| | | Three Months Ended | | Three Months Ended | |
| | | March 31, 2007 | | March 31, 2006 | |
| Cash flows from operating activities: | | | | | |
| Net loss | | $ | (553,937 | ) | $ | (1,605,894 | ) |
| Adjustments to reconcile net loss | | | | | | | |
| to net cash used for operating activities: | | | | | | | |
| Depreciation | | | 243,935 | | | 167,397 | |
| Amortization | | | 179,752 | | | 229,835 | |
| Loss on disposal of assets | | | 12,733 | | | — | |
| Stock based compensation | | | 276,868 | | | 7,721 | |
| Non-cash interest expense associated with discount on convertible | | | | | | | |
| loans payable | | | 7,354 | | | | |
| Changes in operating assets and liabilities: | | | | | | | |
| Accounts receivable | | | (191,369 | ) | | 1,143,837 | |
| Inventory | | | 403,613 | | | (579,622 | ) |
| Other current assets | | | (56,403 | ) | | (97,978 | ) |
| Accounts payable | | | (494,756 | ) | | 296,294 | |
| Accrued interest | | | 106,619 | | | 7,002 | |
| Accrued salaries and other expenses | | | (466,981 | ) | | (642,219 | ) |
| Deferred revenue | | | 129,473 | | | 179,723 | |
| Total adjustments | | | 150,838 | | | 711,990 | |
| | | | | | | | |
| Net cash used for operating activities | | | (403,099 | ) | | (893,904 | ) |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Additions to property and equipment | | | (169,371 | ) | | (102,557 | ) |
| Net cash used for investing activities | | | (169,371 | ) | | (102,557 | ) |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Issuance of common stock for cash | | | 755,115 | | | | |
| Payment of note payable | | | (375,000 | ) | | (375,000 | ) |
| Net cash provided by (used for) financing activities | | | 380,115 | | | (375,000 | ) |
| | | | | | | | |
| Decrease in cash and equivalents | | | (192,355 | ) | | (1,371,461 | ) |
| Cash and equivalents, beginning of period | | | 3,623,404 | | | 4,604,863 | |
| Cash and equivalents, end of period | | $ | 3,431,049 | | | 3,233,402 | |
| | | | | | $ | | |
| Supplemental disclosure of cash flow information: | | | | | | | |
| Interest paid | | $ | 8,743 | | $ | 37,654 | |
| | | | | | | | |
| Non-cash items from investing and financing activities: | | | | | | | |
| Accrued dividends on convertible preferred stock | | $ | 29,050 | | $ | 30,432 | |
| | | | | | | | |
| Property acquired through capital lease | | $ | 102,147 | | $ | | |
| | | | | | | | |
See accompanying notes to consolidated financial statements. | | | | | | | |
| | | | | | | | |
| | | Nine Months | | Nine Months | |
| | | September 30, 2006 | | September 30, 2005 | |
| Cash flows from operating activities: | | | | | |
| Net loss | | $ | (5,258,675 | ) | $ | (3,004,564 | ) |
| Adjustments to reconcile net loss | | | | | | | |
| to net cash used for operating activities: | | | | | | | |
| Depreciation | | | 517,408 | | | 403,163 | |
| Amortization | | | 689,506 | | | 789,256 | |
| Stock based compensation | | | 767,248 | | | — | |
| Changes in operating assets and liabilities: | | | | | | | |
| Accounts receivable | | | 2,143,092 | | | 2,282,128 | |
| Inventory | | | (1,250,432 | ) | | (1,398,870 | ) |
| Other current assets | | | (162,119 | ) | | (114,144 | ) |
| Accounts payable | | | (1,377,661 | ) | | 921,267 | |
| Accrued interest | | | 63,701 | | | (617,082 | ) |
| Accrued salaries and other expenses | | | 99,823 | | | 665,692 | |
| Deferred revenue | | | 191,927 | | | (123,417 | ) |
| Total adjustments | | | 1,682,493 | | | 2,807,993 | |
| | | | | | | | |
| Net cash used for operating activities | | | (3,576,182 | ) | | (196,571 | ) |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Additions to property and equipment | | | (432,342 | ) | | (725,737 | ) |
| Net cash used for investing activities | | | (432,342 | ) | | (725,737 | ) |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Issuance of common stock for cash | | | | | | 515,117 | |
| Proceeds from revolving convertible notes payable | | | 2,000,000 | | | | |
| Proceeds from convertible notes payable from related parties | | | 2,500,000 | | | | |
| Proceeds from convertible notes payable from non-related parties | | | 1,000,000 | | | | |
| Payment of note payable | | | (1,125,000 | ) | | (1,125,000 | ) |
| Net cash provided by (used for) financing activities | | | 4,375,000 | | | (609,883 | ) |
| | | | | | | | |
| Increase (decrease) in cash and equivalents | | | 366,476 | | | (1,532,191 | ) |
| Cash and equivalents, beginning of period | | | 4,604,863 | | | 8,008,163 | |
| Cash and equivalents, end of period | | $ | 4,971,339 | | $ | 6,475,972 | |
| | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | |
| Interest paid | | $ | 94,007 | | $ | 760,022 | |
| | | | | | | | |
| Non-cash items from investing and financing activities: | | | | | | | |
| Accrued dividends on convertible preferred stock | | $ | 88,118 | | $ | 92,312 | |
| Value of beneficial conversion discount | | $ | 58,824 | | $ | | |
| | | | | | | | |
| | | | | | | |
See accompanying notes to consolidated financial statements.iCAD, INC.
(Unaudited)
September 30, 2006March 31, 2007
| (1) | Basis of Presentation and Significant Accounting Policies and Basis of Presentation |
Reference should be made to iCAD, Inc.'s (“iCAD”, “Company”, “we”, “our” or the “Company”“us”) Annual Report on Form 10-K for the year ended December 31, 20052006 for a comprehensive summary of significant accounting policies.
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, these unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position at September 30, 2006,March 31, 2007, the results of operations for the three and nine month periods ended September 30,March 31, 2007 and 2006, and 2005, and cash flows for the ninethree month periods ended September 30, 2006March 31, 2007 and 2005.2006. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in the footnotes prepared in accordance with generally accepted accounting principles in the United States of America has been omitted as permitted by the rules and regulations of the Securities and Exchange Commission. The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10−K for the fiscal year ended December 31, 20052006 filed with the Securities and Exchange Commission on March 31, 2006.22, 2007. The results for the three and nine month periodsperiod ended September 30, 2006March 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006,2007, or any future period. Interim period amounts are not necessarily indicative of the results of operations for the full fiscal year.
| (2) | Financing Arrangements |
Convertible Revolving LoansLoan Payable to Related Party
The Company has a Revolving Loan and Security Agreement (the "Loan Agreement") with Mr. Robert Howard, Chairman of the Board of Directors of the Company, under which Mr. Howard has agreed to advance funds, or to provide guarantees of advances made by third parties in an amount up to $5,000,000. The Loan Agreement currently expires March 31, 2007,2008, subject to extension by the parties, with an agreement fromparties. Mr. Howard has advised the Company that he willdoes not request repayment ofintend to call in the outstanding principal balance ofunder the noteLoan Agreement prior to March 31, 2008.2009. Accordingly, the outstanding borrowings related to the loan payable have been classified as a long term liability in the Company’s consolidated balance sheet as of September 30, 2006.March 31, 2007. Outstanding advances are collateralized by substantially all of the assets of the Company and bear interest at prime interest rate plus 1% (9.25% at September 30, 2006)March 31, 2007). Mr. Howard is entitled to convert outstanding advances made by him under the Loan Agreement into shares of the
iCAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2006March 31, 2007
| (2) | Financing Arrangements (continued) |
Convertible Revolving LoansLoan Payable to Related Party (continued)
Mr. Howard is entitled to convert outstanding advances made by him under the Loan Agreement into shares of the Company's common stock at any time based on the closing market price of the Company's common stock at the lesser of the market price at the time each advance is made or at the time of conversion. Mr. Howard has also agreed that while the Loan Agreement exists, not to convert any outstanding advances under the Loan Agreement into shares of the Company’s common stock that would exceed the shares available for issuance, defined as the authorized shares of the Company’s common stock less issued and outstanding common shares less any reserved shares for outstanding convertible preferred stock, convertible notes, non-employee warrants and non-employee stock options. On June 13, 2006 the Company borrowed $2,000,000 from Mr. Howard pursuant to the Loan Agreement and at September 30, 2006,At March 31, 2007, $2,258,906 was outstanding under the Loan Agreement and $2,741,094 was available for future borrowings.
Convertible Loans Payable to Related Parties
On June 19, 2006, the Company borrowed $200,000 from the emancipated adult son of its Chairmanand Dr. Lawrence Howard, who subsequently became and is currently a Director of the Board (the “Purchaser”) pursuant toCompany, entered into a Note Purchase Agreement dated June 19, 2006 and evidencedwith respect to the purchase by Dr. Howard from the Company of an aggregate of $200,000 principal amount of a 7% Convertible Promissory Note (“Promissory Note”). The Promissory Note matures onof the Company due June 19, 2008 subject to(the “Howard Note”) at a purchase price of $200,000. Interest on the right ofHoward Note is payable on the Purchaser or other holder of the Promissory Note to accelerate payment upon the Company filing for or being adjudicated bankrupt or insolvent. The Purchaser or other holder of the Promissory Note may convert the principaldue date. Principal and accrued and unpaid interest under the PromissoryHoward Note can be converted by the holder into shares of the Company’s common stock at a price of $1.50 per share, which conversion priceshare. Payment of principal under the Howard Note can be accelerated by the holder if the Company files for, or is subjectfound by a court to adjustment under certain circumstances such as common stock splits,be, bankrupt or combinations or common stock dividends. The Purchaserinsolvent and the Company can prepay the Howard Note prior to the due date. Dr. Howard has also agreed that he will not convert any principal amount or accrued and unpaid interest outstanding under the PromissoryHoward Note into shares of the Company’s common stock that would exceed the number of shares of the Company’s common stock then available for issuance defined as the authorized shares of the Company’s common stock less issued and outstanding common shares less any reserved shares for outstanding convertible preferred stock, non-employee warrants and non-employee stock options.
On June 20, 2006, the Company and Mr. Kenneth Ferry, the Company’s Chief Executive Officer, entered into a Note Purchase Agreement with respect to the purchase by Mr. Ferry from the Company of an aggregate of $300,000 principal amount of a 7% Convertible Note of the Company due June 20, 2008 (the “Ferry Note”) at a purchase price of $300,000. Interest on the Ferry Note is payable on the due date. Principal and accrued and unpaid interest under the Ferry Note can be converted by the holder into shares of the Company’s
iCAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2006March 31, 2007
| (2) | Financing Arrangements (continued) |
Convertible Loans Payable to Related Parties (continued)
On June 20, 2006, the Company borrowed $300,000 from its Chief Executive Officer, Mr. Kenneth Ferry, pursuant to a Note Purchase Agreement dated June 19, 2006 and evidenced by a 7% Convertible Promissory Note (“the Note”). The Note matures on June 20, 2008, subject to the right of Mr. Ferry or other holder of the Note to accelerate payment upon the Company filing for or being adjudicated bankrupt or insolvent. Mr. Ferry or other holder of the Note may convert the principal and accrued and unpaid interest under the Note into shares of the Company’s common stock at a price of $1.50 per share, which conversion priceshare. Payment of principal under the Ferry Note can be accelerated by the holder if the Company files for, or is subjectfound by a court to adjustment under certain circumstances such as common stock splits,be, bankrupt or combinations or common stock dividends.insolvent and the Company can prepay the Ferry Note prior to the due date. Mr. Ferry has also agreed that he will not convert any principal amount or accrued and unpaid interest outstanding under the Ferry Note into shares of the Company’s common stock that would exceed the number of shares of the Company’s common stock then available for issuance defined as the authorized shares of the Company’s common stock less issued and outstanding common shares less any reserved shares for outstanding convertible preferred stock, non-employee warrants and non-employee stock options.
On September 12, 14 and 14,19, 2006 the Company borrowed an aggregateentered into Note Purchase Agreements with respect to the purchase from the Company of $2,000,000a total of $2,300,000 principal amount of its 7.25% Convertible Promissory Notes (the “Loans”“Notes”) from Directors, Officersby directors, officers and Employeesemployees of the Company, including the following: Mr. Robert Howard (as to $1,350,000), Mr. James Harlan (as to $300,000), and Dr. Elliott Sussman (as to $100,000), all of whom are directors of the Company, the emancipated adult son of its ChairmanMr. Steven Rappaport (as to $300,000) and Dr. Lawrence Howard (as to $100,000) who subsequently became and are currently Directors of the Board (as to $100,000),Company, and $50,000 by each of the following executive officers and/or employees of the Company: Mr. Jeffrey Barnes, Ms. Stacey Stevens and Ms. Annette Heroux, pursuant to Note Purchase Agreements (“Agreements”) between the Company and each of the investors. The Loans are evidenced by 7.25% Convertible Promissory Notes (“Notes”) issued by the Company in favor of the investors.Heroux. The Notes mature two years from the date of issue subject to the right of the Company to prepay the Notes and the right of the holders of the Notes to accelerate payment of their respective Notes upon the Company filing for or being adjudicated bankrupt or insolvent. The holders of the Notes may convert the principal and accrued and unpaid interest under the Notes into shares of the Company’s common stock at a price of $1.70 per share, which conversion price is subject to adjustment under certain circumstances such as common stock splits, or combinations or common stock dividends.
iCAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2006
(2) | Financing Arrangements (continued)
|
Convertible Loans Payable to Non-Related Parties
On September 19, 2006 the Company borrowed an aggregate of $1,000,000 (the “loans”) from three accredited outside investors, pursuant to Note Purchase Agreements between the Company and each of the investors. The loans are evidenced by Notes issued by the Company in favor of the non-related parties. The Notes maturedue two years from the date of issue subject to the right of the Company to prepay the Notes and the right of the holders of the Notes to accelerate payment of their respective Notes upon the Company filing for or being adjudicated bankrupt or insolvent. The holders of the Notes may convert the principal and accrued and unpaid interest under the Notes into shares of the Company’s common stock at a price of $1.70 per share, which conversion price is subject to adjustment under certain circumstances such as common stock splits, or combinations or common stock dividends. The Note issued to Mr. Steven Rappaport on September 19, 2006 in the aggregate principal amount of $300,000 was issued with a conversion price below the market price of $1.80 per share on the date of the Note and the Company recorded a discount to Note Payables of $17,647 to reflect the beneficial conversion feature. This loan is recorded on the balance sheet at its face value net of the discount at March 31, 2007 of $13,235 at $286,765.
Convertible Loans Payable to Non-Related Parties
On September 19, 2006 the Company entered into Note Purchase Agreements with respect to the purchase from the Company of an aggregate of $700,000 principal amount of its 7.25% Convertible Promissory Notes (the “September Notes”) by two accredited outside investors, pursuant to Note Purchase Agreements between the Company and each
iCAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2007
| (2) | Financing Arrangements (continued) |
Convertible Loans Payable to Non-Related Parties (continued)
of the investors. The loans are evidenced by the September Notes issued by the Company in favor of the non-related parties. The September Notes mature two years from the date of issue subject to the right of the Company to prepay the September Notes and the right of the holders of the September Notes to accelerate payment of their respective Notes upon the Company filing for or being adjudicated bankrupt or insolvent. The holders of the September Notes may convert the principal and accrued and unpaid interest under the September Notes into shares of the Company’s common stock at a price of $1.70 per share, which conversion price is subject to adjustment under certain circumstances such as common stock splits, or combinations or common stock dividends. The September Notes issued on September 19, 2006 in the aggregate principal amount of $1,000,000$700,000 were issued with a conversion price below the market price of $1.80 per share on the date of the Note and the Company recorded a discount to Note Payables of $58,823$41,177 to reflect the beneficial conversion feature which resulted in thesefeature. These loans beingare recorded on the balance sheet at September 30, 2006March 31, 2007 at $669,118, which represents their face value net of the discount at $941,176.of $30,882.
On December 31, 2003, the Company completed the acquisition of Qualia Computing, Inc., a privately-held company based in Beavercreek, Ohio, and its subsidiaries, including CADx Systems, Inc. (together “CADx”). To complete the acquisition, iCAD issued 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 at prime interest rate plus 1% (9.25% at September 30, 2006) to purchase Qualia shares that were owned by two institutional investors. The note iswas payable in quarterly installments of $375,000 plus accrued interest. At September 30, 2006, $750,000 was outstanding underIn January 2007, the secured promissory note andCompany paid the entire amount is classified as a short term liability.
iCAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2006final installment.
| (4) | Stock-Based Compensation |
Effective January 1, 2006, the Company adopted Statement No. 123R, Share-Based Payment (“SFAS 123R”), which requires companies to measure and recognize compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123R is being applied on the modified prospective basis. Prior to the adoption of SFAS 123R, the Company accounted for its stock-based compensation plans under the recognition and measurement principles of Accounting
iCAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2007
| (4) | Stock-Based Compensation |
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, as provided by SFAS 123, “Accounting for Stock Based Compensation” (“SFAS 123”) and accordingly, recognized no compensation expense related to the stock-based plans as stock options exercise prices granted to employees and directors were equal to the fair market value of the underlying stock at the date of grant. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.
Under the modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized for the first nine months of fiscal 2006through March 31, 2007 includes compensation cost for all share-based payments granted prior to, but not yet vested on, January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard. During the three and nine month periodsperiod ended September 30, 2006,March 31, 2007, the Company recorded $220,527 and $767,248, respectively,$276,868 for share-based compensation in accordance with SFAS 123R. Included in the stock based compensation charge recorded in the nine month period ended September 30, 2006 is approximately $258,000 relating to modified outstanding stock options of the Company’s former Chief Executive Officer. As of September 30, 2006,March 31, 2007, there was approximately $1,156,526$1,042,844 of total unrecognized compensation costscost related to unvested options. That cost is expected to be recognized over a weighted average period of 3three years.
The Company issued 1,985,000217,500 stock options in the ninethree months ended September 30, 2006 all of which were issued in the second and third quarter of 2006.March 31, 2007. The options granted during the second and third quartersfirst quarter of 20062007 had a weighted average exercise price of $1.65.$4.15. The weighted average fair value of options granted during the ninethree months ended September 30, 2006March 31, 2007 was $0.78$2.03 and was estimated on the grant date using the Black-Scholes and Lattice option-pricing modelsmodel with the following weighted average assumptions: expected volatility of 62.5%62.8%, expected term of 3.5 years, risk-free interest rate of 4.88%4.70%,
iCAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2006
(4) | Stock-Based Compensation (continued)
|
and expected dividend yield of 0%. Expected volatility is based on peer group volatility, also using the Company’s historical volatility within the peer group. The average expected life was calculated using the simplified method under SAB 107 and other methods.107. The risk-free rate is based on the rate of U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of option grants. The Company uses historical data to estimate pre-vesting forfeiture rates.
The following table illustrates the effect on net loss and net loss per share hadactual option forfeitures recorded during the Company accounted for stock-based compensation in accordance with SFAS 123 in fiscal 2005:
| | | Three Months | | Nine Months | |
| | | September 30, | | September 30, | |
| | 2005 | | 2005 | |
| Net loss attributable to common stockholders, as reported | | $ | (2,593,940 | ) | $ | (3,096,876 | ) |
| | | | | | | | |
| Deduct: Total stock-based employee compensation determined under fair value method for all awards | | | (408,859 | ) | | (1,237,982 | ) |
| Pro forma net loss | | $ | (3,002,799 | ) | $ | (4,334,858 | ) |
| | | | | | | |
| Basic and diluted loss per share | | | | | | | |
| As reported | | $ | (.07 | ) | $ | (.08 | ) |
| Pro forma | | $ | (.08 | ) | $ | (.12 | ) |
For the 2005 periods,same period in 2006, the Company calculatedrecorded stock-based compensation, included in general and administration expense, of approximately $7,700 relating to options granted in November 2005. The Company did not grant any options during the fair value of each grant of options at the grant date, using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 2005: no dividends paid; expected volatility of 78%; risk-free interest rate of 3.69%, 3.91%, 4.03% and 4.18% and an average expected life of 5 years.three month period ended March 31, 2006.
iCAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2006
Intellectual Property. On April 18, 2005, the Company received a letter from R2 Technology, Inc. (“R2”), advising the Company of R2’s position that the Company’s Second Look® product lines allegedly infringed on US Patents 6,266,435, 6,477,262 and 6,574,357, which are licensed to R2. A three member arbitration panel was named and the Company's patent dispute with R2, including counterclaims by the Company that R2 infringes on US Patents 6,115,488, 6,556,699 and 6,650,766, which are owned by the Company, proceeded to a hearing before the panel on October 18 and 19, 2005. On April 19, 2006 the panel of arbitrators in the case entitled R2 Technology and Shih-Ping Wang vs. iCAD, Inc. found that the Company did not infringe any patents asserted by R2. The arbitrators also found that R2 did not infringe any of the patents asserted by the Company.
On August 31, 2006, the Company offered to its employees, members of its Board of Directors and certain consultants of the Company, the opportunity to tender for cancellation, all outstanding options to purchase shares of the Company’s common stock, $0.01 par value, previously granted to them under the iCAD, Inc. 2001 Stock Option Plan, 2002 Stock Option Plan, 2004 Stock Option Plan, the Intelligent Systems Software, Inc. 2001 Stock Option Plan and certain Non-Plan Stock Options that were granted in connection with the Company’s acquisition of Qualia Computing, Inc. and its CADx Systems, Inc. subsidiary, having an exercise price in excess of $2.00 per share in exchange for new options. There were options to purchase 1,692,065 shares of the Company’s common stock outstanding and eligible for tender pursuant to the Offer to Exchange.
Under the option exchange program, participants who tendered their eligible options for exchange were granted new options, some of the key features of which included:
| a. | The number of shares of Common Stock subject to new options equal the same number of shares subject to the cancelled eligible options. |
| b. | The vesting schedule of the cancelled eligible options did not carry over to the new options. Instead, the new options vested immediately. |
| c. | The exercise price of the new options equal $2.00 per share, subject to adjustment for any stock splits, stock dividends and similar events. |
| d. | The new options have a term of two years. |
iCAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2006
(6) | Subsequent Event (continued)
|
| e. | The new options are “non qualified options” and not “incentive stock options”, regardless of whether any of the cancelled eligible options were incentive stock options or non-qualified stock options. |
| f. | The new options otherwise contain other terms and conditions that are substantially the same as those in the above mentioned stock option plans, as the case may be, that governed the eligible plan options surrendered. |
This offer to exchange was conditioned upon stockholder approval of the exchange offer which was obtained at the Company’s 2006 Annual Meeting of Stockholders held on October 20, 2006. Subject to the terms and conditions of the offer, on October 23, 2006, the Company granted new two-year options to purchase a total of 1,159,750 shares of its common stock at $2.07 per share in exchange for the eligible options tendered for exchange.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Certain information included in this Item 2 and elsewhere in this Form 10-Q that are not historical facts contain forward looking statements that involve a number of known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward looking statements. These risks and uncertainties include, but are not limited to, uncertainty of future sales levels, protection of patents and other proprietary rights, the impact of supply and manufacturing constraints or difficulties, product market acceptance, possible technological obsolescence of products, increased competition, litigation and/or government regulation, changes in Medicare reimbursement policies, competitive factors, the effects of a decline in the economy in markets served by the Company and other risks detailed in the Company’s other filings with the Securities and Exchange Commission. The words “believe”, “demonstrate”, “intend”, “expect”, “estimate”, “anticipate”, “likely”, “seek”, “should” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date the statement was made.
Results of Operations
Overview
iCAD is a leadingan industry-leading provider of Computer-Aided Detection (CAD)computer aided detection solutions (“CAD”) that enable radiologists and other healthcare professionals to better serve patients by identifying pathologies and pinpointing cancer earlier. iCAD offers a comprehensive range of high-performance, upgradeable CAD systems for the high, mid and low volume mammography markets. iCAD's cancer detection systems are used by over one thousand women’s healthcare centers worldwide. Early detection of breast cancer can save lives and often permits less costly,is the key to better prognosis, less invasive and less disfiguringlower treatment costs, and higher survival rates. Performed as an adjunct to mammography screening, CAD has quickly become the standard of care in breast cancer treatment options than whendetection, helping radiologists improve clinical outcomes while enhancing workflow. CAD is also reimbursable in the United States under federal and most third-party insurance programs. Since receiving FDA approval for our first breast cancer is detected at a later stage.detection product in January 2002, over fifteen hundred of our CAD systems have been placed in mammography practices worldwide. iCAD is the only independent, digital CAD software and integrated digitizer hardwarestand alone company offering Computer Aided DetectionCAD solutions for the early detection of breast cancer.
iCAD’s industry-leading CAD algorithmsproducts have been shown to detect up to 72 percent of the cancers that biopsy proved were missed on the previous mammogram, an average of 15 months earlier. Our advanced pattern recognition technology analyzes images to identify patternpatterns and then uses sophisticated mathematical analysis to mark suspicious areas.
The Company is applyingintends to apply its core competencies in pattern recognition and algorithm development in disease detection. Our focus is on the development and marketing of cancer detection products for disease states where there are established or emerging protocols for screening as a standard of care andcare. iCAD will pursue select disease states where it is clinically proven that screening has a significant impact on patient outcomes.outcomes, where there is an opportunity to lower health care costs, where screening is non-invasive or minimally invasive and where public
awareness is high. CT Colonography
or CTC is emerging as an alternative imaging procedure for evaluation of the colon. The Company has under development a
virtual colonoscopy product for
colorectal cancer screening.computer aided detection of polyps in CTC. Colorectal cancer has been shown to be highly preventable with early
polyp detection.detection and removal of polyps. The Company’s CAD systems include proprietary softwarealgorithm 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, that utilizes the Company’s proprietary technology and offers what the Company believes is superior performance for the digitization of film basedfilm-based medical images. The Company’s headquarters are located in southern New Hampshire, with manufacturing and contract manufacturing facilities in New Hampshire and Massachusetts and a research and development facility in Ohio.
Critical Accounting Policies
The Company’s discussion and analysis of our financial condition, results of operations, and cash flows are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to accounts receivable allowance, inventory valuation and obsolescence, intangible assets, income taxes, warranty obligations, contingencies and litigation. Additionally, we use assumptions and estimates in calculations to determine stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company’s critical accounting policies are set forth in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
2006. In connection with the adoption of SFAS 123R as of the beginning of the first quarter of 2006, the Company added “Stock Based Compensation” as a critical accounting policy.
Stock Based Compensation
The Company maintains stock-based incentive plans, under which it provides stock incentives to employees and directors. The Company grants options to employees and directors to purchase common stock at an option price equal to the market value of the stock at the date of grant. Prior to the effective date of SFAS 123R, the Company applied APB 25, and related interpretations, for its stock option grants. APB 25 provides that the compensation expense relative to its stock options is measured based on the intrinsic value of the stock option at date of grant.
Effective the beginning of the first quarter of fiscal year 2006, the Company adopted the provisions of SFAS 123R using the modified prospective transition method. Under this method, prior periods are not restated. The Company used the Black-Scholes and Lattice option pricing models which requires extensive use of accounting judgment and financial estimates, including estimates of the expected term participants will retain their vested stock options before exercising them, the estimated volatility of its common stock price over the expected term, and the number of options that will be forfeited prior to the completion of their vesting requirements. Application of alternative assumptions could produce significantly different estimates of the fair value of stock-based compensation and consequently, the related amounts recognized in the Consolidated Statements of Operations. The provisions of SFAS 123R apply to new stock options and stock options outstanding, but not yet vested, on the date the Company adopted SFAS 123R. Stock-based compensation expense was included in applicable departmental expense categories in the Consolidated Statements of Operations for the fiscal 2006 periods.
Quarter Ended September 30, 2006March 31, 2007 compared to Quarter Ended September 30, 2005 and Nine Months Ended September 30,March 31, 2006 compared to Nine Months Ended September 30, 2005
Revenue. Revenue for the three and nine month periodsperiod ended September 30, 2006 were $5,038,336 and $13,281,679, respectively,March 31, 2007 was $6,147,486, compared with revenue of $3,393,804 and $13,632,515$4,373,650 for the three and nine month periodsperiod ended September 30, 2005.March 31, 2006. The $1,773,836increase of 48.5%or 40.6% in revenue in the thirdfirst quarter of 2006,2007, from the same period in 20052006 was due primarily to an increase of $1,926,248$1,489,310 or 167.9%75.8%, in theour digital CAD business to $3,073,620,$3,453,370, compared to sales of $1,147,372$1,964,060 in the same period in 2005.2006. This is due to a substantial increase in the market adoption of Full Field Digital Mammography (FFDM) equipment and the associatedstrong continued demand for adigital CAD solution. Intechnology for the nine month period ended September 30, 2006, salesdetection of iCAD’s digital solutionsbreast cancer.
Sales of our film based products increased $3,044,623 or 82.1% to $6,752,195, compared to sales of $3,707,5723.3% from $1,759,907 in the nine month period in 2005.
This rapid shift in sales to FFDM and the associated CAD technology has contributed to the decline in film based analog technology. Sales of iCAD’s analog products decreased 31.2% in the thirdfirst quarter of 2006 compared to $1,817,304 in the thirdfirst quarter of 2005, and 49.0% or $4,253,2942007. This growth was led by sales of our TotalLookÔ product,
which is used for the nine month period ended September 30, 2006, compared to the same period of 2005. While the transition to digital technology had a significant positive impact on overall performance, the Company is taking actions intended to improve its future analog business, primarily by developing a stronger and expanded distributor channel focused exclusively on analog products.digitizing film based prior mammography exams, for comparative reading with current mammography exams.
Service and supply revenue increased approximately 70.0% and 69.1%35.0% in the three and nine month periodsperiod ended March 31, 2007 from $649,683 in the first quarter of 2006 respectively, to $704,376 and $2,099,547, respectively, compared to $414,284 and $1,241,712, respectively, in$876,812 for the same three and nine month periodsperiod in 2005.2007. The increase in the Company’s service revenue is due primarily to focused efforts by the Company to increase its service value to its customers, resulting in an increase in service contract penetration.
| | | | | | | | | | |
| | | Three months ended September 30, | | | | | |
| | 2006 | | 2005 | | Change | | % Change | |
| Digital revenue | | $ | 3,073,620 | | $ | 1,147,372 | | $ | 1,926,248 | | | 167.9 | % |
| Analog revenue | | | 1,260,340 | | | 1,832,148 | | | (571,808 | ) | | -31.2 | % |
| Service & supply revenue | | | 704,376 | | | 414,284 | | | 290,092 | | | 70.0 | % |
| Total revenue | | $ | 5,038,336 | | $ | 3,393,804 | | $ | 1,644,532 | | | 48.5 | % |
| | | | | | | | | | | | | | |
| | | Nine months ended September 30, | | | | | | | Three months ended March 31, | |
| | | 2006 | | 2005 | | Change | | % Change | | | 2007 | | 2006 | | Change | | % Change | |
| Digital revenue | | $ | 6,752,195 | | $ | 3,707,572 | | $ | 3,044,623 | | | 82.1 | % | | $ | 3,453,370 | | $ | 1,964,060 | | $ | 1,489,310 | | | 75.8% | |
| Analog revenue | | | 4,429,937 | | | 8,683,231 | | | (4,253,294 | ) | | -49.0 | % | | | 1,817,304 | | | 1,759,907 | | | 57,397 | | | 3.3% | |
| Service & supply revenue | | | 2,099,547 | | | 1,241,712 | | | 857,835 | | | 69.1 | % | | | 876,812 | | | 649,683 | | | 227,129 | | | 35.0% | |
| Total revenue | | $ | 13,281,679 | | $ | 13,632,515 | | $ | (350,836 | ) | | -2.6 | % | | $ | 6,147,486 | | $ | 4,373,650 | | $ | 1,773,836 | | | 40.65% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Engineering and Product Development. Engineering and product development costs for the three month period ended September 30, 2006March 31, 2007 decreased by $140,097$254,323 or 10.0%19.3%, from $1,406,486$1,319,198 in 20052006 to $1,266,389$1,064,875 in 2006. Engineering and product development cost for the nine month period ended September 30, 2006 increased by $442,841 or 13.0%, from $3,407,942 in 2005 to $3,850,783 in 2006.2007. The decrease in engineering and product development cost during the thirdfirst quarter of 20062007 was primarily due to a decrease in hardware engineeringpersonnel costs of approximately $135,000, resulting from staff reductions and a shift in personnel to the Company’s marketing department, and a decrease in prototype expense of approximately $56,000 associated with the completion in 2005, of the development of its Fulcrum digitizer which is a main component in the Company’s analog products. The increase in engineeringour TotalLook product. Engineering and product development costscost for the nine month period ended September 30, 2006 was primarilyfirst quarter 2007 includes stock based compensation expense in the amount of approximately $54,000 due to software engineering enhancements relatedthe impact of SFAS 123R compared to the Company’s breast cancer detection algorithms, and the expansion of the Company’s efforts$0 in product development for CT applications, especially the early detection of colonic polyps. In addition, approximately $150,000, relating to severance and recruiting costs was incurred during the second and third quarters of 2006.
General and Administrative. General and administrative expenses for the three month period ended September 30,March 31, 2007 increased 3.7% from $1,749,054 in 2006 decreased by $449,281 or 24.4%, from $1,841,110to $1,813,355 in 2005 to $1,391,829 in 2006. General and administrative expenses for the nine month period ended September 30, 2006 increased by $1,059,797 or 23.5%, from $4,516,470 in 2005 to $5,576,267 in 2006.2007. The decreasedincrease in general and administrative expense during the thirdfirst quarter of 20062007 was due primarily to increases in salaries, employee bonus accrual, a newly established compensation plan for our Board of Directors, recruiting costs and expenses associated with the Company’s new executive offices totaling approximately $345,000, and approximately $160,000 in stock-based compensation expense due to the impact of SFAS 123R compared to approximately $7,700 in 2006. This increase in expense was offset by a decreasereduction in professional and legal expenses.costs in 2007. The Company incurred approximately $574,000$368,000 in professional and legal costs during the thirdfirst quarter of 2005,2006 principally associated with the Company’s patent arbitration proceeding and associated merger discussions with R2 whichTechnology, Inc. The merger discussions with R2 ended in February 2006 and the arbitration proceeding was settledconcluded in April 2006. In addition, amortization and provision for doubtful accounts expenses decreased in the first quarter of 2006. The increase in general and administrative expenses for the nine month period ended September 30, 2006 was2007 by approximately $93,000 due primarily to recruiting and severance expensesfully amortized assets
associated principally with the Company’s transition to new managementacquisition of CADx in 2003, and modification of the outstanding stock options of the Company’s former Chief Executive Officer incurredimprovement in the second quarter of 2006 in connection with his Separation Agreement, offset by a reduction in legal costs.accounts receivable collections.
Marketing and Sales. Marketing and sales expense for the three and nine month periodsperiod ended September 30, 2006March 31, 2007 increased by $471,630$523,072 or 27.1% and $728,919 or 13.7%26.3%, respectively, from $1,741,036 and $5,338,476, respectively,$1,985,687 in 20052006 to $2,212,666 and $6,067,395$2,508,759 in 2006. The increase in marketing and sales expense for the three and nine month periodsperiod ended September 30, 2006,March 31, 2007, primarily resultsresulted from the actions taken by the Company’s new Company management to revamp the direct sales model including the hiring of highly experience healthcareexperienced sales and marketing professionals develop channel partner and lead generation programsa shift of several personnel from engineering to product marketing. In addition, the Company incurred additional expenses of approximately $125,000 for public relations, advertising and re-brand and repositioncollateral materials during the Company.2007 period. The increase in marketing and sales expense forin the nine month period ended September 30, 2006,first quarter 2007, also includes stock based compensation expense in the amount of approximately $150,000$56,000 due to the impact of SFAS 123R. The Company anticipates that marketing and sales expense will increase123R compared to $0 in the fourth quarter as we continue to expand our direct and indirect sales coverage, invest in re-branding and repositioning the Company and unveil these re-branding efforts at our largest trade show in the fourth quarter.2006.
Interest Expense. Net interest expense for the three and nine month periodsperiod ended September 30, 2006March 31, 2007 increased from $6,961 and $54,212, respectively,$6,727 in 20052006 to $67,760 and $95,448,
respectively,$105,806 in 2006. This increase is due primarily to the increase in loanthe Company’s Convertible Loan Payable balances during the second and third quarters of 2006.
Net Loss. As a result of the foregoing and including stock based compensation expense of $220,527,$276,868, the Company recorded a net loss of ($1,094,482)553,937) or ($0.03)0.02) per share for the three month period ended September 30, 2006March 31, 2007 on revenue of $5,038,336$6,147,486 compared to a net loss of ($2,562,831)1,605,894) or ($0.07) per share for the same period in 2005 on revenue of $3,393,804. The loss for the nine months ended September 30, 2006, including stock based compensation expense of $767,248, was ($5,258,675) or ($0.14)0.04) per share on revenue of $13,281,679 compared with a net loss of ($3,004,564) or ($0.08) per share on revenue of $13,632,515$4,373,650 for the ninethree months ended September 30, 2005.March 31, 2006.
Backlog. The Company’s product backlog (excluding service and supplies) as of September 30, 2006March 31, 2007 totaled approximately $1,401,445$2,072,000 as compared to $940,765$493,000 as of June 30,March 31, 2006 and $913,975$2,566,000 at December 31, 2005.2006. It is expected that the majority of the backlog at September 30, 2006March 31, 2007 will be shipped within the current fiscal year. Backlog as of any particular period should not be relied upon as indicative of the Company’s net revenues for any future period.
Liquidity and Capital Resources
The Company believes that its current liquidity and capital resources are sufficient to support and sustain operations through at least the next 12 months, primarily due to cash expected to be generated from continuing operations and the availability of a $5,000,000 credit line under the Loan Agreement with its Chairman, Mr. Robert Howard, of which $2,741,094 was available for borrowing at September 30, 2006.March 31, 2007. The Loan Agreement currently expires March 31, 2007,2008, subject to extension by the parties, with an agreement fromparties. Mr. Howard has advised the Company that he willdoes not request repayment ofintend to call in the outstanding principal balance ofunder the noteLoan Agreement prior to March 31, 2008.2009. Outstanding advances are collateralized by substantially all of the assets of the Company and bear interest at the prime interest rate plus 1%, (9.25% at September 30, 2006)March 31, 2007). Mr. Howard has also agreed that while the Loan Agreement exists he will not to convert any outstanding advances under the Loan Agreement into shares of the Company’s common stock that would exceed the available shares for issuance defined as the authorized shares of the Company’s common stock less issued and outstanding common shares less any reserved shares for outstanding convertible preferred stock, convertible notes payable, non-employee warrants and non-employee stock options. The Company's ability to generate cash adequate to meet its future capital
requirements beyond the next 12 months will depend primarily on operating cash flow. If sales or cash collections are reduced from current expectations, or if expenses and cash requirements are increased, the Company may require additional financing.
At September 30, 2006March 31, 2007 the Company had current assets of $10,892,790,$10,210,104, current liabilities of $6,287,464$5,554,630 and working capital of $4,605,326.$4,655,474. The ratio of current assets to current liabilities was 1.7:1.8:1
Net cash used for operating activities for the ninethree months ended September 30, 2006March 31, 2007 was $3,576,182,$403,099, compared to $196,571net cash used of $893,904 for the same period in 2005.2006. The cash used for the ninethree months ended September 30, 2006March 31, 2007 resulted from the net loss of $5,258,675, an increase$553,937, increases in inventoryaccounts receivable of $1,250,432 $191,369 and other current assets of $162,119,$56,403, and a decrease in accounts payable of $1,377,661,$494,756 and accrued expenses of $466,981, offset by athe decrease in accounts receivableinventory of $2,143,092$403,613 and increases in accrued expensesinterest and deferred revenue totaling $355,451,$236,092, plus non-cash items including, depreciation, amortization, disposal of assets and amortizationinterest expense associated with discount on convertible loans payable of $1,206,914$443,774 and stock based compensation of $767,248.$276,868.
The net cash used for investing activities, which consisted of additions to property and equipment, for the ninethree month period ended September 30, 2006March 31, 2007 was $432,342,$169,371, compared to $725,737$102,557 for the comparable period in 2005.2006.
Net cash provided by financing activities for the ninethree months ended September 30, 2006March 31, 2007 was $4,375,000,$380,115, compared to net cash used for financing activities of $609,883$375,000 for the same period in 2005.2006. The increase in cash provided forby financing activities during the ninethree months ended September 30, 2006March 31, 2007 was due primarily to the proceedscash received from the issuance of $3,500,000 of Convertible Promissory Notes and the borrowing of $2,000,000 pursuantcommon stock relating to the Loan Agreement,exercise of stock options in the amount of $755,115 offset by the final payment of the note payable associated with the CADx acquisition in the amount of $1,125,000.$375,000.
On June 13, 2006, the Company borrowed $2,000,000 from Mr. Robert Howard, the Chairman of the Company’s Board of Directors, pursuant to the Loan Agreement. At September 30, 2006, $2,258,906 was owed by the Company to Mr. Howard pursuant to the Loan Agreement with $2,741,094 available for future borrowings under the Loan Agreement. Notwithstanding the current expiration date of Loan Agreement, Mr. Howard has agreed not to request repayment of the principal amount due to him under the Loan prior to March 31, 2008. Mr. Howard has also agreed that while the Loan Agreement exists not to convert any outstanding advances under the Loan Agreement into shares of the Company’s common stock that would exceed the available shares for issuance defined as the authorized shares of the Company’s common stock less issued and outstanding common shares less any reserved shares for outstanding convertible preferred stock, non-employee warrants and non-employee stock options.
On June 19, 2006, the Company borrowed $200,000 from the emancipated adult son of its Chairman of the Board pursuant to a Note Purchase Agreement dated June 19, 2006 and evidenced by a 7% Convertible Promissory Note. The Promissory Note matures on June 19, 2008, subject to the right of the Purchaser or other holder of the Promissory Note to accelerate payment upon the Company filing for or being adjudicated bankrupt or insolvent. The Purchaser may convert the principal and accrued and unpaid interest under the Promissory Note into shares of the Company’s common stock at a price of $1.50 per share, which conversion price is subject to adjustment under certain circumstances such as common stock splits, or combinations or common stock dividends The Purchaser has agreed that he will not convert any principal amount or accrued and unpaid interest outstanding under the Promissory Note into shares of the Company’s common stock that would exceed the number of shares of the Company’s common stock then available for issuance defined as the authorized shares of the Company’s common stock less issued and outstanding common shares less any reserved shares for outstanding convertible preferred stock, non-employee warrants and non-employee stock options.
On June 20, 2006, the Company borrowed $300,000 from its Chief Executive Officer, Mr. Kenneth Ferry, pursuant to a Note Purchase Agreement dated June 19, 2006 and evidenced by a7% Convertible Promissory Note (“the Note”). The Note matures on June 20, 2008, subject to the right of Mr. Ferry or other holder of the Note to accelerate payment upon the Company filing for or being adjudicated bankrupt or insolvent. Mr. Ferry may convert the principal and accrued and unpaid interest under the Note into shares of the Company’s common stock at a price of $1.50 per share, which conversion price is subject to adjustment under certain circumstances such as common stock splits, or combinations or common stock dividends Mr. Ferry has also agreed that he will not convert any principal amount or accrued and unpaid interest outstanding under the Note into shares of the Company’s common stock that would exceed the number of shares of the Company’s common stock then available for issuance defined as the authorized shares of the Company’s common stock less issued and outstanding common shares less any reserved shares for outstanding convertible preferred stock, non-employee warrants and non-employee stock options.
On September 12, 14, and 19, 2006 the Company borrowed an aggregate of $3,000,000 (the “Loans”) from a total of ten accredited investors including the following: Mr. Robert Howard (as to $1,350,000), Mr. James Harlan (as to $300,000) and Dr. Elliott Sussman (as to $100,000), all of whom are directors of the Company, a total of $1,000,000 from three outside investors, the emancipated adult son of its Chairman of the Board (as to $100,000), and $50,000 by each of the following employees and/or executive officers of the Company: Mr. Jeffrey Barnes, Ms. Stacey Stevens and Ms. Annette Heroux, pursuant to Note Purchase Agreements (“Agreements”) between the Company and each of the investors. The Loans are evidenced by 7.25 % Convertible Promissory Notes (“Notes”) issued by the Company in favor of the investors. The Notes mature two years from the date of issue subject to the right of the Company to prepay the Notes and the right of the holders of the Notes to accelerate payment of their respective Notes upon the Company filing for or being adjudicated bankrupt or insolvent. The holders of the Notes may convert the principal and accrued and unpaid interest under the Notes into shares of the Company’s common stock at a price of $1.70 per share, which conversion price is subject to adjustment under certain circumstances such as common stock splits, or combinations or common stock dividends. The Notes issued on September 19, 2006 in the aggregate principal amount of $1,000,000 were issued with a conversion price below the market price of $1.80 per share and the Company recorded a discount to Note Payables of $58,823 to reflect the beneficial conversion feature which resulted in these loans being recorded on the balance sheet at September 30, 2006 at their face value net of the discount at $941,176.Contractual Obligations
The following table summarizes, for the periods presented, the Company’s future estimated cash payments under existing contractual obligations.
Contractual Obligations | | Payments due by period | |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | |
| Convertible revolving loans payable to related party | | $ | 2,258,906 | | $ | — | | $ | 2,258,906 | | $ | | |
| Convertible loan payable to related parties | | $ | 2,500,000 | | $ | | | $ | 2,500,000 | | $ | | |
| Convertible loans payable to investors | | $ | 941,176 | | $ | | | $ | 941,176 | | $ | | |
| Note Payable | | $ | 750,000 | | $ | 750,000 | | $ | | | $ | | |
| Lease Obligations | | $ | 2,032,945 | | $ | 138,127 | | $ | 1,408,378 | | $ | 486,440 | |
| Other Long-Term Obligations | | $ | 488,000 | | $ | 292,800 | | $ | 195,200 | | $ | | |
| Interest Obligation* | | $ | 26,229 | | $ | 26,229 | | $ | | | $ | | |
Total Contractual Obligations | | $ | 8,997,256 | | $ | 1,207,156 | | $ | 7,303,660 | | $ | 486,440 | |
| | | | | | | | | | | | | |
Contractual Obligations | | Payments due by period | |
| | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | 5+ years | |
| Convertible revolving loan payable to related party | | $ | 2,258,906 | | $ | — | | $ | 2,258,906 | | $ | | | $ | | |
| Convertible loans payable to related parties | | $ | 2,786,765 | | $ | | | $ | 2,786,765 | | $ | | | $ | | |
| Convertible loans payable to investors | | $ | 669,118 | | $ | | | $ | 669,118 | | $ | | | $ | | |
| Lease Obligations | | $ | 2,407,753 | | $ | 411,331 | | $ | 1,180,788 | | $ | 815,634 | | $ | | |
| Other Long-Term Obligations | | $ | 379,233 | | $ | 292,800 | | $ | 86,433 | | $ | | | $ | | |
| Interest Obligation* | | $ | 428,007 | | $ | | | $ | 428,007 | | $ | | | $ | | |
Total Contractual Obligations | | $ | 8,929,782 | | $ | 704,131 | | $ | 7,410,017 | | $ | 815,634 | | $ | | |
| | | | | | | | | | | | | | | | |
| * | Represents interest under the short term note payable agreement based on the rate at September 30, 2006 of 9.25%. The Company’s interest obligation relating to the Loan Agreement with Mr. Howard, its Convertible Revolving Loan Agreements areChairman, is not included in this table. |
Recent Accounting Pronouncements
In JulyJune 2006, the FASBFinancial Accounting Standards Board (“FASB”) issued FIN 48, "AccountingAccounting for Uncertainty in Income Taxes—anTaxes-an interpretation of FASB Statement No. 109," which seeks to reduce Accounting for Income Taxes. This interpretation addresses the significant diversity in practice associated with certain aspectsdetermination of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of awhether tax position takenbenefits claimed or expected to be taken inclaimed on a tax return andshould be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods disclosure, and transition. The provisionsrequires increased disclosures.
Upon the adoption of FIN 48, are effectivethe Company commenced a review of all open tax years for fiscal years beginning after December 15, 2006.federal and state jurisdictions. The Company’s management does not believe it has included any “uncertain tax positions” in its previously filed Federal or state income tax returns, which it believes upon the result of an examination, would have a material impact on the financial statements or exceed net operating loss and tax credit carryfowards available.
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Upon adoption the cumulative effect of any changes in net assets resulting from the application of FIN 48 will be recorded as an adjustment to retained earnings.on January 1, 2007, the Company did not record any interest or penalties. The Company is currently evaluatingsubject to taxation in the impact, if any, thatUnited States and various state jurisdictions. The Company’s tax years for 2003 and forward are subject to examination by the United States tax authorities due to the carryforward of unutilized net operating losses. The adoption of FIN 48 willdid not have a material impact on itsour financial position andcondition, results of operations.operations or cash flows.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Not applicable.
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 (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (”Exchange Act”)) were effective at the reasonable level of assurance.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and
not be detected. The Company conducts periodic evaluations to enhance, where necessary its procedures and controls.
The Company’s principal executive officer and principal financial officer 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 September 30, 2006,March 31, 2007, 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.
Exhibit No.ExhibitNo. | Description |
10.1 | Employment agreement dated September 8, 2006 between the Company and Darlene M. Deptula-Hicks (1)* |
10.2 | Option Agreement dated September 8, 2006 between the Company and Darlene M. Deptula-Hicks (1)* |
10.3 | Note Purchase Agreements between certain of the Company’s Directors and Executive Officers and the Company dated September 12 and 14, 2006 |
10.4 | Form of Note Purchase Agreement between certain investors and the Company dated September 19, 2006 |
10.510.1 | OptionAddendum No. 19 dated March 1, 2007, extending the Revolving Loan and Security Agreement, dated April 19, 2006and Convertible Revolving Credit Promissory Note between Robert Howard and the Company and Kenneth Ferry *dated October 26, 1987. (incorporated by reference to the applicable exhibit filed with the Company’s Current Report on Form 8-K for the event dated March 1, 2007.) |
10.610.2 | Option Agreement dated April 19, 2006 between the Company and Jeffrey Barnes *Summary Sheet of Certain Executive Officer Compensation |
10.7 | Option Agreement dated April 28, 2006 between the Company and Stacey Stevens * |
| 11. | Earnings Per Share Calculation |
| 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 management compensation plan or arrangement. |
(1) | Incorporated by reference to the applicable exhibit filed in the Company’s current report on Form 8-K for the event dated September 8, 2006. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
iCAD, Inc.
Kenneth M. Ferry