company's 7% Series A Preferred
Stock were converted by unrelated parties into 100,000 shares of the
Company's Common Stock. In October 2003, Dr. Lawrence Howard converted
1,000 shares of the Company's 7% Series A Preferred Stock into 100,000
shares of the Company's Common Stock. As of December 31, 2004 and 2003 the
Company's had 6,150 shares of its 7% Series A Preferred Stock issued and
outstanding, with an aggregate liquidation value of $615,000.
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
74
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(a) Preferred Stock (continued)
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 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. 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 of the Company's Common Stock. As of December 31, 2004 and 2003 the
Company's had 1,285 shares of its 7% Series B Preferred Stock issued and
outstanding, with an aggregate liquidation value of $642,500.
(b) Stock Options
The Company has four stock option plans, which are described as follows:
The 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
75
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(b) Stock Options (continued)
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. 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 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.
76
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(b) Stock Options (continued)
The 2004 Stock Incentive Plan, ("The 2004 Plan"). The 2004 Plan was
adopted in June 2004, at the Annual Meeting of Stockholders. The 2004 Plan
provides for the granting of non-qualifying and incentive stock options to
employees and other persons to purchase up to an aggregate of 1,000,000
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 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 incentive 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 2004 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 2004 Plan are generally exercisable over a ten year
period.
A summary of stock option (incentive and non-qualifying) activity is as
follows:
Option Price range Weighted
Shares per share Average
--------------------------------------
Outstanding, January 1, 2002 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
Forfeited ( 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
Forfeited (381,057) $ .81-$3.49 $2.41
--------------------------------------
Outstanding, December 31, 2003 3,688,551 $ .80-$4.91 $2.12
Granted 1,334,000 $2.59-$5.28 $4.74
Exercised (593,574) $ .80-$3.49 $1.64
Forfeited (514,466) $1.55-$5.28 $2.52
--------------------------------------
Outstanding, December 31, 2004 3,914,511 $ .80-$5.28 $3.04
======================================
Exercisable at year-end
2002 2,976,918 $ .80-$3.49 $2.05
2003 2,598,682 $ .80-$3.49 $2.19
2004 2,414,182 $ .80-$3.49 $2.28
77
(8) Stockholders' Equity (continued)
(b) Stock Options (continued)
Available for future grants
2004 1,036,612
The weighted-average fair value of options granted during the year was
$2.59 per option for 2004, $1.25 per option for 2003 and $1.49 per option
for 2002.
The weighted-average remaining contractual life of stock options
outstanding for all plans at December 31, 2004 was 7.4 years.
The following table summarizes information about stock options outstanding
at December 31, 2004:
$.80 $2.20
to to
Range of Exercise Prices: $1.97 $3.49 $5.28
----------------------------------------
Outstanding options:
Number outstanding at December 31, 2004 1,470,895 1,506,000 937,616
Weighted average remaining contractual life (years) 5.7 7.9 9.1
Weighted average exercise price $1.35 $3.28 $5.28
Exercisable options:
Number outstanding at December 31, 2004 1,257,182 1,157,000 -0-
Weighted average remaining contractual life (years) 6.3 8.4 -0-
Weighted average exercise price $1.29 $3.35 $0
(c) Private Placement
On December 24, 2004, the Company sold 1,872,222 shares of its common
stock for $4.50 per share in a private placement to institutional
investors. The net proceeds to the Company for the 1,872,222 shares sold
were approximately $8,325,000. In connection with these transactions the
Company issued warrants to purchase 936,111 shares of the Company's common
stock. The warrants are exercisable for a period of five years from the
closing of the offering at an exercise price of $5.50 per share.
In February 2004 a total of 90,000 shares of the Company's common stock
were issued in connection with the additional investment rights issued in
2003 (see below). The remaining shares expired unexercised. The net
proceeds to the Company for the 90,000 shares sold were approximately
$418,000. 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.
78
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(c) Private Placement (continued)
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.
(d) Stock Subscription Warrants
In December 2004, in connection with a private placement transaction the
Company issued to the investors in the private placement common stock
purchase warrant (the "2004 Warrant") under a Subscription Agreement. The
2004 Warrant entitles the holders to purchase from the Company up to an
aggregate of 936,111 shares of the Company's common stock at $5.50 per
share. The 2004 Warrants are exercisable for a period of five years from
the closing of the offering and expire on December 15, 2009.
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 "2000
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 2000 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 2000
Warrant at any time or from time to time on or prior to February 28, 2005.
The Company estimated the fair value of the 2000 Warrant at the date of
issue to be $12,818 using the Black-Scholes option-pricing model. The
value of the 2000 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 could 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
79
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(d) Stock Subscription Warrants (continued)
the Black-Scholes option-pricing model. Accordingly, the value of the
Warrant was expensed over the two year period of the agreement. On
December 30, 2004 the Manufacturer exercised the 50,000 shares of the
Company's common stock at $2.50 per share.
At December 31, 2004 there are warrants to purchase 1,010,311 of the
Company's common stock that are exercisable at the following prices:
Warrants Exercise Price
------------------------ --------------------
67,200 $5.00
7,000 $3.00
936,111 $5.50
No warrants were exercised in 2003 or 2002.
(9) Income Taxes
As a result of the 2004, 2003 and 2002 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. The
Company has fully reserved the deferred tax asset as there is no guarantee
that the asset will be utilized. Deferred tax liabilities (assets) are
comprised of the following at December 31:
2004 2003
------------ ------------
Inventory (Section 263A) $ (72,000) $ (86,000)
Inventory reserves (102,000) (39,000)
Receivable reserves (153,000) (36,000)
Other accruals (33,000) (24,000)
Accumulated depreciation 243,000 353,000
Acquisition related intangibles -- 3,494,000
Tax credits (1,998,000) (2,530,000)
NOL carry forward (12,983,000) (13,927,000)
------------ ------------
Net deferred tax asset (15,098,000) (12,795,000)
Valuation allowance $ 15,098,000 $ 12,795,000
------------ ------------
$ 0 $ 0
============ ============
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iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(9) Income Taxes (continued)
As of December 31, 2004, the Company has net operating loss carryforwards
totaling approximately $38,200,000 expiring between 2005 and 2024. 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.
In addition the Company has available tax credit carryforwards (adjusted
to reflect provisions of the Tax Reform Act of 1986) of approximately
$1,998,000, which are available to offset future taxable income and income
tax liabilities, when earned or incurred. These amounts expire in various
years through 2024.
(10) Sales Information
(a) Geographic Information
The Company's sales are made to U.S. distributors and dealers, and to
foreign distributors of computer and related products. Total export sales
were approximately $1,331,000 or 6% of total sales in 2004, $289,000 or 4%
of total sales in 2003 and $301,000 or 6% of total sales in 2002.
The Company's principal concentration of export sales was in Europe, which
accounted for 78% of the Company's export sales in 2004, 23% in 2003 and
26% in 2002, with Australia accounting for 11% of the Company's export
sales in 2004, 35% in 2003 and 17% in 2002. The balance of the export
sales in 2004 was into Mexico, Jordan, Guam and Canada.
As of December 31, 2004 and 2003 the Company had outstanding receivables
of $163,151 and $65,079, respectively, from distributors of its products
who are located outside of the United States.
(b) Major Customers
During the year ended December 31, 2004 the Company had sales of
$6,871,412 and $4,983,683, or 29% and 21% of sales, to SourceOne
Healthcare and General Electric Medical Systems, Inc., respectively. These
were the Company's two major customers in 2004 with accounts receivable
balances of $1,849,791 and $12,090, respectively, due from these customers
at December 31, 2004. For 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.
81
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(10) Sales Information (continued)
(c) Product Information
The Company's revenues by product line are as follows:
For the year ended December 31, 2004 2003 2002
----------- ----------- -----------
CAD $22,238,699 $ 4,229,622 $ 2,628,135
Medical imaging 1,069,763 2,290,684 1,660,493
FotoFunnel -- -- 274,169
Graphic arts -- -- 437,387
----------- ----------- -----------
Total $23,308,462 $ 6,520,306 $ 5,000,184
=========== =========== ===========
(11) Commitments and Contingencies
(a) Lease Obligations
As of December 31, 2004, 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
$61,000. Additionally, the Company is required to pay utilities and
provide insurance.
The Company leased a facility for its software research and development
group in Tampa, Florida. The facility consisted 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 utilities and
provide insurance. During the first quarter of 2004, the Company took
action following its merger with CADx to reduce its workforce and close
its office and software development group located in Tampa, Florida. In
connection with the close of its Tampa facility the Company accrued
approximately $180,000 of expense due under the non-cancelable operating
lease for the facility as part of a restructuring charge. See Note 3(b).
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
group 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
$445000. Additionally, the Company is required to pay 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.
82
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(11) Commitments and Contingencies (continued)
(a) Lease Obligations (continued)
Rental expense for all leases for the years ended December 31, 2004, 2003
and 2002 was $781,855, $125,797 and $198,429, respectively.
Future minimum rental payments due under these agreements as of December
31, 2004 are approximately as follows:
Fiscal Year Amount
----------- ------------
2005 $ 536,000
2006 552,000
2007 478,000
2008 459,000
2009 472,000
2010 486,000
------------
$ 2,983,000
============
(b) Litigation
The Company was 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
Company had no liability in this matter and 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. 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.
83
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(11) Commitments and Contingencies (continued)
(b) Litigation (continued)
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 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) Quarterly Financial Data (unaudited)
Net Gross Net (Loss)
2004 sales profit income (loss) per share
-------------- ---------- ---------- ----------- ---------
First quarter $5,426,881 $3,597,635 $(1,899,401) $ (0.06)
Second quarter $5,636,586 $3,975,139 $ 46,458 $ 0.00
Third quarter $5,977,048 $4,359,260 $ 366,049 $ 0.01
Fourth quarter $6,267,947 $4,843,132 $ 658,631 $ 0.02
2003
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)
84
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(12) Quarterly Financial Data (unaudited) (continued)
The 2004 totals above are reflective of the Company's merger with and
acquisition of CADx on December 31, 2003. The acquisition expanded the
Company's distribution channels, which contributed to immediate growth in
sales, increased gross margin with the addition of sales of higher margin
products for digital mammography and expanded the Company's new product
development group. During the first quarter of 2004 the Company reduced
its workforce by approximately 36%; closed offices in Tampa, Florida and
San Rafael, California; and reduced or eliminated duplication in
marketing, administrative and other activities.
In addition, the Company reduced operating expenses from $5.3 million in
the first quarter of 2004 to approximately $3.8 million in each of the
second and third quarters of 2004, in part through a reduction in
personnel from 110 at the beginning of the first quarter of 2004 to
approximately 70 at the beginning of the second quarter of 2004.
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, 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.
85
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, 2004:
Allowance for Doubtful Accounts $ 105,000 $ 187,450 $ (157,550)(1) $ 450,000
Inventory Reserve $ 115,000 $ (64,063) $ (249,063)(2) $ 300,000
Warranty Reserve $ 100,000 $ 50,000 $ -- $ 150,000
Restructuring Reserve $ -- $ 140,945 $ -- $ 140,945
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
Warranty Reserve $ -- $ 100,000 $ -- $ 100,000
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
- ----------
(1) Represents the amount of accounts charged off.
(2) Represents inventory written off and disposed of.
86