SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission file number 1-9341
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
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Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant as
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. YES X NO .
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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. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) YES NO X .
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The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price for the registrant's Common Stock on
June 28, 2002 was $43,940,562.
As of March 25, 2003, the registrant had 26,350,248 shares of Common Stock
outstanding.
2
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
Certain information included in this report on Form 10-K that are not historical
facts contain forward looking statements that involve a number of known and
unknown risks, uncertainties and other factors that could cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievement expressed or implied by such
forward looking statements. These risks and uncertainties include, but are not
limited to, uncertainty of future sales levels, protection of patents and other
proprietary rights, the impact of supply and manufacturing constraints or
difficulties, product market acceptance, possible technological obsolescence of
products, increased competition, litigation and/or government regulation,
changes in Medicare reimbursement policies, competitive factors, the effects of
a decline in the economy in markets served by the Company and other risks
detailed in 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 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 achieved in June 2002 with the acquisition of
Intelligent Systems Software, Inc. ("ISSI"), a software company offering
computer aided detection ("CAD") systems for breast cancer.
Early detection of breast cancer can save lives and often permits less costly,
less invasive and less disfiguring cancer treatment options than when the cancer
is detected at a later stage. Computer-aided detection from products sold by
iCAD, Inc. can detect 23% of breast cancers, an average of 14 months earlier
than screening mammography alone. iCAD believes that it offers the fastest CAD
system available for multiple case processing, the only system to look for
asymmetries in the appearance between the left and right breast, which may be
indicative of cancer ("asymmetries"), and the most effective system available to
detect breast masses. Further, the Company believes that its iCAD system is the
only CAD system designed on a relational database platform, which can improve
productivity and reduce operating and capital costs at women's health centers by
offering computer-assisted detection as an integrated or integration-ready part
of current or anticipated informatics systems, digital imaging resources, and
workflows.
3
The Company's CAD systems include proprietary software technology and a
radiographic film digitizer manufactured by the Company, together with standard
computer and display equipment. iCAD also manufactures medical film digitizers
for a variety of medical imaging and other applications. The Company has
established a wholly owned subsidiary, Howtek Devices Corporation, to
manufacture and promote the Company's film digitizer products to third party
customers. The Company believes that iCAD's experience in providing film
digitizers and software for medical picture archiving and communications (PACS)
and telemedicine applications contributes to the successful integration of the
Company's CAD products into networked and digital mammography environments. The
Company's headquarters and its production and assembly facilities are located in
southern New Hampshire, with software research and development facilities in
Tampa, Florida.
At the end of the second quarter of 2002, consistent with the Company's
intention to concentrate its efforts in the medical imaging and scanning
business on higher margin medical and computer assisted detection applications
and to seek licensees for its graphic arts and photographic product lines, the
Company established non-cash reserves and took inventory adjustments associated
with its graphic arts and photographic products. All inventories, fixed assets
and intangible assets related to the graphic arts and photographic business
lines were written down by approximately $3.0 million as of June 30, 2002 to
their estimated salvage values of $0.
During the third quarter of 2002, the Company's first quarter of combined
operations with ISSI, 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, Inc. and ISSI. As a result,
the Company eliminated three senior management positions and is closing the
Company's office in Boca Raton, Florida in 2003. These actions are intended to
permit improved operating efficiencies while substantially reducing personnel
and overhead. The Company recorded a one time charge of $884,000 during the
third quarter of 2002 in connection with separation agreements negotiated with
its former Chief Executive Officer and its former Vice President of Finance and
costs of closing the Boca Raton office. The charge is included in general and
administrative expenses in the consolidated statement of operations filed with
this report on Form 10-K.
During the fourth quarter of 2002, the Company concluded the licensing and
divestiture of its graphic arts and prepress business line, and is no longer
active in this area. The license agreement provided for the sales of all
tangible and intangible assets related to the graphic arts and prepress business
lines. Total consideration received by the Company for the sale of the assets
amounted to $188,117 and was paid through the assumption of certain liabilities
of the Company. In accordance with the licensing agreement any sales by the
licensee of the licensed products will result in royalty revenue to the Company.
Royalty revenues are earned as a flat fee for each unit sold by the licensee.
4
During 2002, iCAD was the recipient of a national Tibbets Award for unique
technological innovations of particular significance and value to the community.
ISSI and iCAD have been responsible for a range of innovations in CAD products,
including: the first and only CAD system to search for and mark clinical
asymmetries; the first free-standing, eye-level radiologist review station; the
ability to choose between soft copy and printed CAD results; the first system to
offer multiple radiologist viewing stations; and 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 CAD system supporting open architecture, standardized protocols and
accessible data interfaces; the ability to share digitizers between CAD and
medical picture archiving and communications ("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 $100,000.
While iCAD believes it is poised to exploit application of CAD technology to
additional practice areas, iCAD's research and development emphasizes the
development or enhancement of products relating to women's health care practice,
working to make CAD more affordable and more effective and accessible through
enhanced integration with existing imaging and information sharing systems in
the mammography clinic and hospital environment.
Unlike many other companies in its industry, iCAD's commitment to women's health
is reinforced by the fact that key management roles at iCAD are held by women,
including the Company's Executive Vice President, its Chief Financial Officer,
Vice President of Product Marketing and Director of Customer Services, as well
as representation on the Board of Directors. The Company's Medical and Technical
Advisory Board consists primarily of women, half of iCAD's field sales
representatives are professional women, and iCAD's principal contract
manufacturer, is woman owned and managed.
iCAD is the only integrated digitizer hardware and CAD software company offering
computer aided detection solutions. As such, iCAD is able to reduce costs at
each step in the CAD product design, production and assembly process. The
Company believes that its acquisition of ISSI and resulting vertical integration
of CAD and hardware development have resulted in better integration of software
and film digitizer components, lower production costs and reduced administrative
overhead. These achievements have allowed iCAD to progressively enhance its CAD
product line, while reducing the costs of CAD to many customers and allowing
more women to realize the benefits inherent in the early detection of breast
cancer.
The Company reported profitable operations in the fourth quarter of 2002, an
increase of 222% in medical sales from the fourth quarter of 2001, and excluding
sales totaling $188,117 of previously written off inventory gross profit margins
amounted to 65% in the fourth quarter of 2002.
5
Merger with ISSI
On June 28, 2002, the Company completed the acquisition of ISSI pursuant to a
previously reported plan and agreement of merger. The Company acquired all of
the issued and outstanding capital stock of ISSI, a privately held company based
in Boca Raton, Florida. 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 that corporation immediately prior to the merger, as
approved by the Company's shareholders and in accordance with the provisions of
the merger agreement. Subsequent to completion of the merger the Company amended
its certificate of incorporation to increase its authorized common stock to
50,000,000 shares, change its name from "Howtek, Inc." to "iCAD, Inc." and
classified its Board of Directors into three classes.
Medical Business
Computer Assisted Detection is used to provide physicians with support in
detecting breast cancer at an early stage. There is a need for devices that
facilitate the early detection of breast cancer and other forms of cancer. For
most cancers, the earlier treatment is rendered, the greater the likelihood of
successfully managing the cancer. Some studies show that if breast cancer is
detected while still localized and before metastasis spread, the five-year
survival rate is 96.8% or better. If the cancer spreads regionally before
treatment, the survival rate drops to around 75.9%. If there is distant
metastasis, the survival rate drops to around 20.6%.
A primary method of detecting breast cancer is through mammography screening.
Mammography is a radiographic examination of a breast. The American Cancer
Society recommends that women undergo annual mammogram examinations beginning at
age 40. Approximately 5 million additional women in the United States will be
entering the mammography testing 40-and-over age 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 10% 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.
There are approximately 20,000 locations throughout the world offering
mammography. Approximately 9,500 of these centers are located in the United
States. The Company believes that economic, marketing and legal factors will
drive mammography centers to adopt CAD technology, including the Company's iCAD
computer aided detection of breast cancer products, and that newly implemented
reimbursement programs will help to support acquisitions of such systems.
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 grow as a percentage of installed 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.
6
The Company's Howtek medical digitizer products are used in the Company's CAD
systems, and marketed to third parties for use in the computer aided detection
market, in teleradiology and in medical image storage and management networks
known as Picture Archiving and Communications Systems, or "PACS".
Teleradiology is the practice of digitally transmitting medical x-ray images to
another location for analysis, consultation or diagnostic interpretation. The
Company's digitizers are used in this process to convert radiographic film to
digital form, for transmission, communication or storage. Use of teleradiology
is increasingly influenced by the economics of managed care, which mandates
ever-growing sensitivity to costs and has strongly encouraged the
decentralization of patient care, with specialized services available in fewer
locations, on a consultative, remote basis. PACS combine teleradiology, local
area networks (LAN) and medical information systems to facilitate management and
storage of medical images and integration of those images into patient
management and hospital information systems. These systems also enable virtually
instantaneous recall and viewing of medical images, and permit the viewing of
several images simultaneously. PACS can significantly reduce the cost of
providing efficient radiology services, in part by reducing the incidence of
lost and misplaced medical films.
iCAD Computer Aided Detection Technology and Products
The Company's CAD systems, approved by the FDA for sale in the United States in
January, 2002, include proprietary software technology and a radiographic film
digitizer manufactured by the Company, together with standard computer and
display equipment. iCAD offers the fastest CAD system available for multiple
case processing, the only system to look for asymmetries, and the most effective
system available to detect breast masses. Further, the Company believes that its
iCAD system is the only CAD system designed on a relational database platform,
which can improve productivity and reduce operating and capital costs at women's
health centers by offering computer-assisted detection as an integrated or
integration-ready part of current or anticipated informatics systems, digital
imaging resources, and workflows. The Company's CAD systems can detect 23% of
breast cancers, an average of 14 months earlier than screening mammography
alone.
iCAD offers its iCAD systems for computer aided detection of breast cancer, in
a variety of configurations. Products are upgradeable from entry-level systems
through more fully featured systems.
7
Products include:
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Brief Description Retail Price Detailed Description
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MammoReader II(TM) Dual $189,950.00 MammoReader II twin scanner input computer aided detection system for
Scanner Computer Aided highly accurate detection of breast cancer in high-speed, high volume
Detection System and reduced down-time applications. Includes application software, CAD
communcations module with patient information requester, client-server
support for remote radiologist review station, high resolution film
digitizer, dual processor server, 17" flat panel display, barcode
printer, barcode reader, high duty cycle laser printer, analyser
workstation with back-lit film review panel and radiologist review
station, including zero-footprint 15" high quality touch screen monitor
with integrated processor.
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MammoReader(TM) $149,950.00 MammoReader highly accurate computer aided detection system with
integrated SQL Server relational database for easy connectivity to
health center information, reporting and PACS systems. Includes
application software, CAD communcations module with patient
information requester, client-server support for remote radiologist
review station, high resolution film digitizer, dual processor server,
17" flat panel display, barcode printer, barcode reader, high duty
cycle laser printer, analyser workstation with back-lit film review
panel and radiologist review station, including zero-footprint 15"
high quality touch screen monitor with integrated processor.
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MammoWriter(TM) $ 99,950.00 MammoWriter stand-alone computer aided detection system for highly
accurate detection of breast cancer and production and distibution of
CAD results in printed form. Includes application software, high
resolution film digitizer, high speed server, 17" flat panel display,
barcode printer, barcode reader and laser printer.
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During the first quarter of 2003, and extending at least through June 2003, iCAD
initiated promotional pricing for group purchasers and existing customers of its
distributor, Instrumentarium Imaging, Inc., and for customers of PenRad, Inc., a
developer and vendor of mammography information systems. This pricing is
intended to help provide the Company with information on the price elasticity of
the CAD systems market, and to assist the Company in determining pricing for
future products, while promoting current sales. Under this promotional pricing,
the MammoWriter system is offered at $79,950, the MammoReader system is offered
at $89,000, and the MammoReader II system is offered at $129,000.
8
iCAD has entered into development and marketing agreements with Fischer Imaging
Corporation ("Fischer") and Instrumentarium Corporation, two of the
manufacturers of full field digital mammography systems, and is now testing a
digital source iCAD system with Fischer. The Company anticipates commercial
availability of this product in Europe by the third quarter of 2003, and
subsequent availability in the United States, subject to FDA approval. iCAD
licenses its software to FFDM manufacturers on an OEM basis, and user pricing is
set by the licensee.
Medical Film Digitizer Technology and Products
Historically, radiographic film digitizers have utilized a laser light source to
illuminate a film, and a photo multiplier tube to sense and measure the amount
of light penetrating different regions of the film in order to capture the
highest quality digital images. While these "first-generation" laser digitizers
offer excellent image quality, they are expensive to acquire, comparatively
delicate, and in many cases expensive to maintain. A "second-generation" of
digitizers, using a fluorescent light source for image illumination and a
charge-coupled device ("CCD") sensor for image capture, offers reduced cost at
the expense of reduced image quality.
iCAD believes that its competitive advantage in the medical digitizer market is
based on its introduction of a "third generation" film digitizer that utilizes
high energy, narrow-band red light, generated by an array of individually
controlled, solid state, light emitting diodes (LEDs), to improve illumination
of films and increase resulting image quality. This individually calibrated Red
LED illumination technology avoids problems and disadvantages associated with
use of common fluorescent light for film illumination, without the acquisition
and maintenance costs commonly associated with film digitizers using laser
illumination technology. As a result, the Company believes its MultiRAD(TM)
medical film digitizers are less expensive than existing competitive products
with comparable capabilities, and are superior in performance to scanners
previously available at comparable prices.
The MultiRAD product line, used to digitize radiographic film in telemedicine,
image archiving and CAD applications, among others, currently includes:
o The MultiRAD 860, a high-resolution film digitizer that the Company
believes is uniquely positioned to serve an increasing market for
computer-assisted mammography. The MultiRAD 860 list price is
$19,995.
o The MultiRAD 460, with a list price of $16,995, offers lower
resolution image capture applicable in teleradiology and archiving
applications.
9
iCAD has announced the development of the Fulcrum(TM) digitizer, a new,
specialty film digitizer designed for fast, very high-quality digitization of
mammography films. The Fulcrum digitizer utilizes a proprietary imaging and
electro-optical technology developed by iCAD. A new "Red HotTM" light source
that is specifically tuned to illuminate detail in mammograms and X-rays is
combined with a fast, maintenance-free, full-width image sensor to capture the
full fidelity of the breast image. Structural detail of up to 15 line pairs per
millimeter and up to 4.46 optical densities can be captured from ordinary
mammographic films. Fulcrum is designed to operate as a conventional digitizer,
or with a fully integrated computer, thus permitting stand-alone use as a
workstation or network-based scanner/server.
In addition to using the Fulcrum in iCAD's own future CAD products, the Company
believes that the speed, performance and compact size of the Fulcrum digitizer,
coupled with consistency from film to film, will also make the digitizer
attractive to other CAD vendors, creating an enhanced OEM sales opportunity for
the product. Versions of the Fulcrum for teleradiology and PACS markets are also
contemplated. Manufacturing test units of the Fulcrum digitizer have been
provided to potential customers. Pricing has not yet been finalized.
Sales & Marketing
The Company reaches the CAD market through Instrumentarium Imaging, Inc., its
exclusive distributor for MammoReader computer aided detection of breast cancer
products in the United States. Instrumentarium Imaging is part of
Instrumentarium Corporation, a leading international medical technology company,
operating in anesthesia and critical care (Datex-Ohmeda, Spacelabs Medical) and
medical equipment. In December 2002 Instrumentarium Corporation and General
Electric Company announced that they had entered into a definitive combination
agreement for General Electric to acquire Instrumentarium Corporation. Based on
preliminary and non-binding discussions with Instrumentarium Imaging, Inc., the
Company believes its distribution relationship with Instrumentarium Imaging can
continue subsequent to the acquisition of Instrumentarium by General Electric.
The Company markets its CAD software directly to manufacturers of FFDM systems
on an OEM basis. The Company has concluded development and marketing agreements
with two such manufacturers, under which the Company expects to license its CAD
software for promotion by the FFDM manufacturer, in conjunction with FFDM system
sales. Negotiations with additional such manufacturers are in progress, or
contemplated.
Through its Howtek Devices Corporation subsidiary, the Company markets its
medical film digitizer products to OEMs in the CAD market, including CADx
Medical Systems, Inc. and Scanis, Inc. In its other medical film digitizer
markets, Howtek is a recognized supplier of digitizers for medical film images
with an established distribution channel including OEM's, value added resellers
and distributors.
During the fourth quarter of 2002, the Company concluded the licensing and
divestiture of its graphic arts and prepress business line, and is no longer
active in this area. In accordance with the licensing agreement any sales of the
licensed products 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.
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. Because many of these companies have significantly
greater resources than the Company, 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 to 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 in order 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.
iCAD currently faces direct competition from R2 Technology, Inc. and CADx
Medical Systems. Each of those competitors has received FDA approval to market
their respective CAD systems for use in mammography screening and diagnostics.
The Company believes that additional vendors will receive FDA approval to market
CAD product within the next 12 months. In general, iCAD competes in this market
on the basis of its cancer detection effectiveness, the advantages created by
inclusion of a relational database in its CAD application, the reputation of
Instrumentarium Imaging, its US distributor, for quality service and customer
support, and price.
iCAD's competition for high quality medical digitizing market includes the
"first generation" LumiScan(TM) digitizer from Lumisys Corporation, now owned by
Kodak. Since 1990, Lumisys digitizers, using a monochromatic laser illumination
source, have been considered the quality standard in medical image digitizers.
In the computer-assisted detection and teleradiology/PACS markets, Lumisys
digitizers enjoyed an overwhelming market share. As described more fully below,
the Company believes that the technology employed by the Lumisys devices has
several inherent weaknesses. Because Lumisys' laser technology requires
manufacturing costs greater than those of iCAD's newer generation technology
products, Lumisys products are expensive to acquire compared to the iCAD's
digitizer. Lumisys' technology is also comparatively delicate, and expensive to
maintain. As a result, Lumisys is believed by the Company to have lost market
share to other competitors, including iCAD.
Vidar Corporation, a privately held company, has the greatest overall market
share in medical digitizers, as a result of Vidar's dominance in the lower
quality and most price sensitive segments of the market. Vidar digitizers might
be considered a second generation of medical film digitizers (with Lumisys laser
illuminated digitizers as the first generation). Vidar devices use a fluorescent
light source to illuminate an image, capturing image information with a
charge-coupled device (CCD). Offering a lower cost alternative to laser
illuminated digitizers, (comparable or lower in price than iCAD's products) the
Vidar products are believed to offer lower image quality than the Lumisys or the
iCAD products. Vidar's Sierra Film Digitizer, priced under $10,000 reinforces
Vidar's position in the low end market entry niche.
In general, the Company uses its proprietary solid state, red-light illumination
system and superior image quality to compete with Lumisys and Vidar. The Company
competes with Lumisys on the basis of comparable (or superior) image quality and
lower price. With Vidar, the Company competes on the basis of superior image
quality.
11
Risk Factors
The Company's business is subject to a number of risks including the risks set
forth below.
The migration of the Company's principal lines of business over the past three
years has resulted in declining sales and a dependence upon its medical imaging
products.
In 1999 the Company decided to shift its business focus from its prepress and
graphic arts products, which then accounted for a majority of its revenues, to
its products for use in the medical and photographic markets, which it believed
would provide it with higher margins. In 2002, the Company acquired a privately
held software development company with an FDA approved system for computer-aided
detection of breast cancer, and further narrowed its business focus to
concentrate primarily on its new CAD medical software and systems business, and
secondarily on its existing medical digitizer business. In the fourth quarter of
2002 the Company completed the licensing and divestiture of its graphic arts and
prepress business lines. As a result of this migration, the Company's revenues
declined from approximately $7.8 million in 2000 to approximately $5.0 million
in 2002 and the Company has become totally dependent upon sales of its CAD
medical imaging and digitizer products. There can be no assurance that these
actions will result in increased sales or that any such increase will offset the
reduction in sales as a result of the Company's divestiture of its prepress and
graphic arts and photographic products.
The Company has incurred significant annual losses and there can be no assurance
that the Company will be able to achieve and sustain continuing annual
profitability.
As of December 31, 2002, the Company has incurred losses in excess of $60
million in the aggregate since its inception, including a net loss of
approximately $9.4 million during the year ended December 31, 2002. Although the
Company reported net income of $103,007 in the fourth quarter of 2002 on sales
of $2,160,985, results for the fourth quarter 2002 may not be indicative of
future performance. There can be no assurance that the Company will be able to
achieve and sustain future profitability.
The Company's medical digitizer business has been adversely affected by the
Company's acquisition and commercialization of a CAD product line.
Prior to acquisition of a CAD product line, the Company promoted its medical
digitizer line to a variety of current and prospective customers offering or
seeking to offer their own CAD products. With the acquisition of a CAD product
line, the Company has entered into a competitive or potentially competitive
position with respect to such current and prospective customers, which has, in
some cases, led current and prospective customers to seek alternative suppliers
of medical digitizers. The Company's sales and marketing efforts, moreover, have
concentrated on CAD products during 2002, and the Company has limited
development and support of its medical digitizer product channels during this
time. There can be no assurance that these actions will result in increased
sales of CAD products or that sales of the Company's medical digitizer products
will not continue to decline.
12
The Company may need additional financing to implement its strategy and expand
its business.
The Company may need additional debt or equity financing to pursue its strategy
and increase sales in the medical markets. Any financing that the Company needs
may not be available at all and, if available, may not be available on terms
that are acceptable to the Company. The failure to obtain financing on a timely
basis, or on economically favorable terms, could prevent the Company from
continuing its strategy or from responding to changing business or economic
conditions, and could cause the Company to experience difficulty in withstanding
adverse operating results or competing effectively.
Because some of the Company's medical digitizers are incorporated into original
equipment manufacturers' products which are regulated by the Food and Drug
Administration, or FDA, the Company's sales of these products are in part
dependent upon these third parties obtaining FDA approval for their products.
The Company's medical digitizers are incorporated into products sold by
third-party original equipment manufactures, or OEMs. Some of these OEM products
are regulated by the FDA and require FDA approval, prior to marketing the
products in the United States. Obtaining FDA approval is a lengthy process and
is handled by the third-party OEM. Accordingly, the Company is not in control of
the process. In the event that the Company is unable to maintain its
relationship with the OEM's which incorporate its products or enter into
agreements with additional OEM's whose subsequently receive FDA approval, the
Company's business operating results and prospects will suffer.
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 effect the Company's gross margins and operating results. The Company
cannot give any assurance that it will be able to effectively compete in the
future or that it will not be required to discount its products to increase
sales.
13
The Company's products may become obsolete.
The Company's ability to compete effectively will depend, in large part, on its
ability to offer state of the art products. The Company's competitors might
develop and sell new products that are technically superior to the Company's
current product line that could result in the Company's inability to sell
existing products or its inability to sell its products without offering a
significant discount. The Company cannot give any assurance that its products
will not become obsolete in the future or that it will be able to upgrade its
product line or introduce new products if required.
The Company depends upon a limited number of suppliers and manufacturers for its
products, and certain components in its products may be available from a sole or
limited number of suppliers.
The Company's products are generally either manufactured and assembled for it by
a sole manufacturer, by a limited number of manufacturers or assembled by the
Company from supplies it obtains from a limited number of suppliers. Critical
components required to manufacture these products, whether by outside
manufacturers or directly, may be available from a sole or limited number of
component suppliers. The Company generally does not have long-term arrangements
with any of its manufacturers or suppliers. The loss of a sole or key
manufacturer or supplier would impair the Company's ability to deliver products
to customers in a timely manner and would adversely affect the Company's sales
and operating results. The Company's business would be harmed if any of its
manufacturers or suppliers could not meet the Company's quality and performance
specifications and quantity and timing requirements.
Provisions of the Company's corporate charter documents and Delaware law could
delay or prevent a change of control.
The Company's certificate of incorporation authorizes the board of directors to
issue up to 1,000,000 shares of preferred stock. The preferred stock may be
issued in one or more series, the terms of which may be determined at the time
of issuance by the Company's s board of directors, without further action by
stockholders, and may include, among other things, voting rights (including the
right to vote as a series on particular matters), preferences as to dividends
and liquidation, conversion and redemption rights, and sinking fund provisions.
There are two series of preferred stock currently outstanding which have
dividend and liquidation preferences over the Company's common stock. In
addition, specific rights granted to future holders of preferred stock could be
used to restrict the Company's ability to merge with, or sell its assets to a
third party. The ability of the Company's board of directors to issue preferred
stock could discourage, delay, or prevent a takeover of the Company thereby
preserving control by the current stockholders.
As a Delaware corporation, the Company is subject to the General Corporation Law
of the State of Delaware, including Section 203, an anti-takeover law enacted in
1988. In general, Section 203 restricts the ability of a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder. Subject to exceptions, an
interested stockholder is a person who, together with affiliates and associates,
owns, or within three years did own, 15% or more of a corporation's voting
stock. As a result of the application of Section 203, potential acquirers may be
discouraged from attempting to acquire the Company, thereby possibly depriving
its stockholders of acquisition opportunities to sell or otherwise dispose of
its stock at above-market prices typical of acquisitions.
14
The price of the Company's common stock could be volatile.
The Company's common stock is quoted on the Nasdaq SmallCap Market which has
experienced, and is likely to experience in the future, significant price and
volume fluctuations which could adversely affect the market price of the
Company's common stock without regard to the operating performance. In addition,
the trading price of the Company's common stock could be subject to significant
fluctuations in response to actual or anticipated variations in the Company's
quarterly operating results announcements by the Company or its competitors,
factors affecting the medical imaging industry generally, changes in national or
regional economic conditions, changes in securities analysts' estimates for the
Company's competitors' or industry's future performance or general market
conditions. The market price of the Company's common stock could also be
affected by general market price declines or market volatility in the future or
future declines or volatility in the prices of stocks for companies in the
Company's industry.
Risks relating to the Medical Device 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.
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.
15
In order to market and sell its CAD products in certain countries outside of the
United States the Company must obtain and maintain regulatory approvals and
comply with the regulations of those countries. These regulations, including the
requirements for approvals, and the time required for regulatory review, vary
from country to country. Obtaining and maintaining foreign regulatory approvals
is an expensive and time consuming process. The Company cannot be certain that
it will be able to obtain the necessary regulatory approvals timely or at all in
any foreign country in which it plans to market its CAD products, and if the
Company fails to receive such approvals, its ability to generate revenue may be
significantly diminished.
The Company may not be able to obtain regulatory approval for any of the other
products that it may consider developing.
The Company has received FDA approvals only for its currently offered iCAD
products. Before the Company is able to commercialize any other product, the
Company must obtain regulatory approvals for each indicated use for that
product. The process for satisfying these regulatory requirements is lengthy and
will require the Company to comply with complex standards for research and
development, testing, manufacturing, quality control, labeling, and promotion of
products.
The Company's products may be recalled even after 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 a Company product 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.
Reforms in reimbursement procedures by Medicare or other third-parties may
adversely affect the Company's business.
In the United States, Medicare and a number of commercial third-party payers
provide reimbursements for the use of CAD in connection with mammography
screening and diagnostics. In the future, however, these reimbursements may be
unavailable or inadequate due to changes in applicable legislation or
regulations, changes in attitudes toward the use of mammograms for broad
screening to detect breast cancer or due to changes in the reimbursement
policies of third-party payers. As a result, healthcare providers may be
unwilling to purchase the Company's CAD products or any of the Company's future
products, which could significantly harm the Company's business, financial
condition and operating results.
Acceptance of the Company's products outside of the United States depends, in
part, upon the availability of similar reimbursements in the markets in which
the Company intends to focus its international marketing activities.
Reimbursements and health insurance systems in markets outside of the United
States vary from country to country. If the Company is unable to qualify its
products for reimbursement outside of the United States, the Company may not be
able to gain international market acceptance for its products.
There is no guaranty that any of the products which the Company contemplates
developing will become eligible for reimbursements or health insurance coverage
in the United States or abroad at favorable rates or even at all or maintain
eligibility.
16
The sales cycle for the Company's products is lengthy and unpredictable and its
quarterly results will be unpredictable.
Many of the customers of the Company's medical imaging products are
institutional organizations, such as hospitals, with significant purchasing
power and cyclical ordering practices. Although the Company's CAD system is
currently less expensive than the devices of its competitors, the purchase of
the iCAD CAD system requires a material capital expenditure that will likely
require approval of the Company's customers' senior management and result in a
lengthy sales and purchase order cycle. Consequently, the Company may be unable
to accurately estimate its manufacturing and support requirements. The Company's
larger institutional customers may also demand discounted prices on the
Company's products. As a result, the Company's actual sales may differ
significantly from its estimated sales and the Company may incorrectly allocate
its resources. If the Company is unable to accurately project sales and allocate
corresponding resources, it may incur substantial fluctuations in its operating
results for any given quarter.
Even if the Company is able to achieve profitability in future fiscal periods,
it may occur in a quarter with concentrated revenue. In that case, the Company
would expect reduced revenue in the following quarter or quarters, and possibly
a quarterly loss or quarterly losses. As a result, stockholders may not be able
to rely upon the Company's operating results in any particular period as an
indication of future performance.
The medical equipment industry is litigious, and the Company has been and may be
sued again for allegedly violating the intellectual property rights of others.
The medical technology industry is characterized by a substantial amount of
litigation and related administrative proceedings regarding patents and
intellectual property rights. In addition, major medical device companies have
used litigation against emerging growth companies as a means of gaining a
competitive advantage.
From time to time, the Company may learn of allegations or threats from third
parties drawing its attention to their patent rights. The Company is currently a
defendant in two actions where the plaintiff's allege that the Company has
infringed upon certain of the third party's patents. There may be other patent
rights of which the Company is presently unaware. The Company anticipates that
the costs associated with its legal defense against claims of patent
infringement by a competitor in the CAD industry will have a material and
adverse effect on its financial condition during the period of the litigation.
Should third parties file patent applications or be issued patents claiming
technology also claimed by the Company in pending applications, the Company may
be required to participate in interference proceedings in the U.S. Patent and
Trademark Office to determine the relative priorities of its inventions and the
third parties' inventions. The Company could also be required to participate in
interference proceedings involving any patents which may be issued to the
Company and pending applications of another entity. An adverse outcome in an
interference proceeding could require the Company to cease using the technology
or to license rights from prevailing third parties.
17
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.
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.
18
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.
The Company may be exposed to significant product liability for which the
Company may not be able to procure sufficient insurance coverage.
The Company's business exposes it to potential product liability risks which are
inherent in the testing, manufacturing, marketing and sale of medical imaging
devices. If available at all, product liability insurance for the medical device
industry generally is expensive. Currently, the Company has liability insurance
coverage which it deems appropriate for its current stage of development. No
assurance can be given that this level of coverage will be adequate or that
adequate insurance coverage will be available in sufficient amounts or at a
reasonable cost in the future, or that a product liability claim would not have
a material adverse effect on the Company.
19
Other Risks Related to the Company
The Company may not be able to successfully implement its current business model
or effectively manage its growth.
The Company only commenced generating revenue from the sale of MammoReader, its
first CAD product, in 2002. Sales of the Company's products may not generate
sufficient cash to support the Company's future operations. There can be no
assurance that adequate funds for the Company's operations, whether from the
Company's revenues, financial markets, collaborative or other arrangements with
corporate partners, if any, or from other sources, will be available when needed
or on terms attractive to the Company. The inability to obtain sufficient funds
may require the Company to delay, scale back or eliminate some or all of its
development activities, clinical studies and/or regulatory activities or to
license third parties to commercialize products or technologies that the Company
would otherwise seek to develop itself. No assurance can be given that any
future technologies or products that may be developed by the Company will be
successfully developed, commercialized or accepted by the marketplace or that
sufficient revenues will be realized to support operations or future research
and development programs.
To address these risks, the Company must, among other things, establish,
maintain and increase its relationships with radiologists and other members of
the health care industry, implement and successfully execute the Company's
business and marketing strategies, respond to competitive developments, and
attract, retain and motivate qualified personnel. There can be no assurance that
the Company will be successful in addressing such risks, and the failure to do
so could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's future prospects depend on its ability to retain current key
employees and attract additional qualified personnel.
The Company's success depends in large part on the abilities and continued
service of the Company's executive officers and other key employees. The Company
may not be able to retain the services of its executive officers and other key
employees. The loss of executive officers or other key personnel could have a
material adverse effect on the Company.
In addition, in order to support the Company's continued growth, the Company
will be required to effectively recruit, develop and retain additional qualified
personnel. If the Company is unable to attract and retain additional necessary
personnel, it could delay or hinder the Company's plans for growth. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to successfully attract, assimilate or retain sufficiently
qualified personnel. The failure to retain and attract necessary personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations.
20
Some of the Company's competitors have significantly greater resources and may
prevent the Company from achieving or maintaining significant market share. As
the market for CAD grows, competition for mammography products will likely
increase.
The medical equipment market is highly competitive and changes rapidly.
Competitors in this market are highly sensitive to the introduction of new
products and competitors. Other well known medical imaging equipment
manufacturers have explored the possibility of introducing their own versions of
CAD products into the market. Because many of these companies have significantly
greater resources than the Company has, they may be able to respond more quickly
to the evolving and emerging technologies in the market and they may be better
suited to respond the changing needs of their customers. The financial strength
of many of these companies may enable them to develop their own proprietary CAD
products or acquire the Company's competitors to bring competing products to
market more quickly. Additionally, some of these companies benefit from name
recognition, established relationships with healthcare professionals,
diversified product lines, established distribution channels, and greater
product development, manufacturing, and sales and marketing resources.
The Company currently faces direct competition from R2 Technology, Inc. and CADx
Medical Systems. Each of those competitors has received FDA approval to market
their respective CAD systems for use in mammography screening and diagnostics.
The Company also expects that Scanis, Inc. will receive FDA approval to market
its CAD product within the next 12 months. The Company expects that as the
market for CAD grows, other competitors may seek to introduce CAD products
priced even lower than the Company. Customers seeking a low-cost CAD solution
may prefer a competitor's lower-priced product to the Company's and may result
in pricing cutting by the Company which will reduce its profit margin.
The Company relies exclusively on one distributor in the United States for the
sale, service, installation and distribution of its CAD products, and that
distributor has entered into an agreement to be acquired by General Electric
Corporation. If that distributor fails, or is unable, to allocate sufficient
resources to sell, service, install and distribute the Company's products, or
otherwise alters its commitment and efforts to sell, service, install and
distribute the Company's products as a result of the acquisition of the
distributor by General Electric or any other party or otherwise, the Company's
financial condition will suffer.
The Company has appointed Instrumentarium Imaging, Inc. as its exclusive
distributor in the United States for the sale, service, installation and
distribution of its MammoReader products. If Instrumentarium Imaging. becomes
subject to financial difficulty or otherwise does not commit the resources
necessary to execute the Company's sales, service, installation and marketing
strategy, the Company will be required to establish alternative sales channels
and mechanisms for installation, service and support of its products. Such a
process could result in increased costs and reduced sales, and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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, following the merger, adversely affect the
Company's business, financial condition and results of operations.
21
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.
22
Sources and Availability of Materials
The Company depends upon a limited number of suppliers and manufacturers for its
products, and certain components in its products may be available from a sole or
limited number of suppliers. The Company's products are generally either
manufactured and assembled for it by a sole manufacturer, by a limited number of
manufacturers or assembled by the Company from supplies it obtains from a
limited number of suppliers. Critical components required to manufacture these
products, whether by outside manufacturers or directly, may be available from a
sole or limited number of component suppliers. The Company generally does not
have long-term arrangements with any of its manufacturers or suppliers. The loss
of a sole or key manufacturer or supplier would impair the Company's ability to
deliver products to customers in a timely manner and would adversely affect the
Company's sales and operating results. The Company's business would be harmed if
any of its manufacturers or suppliers could not meet the Company's quality and
performance specifications and quantity and timing requirements.
Patents and Licenses
The Company has several patents covering its scanner technology in the United
States and certain foreign countries. These patents help the Company maintain a
proprietary position in the scanner market, but because of the pace of
innovation in that market it is difficult to determine the overall importance of
these patents to the Company.
The Company has current patent applications pending domestically and
internationally, and plans to file additional domestic and foreign applications
when it believes such protection will benefit the Company. These patent
applications relate to computer aided detection technology and to digitizer
technology. There is no assurance that additional patents will be obtained
either in the United States or in foreign countries or that existing or future
patents or copyrights will provide substantial protection or commercial benefit
to the Company.
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. See Item 3 - Legal
Proceedings for a description of certain patent actions in which the Company is
a defendant. No assurance can be given that the Company will be able to do so in
a timely manner or upon acceptable terms and conditions; and the failure to do
either of the foregoing could have a material adverse effect upon the Company's
business.
In February 2003 iCAD secured a Patent License to United States, Canadian, and
Japanese patents owned by Scanis, Inc., which relate broadly to computer aided
detection of breast cancer. Rights to a European patent application covering
similar inventions are also included. In conjunction with the Patent License to
iCAD, Scanis entered into a multi-year, exclusive digitizer supply agreement
with iCAD's wholly owned subsidiary, Howtek Devices Corporation. In
consideration for the Patent License from Scanis, Inc. the Company granted
discounts to Scanis with respect to future purchases of the Company's digitizer
products.
23
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, 2002 the Company had sales of $2,631,709 (or
53% of sales) to Instrumentarium Imaging, Inc. and an accounts receivable
balance of $1,190,990 due from this customer at December 31, 2002. The Company
did not have any major customers in 2001. In 2000 the Company had sales of
$2,062,955 (or 26% of sales) to Techexport, Inc. and an accounts receivable
balance of $428,994 at December 31, 2000 due from this customer.
Manufacturing
The Company operates an FDA certified manufacturing facility in Boca Raton,
Florida at which the Company's CAD systems are assembled, integrated and tested.
The Company has received FDA approval to transfer the manufacturing to its
Nashua, NH facility, which is ISO 9001 certified. This transfer is expected to
take place during the second quarter of 2003, after which the Boca Raton
facility will be closed. The Company's digitizer products are manufactured by
third party contract manufacturing organizations. The software applications that
are sold with the Company's products are either developed in-house or licensed
from third parties.
Engineering and Product Development
The Company spent $1,626,001, $751,467 and $709,595 on research and development
activities during the years ended December, 2002, 2001 and 2000, respectively.
The research and development expenses for 2002 are primarily attributed to the
development of the Company's new Fulcrum medical film digitizer product and the
addition, as a result of its acquisition of ISSI, of a software technology
development group to support its CAD products.
24
Employees
On March 1, 2003 the Company had 28 full time employees and 1 part time
employee. 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, 2002 was approximately $338,000 as compared to approximately
$157,000 on the corresponding date in 2001.
Environmental Protection
Compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had a material effect
upon the capital expenditures, earnings (losses) and competitive position of the
Company.
Financial Geographic Information
The Company's sales are made to U.S. distributors, dealers and to foreign
distributors of computer and related products. Total export sales, which
includes sales made to a U.S. based international distributor of computer and
related products, were $301,000 or 6% of total sales in 2002, $944,000 or 20% of
total sales in 2001 and $3,243,000 or 42% of total sales in 2000.
The Company's principal concentration of export sales was in Europe, which
accounted for 26% of 2002 export sales. In 2001, Australia accounted for 35% of
the Company's export sales and in 2000, with the addition of a large OEM
customer, the Company's principal concentration of export sales was in Canada,
which accounted for 71% of export sales. The balance of the export sales was
into the Far East, Mexico and Central America.
Item 2. Properties
The Company recently relocated its principal executive offices and research and
development laboratory to 4 Townsend West, Suite 17, Nashua, New Hampshire, from
its previous location in Hudson, New Hampshire. The facility consists of
approximately 6,000 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 $40,200.
25
In addition, as a result of its acquisition of ISSI, the Company leases a
facility for its software research and development group located at 4902
Eisenhower Blvd, Suite 185, Tampa, Florida. The facility consists of
approximately 2,670 square feet of research and development and office space and
is leased by the Company pursuant to a lease, which expires July 31, 2007 at an
annual rent of approximately $53,000. Additionally, the Company is required to
pay real estate taxes and provide insurance. If the Company is required to seek
additional or replacement facilities, it believes there are adequate facilities
available at commercially reasonable rates.
During the third quarter of 2002, the Company took action to close the Company's
Boca Raton, Florida office. The cost of closing the facility totaled
approximately $94,000 which represented the remaining amount due under the
non-cancelable operating lease for the facility.
Item 3. Legal Proceedings.
A complaint was filed against the Company and 213 other defendants in the United
States District Court for the Eastern District of Texas, entitled The
Massachusetts Institute of Technology and Electronics for Imaging, Inc. v.
Abacus Software Inc. et al., Case No. 501CV344. The plaintiff claims the Company
and other defendants have infringed a United States patent alleged to cover
color reproduction system technology. With respect to the Company, the alleged
infringement involves certain of the Company scanners and other products sold to
customers in the graphic arts/prepress and photographic markets. The plaintiff
seeks unspecified damages together with interest, injunctive relief and recovery
of reasonable attorney's fees.
Based upon management's review of the claim, it is estimated that the Company's
probable and estimable infringement liability for this claim will range between
$383,000 and $639,000. As of December 31, 2002, the Company has recorded an
accrual of $383,000 related to this claim.
While it is not possible to predict the ultimate outcome of the infringement
claim, the Company believes that resolution of this matter is not expected to
have a material adverse effect on the Company's financial position. The Company
cautions, however, that these estimates for infringement claims are difficult to
predict and may be influenced by many factors. Accordingly, this matter, if
resolved in a manner different from the estimate, could have a material effect
on the Company's financial position.
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 alleges that
ISSI's MammoReader device infringes certain patents owned by R2 Technology, Inc.
The complaint requests treble damages, but does not specify the amount of
damages sought. The complaint also seeks to enjoin ISSI from further
infringement. On July 11, 2002, subsequent to the acquisition of ISSI by Howtek,
the plaintiffs amended their complaint to add iCAD, Inc. (formerly, Howtek Inc.)
and its subsidiary ISSI Acquisition Corp. as additional parties. The Company
believes the lawsuit is without merit and intends to vigorously defend itself.
On November 8, 2002, the Company filed an answer to the lawsuit, denying all
claims and asserting counterclaims challenging the validity of the R2 patents in
question.
26
Item 4. Submission of Matters to a Vote of Security-Holders
Not applicable
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 2002 and 2001.
Fiscal year ended High Low
---- ---
December 31, 2002
- -----------------
First Quarter $3.500 $1.420
Second Quarter 3.250 2.010
Third Quarter 3.170 .950
Fourth Quarter 2.800 1.030
Fiscal year ended
December 31, 2001
First Quarter $3.375 $2.500
Second Quarter 3.000 1.860
Third Quarter 2.150 .700
Fourth Quarter 1.900 .930
As of March 11, 2003 there were 304 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, 2002.
27
Item 6. Selected Financial Data
Selected Statement of Operations Data
Year Ended December 31,
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----- ----- ----- ----- -----
Sales $5,000,184 $4,835,297 $7,793,517 $6,663,230 $5,323,601
Gross margin (161,459) 898,891 1,900,027 1,594,124 1,223,135
Total operating expenses (9,208,664) (3,439,557) (3,595,661) (3,789,306) (4,096,944)
Loss from operations (9,370,123) (2,540,666) (1,695,634) (2,195,182) (2,873,809)
Interest expense - net (48,167) (80,105) (132,014) (1,801,646) (498,514)
Net loss (9,418,290) (2,620,771) (1,827,648) (3,996,828) (3,372,323)
Net loss available to common stockholders (9,566,338) (2,775,821) (2,896,520) (3,996,828) (3,372,323)
Net loss per share (0.46) (0.20) (0.22) (0.32) (0.33)
Weighted average shares outstanding
basic and diluted 20,928,397 13,950,119 13,373,086 12,660,613 10,142,672
Selected Balance Sheet Data
As of December 31,
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----- ----- ----- ----- -----
Total current assets $3,116,665 $3,586,602 $5,082,016 $4,457,910 $4,798,576
Total assets 26,077,356 4,161,125 5,945,928 5,696,609 6,351,421
Total current liabilities 4,313,690 2,003,807 2,143,873 2,019,340 2,198,995
Loans payable to related parties, including
current portion 200,000 500,000 1,400,000 1,140,000 765,000
Note payable, including current portion 173,916 178,870 - - -
Convertible Subordinated Debentures,
including current portion 10,000 10,000 117,000 117,000 1,881,000
Stockholders' equity 21,455,276 2,039,557 2,902,055 2,920,269 2,271,426
28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Critical Accounting Policies and Estimates
In May 2002, the SEC proposed disclosure rules that would require registrants to
include in Management's Discussion and Analysis a separate section regarding the
application of critical accounting policies that discloses the critical
accounting estimates that are made by a registrant in applying its accounting
policies and information concerning the initial adoption of certain accounting
policies that have a material impact on a registrant's financial presentation.
Note 1 of the Notes to the Consolidated Financial Statements includes a summary
of the significant accounting policies and methods used in the preparation of
our Consolidated Financial Statements. The following is a brief discussion of
the more significant accounting policies and methods used by the Company.
The financial statements are prepared in accordance with accounting principles
generally accepted in the U.S., which require the Company to make estimates and
assumptions. On an on-going basis, the Company evaluates its estimates related
to the Allowance for Doubtful Accounts and the estimated useful lives of its
fixed and identifiable intangible assets. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
Revenue is recognized when products are shipped to customers, provided that
there are no uncertainties regarding customer acceptance, there is persuasive
evidence of an arrangement, the sales price is fixed or determinable and
collection of the related receivable is probable.
Long-lived assets, such as intangible assets, other than goodwill, and property
and equipment, are evaluated for impairment when events or changes is
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets are written
down to fair value. Goodwill is not amortized and is evaluated for impairment at
least annually.
Results of Operations
Overview
The Company was incorporated in 1984 in the State of Delaware, as Howtek, Inc.,
and 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 achieved in June 2002 with the acquisition of Intelligent Systems
Software, Inc. ("ISSI"), a software company offering computer aided detection
("CAD") systems for breast cancer.
29
Early detection of breast cancer can save lives and often permits less costly,
less invasive and less disfiguring cancer treatment options than when the cancel
is detected at a later stage. Computer-aided detection from products sold by
iCAD, Inc. can detect 23% of breast cancers, an average of 14 months earlier
than screening mammography alone. iCAD believes that it offers the fastest CAD
system available for multiple case processing, the only system to look for
asymmetries in the appearance between the left and right breast, which may be
indicative on cancer ("asymmetries"), and the most effective system available to
detect breast masses. Further, the iCAD system is the only CAD system designed
on a relational database platform, which can improve productivity and reduce
operating and capital costs at women's health centers by offering
computer-assisted detection as an integrated or integration-ready part of
current or anticipated informatics systems, digital imaging resources, and
workflows.
The Company's CAD systems include proprietary software technology and a
radiographic film digitizer manufactured by the Company, together with standard
computer and display equipment. iCAD also manufactures medical film digitizers
for a variety of medical imaging and other applications. The Company has
established a wholly owned subsidiary, Howtek Devices Corporation, to
manufacture and promote the Company's film digitizer products to third party
customers. The Company believes that iCAD's experience in providing film
digitizers and software for medical picture archiving and communications (PACS)
and telemedicine applications contributes to the successful integration of the
Company's CAD products into networked and digital mammography environments. The
Company's headquarters and its production and assembly facilities are located in
southern New Hampshire, with software research and development facilities in
Tampa, Florida.
At the end of the second quarter of 2002, consistent with the Company's
intention to concentrate its efforts in the medical imaging and scanning
business on higher margin medical and computer assisted detection applications
and to seek licensees for its graphic arts and photographic product lines, the
Company established non-cash reserves and took inventory adjustments associated
with its graphic arts and photographic products, which totaled approximately
$3.0 million as of September 30, 2002.
During the third quarter of 2002, the Company's first quarter of combined
operations with ISSI, 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, Inc. and ISSI. As a result,
the Company eliminated three senior management positions and is closing the
Company's office in Boca Raton, Florida in 2003. These actions are intended to
permit improved operating efficiencies while substantially reducing headcount
and overhead. The Company recorded a one time charge of $884,000 during the
third quarter of 2002 in connection with separation agreements negotiated with
its former Chief Executive Officer and Vice President of Finance and costs of
closing the Boca Raton office. The charge is included in general and
administrative expenses in the consolidated statement of operations filed with
this report on Form 10-K.
30
During the fourth quarter of 2002, the Company concluded the licensing and
divestiture of its graphic arts and prepress business line, and is no longer
active in this area. In conjunction with the divestiture, all inventories, fixed
assets and intangible assets related to the graphic arts and prepress business
lines were written down to their estimated salvage values of $0 during the
second quarter. The license agreement related to the discontinued product lines
provided for the sales of all tangible and intangible assets related to the
graphic arts and prepress business lines. Total consideration received by the
Company for the sale of the assets amounted to $188,117 and was paid through the
assumption of certain liabilities of the Company. 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.
During 2002, iCAD was the recipient of a national Tibbets Award for unique
technological innovations of particular significance and value to the community.
ISSI and iCAD have been responsible for a range of innovations in CAD products,
including the first and only CAD system to search for and mark clinical
asymmetries; the first free-standing, eye-level radiologist review station; the
ability to choose between soft copy and printed CAD results; the first system to
offer multiple radiologist viewing stations; and 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 CAD system supporting open architecture, standardized protocols and
accessible data interfaces; the ability to share digitizers between CAD and
medical picture archiving and communications ("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 $100,000.
While iCAD believes it is poised to exploit application of CAD technology to
additional practice areas, iCAD's research and development emphasizes the
development or enhancement of products relating to the Women's health care
practice, working to make CAD more affordable and more effective and accessible
through enhanced integration with existing imaging and information sharing
systems in the mammography clinic and hospital environment.
Unlike many other companies in its industry, iCAD's commitment to women's health
is reinforced by the fact that key management roles at iCAD are held by women,
including the Company's Executive Vice President, Chief Financial Officer, Vice
President of Product Marketing and Director of Customer Services, as well as
representation on the Board of Directors. The Company's Medical and Technical
Advisory Board consists primarily of women, half of iCAD's field sales
representatives are professional women, and iCAD's principal contract
manufacturer, is woman owned and managed.
31
iCAD is the only integrated digitizer hardware and CAD software company offering
computer aided detection solutions. As such, iCAD is able to reduce costs at
each step in the CAD product design, production and assembly process. The
Company believes that its acquisition of ISSI and resulting vertical integration
of CAD and hardware development have resulted in better integration of software
and film digitizer components, lower production costs and reduced administrative
overhead. These achievements have allowed iCAD to progressively enhance its CAD
product line, while reducing the costs of CAD to many customers and allowing
more women to realize the benefits inherent in the early detection of breast
cancer.
The Company reported profitable operations in the fourth quarter of 2002, an
increase of 222% in medical sales from the fourth quarter of 2001, and excluding
sales totaling $188,117 of previously written off inventory gross profit margins
amounted to 65% in the fourth quarter of 2002.
Merger with ISSI
On June 28, 2002, the Company completed the acquisition of Intelligent Systems
Software, Inc. pursuant to a previously reported plan and agreement of merger.
The Company acquired all of the issued and outstanding capital stock of ISSI, a
privately held company based in Boca Raton, Florida. 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 that
corporation immediately prior to the merger, as approved by the Company's
shareholders and in accordance with the provisions of the merger agreement.
Subsequent to completion of the merger the Company amended its certificate of
incorporation to increase its authorized common stock to 50,000,000 shares,
change its name from "Howtek, Inc." to "iCAD, Inc." and classify its Board of
Directors into three classes.
Year Ended December 31, 2002 compared to Year Ended December 31, 2001
Sales. Sales for the year ended December 31, 2002 were $5,000,184, compared with
sales of $4,835,297 for the year ended December 31, 2001. Sales increased during
the third and fourth quarter of 2002 as a result of the addition of the CAD
product line through acquisition of ISSI on June 28, 2002. CAD sales, which
began upon the acquisition of ISSI, were $2,628,135 (53% of sales) for the year
ended December 31, 2002. The shift in the Company's business focus, from graphic
arts and photographic product lines to CAD imaging and medical digitizer
products, was largely responsible for the reduced overall sales during the first
and second quarters of 2002. Sales related to discontinued products totaled
$711,556 for the year ended December 31, 2002. Sales are expected to increase in
future periods as a result of increased sales of CAD products.
Gross Margin. Gross margin for the year ended December 31, 2002 decreased as a
result of the write-offs of inventory relating to graphic arts and photographic
products in the amount of $2,369,539. Before the write-offs, gross margin for
the year ended December 31, 2002 increased to 49% from 19% in 2001, as a result
of reduced production overhead and indirect production expenses and sales of its
CAD and medical imaging products which have higher margins than the Company's
graphic arts products.
32
During the first quarter of 2003, iCAD initiated reduced, promotional pricing
for group purchasers and existing customers of its distributor, Instrumentarium
Imaging, Inc. and for customers of PenRad, Inc., a developer and vendor of
mammography information systems. This pricing is intended to help provide the
Company with information on the price elasticity of the CAD systems market, and
to assist the Company in determining pricing for future products while promoting
current sales. These factors are significant in determining how the Company can
best exploit its comparative advantage in manufacturing costs. Products sold
under this promotional and market analysis program, which is currently planned
to extend through June 30, 2003, will reflect reduced transfer prices and
reduced gross margins.
Engineering and Product Development. Engineering and product development costs
for the year ended December 31, 2002 increased from $751,467 in 2001 to
$1,626,001 in 2002. The increase in engineering and product development costs
resulted primarily from the Company's addition, as a result of its acquisition
of ISSI, of a software technology development group to support its CAD products.
Additionally, the Company continues its development of its new Fulcrum medical
film digitizer product and utilization of outside and contract engineering
resources. The Company anticipates that engineering and product development
costs will increase in 2003.
General and Administrative. General and administrative expenses increased from
$1,124,710 in 2001 to $6,595,076 in 2002. The increase in general and
administrative expenses resulted primarily from a one-time, $2,800,000 non-cash
accounting charge associated with the placement of $2,000,000 in restricted
common stock by ISSI immediately prior to the successful acquisition of ISSI by
the Company. Pursuant to the acquisition agreement between the two companies,
which was approved by the Company's stockholders, this sale of securities
increased working capital and funded the promotion of the MammoReader product.
Additional increases in general and administrative expenses in 2002 reflected
non-recurring severance benefits and other expenses associated with reductions
of staff resulting from the combination of ISSI and Howtek in the amount of
$884,000, a write-off of fixed assets, including test equipment and software
development costs, relating to the Company's graphic arts and photographic
product lines totaling $417,004 and an accrued litigation cost of $383,000 in
connection with the complaint filed against the Company by The Massachusetts
Institute of Technology and Electronics for Imaging, INC. See Part I, Item 3 -
Legal Proceedings.
Marketing and Sales. Marketing and sales expenses for the year ended
December 31, 2002 decreased 37% from $1,563,380 in 2001 to $987,587 in 2002.
This decrease was due primarily to the reduction of personnel, promotional and
trade show expenses related to the Company's traditional graphic arts and
FotoFunnel lines. With the release of its MammoReader product and the
introduction of its new medical film digitizer product, however, the Company
expects marketing and sales expenses to increase in future periods.
Interest Expense. Net interest for the year ended December 31, 2002 decreased
40%, from $80,105 in 2001 to $48,167 in 2002. This decrease was due primarily to
a decrease in loan balances and interest rates.
33
As a result of the foregoing, the Company recorded a net loss of $9,418,290 or
$0.46 per share for the year ended December 31, 2002 on sales of $5,000,184
compared to a net loss of $2,620,771 or $0.20 per share in 2001 on sales of
$4,835,297.
Year Ended December 31, 2001 compared to Year Ended December 31, 2000
Sales. Sales for the year ended December 31, 2001 were $4,835,297, compared with
sales of $7,793,517 for the year ended December 31, 2000. As expected, as a
result of the Company's shift in the focus of its business, sales of the
Company's prepress and graphic arts products, including related maintenance and
repair services, decreased by $1,788,047, from $3,319,407 in 2000 to $1,531,360
in 2001.
The Company continued to emphasize its medical and photographic business
opportunities, while managing the decline in its traditional graphic arts
business. Sales of the Company's medical imaging products increased from
$2,256,312 (29% of sales) for the year ended December 31, 2000 to $2,315,738
(48% of sales) for the year ended December 31, 2001. Howtek's medical product
sales were made primarily to the Company's respective "integration partners" or
resellers, which added software and other components to Howtek's products to
provide full medical imaging solutions to their customers. The Company believed
that there was a softening in the telemedicine and Picture Archiving and
Communications Systems (PACS) segments of the medical market place, as customer
purchases were being deferred or reconsidered as a result of what was perceived
to be an overall softness in the economy. To address this softening the Company
had increased the number of resellers offering the Howtek digitizers into the
telemedicine and large-scale PACS markets. The increases in resellers were
expected to contribute to increased sales of medical products in future periods.
The Company had made a significant investment in time and resources in
developing and supporting OEM customers using its digitizers in computer
assisted diagnosis of breast cancer systems and applications. In January 2001,
the FDA approved for sales in the United States, CAD systems incorporating
Howtek digitizers offered by two of the Company's OEM customers.
In 2001 the Company introduced its FilmFunnel(TM) and ImageFunnel(TM) systems
for commercial sale. These systems coupled Howtek digitizers with image view and
media-burning capabilities and included Howtek's portable MyLivingRecord(TM)
image viewing solutions. The Company expected that these systems would offer
film libraries, radiology departments and individuals, a cost-effective approach
to the duplication, distribution and personal retention of medical images.
FilmFunnel and ImageFunnel systems were expected to contribute higher per sales
revenues and margins than current digitizer sales, while the MyLivingRecord
media component created the potential for recurring, consumables revenues. These
markets, which were new to the Company, were expected by the Company to be
comparatively resistant to an increasingly adverse economic environment.
34
Sales of the Company's FotoFunnel photo print scanning system decreased from
$2,217,798 (28% of sales) for the year ended December 31, 2000 to $988,199 (20%
of sales) for the year ended December 31, 2001. Almost all FotoFunnel sales in
2000 were made to one reseller, which purchased the scanners in connection with
an Internet-driven business model that proved unsuccessful. The Company had
established alternative positioning and distribution channels for the FotoFunnel
product line, including Noritsu America Corporation, which offered and promoted
the FotoFunnel scanner as an accessory with certain of its minilab and
photo-finishing products.
Gross Margin. Gross margin for the year ended December 31, 2001 decreased to 19%
from 24% in 2000. This decrease was due to the Company's decision to increase
its inventory reserve by $300,000 associated with its prepress and graphic arts
product lines. Before the increase in reserve gross margins improved to 25% in
2001 from 24% in 2000, as a result of reduced production overhead and indirect
production expenses, associated with the Company's continued overhead and
expense control measures, increased sales of higher margin medical digitizers
into the market for computer assisted diagnosis of breast cancer, and increased
sales of FotoFunnel products through channels that had higher margins than the
Company's original OEM channel.
Engineering and Product Development. Engineering and product development costs
for the year ended December 31, 2001 increased slightly from $709,595 in 2000 to
$751,467 in 2001. The Company expected to continue its utilization of outside
and contract engineering resources.
General and Administrative. General and administrative expenses had decreased 4%
from $1,165,392 in 2000 to $1,124,710 in 2001. This change resulted primarily
from a decrease in expense associated with the redesign of the Company's Web
site incurred in 2000.
Marketing and Sales. Marketing and sales expenses for the year ended December
31, 2001 decreased 9% from $1,720,674 in 2000 to $1,563,380 in 2001. During the
second and third quarter of 2001, the Company had significantly reduced expenses
related to its traditional graphic art business, while increasing medical and
FotoFunnel sales expenses.
Interest Expense. Net interest for the year ended December 31, 2001 decreased
39%, from $132,014 in 2000 to $80,105 in 2001. The decrease was due primarily to
a decrease in loan balances and interest rates.
As a result of the foregoing, the Company recorded a net loss of $2,620,771 or
$0.20 per share for the year ended December 31, 2001 on sales of $4,835,297
compared to a net loss of $1,827,648 or $0.22 per share in 2000 on sales of
$7,793,517.
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its requirements depends
primarily on operating cash flow and the availability of a $3,000,000 credit
line under the Loan Agreement with its Chairman, Mr. Robert Howard, of which
$2,800,000 was available at December 31, 2002. The Company believes that these
sources are sufficient to satisfy its cash requirements for the foreseeable
future.
35
During 2002, the Company used $2,255,709 in cash from operations compared to
$1,376,790 in 2001. The cash used in 2002 resulted primarily from the net loss
of $9,418,290, offset partially by non-cash stock compensation and depreciation
and amortization totaling $3,189,881. The remainder of the offset was comprised
of changes in operating assets and liabilities totaling $3,499,350, the majority
of which related to a decrease in inventory of $2,207,149.
During 2002, the Company generated $2,501,978 in cash from investing activities
compared to $196,750 in 2001. The majority of the increase in 2002 related to
the net cash acquired through the acquisition of ISSI totaling $2,202,040.
The Company does not anticipate any substantial capital purchases during 2003.
Working capital decreased $2,779,820 from $1,582,795 at December 31, 2001 to a
deficit of $1,197,025 at December 31, 2002. The ratio of current assets to
current liabilities at December 31, 2002 and 2001 was .7 and 1.8, respectively.
These decreases are due primarily to the loss incurred in 2002.
The Company had Secured Demand Notes and Security Agreements (the "Notes") owed
to Mr. Robert Howard. The principal of these Notes was due and payable in full,
together with interest accrued and any penalties provided for, on demand. Under
the terms of the Notes, the Company agreed to pay interest at the lower rate of
(a) 12% per annum, compounded monthly or (b) the maximum rate permitted by
applicable law. Payment of the Notes was secured by a security interest in
certain assets of the Company. In March 2002, the Company repaid the principal
balance due in the amount of $500,000 and the Notes were discharged.
Effect of New Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements SFAS
Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.
SFAS No. 145 rescinds Statement No. 4, Reporting Gains and Losses from
Extinguishments of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No.
145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of
Motor Carriers. SFAS No. 145 amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provision of SFAS
No.145 related to the rescission of Statement No. 4 shall be applied in fiscal
year beginning after May 15, 2002. The provisions of SFAS No. 145 related to
Statement No. 13 should be for transactions occurring after May 15, 2002. Early
application of the provisions of this Statement is encouraged. The Company does
not expect that the adoption of SFAS No. 145 will have a significant impact on
its consolidated results of operations, financial position or cash flows.
36
In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated with
Exit or Disposal Activities. This statement superseded EITF No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity. Under this statement, a liability or a cost associated with a disposal
or exit activity is recognized at fair value when the liability is incurred
rather than at the date of an entity's commitment to an exit plan as required
under EITF 94-3. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
adoption permitted. The Company does not expect that the adoption of SFAS No.
146 will have a significant impact on its consolidated results of operations,
financial position or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, it amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The annual requirements of SFAS No. 148 are effective for fiscals years
ending after December 15, 2002 and the interim requirements are effective for
interim periods beginning after December 15, 2002. The Company does not plan to
transition to the fair value method of accounting for its stock-based employee
compensation.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
See Financial Statements and Schedule attached hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
37
PART III
Item 10. Directors and Executive Officers of the Registrant.
Director
Name Age Position Since
- ---- --- -------- -------
Robert Howard 79 Chairman of the Board, and Director 1984
W. Scott Parr 51 President, Chief Executive Officer
and Director 1998
Annette Heroux 46 Vice President of Finance, Chief Financial
Officer -
James Harlan 51 Director 2000
Maha Sallam 35 Executive Vice President, Director 2002
Brett Smith 33 Director 2000
Elliot Sussman 51 Director 2002
Kevin Woods 36 Vice President of Research and Development
Director 2002
All directors listed above are currently serving a term of office which
continues until the next annual meeting of stockholders.
Robert Howard, the founder and Chairman of the Board of Directors of the
Company, was the inventor of the first impact dot matrix printer. Mr. Howard was
Chief Executive Officer of the Company from its establishment in 1984 until
December of 1993. He was the founder, and from 1969 to April 1980 he served as
President and Chairman of the Board, of Centronics Data Computer Corp.
("Centronics"), a manufacturer of a variety of computer printers. He resigned
from Centronics' board of directors in 1983. From April 1980 until 1983, Mr.
Howard was principally engaged in the management of his investments. Commencing
in mid-1982, Mr. Howard, doing business as R.H. Research, developed the ink jet
technology upon which the Company was initially based. Mr. Howard contributed
this technology, without compensation, to the Company. Mr. Howard was Chairman
of the Board of Presstek, Inc. ("Presstek"), a public company which has
developed proprietary imaging and consumables technologies for the printing and
graphic arts industries from June 1988 to September 1998 and served as Chairman
Emeritus of the Board from September 1998 to December 2000.
38
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. In connection with the merger of ISSI, W. Kip Speyer, the
President and Chief Executive Officer of ISSI assumed the position of Chief
Executive Officer of the Company and Mr. Parr continued in the position of
President of the Company. Upon Mr. Speyer's resignation in September 2002, Mr.
Parr was re-appointed as Chief Executive Officer of the Company. Prior to
joining iCAD, Mr. Parr served as Divisional Director and a member of the Board
of Directors of SABi International Ventures, Inc. in 1997, where he was
responsible for restructuring and upgrading certain US 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, Ms. Heroux worked from 1980
to 1987 for Laurier, Inc., a semiconductor equipment manufacturer, in various
financial and managerial capacities.
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 and planning and finance
development work with 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. He
has a PhD in Public Policy with an operations research dissertation from Harvard
University and a BS in Chemical Engineering from Washington University.
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 eleven 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. Dr. Sallam received her doctorate degree in
Computer Science and Engineering from the University of South Florida in May
1997. She also earned a Master of Science from the University of South Florida
in 1991 and a Bachelor of Science in Computer Engineering from the University of
South Florida in 1990.
Brett Smith, the son of Mrs. Kit Howard, the wife of the Company's Chairman, has
been the Chairman and CEO of ei3 Corporation, a provider of technology services
to manufacturing companies utilizing advanced frame relay and internet
technologies. Prior to joining ei3 Mr. Smith was a member of the restructuring
team for Delta V Technologies, a subsidiary of Presstek, where he served as
Director of Business Development from 1996 to 1999. From 1995 to 1996 Mr. Smith
worked for the Asia Times newspaper start-up team in Hong Kong. He began his
career as an analyst, from 1992 to 1994, at Susquehanna Investment Group. Mr.
Smith received a Bachelor of Science from Emory University.
39
Elliot Sussman is currently President and CEO 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. Dr.
Sussman holds a Masters in Business Administration from the Wharton School,
University of Pennsylvania, a Medical Degree from Harvard University and a
Bachelor of Arts Degree from Yale University.
Kevin Woods has been the Vice President of Research and Development for the
Company since June 2002. From 1997 until the acquisition of ISSI in June 2002,
Dr. Woods served as Director and Vice President of Research and Development and
was one of ISSI's founders. Prior to joining ISSI, Dr. Woods held a
competitively awarded, post-doctoral research position funded by the U.S. Army
Medical Research and Material Command's Breast Cancer Research Program. He has
been researching the automated analysis of digital mammogram images and has been
awarded research grants totaling over $1,400,000 for this purpose. Dr. Woods
received his doctoral degree in Computer Science and Engineering from the
University of South Florida in 1991. Dr. Woods also received a Master of Science
and Bachelor of Science in Computer Engineering from the University of South
Florida in 1989.
Key Employees
Name Age Position
- ---- --- --------
Richard Lehman 65 Vice President of Hardware Engineering
William Langille 51 Vice President of Operations
Ernest Henrichon 60 Vice President of Software Engineering
Richard F. Lehman joined the Company in July 1990, as Director of Scanner
Engineering. In December 1993, he was named Vice President of Scanner
Engineering and in October 1996, he was named Vice President of Engineering.
Prior to joining the Company, Mr. Lehman was employed by Xerox Corporation for
23 years where he served in various engineering and managerial capacities.
William A. Langille joined the Company in March 2001 as Vice President of
Operations and has also served as President of the Company's Howtek Devices
Corporation subsidiary since July 2002. Prior to joining the Company, Mr.
Langille worked from 1999 to 2001 for Inspex, a manufacturer of test equipment
for the semiconductor industry. From 1973 to 1997, Mr. Langille worked for
Nashua Corporation, a fortune 500 multinational manufacturer and distributor of
computer products and office supplies, in various manufacturing and managerial
capacities.
40
Ernest Henrichon joined the Company in February 2003, as Vice President of
Software Engineering. From 1998 to 2002, Dr. Henrichon was Vice President of
Engineering at Newpoint Technologies, Inc., a provider of real-time network
management software and systems integration services to the satellite and
broadcast industries. He was Vice President of Engineering at Imaging Technology
Inc. from 1990 to 1997, where he had responsibility for the development of
software and hardware components used in OEM image processing applications.
Item 11. Executive Compensation.
The following table provides information on the compensation provided by the
Company during fiscal years 2002, 2001 and 2000 to the persons serving as the
Company's Chief Executive Officer during fiscal 2002, the Company's most highly
compensated executive officers and certain key employees serving at the end of
the 2002 fiscal year ("the Named Persons"). Included in this list are only those
executive officers and key employees whose total annual salary and bonus
exceeded $100,000 during the 2002 fiscal year.
SUMMARY COMPENSATION TABLE
Securities
Underlying
Name and Principal Position Year Salary($) Option(#)
- --------------------------- ---- --------- ---------
W. Kip Speyer (1)
Chief Executive Officer........................ 2002 116,874 625,000(2)
W. Scott Parr
President, Chief Executive Officer, Director... 2002 173,762 125,000
2001 145,669 4,000
2000 138,357 - 0 -
Richard F. Lehman
Vice President of Hardware Engineering. .... 2002 126,178 15,372
2001 114,135 4,000
2000 116,986 5,000
William A. Langille
Vice President of Operations................... 2002 117,479 54,500
2001 71,786 83,000
(1) Mr. Speyer served as Chief Executive Officer of iCAD from June 2002 until
his resignation in September 2002.
(2) Includes 75,000 options issued by the Company in the merger with ISSI in
June 2002 in exchange for ISSI options held by Mr. Speyer.
41
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 2002.
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 in Base Price Expiration for Option Term (3)
Name Granted(4) Fiscal Year(2) ($/Sh) Date 5%($) 10%($)
- ---- ---------- -------------- ------ ---- ----- ------
W. Kip Speyer 75,000 (4) .80 05/29/2011 37,734 95,625
550,000 25% 3.49 06/28/2012 1,207,163 3,059,189
W. Scott Parr 25,000 1.75 01/16/2012 27,514 69,726
100,000 5% 2.69 11/29/2012 169,173 428,717
Richard F. Lehman 15,372 1% 1.55 11/04/2012 14,984 37,973
William A. Langille 20,000 1.75 01/16/2012 22,011 55,781
34,500 2% 1.55 11/04/2012 33,630 85,225
(1) All of the foregoing options vest in installments at various times between
January 16, 2002 and June 28, 2005.
(2) The toal number of options granted in fiscal 2002 includes 500,000 options
of the Company issued in exchange for ISSI options in connection with the merger
in June 2002.
(3) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the compounded
rates specified over the term of the options. These numbers do not take into
account provisions of options providing for termination of the option following
termination of employment or non transferability of the options and do not make
any provision for taxes associated with exercise. Because actual gains will
depend upon, among other things, future performance of the Common Stock, there
can be no assurance that the amounts reflected in this table will be achieved.
(4) Represents options of the Company issued in exchange for ISSI options in
connection with the merger in June 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding the exercise of stock
options during the Company's last completed fiscal year by each of the Named
Persons and the fiscal year-end value of unexercised options.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the Money
Options at Options at
Shares FY-End (#) FY-End($) (1)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
- ---- ------------ -------- ------------- -------------
W. Kip Speyer (2) 0 0 625,000 / -0- 128,250 / -0-
W. Scott Parr (2) 0 0 510,050 / 21,468 584,512 / 36,496
Richard F. Lehman (2) 0 0 64,628 / 15,372 73,793 / 14,757
William A. Langille (2) 0 0 73,000 / 74,500 89,880 / 95,520
- ------------------------
(1) Based upon the closing price of the Common Stock on December 31, 2002, of
$2.51 per share.
(2) Options granted pursuant to the Company's merger and 1993 and 2001 Stock
Option Plans.
42
The Company does not have any employment agreements with its executive officers
or key employees.
In September 2002, the Company entered into a Separation Agreement with each of
W. Kip Speyer, the former Chief Executive Officer of iCAD and Gregory J. Stepic,
the former Vice President of Finance of iCAD. The Separation Agreements
acknowledged the resignations of each of Messrs. Speyer and Stepic and provided
for severance payments to Messrs. Speyer and Stepic of $500,000 and $148,000,
respectively, in lieu of any severance payments to which they may have been
entitled to under their employment agreements. The severance payments, less any
required withholding by the Company, are payable to Mr. Speyer in equal
installments over a 30 month period and to Mr. Stepic in equal installments over
a 12 month period, in each case subject to the right to accelerate payments upon
the sale of the outstanding stock of the Company or upon a sale by the Company
of substantially all of its assets. Under the Separation Agreements, each of
Messrs. Speyer and Stepic was entitled to retain his outstanding options of the
Company which remain exercisable in accordance with their respective terms.
Also, pursuant to the Separation Agreements Messrs. Speyer and Stepic each
agreed to remain bound by the confidentiality and non-competition provisions of
their employment agreements for the periods set for in the employment
agreements.
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.
During fiscal 2002 the Company granted the following ten-year options to its
board members: an aggregate of 125,000 options exercisable at prices ranging
from $1.75 to $2.69 per share to W. Scott Parr, which options were immediately
exercisable; 75,000 options exercisable at $1.55 per share to James Harlan,
which options vest annually in three equal installments beginning on September
30, 2003; 100,000 options exercisable at $3.49 per share to Maha Sallam, which
options were immediately exercisable; 20,000 options exercisable at $1.55 per
share to Brett Smith, which options vest annually in three equal installments
beginning on September 30, 2003; 45,000 options exercisable at $1.55 per share
to Dr. Elliot Sussman, which options vest annually in three equal installments
beginning on September 30, 2003; and 155,000 options exercisable at $3.49 per
share to Kevin Woods, which options were immediately exercisable.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
There is no Compensation Committee or other committee of the Company's Board of
Directors performing similar functions. The person who performed the equivalent
function in 2002 was Robert Howard, Chairman of the Board under the direction of
the Board of Directors. W. Scott Parr, Chief Executive Officer and a director,
participated in discussions with Mr. Howard during the past completed fiscal
year in his capacity as an executive officer in connection with executive
officer compensation. During 2002 none of the executive officers of the Company
served on the Board of Directors or Compensation Committee of any other entity.
43
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
25, 2003, by (i) each person who is known to the Company to own beneficially
more than 5% of the outstanding shares of the Company's Common Stock (ii) each
executive officer and key employee named in the Summary Compensation Table,
(iii) each director of the Company, and (iv) all current executive officers and
directors as a group. The table also provides information regarding beneficial
owners of more than 5% of the outstanding shares of the Company's Series A and
Series B Convertible Preferred Stock. Unless otherwise indicated below, the
address of each beneficial owner is c/o iCAD, Inc. 4 Townsend West, Suit 17,
Nashua, New Hamsphire 03063.
Number of Shares
Name and Address of Title Beneficially Percentage
Beneficial Owner of Class Owned (1) (2) of Class
---------------- -------- -------------- --------
Robert Howard Common 5,184,863 (3) 19.7%
145 East 57th Street
New York, New York 10022
Maha Sallam Common 2,346,000 (4) 8.9%
4902 Eisenhower Blvd.
Tampa, FL 33634
Donald Chapman Common 1,950,706 (5) 7.2%
8650 South Ocean Drive Preferred Series A 4,600 64.3%
Jenson Beach, FL 34957 Preferred Series B 680 48.6%
W. Kip Speyer Common 1,860,000 (6) 6.9%
10361 Parkstone Way
Boca Raton, FL 33498
Kevin Woods Common 1,557,275 (7) 5.9%
4902 Eisenhower Blvd.
Tampa, FL 33634
W. Scott Parr Common 636,179 (8) 2.4%
Preferred Series A 550 7.7%
Preferred Series B 50 3.6%
Edgar Ball Preferred Series B 200 14.3%
PO Box 560726
Rockledge, FL 32956
Dr. Lawrence Howard Preferred Series A 1,000 14.0%
660 Madison Avenue
New York, NY 10021
John McCormick Preferred Series A 1,000 14.0%
11340 SW Aventine Circus
Portland, OR 97219
Dr. Herschel Sklaroff Preferred Series B 100 7.1%
1185 Park Avenue
New York, NY 10128
John Westerfield Preferred Series B 100 7.1%
4522 SW Bimini Circle N.
Palm City, FL 34990
James Harlan Common 104,000 (9) *
Brett Smith Common 36,588 (10) *
Preferred Series B 20 1.4%
Dr. Elliot Sussman Common 3,000 *
Richard Lehman Common 65,628 (11) *
William Langille Common 79,389 (12) *
All current executive officers and Common 9,981,222 (3), (4) & 36.3%
directors as a group (8 persons) (7) through (10)
Preferred Series A 550 7.7%
Preferred Series B 70 5.0%
- ----------------------------------------------------------------------------
* Less than one percent
44
1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 25, 2003, 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 25, 2003, have been exercised.
2) Unless otherwise noted, the Company believes that the persons referred to
in the table have sole voting and investment power with respect to all
shares reflected as beneficially owned by them.
3) Includes options to purchase 10,000 shares of the Company's Common Stock
at $1.72 per share. Also, includes 40,000 shares beneficially owned by Mr.
Howard's wife.
4) Includes 183,625 shares owned by Dr. Sallam's husband. Also includes
options to purchase 56,250 shares of the Company's Common Stock at $0.80
per share and 100,000 shares at $3.49 per share.
5) Includes 28,000 shares owned by Mr. Chapman's wife, 460,000 shares of
Common Stock issuable upon conversion of 4,600 shares of Series A
Convertible Preferred Stock and 340,000 shares of Common Stock issuable
upon conversion of 680 shares of Series B Convertible Preferred Stock
owned by Mr. Chapman.
6) Includes options to purchase 75,000 shares of the Company's Common Stock
at $0.80 per share and 550,000 shares at $3.49 per share.
7) Includes options to purchase 56,250 shares of the Company's Common Stock
at $0.80 per share and 155,000 shares at $3.49 per share.
8) 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,
103,532 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.
9) Includes options to purchase 25,000 shares of the Company's Common Stock
at $1.75 per share.
10) Includes options to purchase 25,000 of the Company's Common Stock at $3.00
per share. Also, includes 10,000 shares of Common Stock issuable upon
conversion of 20 shares of Series B Convertible Preferred Stock.
45
11) Includes 1,000 shares owned by Mr. Lehman's wife. Also includes options to
purchase 26,500 of the Company's Common Stock at $1.72 per share, 16,376
shares at $1.13 per share, 7,752 shares at $1.00 per share, 5,000 shares
at $0.81 per share, 5,000 shares at $1.75 per share and 4,000 shares at
$0.95 per share.
12) Includes options to purchase 30,000 shares of the Company's Common Stock
at $1.75 per share and 43,000 shares at $0.95 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, 2002.
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: 3,774,748 $2.04 771,305
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans 57,000 $2.56 -0-
not approved by security
holders (1):
- --------------------------------------------------------------------------------------------------------------------
Total 3,831,748 $2.05 771,305
- --------------------------------------------------------------------------------------------------------------------
(1) Represents the aggregate number of shares of common stock issuable upon
exercise of individual arrangements with option and warrant holders. These
options and warrants are five years in duration, expire at various dates
between December 31, 2004 and February 28, 2005, 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 $3,000,000. The Loan Agreement
expires January 4, 2004, 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%. 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.
46
In March 2002, Mr. Howard converted $500,000 of advances made under the Loan
Agreement into 215,517 shares of restricted common stock of the Company.
During the second quarter of 2002 the Company borrowed $250,000 and in November
2002 the Company repaid Mr. Howard $50,000 pursuant to the Loan Agreement. As of
December 31, 2002, $200,000 was owed by the Company and the Company had
$2,800,000 available for future borrowings under the Loan Agreement.
In connection with the merger of Howtek, Inc. and ISSI in June 2002, the Company
issued 2,000,000 shares of Common Stock to an entity owned by Mr. Robert Howard
in exchange for 1,600,000 shares of ISSI common stock owned by that entity.
The Company had Secured Demand Notes and Security Agreements (the "Notes") owed
to Mr. Robert Howard. The principal of these Notes was due and payable in full,
together with interest accrued and any penalties provided for, on demand. Under
the terms of the Notes the Company agreed to pay interest at the lower rate of
(a) 12% per annum, compounded monthly or (b) the maximum rate permitted by
applicable law. Payment of the Notes was secured by a security interest in
certain assets of the Company. In March 2002 the Company repaid the principal
balance due in the amount of $500,000 and the Notes were discharged.
The facility formerly housing the Company's principal executive offices and
research and development laboratory was leased by the Company from Mr. Robert
Howard. Rental expense for the year ended December 31, 2002 was $78,500. The
Company relocated in January 2003 to a facility leased from an unafilliated
party.
Item 14. Controls and Procedures
Within the 90 days prior to the filing date of this Annual Report on Form 10-K,
an evaluation was carried out (the "Controls Evaluation"), under the supervision
and with the participation of Company's management, including its Chief
Executive Officer ("CEO") and its Chief Financial Officer ("CFO"), of the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in Section 13a-14 (c) and 15d-14 (c) of the Securities Exchange Act of 1934
("Disclosure Controls"). Based upon that evaluation, the CEO and CFO have
concluded that the Disclosure Controls are effective to ensure that the
information required to be disclosed by the Company in reports it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as required by the rules and forms of the Securities and
Exchange Commission.
The CEO and CFO note that, since the date of the Controls Evaluation to the date
of this Annual Report on Form 10-K, there have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect the internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
47
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a) The following documents are filed as part of this Annual
Report on Form 10-K:
i. Financial Statements - See Index on page 55.
ii. Financial Statement Schedule - See Index on page 55. 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]
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].
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].
48
3(e) Certificate of Amendment of Certificate of
Incorporation of the Registrant filed with the
Secretary of State of the State of Delaware on
September 28, 1999 [incorporated by reference to
Exhibit 3(d) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001].
3(f) Certificate of Amendment of Certificate of
Incorporation of the Registrant filed with the
Secretary of State of the State of Delaware on
June 28, 2002 [incorporated by reference to
Exhibit 3.1 of the Registrant's Quarterly report
on Form 10-Q for the quarter ended June 30, 2002].
3(g) By-laws of Registrant [incorporated by reference
to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-18 (Commission File No.
2-94097-NY), filed on October 31, 1984].
10(a) Revolving Loan and Security Agreement, and
Convertible Revolving Credit Promissory Note
between Robert Howard and Registrant dated October
26, 1987 (the "Loan Agreement") [incorporated by
reference to Exhibit 10 to the Registrant's Report
on Form 10-Q for the quarter ended September 30,
1987].
10(b) Letter Agreement dated June 28, 2002, amending the
Revolving Loan and Security Agreement, and
Convertible Revolving Credit Promissory Note
between Robert Howard and Registrant dated October
26, 1987.
10(c) Form of Secured Demand Notes between the
Registrant and Mr. Robert Howard. [incorporated by
reference to Exhibit 10(e) to the Registrant's
Report on Form 10-K for the year ended December
31, 1998].
49
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].
10(e) Certificate of Designation of 7% Series A
Convertible Preferred Stock dated December 22,
1999. [incorporated by reference to Exhibit 10(i)
to the Registrant's Report on Form 10-K for the
year ended December 31, 1999].
10(f) Certificate of Designation of 7% Series B
Convertible Preferred Stock dated October 16, 2000
[incorporated by reference to Exhibit 10(j) to the
Registrant's Report on Form 10-K for the year
ended December 31, 2000].
10(g) Separation agreement dated September 24, 2002
between the Registrant and W. Kip Speyer
[incorporated by reference to Exhibit 10.1 to the
Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 2002].*
10(h) Separation agreement dated September 30, 2002
between the Registrant and Gregory J. Stepic
[incorporated by reference to Exhibit 10.2 to the
Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 2002].*
10(i) 1993 Stock Option Plan [incorporated by reference
to Exhibit A to the Registrant's proxy statement
on Schedule 14-A filed with the Securities and
Exchange Commission on August 24, 1999].*
10(j) 2001 Stock Option Plan [incorporated by reference
to Annex A of the Registrant's proxy statement on
Schedule 14-A filed with the Securities and
Exchange Commission on June 29, 2001].*
10(k) 2002 Stock Option Plan [incorporated by reference
to Annex F to the Registrant's Registration
Statement on Form S-4 (File No. 333-86454)].*
10(l) Exclusive Distribution Agreement between
Intelligent Systems Software, Inc. and
Instrumentarium Imaging, Inc., dated August 15,
2001.**
10(m) License Agreement between Scanis, Inc. and the
Registrant dated February 18, 2003.**
21 Subsidiaries
23(a) Consent of BDO Seidman, LLP.
50
99.1 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 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 have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment of the omitted portions.
(b) During the last quarter of the period covered by this
Annual Report on Form 10-K the Company filed no reports
on Form 8-K.
(c) Exhibits - See (a) iii above.
(d) Financial Statement Schedule - See (a) ii above.
51
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 31, 2003
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 31, 2003
Robert Howard
/s/ W. Scott Parr President, Chief Executive
- ------------------------------------ Officer, Director (Principal March 31, 2003
W. Scott Parr Executive Officer)
/s/ Annette Heroux Chief Financial Officer (Principal
- ------------------------------------ Accounting Officer) March 31, 2003
Annette Heroux
/s/ James Harlan Director March 31, 2003
- ------------------------------------
James Harlan
/s/ Maha Sallam Director March 31, 2003
- ------------------------------------
Maha Sallam
/s/ Brett Smith Director March 31, 2003
- ------------------------------------
Brett Smith
/s/ Elliot Sussman Director March 31, 2003
- ------------------------------------
Elliot Sussman
/s/ Kevin Woods Director March 31, 2003
- ------------------------------------
Kevin Woods
52
Certification of Principal Executive Officer
I, W. Scott Parr, Chief Executive Officer of iCAD, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of iCAD, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ W. Scott Parr
---------------------------
W. Scott Parr
Chief Executive Officer
53
Certification of Principal Financial Officer
I, Annette Heroux, Chief Financial Officer of iCAD, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of iCAD, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Annette L. Heroux
-----------------------
Annette L. Heroux
Chief Financial Officer
54
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Certified Public Accountants 56
Consolidated Balance Sheets
As of December 31, 2002 and 2001 57
Consolidated Statements of Operations
For the years ended December 31, 2002, 2001 and 2000 58
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2002, 2001 and 2000 59
Consolidated Statements of Cash Flows
For the years ended December 31, 2002, 2001 and 2000 60
Notes to Consolidated Financial Statements 61-84
Schedule II - Valuation and Qualifying
Accounts and Reserves 85
55
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
iCAD, Inc.
Nashua, New Hampshire
We have audited the accompanying consolidated balance sheets of iCAD, Inc.,
formerly Howtek, Inc., and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2002. We have also audited the financial statement schedule listed
in the accompanying index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of iCAD, Inc. and
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO SEIDMAN, LLP
Boston, Massachussetts
February 20, 2003
56
ICAD, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
------------------ ------------------
Assets 2002 2001
------ ----- -----
Current assets:
Cash and equivalents $ 1,091,029 $ 495,360
Trade accounts receivable net of allowance
for doubtful accounts of $40,000 in 2002
and $165,000 in 2001 1,550,167 691,415
Inventory 390,349 2,363,237
Prepaid and other current assets 85,120 36,590
------------------ ------------------
Total current assets 3,116,665 3,586,602
------------------ ------------------
Property and equipment:
Equipment 840,410 1,408,347
Leasehold improvements 8,051 41,721
Furniture and fixtures 22,271 -
------------------ ------------------
870,732 1,450,068
Less accumulated depreciation and amortization 579,545 1,118,685
------------------ ------------------
Net property and equipment 291,187 331,383
------------------ ------------------
Other assets:
Software development costs, net of accumulated
amortization of $965,693 at December 31, 2001 - 230,247
Patents, net of accumulated amortization
of $107,941 at December 31, 2001 - 12,893
Technology intangible, net of accumulated amortization
of $130,447 at December 31, 2002 3,740,553 -
Distribution agreement, net of accumulated amortization
of $52,772 at December 31, 2002 1,513,228 -
Goodwill 17,415,723 -
------------------ ------------------
Total other assets 22,669,504 243,140
------------------ ------------------
Total assets $ 26,077,356 $ 4,161,125
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,232,262 $ 1,026,335
Accrued interest 229,078 203,299
Accrued expenses 1,776,824 203,064
Loans payable to related party - 500,000
Convertible subordinated debentures 10,000 10,000
Current maturities of notes payable 65,526 61,109
------------------ ------------------
Total current liabilities 4,313,690 2,003,807
Loans payable to related party 200,000 -
Notes payable, less current maturities 108,390 117,761
------------------ ------------------
Total liabilities 4,622,080 2,121,568
------------------ ------------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $ .01 par value: authorized
1,000,000 shares; issued and outstanding
8,550 in 2002 and 9,550 in 2001, with the aggregate
liquidation value of $2,115,000 in 2002 and $2,215,000
in 2001, plus 7% annual dividend 86 96
Common stock, $ .01 par value: authorized
50,000,000 shares; issued 26,418,124 in 2002
and 15,241,833 shares in 2001; outstanding
26,350,248 in 2002 and 15,173,957 shares in 2001 264,181 152,418
Additional paid-in capital 85,829,483 57,107,227
Accumulated deficit (63,688,210) (54,269,920)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------------ ------------------
Stockholders' equity 21,455,276 2,039,557
------------------ ------------------
Total liabilities and stockholders' equity $ 26,077,356 $ 4,161,125
================== ==================
See accompanying notes to consolidated financial statements.
57
ICAD, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31,
----------------------------------------------------------
2002 2001 2000
----- ----- -----
Sales (notes 4 and 10) $ 5,000,184 $ 4,835,297 $ 7,793,517
Cost of sales 5,161,643 3,936,406 5,893,490
----------------- ----------------- ------------------
Gross margin (161,459) 898,891 1,900,027
----------------- ----------------- ------------------
Operating expenses:
Engineering and product development 1,626,001 751,467 709,595
General and administrative (notes 2, 3 and 4) 6,595,076 1,124,710 1,165,392
Marketing and sales 987,587 1,563,380 1,720,674
----------------- ----------------- ------------------
Total operating expenses 9,208,664 3,439,557 3,595,661
----------------- ----------------- ------------------
Loss from operations (9,370,123) (2,540,666) (1,695,634)
Interest expense - net (includes $26,761,
$114,952 and $145,979, respectively,
to related parties) (note 4) (48,167) (80,105) (132,014)
----------------- ----------------- ------------------
Net loss (9,418,290) (2,620,771) (1,827,648)
Preferred dividends 148,050 155,050 72,589
Accreted dividends - - 996,283
----------------- ----------------- ------------------
Net loss available to common stockholders $ (9,566,340) $ (2,775,821) $ (2,896,520)
================= ================= ==================
Net loss per share (note 8)
Basic and diluted $ (0.46) $ (0.20) $ (0.22)
Weighted average number of shares used in
computing earnings per share
Basic and diluted 20,928,397 13,950,119 13,373,086
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
Shares Issued Par Value Shares Issued Par Value Capital
--------------- ------------- --------------- -------------- ----------------
Balance at December 31, 1999 6,900 69 13,330,542 133,305 52,562,377
Issuance of common stock pursuant
to incentive stock option plan - - 131,822 1,318 143,619
Issuance of common stock for payment
of dividends to investors (note 8 (a)) - - 25,762 258 72,010
Issuance of common stock relative to
conversion of preferred stock (note 4) (1,000) (10) 100,000 1,000 (990)
Issuance of preferred stock to
investors (note 8 (a)) 3,650 37 - - 1,624,963
Issuance of stock subscription warrant
for services (note 8 (d)) - - - - 39,818
Preferred stock dividends (note 8 (a)) - - - - (72,589)
Accreted dividends (note 8 (a)) - - - - 996,283
Net loss - - - - -
--------------- ------------- --------------- -------------- ----------------
Balance at December 31, 2000 9,550 96 13,588,126 135,881 55,365,491
Issuance of common stock pursuant
to incentive stock option plan - - 118,832 1,188 151,071
Issuance of common stock relative
to conversion of loan payable to
related parties (note 4) - - 1,432,910 14,329 1,591,364
Issuance of common stock for payment
of dividends to investors (note 8 (a)) - - 101,965 1,020 154,351
Preferred stock dividends (note 8 (a)) - - - - (155,050)
Net loss - - - - -
--------------- ------------- --------------- -------------- ----------------
Balance at December 31, 2001 9,550 96 15,241,833 152,418 57,107,227
Issuance of common stock pursuant
to incentive stock option plan - - 150,454 1,505 159,004
Issuance of common stock relative
to conversion of loan payable to
related parties (note 4) - - 215,517 2,155 497,845
Issuance of common stock relative to
conversion of preferred stock (note 4) (1,000) (10) 100,000 1,000 (990)
Issuance of common stock to investor - - 250,000 2,500 497,500
Issuance of common stock relative to - - 10,400,000 104,000 27,569,500
merger (note 2)
Issuance of common stock for payment
of dividends to investors (note 8 (a)) - - 60,320 603 147,447
Preferred stock dividends (note 8 (a)) - - - - (148,050)
Net loss - - - - -
--------------- ------------- --------------- -------------- ----------------
Balance at December 31, 2002 8,550 $ 86 26,418,124 $ 264,181 $ 85,829,483
=============== ============= =============== ============== ================
Accumulated Treasury Stockholders'
Deficit Stock Equity
--------------- --------------- --------------
Balance at December 31, 1999 (48,825,218) (950,264) 2,920,269
Issuance of common stock pursuant
to incentive stock option plan - - 144,937
Issuance of common stock for payment
of dividends to investors (note 8 (a)) - - 72,268
Issuance of common stock relative to
conversion of preferred stock (note 4) - - -
Issuance of preferred stock to
investors (note 8 (a)) - - 1,625,000
Issuance of stock subscription warrant
for services (note 8 (d)) - - 39,818
Preferred stock dividends (note 8 (a)) - - (72,589)
Accreted dividends (note 8 (a)) (996,283) - -
Net loss (1,827,648) - (1,827,648)
--------------- --------------- --------------
Balance at December 31, 2000 (51,649,149) (950,264) 2,902,055
Issuance of common stock pursuant
to incentive stock option plan - - 152,259
Issuance of common stock relative
to conversion of loan payable to
related parties (note 4) - - 1,605,693
Issuance of common stock for payment
of dividends to investors (note 8 (a)) - - 155,371
Preferred stock dividends (note 8 (a)) - - (155,050)
Net loss (2,620,771) - (2,620,771)
--------------- --------------- --------------
Balance at December 31, 2001 (54,269,920) (950,264) 2,039,557
Issuance of common stock pursuant
to incentive stock option plan - - 160,509
Issuance of common stock relative
to conversion of loan payable to
related parties (note 4) - - 500,000
Issuance of common stock relative to
conversion of preferred stock (note 4) - - -
Issuance of common stock to investor - - 500,000
Issuance of common stock relative to - - 27,673,500
merger (note 2)
Issuance of common stock for payment
of dividends to investors (note 8 (a)) - - 148,050
Preferred stock dividends (note 8 (a)) - - (148,050)
Net loss (9,418,290) - (9,418,290)
--------------- --------------- --------------
Balance at December 31, 2002 $ (63,688,210) $ (950,264) $ 21,455,276
=============== =============== ==============
See accompanying notes to consolidated financial statements.
59
ICAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31,
---------------------------------------------------
2002 2001 2000
----- ----- -----
Cash flows from operating activities:
Net loss $ (9,418,290) $ (2,620,771) $ (1,827,648)
---------------- --------------- ---------------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 143,809 242,335 339,818
Amortization 246,072 243,804 283,882
Loss on disposal of assets 473,350 - -
Compensation expense related to issue of stock at merger 2,800,000 - -
Compensation expense relative to issue of
Stock Subscription Warrants (note 8 (d)) - - 39,818
Changes in operating assets and liabilities:
Accounts receivable (167,262) 391,368 318,204
Inventory 2,207,149 79,913 206,310
Prepaid and other current assets 4,026 74,722 33,078
Accounts payable 905,624 80,161 (55,306)
Accrued interest 25,779 114,045 145,979
Accrued expenses 524,034 17,633 (58,461)
---------------- --------------- ---------------
Total adjustments 7,162,581 1,243,981 1,253,322
---------------- --------------- ---------------
Net cash used by
operating activities (2,255,709) (1,376,790) (574,326)
---------------- --------------- ---------------
Cash flows from investing activities:
Additions to patents, software development and other - (111,168) (137,140)
Additions to property and equipment (150,062) (85,582) (111,773)
Acquisition of ISSI, net of cash acquired 2,202,040 - -
---------------- --------------- ---------------
Net cash provided (used) by investing activities 2,051,978 (196,750) (248,913)
---------------- --------------- ---------------
Cash flows from financing activities:
Issuance of common stock for cash 160,509 152,259 144,937
Issuance of preferred stock for cash - - 1,600,000
Proceeds from investor 500,000 - -
Proceeds of convertible note payable to principal stockholder 750,000 480,000 260,000
Proceeds of note payable - 193,492 -
Payment of demand note payable to principal stockholder (550,000) (80,000) -
Payment of note payable (61,109) (14,622) -
Payment of convertible subordinated debentures - (107,000) -
---------------- --------------- ---------------
Net cash provided by financing activities 799,400 624,129 2,004,937
---------------- --------------- ---------------
Increase (decrease) in cash and equivalents 595,669 (949,411) 1,181,698
Cash and equivalents, beginning of year 495,360 1,444,771 263,073
---------------- --------------- ---------------
Cash and equivalents, end of year $ 1,091,029 $ 495,360 $ 1,444,771
================ =============== ===============
Supplemental disclosure of cash flow information:
Interest paid $ 983 $ 10,530 $ 10,530
================ =============== ===============
Non-cash items from financing activities:
Conversion of loans and accrued interest payable
to related parties into Common Stock (note 4) $ 500,000 $ 1,605,693 $ -
================ =============== ===============
Conversion of accounts payable into related
party loan payable $ - $ 150,000 $ -
================ =============== ===============
Conversion of accounts payable into Common Stock $ - $ - $ 25,000
================ =============== ===============
Conversion of dividends payable into
Common Stock $ 148,050 $ 155,371 $ 72,268
================ =============== ===============
Fair market value of icad common stock and common
stock options issued to acquire capital stock of ISSI $ 27,673,500 $ - $ -
================ =============== ===============
Net tangible assets of ISSI acquired, excluding cash
acquired of $2,202,040 $ 406,433 $ - $ -
================ =============== ===============
Fair market value of indentifiable intangible assets
acquired from ISSI $ 5,437,000 $ - $ -
================ =============== ===============
See accompanying notes to consolidated financial statements.
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., formerly Howtek, Inc., and its subsidiaries (the "Company")
designs, develops, manufactures and markets Computer Aided Detection
(CAD) technology for mammography applications and medical film
digitizers. The Company considers itself a single reportable business
segment. The Company sells its products throughout the world through
various distributors, resellers and systems integrators. See Note 10
for geographical and major customer information.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. Many of the Company's estimates and assumptions
used in the preparation of the financial statements relate to the
Company's products, which are subject to rapid technological change. It
is reasonably possible that changes may occur in the near term that
would affect management's estimates with respect to inventories,
equipment and software development costs.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries that were acquired during
2002, Howtek Devices, Inc. and ISSI Acquisition, Inc. Any material
intercompany transactions and balances have been eliminated in
consolidation.
(c) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are customer obligations due under normal trade
terms. The Company performs continuing credit evaluations of its
customers' financial condition and generally does not require
collateral.
Senior management reviews accounts receivable on a periodic basis to
determine if any receivables will potentially be uncollectible. The
Company includes any accounts receivable balances that are determined
to be uncollectible, along with a general reserve, in its overall
allowance for doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written off against the
allowance. Based on the information available to the Company, it
believes their allowance for doubtful accounts as of December 31, 2002
is adequate. However, actual write-offs might exceed the recorded
allowance.
61
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(d) Inventory
Inventory is valued at the lower of cost or market value, with cost
determined by the first-in, first-out method. At December 31, inventory
consisted of raw material and finished goods of approximately $161,000
and $229,000, respectively, for 2002 and raw material and finished
goods of approximately $1,330,000 and $1,033,000, respectively, for
2001.
During the quarter ended June 30, 2002, the Company wrote down
inventory related to its discontinued graphic arts and photographic
product lines to its estimated salvage value of $0. The write down for
the year ended December 31, 2002 totaled approximately $2,370,000.
(e) Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the various
classes of assets (ranging from 3 to 5 years).
(f) Patents
The costs for patents were being amortized over the estimated useful
life of the respective assets using the straight-line method. Patents
related to discontinued product lines with net book values totaling
$10,086 were written off during 2002.
(g) Software Development Costs
Software development costs for application software and application
software enhancements were capitalized subsequent to the establishment
of their technological feasibility (as defined in Statement of
Financial Accounting Standards No. 86). The Company capitalized
$101,875 and $137,140 of internally developed and externally purchased
software costs during fiscal 2001 and 2000, respectively. No amounts
were capitalized during 2002.
The capitalized software balances were presented net of accumulated
amortization. Capitalized software costs were amortized using the
straight-line method over their estimated economic lives (36 months).
Software costs related to discontinued product lines with net book
values totaling $170,202 were written off during 2002.
(h) Revenue Recognition
Revenue is recognized when products are shipped to customers, provided
that there are no uncertainties regarding customer acceptance, there is
persuasive evidence of an arrangement, the sales price is fixed or
determinable and collection of the related receivable is probable.
62
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(i) Cost of Sales
Cost of sales consists of the costs of products purchased for resale,
any associated inbound and outbound freight and duty, any costs
associated with manufacturing, warehousing, material movement and
inspection, amortization of any license rights, and amortization of
capitalized software.
(j) Warranty Costs
The Company's products are generally under warranty against defects in
material and workmanship from a 90 day to 2 year period, depending on
the product. Warranty costs were not material in any period presented.
(k) Engineering and Product Development
These costs relate to research and development costs which are expensed
as incurred, except for amounts related to software development costs
incurred after the establishment of technological feasibility (see (g)
above) which are capitalized.
(l) Net Loss Per Common Share
Net loss per common share has been computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per
Share".
(m) Cash Flow Information
For purposes of reporting cash flows, the Company defines cash and
equivalents as all bank transaction accounts, certificates of deposit,
money market funds and deposits, and other money market instruments
maturing in less than 90 days, which are unrestricted as to withdrawal.
(n) Income Taxes
The Company follows the liability method under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"). The primary objectives of
accounting for taxes under SFAS 109 are to (a) recognize the amount of
tax payable for the current year and (b) recognize the amount of
deferred tax liability or asset for the future tax consequences of
events that have been reflected in the Company's financial statements
or tax returns.
63
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(o) Long Lived Assets
Long-lived assets, such as intangible assets, other than goodwill, and
property and equipment, are evaluated for impairment when events or
changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated undiscounted future
cash flows from the use of these assets. When any such impairment
exists, the related assets are written down to fair value.
Intangible assets subject to amortization consist of developed
technology and a distribution agreement purchased in the acquisition of
the assets of ISSI in June, 2002. (See Note 2). The developed
technology and distribution agreement are being amortized on a
straight-line basis over their estimated useful lives of 15 years each.
Amortization expense related to these assets totaled $183,219 in 2002
and will be approximately $362,000 per year in fiscal years 2003
through 2007.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Standards No. 144 (SFAS 144), "Accounting for
the Impairment or Disposal of Long-Lived Assets". This statement
supersedes Statement of Financial Accounting Standards No. 121 (SFAS
121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and amends Accounting Principles
Board Opinion No. 30, "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS 144
retained the fundamental provisions of SFAS 121 for recognition and
measurement of impairment, but amended the accounting and reporting
standards for segments of a business to be disposed of. SFAS 144 was
adopted effective January 1, 2002. The adoption of SFAS 144 did not
have an impact on the Company's financial position or results of
operations.
(p) Goodwill
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 requires companies to
use the purchase method of accounting for all business combinations
initiated after June 30, 2001, and establishes specific criteria for
the recognition of intangible assets separately from goodwill. SFAS 142
supersedes APB Opinion No. 17, "Intangible Assets", and addresses the
accounting for acquired goodwill and intangible assets. Goodwill and
indefinite-lived intangible assets will no longer be amortized and will
be tested for impairment at least annually.
Goodwill arose in connection with the ISSI acquisition in June 2002.
See Note 2.
64
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(q) Stock-Based Compensation
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for their four
stock option plans. Under APB Opinion 25, when the exercise price of
the Company's employee stock options equals the market price of the
exercise price of the underlying stock on the date of grant, no
compensation cost is recognized.
The Company provides proforma disclosures of compensation expense under
the fair value method of SFAS No. 123, "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". The Company estimates the
fair value of each granting of options at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002: no dividends paid; expected
volatility of 80.3%; risk-free interest rates of 2.01%, 4.86%, 3.37%,
1.79% and 1.56%; and expected lives of 1 to 9 years. The
weighted-average assumptions used for grants in 2001 were: no dividends
paid; expected volatility of 75.9%; risk-free interest rates of 4.78%
and 3.87%; and expected lives from 1 and 4 years. The weighted-average
assumptions used for grants in 2000 were: no dividends paid; expected
volatility of 76%; risk-free interest rates of 6.62% and 5.96%; and
expected lives of 4 to 5 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,
2002, 2001 and 2000 would have been as follows:
2002 2001 2000
---- ---- ----
Net loss as reported $ (9,566,338) $(2,775,821) $(2,896,520)
Add: Stock-based employee
compensation expense
included in reported net
income, net of related tax effects - - -
Deduct: Total stock-based
employee compensation
determined under fair value
method for all awards, net
of related tax effects ( 1,820,855) (142,210) (140,535)
------------- ------------ ------------
Pro forma net loss $(11,387,193) $(2,918,031) $(3,037,055)
============= ============ ============
Basic and diluted loss per share
As reported $ (.46) $ (.20) $ (.22)
Pro forma $ (.54) $ (.21) $ (.23)
65
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(r) Advertising
The Company expenses advertising costs as incurred. Advertising expense
for the years ended December 31, 2002, 2001 and 2000 was $125,000,
$151,000 and $134,000, respectively.
(s) Recently Issued Accounting Standards
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13
and Technical Corrections. SFAS No. 145 rescinds Statement No. 4,
Reporting Gains and Losses from Extinguishments of Debt, and an
amendment of that Statement, FASB Statement No. 64 Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also
rescinds FASB Statement No. 44, Accounting for Intangible Assets of
Motor Carriers. SFAS No. 145 amends FASB Statement No. 13, Accounting
for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. SFAS No. 145 also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. The provision of SFAS No.145 related to the
rescission of Statement No. 4 shall be applied in fiscal year beginning
after May 15, 2002. The provisions of SFAS No. 145 related to Statement
No. 13 should be for transactions occurring after May 15, 2002. Early
application of the provisions of this Statement is encouraged. The
Company does not expect that the adoption of SFAS No. 145 will have a
significant impact on its consolidated results of operations, financial
position or cash flows.
In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities. This statement superseded
EITF No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. Under this statement, a
liability or a cost associated with a disposal or exit activity is
recognized at fair value when the liability is incurred rather than at
the date of an entity's commitment to an exit plan as required under
EITF 94-3. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with
early adoption permitted. The Company does not expect that the adoption
of SFAS No. 146 will have a significant impact on its consolidated
results of operations, financial position or cash flows.
66
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(s) Recently Issued Accounting Standards (continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS
No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, it amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used
on reported results. The annual requirements of SFAS No. 148 are
effective for fiscals years ending after December 15, 2002 and the
interim requirements are effective for interim periods beginning after
December 15, 2002. The Company does not plan to transition to the fair
value method of accounting for its stock-based employee compensation.
(2) Acquisition of ISSI
On June 28, 2002, the Company completed the acquisition of Intelligent
Systems Software, Inc. ("ISSI") pursuant to a plan and agreement of
merger. The Company acquired all of the issued and outstanding capital
stock of ISSI, a privately held company based in Boca Raton, Florida.
The Company initiated the merger with the intention of improving its
competitive position in the CAD market place for products of the
combined companies. In the merger, the Company issued a total of
10,400,000 shares of its common stock to the ISSI stockholders,
including 2,000,000 shares of the Company's common stock which were
issued to a corporation owned by the Chairman of the Company, Mr.
Robert Howard, in exchange for shares of ISSI Common Stock purchased by
the corporation immediately prior to the merger, as approved by the
Company's shareholders and in accordance with the provisions of the
merger agreement. The value of the Company's Common Stock issued was
based upon a per share value of $3.20, equal to the closing price on
February 19, 2002, the day the acquisition was announced. In connection
with the 2,000,000 shares issued to the corporation owned by Mr.
Howard, the Company recorded compensation expense of $2,800,000, which
represented the amount that the fair market value of iCAD common shares
issued exceeded the consideration paid for ISSI common stock. The
acquisition was accounted for as a purchase, and accordingly, the
operations of ISSI are included in the consolidated financial
statements since the effective date, the close of business on June 28,
2002 through December 31, 2002. The purchase price has been allocated
to net assets acquired based upon an appraisal of their fair values.
67
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(2) Acquisition of ISSI (continued)
Following is a summary of the estimated fair values of the assets
acquired and liabilities assumed as of the date of acquisition:
Current assets $ 3,180,347
Property and equipment 246,613
Identifiable intangible assets 5,437,000
Goodwill 17,415,723
Current liabilities (762,332)
Notes payable (56,155)
-----------
Purchase price $25,461,196
===========
The goodwill of $17,415,723 is not expected to be deductible for income
tax purposes.
The unaudited proforma operating results for the Company, assuming the
acquisition of ISSI occurred as of the beginning of the years
presented, are as follows:
Years ended December 31, 2002 2001
-----------------------------------------------------------------------
Sales $ 6,246,432 $ 5,321,627
Loss from operations $( 9,991,795) $(4,251,871)
Net loss $ (10,039,962) $(4,331,976)
Net loss per share:
Basic and diluted $(0.39) $(0.18)
(3) Restructuring Charges
Discontinued product lines
During the second quarter of 2002, the Company implemented a plan
whereby it would no longer support its graphic arts and photographic
product lines and would concentrate its efforts in the medical imaging
and CAD business. In connection therewith, the Company wrote off all
inventories, fixed assets and intangible assets related to the
discontinued product lines down to their estimated salvage values.
Accordingly, during 2002 the Company recorded charges for the write off
of inventory of approximately $2,370,000, fixed assets of approximately
$237,000 and intangible assets of approximately $180,000.
During the fourth quarter of 2002, the Company concluded the licensing
and divestiture of the discontinued product lines. The license
agreement provided for the sale of all tangible and intangible assets
related to the product lines. Total consideration of $188,117 was paid
through the assumption of certain liabilities of the Company and is
included in the cost of sales in the accompanying consolidated
statements of operations for the year ended December 31, 2002. In
accordance with the licensing agreement any sales by the licensee will
result in royalty revenue to the Company. Royalty revenues are earned
as a flat fee for each unit sold by the licensee.
68
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(3) Restructuring Charges (continued)
Closure of Boca Raton Office
During the third quarter of 2002, the Company's first quarter of
combined operations, iCAD's management and directors evaluated the
Company's organization and operations to identify and eliminate
redundancies and inefficiencies created through the merger of Howtek
and ISSI. As a consequence, the Company negotiated the resignations of
three members of senior management, and took action to close the
Company's office in Boca Raton, Florida in 2003 resulting in a one time
charge of $884,000. Charges recorded in connection with separation
agreements negotiated with its former Chief Executive Officer and Vice
President of Finance totaled approximately $790,000. The cost of
closing the Boca Raton office totaled approximately $94,000 and
represented remaining amounts due under the non-cancelable operating
lease for the facility. The total charge is included in general and
administrative expenses in the accompanying consolidated statement of
operations. As of December 31, 2002 approximately $110,000 of severance
and closing costs were paid and charged against the liability.
Severance and closing costs accrued as of December 31, 2002 totaled
approximately $774,000, with expected payments during 2003, 2004 and
2005 of $449,000, $269,000 and $56,000, respectively.
(4) Related Party Transactions
(a) Loan Payable to Principal Stockholder
The Company has a Revolving Loan and Security Agreement (the "Loan
Agreement") with Mr. Robert Howard, Chairman of the Board of Directors
of the Company, under which Mr. Howard has agreed to advance funds, or
to provide guarantees of advances made by third parties in an amount up
to $3,000,000. The Loan Agreement expires January 4, 2004, 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%. 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 2001, Mr. Howard converted $1,244,219 principal and accrued interest
on advances made under the Loan Agreement into 1,071,436 shares of
restricted common stock of the Company. In March 2002, Mr. Howard
converted $500,000 of advances made under the Loan Agreement into
215,517 shares of restricted common stock of the Company.
69
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(4) Related Party Transactions (continued)
(a) Loan Payable to Principal Stockholder (continued)
During the second quarter of 2002 the Company borrowed $250,000 and in
November 2002 the Company repaid Mr. Howard $50,000 pursuant to the
Loan Agreement. As of December 31, 2002, $200,000 was owed and the
Company had $2,800,000 available for future borrowings under the Loan
Agreement.
The Company had Secured Demand Notes and Security Agreements (the
"Notes") owed to Mr. Robert Howard, totaling $500,000 as of
December 31, 2001. The principal of these Notes was due and payable in
full, together with interest accrued and any penalties provided for, on
demand. Under the terms of the Notes the Company agreed to pay interest
at the lower rate of (a) 12% per annum, compounded monthly or (b) the
maximum rate permitted by applicable law. Payment of the Notes was
secured by a security interest in certain assets of the Company. In
March 2002 the Company repaid the principal balance due in the amount
of $500,000 and the Notes were discharged.
During 1999 the Company borrowed $310,000 from Mr. Robert Howard,
pursuant to Convertible Promissory Notes (the "Promissory Notes").
Under the terms of the Promissory Notes the Company agreed to pay
interest at a fixed rate of 7% per annum. The Promissory Notes entitled
the payee to convert outstanding principal due into shares of the
Company's common stock at $1.00 per share, which was the market price
of the Company's stock at the date the Promissory Notes were issued. In
September 2001, Mr. Howard converted the outstanding balance, including
interest, on the Promissory Notes into 361,474 shares of restricted
common stock of the Company.
(b) Premises Lease and Other Expenses
The Company conducted its operations in premises owned by Mr. Robert
Howard, pursuant to a lease, which expired January 31, 2003. As of
December 31, 2002, future minimum lease payments under this lease are
$6,542 for 2003. The Company was required to pay real estate taxes,
provide insurance and maintain the premises.
Total rent paid under this lease for each of the years ended
December 31, 2002, 2001, and 2000 was $78,500.
In January 2003, the Company relocated its principal executive offices.
See note 11 (a) of the Notes to Consolidated Financial Statements.
70
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(4) Related Party Transactions (continued)
(c) Related Party Sales
During the year ended December 31, 2000, the Company sold engineering
services totaling $24,456 to Presstek, Inc., which Mr. Howard was the
Chairman Emeritus of the Board through December 2000. There were no
sales to Presstek, Inc. in 2001 or 2002.
(5) Accrued Expenses
Accrued expenses consist of the following at December 31, 2002 and
2001:
2002 2001
---- ----
Accrued office closure and related costs $ 774,332 $ -
Accrued litigation 383,000 -
Accrued salary and related expenses 178,127 59,452
Other accrued expenses 441,365 143,612
---------- ---------
$1,776,824 $ 203,064
========== =========
(6) Convertible Subordinated Debentures
The Company has 9% Convertible Subordinated Debentures (the
"Debentures"), which became due December 1, 2001. Interest on the
Debentures is 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,
Debentures owned by related parties in the principal amount of $300,000
were converted into 300,000 shares of Common Stock, at the conversion
price of $1.00 per share on December 31, 1998. In the first quarter of
1999, Debentures in the principal amount of $1,764,000 were converted
into 1,764,000 shares of Common Stock, at the conversion price of $1.00
per share. As of December 31, 2000, the Company's outstanding balance
on its Debentures was $117,000. In December 2001, $107,000 of its
Debentures were presented for payment. As of December 31, 2001 and 2002
the Company's outstanding balance on its Debentures was $10,000.
71
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(7) Notes Payable
During 2001 the Company entered into a financing agreement with a
supplier to purchase $193,492 of components, pursuant to a note payable
(the "Note"). Principal on the Note is payable over 36 months starting
October 1, 2001. Under the terms of the Note the Company agreed to pay
interest at a fixed rate of 7% per annum. As of December 31, 2002, the
Company owed $117,761 pursuant to the Note. Principal payments are due
as follows: December 31, 2003 - $65,526, December 31, 2004 - $52,235.
In connection with the acquisition of ISSI, the Company assumed two
convertible promissory notes payable with an original principal amount
totaling $56,155. The Company is required to make quarterly interest
payments on the outstanding principal balance at a rate of 7% per
annum. The convertible promissory notes payable mature in November 2004
at which time any outstanding principal balance is due. The convertible
promissory notes payable give the holder the right at any time to
convert the then outstanding principal and any accrued interest
balances into share of common stock based on the conversion rate of
$0.89 per share of the Company's common stock.
(8) Stockholders' Equity
(a) Preferred Stock
On December 22, 1999 the Company, pursuant to the authority of the
Company's Board of Directors, adopted a resolution creating a series of
preferred stock designated as 7.0% Series A Convertible Preferred Stock
(the "Series A Preferred Stock"). The number of shares initially
constituting the Series A Preferred Stock was 10,000, par value $.01
per share, which may be decreased (but not increased) by the Board of
Directors without a vote of stockholders, provided, however, that such
number may not be decreased below the number of then outstanding shares
of Series A Preferred Stock. The holders of the shares of Series A
Preferred Stock shall vote together with the Common Stock as a single
class on all actions to be voted on by the stockholders of the Company.
Each share of Series A Preferred Stock shall entitle the holder thereof
to such number of votes per share on each such action as shall equal
the number of whole shares of Common Stock into which each share of
Series A Preferred Stock is then convertible. The holders shall be
entitled to notice of any stockholder's meeting in accordance with the
By-Laws of the Company. Each share of Series A Preferred Stock is
convertible into that number of shares of Common Stock determined by
dividing the aggregate liquidation preference of the number of shares
of Series A Preferred Stock being converted by $1.00 (the "Conversion
Rate"). The Conversion Rate shall be subject to appropriate adjustment
by stock split, dividend or similar division of the Common Stock or
reverse split or similar combinations of the Common Stock prior to
conversion. The Company may at any time after the date of issuance, at
the option of the Board of Directors, redeem in whole or in part the
Series A Preferred Stock by paying cash equal to $100 per share
together with any accrued and unpaid dividends (the "Redemption
Price"). The Redemption Price shall be subject to appropriate
adjustment by the Board of Directors of similar division of shares of
Series A Preferred Stock or reverse split or similar combination of the
Series A Preferred Stock. In the event the Company shall liquidate,
dissolve or wind up, no distribution shall be made to the holders of
shares of Common Stock unless, prior thereto the holders of shares of
Series A Preferred Stock shall have received $100 per share (as
adjusted for any stock dividends, combinations or splits) plus all
declared or accumulated but unpaid dividends. The holders of shares of
Series A Preferred Stock, in preference to the holders of shares of
Common Stock, shall be entitled to receive cumulative dividends of
$7.00 per annum per share, payable annually, subject to appropriate
adjustment by the Board of Directors of the Company in the event of any
stock split, dividend or similar division of shares of Series A
Preferred. Dividends are payable annually, in arrears, on the last day
of December in each year.
72
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(a) Preferred Stock (continued)
On April 12, 2000, the Company sold, in private transactions, a total
of 2,250 shares of its 7% Series A Convertible Preferred Stock ($.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.
On October 19, 2000 the Company, pursuant to the authority of the
Company's Board of Directors, adopted a resolution creating a series of
preferred stock designated as 7.0% Series B Convertible Preferred Stock
(the "Series B Preferred Stock"). The number of shares initially
constituting the Series B Preferred Stock was 2,000, par value $.01 per
share, which may be decreased (but not increased) by the Board of
Directors without a vote of stockholders, provided, however, that such
number may not be decreased below the number of then outstanding shares
of Series B Preferred Stock. The holders of the shares of Series B
Preferred Stock have no voting rights other than is required by law.
Each share of Series B Preferred Stock is convertible into that number
of shares of Common Stock determined by dividing the aggregate
liquidation preference of the number of shares of Series B Preferred
Stock being converted by $2.00 (the "Conversion Rate"). The Conversion
Rate shall be subject to appropriate adjustment by stock split,
dividend or similar division of the Common Stock or reverse split or
similar combinations of the Common Stock prior to conversion. The
Company may at any time after the date of issuance, at the option of
the Board of Directors, redeem in whole or in part the Series B
Preferred Stock by paying cash equal to $1,000 per share together with
any accrued and unpaid dividends (the "Redemption Price"). The
Redemption Price shall be subject to appropriate adjustment by the
Board of Directors of similar division of shares of Series B Preferred
Stock or reverse split or similar combination of the Series B Preferred
Stock. In the event the Company shall liquidate, dissolve or wind up,
no distribution shall be made to the holders of shares of Common Stock
unless, prior thereto, the holders of shares of Series B Preferred
Stock shall have received $1,000 per share (as adjusted for any stock
dividends, combinations or splits) plus all declared or accumulated but
unpaid dividends. The holders of shares of Series B Preferred Stock, in
preference to the holders of shares of Common Stock, shall be entitled
to receive cumulative dividends of $70.00 per annum per share, payable
annually, subject to appropriate adjustment by the Board of Directors
of the Company in the event of any stock split, dividend or similar
division of shares of Series B Preferred. Dividends are payable
annually, in arrears, on the last day of December in each year.
73
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(a) Preferred Stock (continued)
In October 2000 the Company sold, in private transactions, a total of
1,400 shares of its 7% Series B Convertible Preferred Stock ($.01 per
share par value), at $1,000 per share, consisting of 1,350 shares to
unrelated parties, and 50 shares to Mr. W. Scott Parr, for gross
proceeds of $1,400,000.
The 1,400 shares of 7% Series B Convertible Redeemable 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.
74
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(b) Stock Options
The Company has four stock option plans, which are described as
follows:
The Howtek, Inc. 1993 Stock Option Plan, ("The 1993 Plan").
The 1993 Plan (the "Plan") was adopted in November 1993. The Plan
provides for the granting of non-qualifying and incentive stock options
to employees and other persons to purchase up to an aggregate of
1,625,000 shares of the Comp'ny's common stock. The purchase price of
each share for which an option is granted shall be at the discretion of
the Board of Directors or the Committee appointed by the Board of
Directors provided that the purchase price of each share for which an
incentive option is granted shall not be less than the fair market
value of the Company's common stock on the date of grant, except for
options granted to 10% holders for whom the exercise price shall not be
less than 110% of the market price. Incentive options granted under the
Plan vest 100% over periods extending from six months to five years
from the date of grant and expire ten years after the date of grant,
except for 10% holders whose options shall expire five years after the
date of grant. Non-qualifying options granted under the Plan are
generally exercisable over a ten-year period, vesting 1/3 each on the
first, second, and third anniversaries of the date of grant.
The Howtek, Inc. Director Incentive Plan
The Company has a Director Incentive Plan (the "Director Plan"). The
Company has reserved for issuance 250,000 shares under the Director
Plan. The Director Plan provides for the award of (i) restricted and
unrestricted stock, (ii) qualified stock options, and (iii)
non-qualified stock options. The Director Plan is administered by a
committee of at least one director or non-director appointed by the
Board. The term of the Director Plan is ten years and the term of
individual grants of stock options thereunder is ten years. Vesting
periods for exercise of options and restrictions on the transferability
of stock awards is determined by the committee administering the
Director Plan.
75
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(b) Stock Options (continued)
The Howtek, Inc. 2001 Stock Option Plan, ("The 2001 Plan").
The 2001 Plan was adopted in August 2001, at the Annual Meeting of
Stockholders at which the Stockholders voted to replace the 1993 plan,
which had no further stock available for grant. The 2001 Plan provides
for the granting of non-qualifying and incentive stock options to
employees and other persons to purchase up to an aggregate of 1,200,000
shares of the Company's common stock. The purchase price of each share
for which an option is granted shall be at the discretion of the Board
of Directors or the Committee appointed by the Board of Directors
provided that the purchase price of each share for which an incentive
option is granted shall not be less than the fair market value of the
Company's common stock on the date of grant, except for options granted
to 10% holders for whom the exercise price shall not be less than 110%
of the market price. Incentive options granted under the 2001 Plan vest
100% over periods extending from six months to five years from the date
of grant and expire ten years after the date of grant, except for 10%
holders whose options shall expire five years after the date of grant.
Non-qualifying options granted under the 2001 Plan are generally
exercisable over a ten year period, vesting 1/3 each on the first,
second, and third anniversaries of the date of grant.
The Howtek, Inc. 2002 Stock Option Plan, ("The 2002 Plan").
The 2002 Plan was adopted in June 2002, at the Annual Meeting of
Stockholders. The 2002 Plan provides for the granting of non-qualifying
and incentive stock options to employees and other persons to purchase
up to an aggregate of 500,000 shares of the Company's common stock. The
purchase price of each share for which an option is granted shall be at
the discretion of the Board of Directors or the Committee appointed by
the Board of Directors provided that the purchase price of each share
for which an incentive option is granted shall not be less than the
fair market value of the Company's common stock on the date of grant,
except for options granted to 10% holders for whom the exercise price
shall not be less than 110% of the market price. Incentive options
granted under the 2002 Plan vest 100% over periods extending from six
months to five years from the date of grant and expire ten years after
the date of grant, except for 10% holders whose options shall expire
five years after the date of grant. Non-qualifying options granted
under the 2002 Plan are generally exercisable over a ten year period.
76
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(b) Stock Options (continued)
A summary of stock option (incentive and non-qualifying) activity is as
follows:
Option Price range Weighted
Shares per share Average
--------------------------------------------------------------
Outstanding, January 1, 2000 1,283,574 $ .81-$1.81 $1.22
Granted 401,179 $1.37-$1.75 $1.74
Exercised (131,822) $ .81-$1.72 $1.10
Cancelled (127,442) $ .81-$1.81 $1.15
--------------------------------------------------------------
Outstanding, December 31, 2000 1,425,489 $ .81-$1.81 $1.31
Granted 197,000 $ .95-$3.00 $1.21
Exercised (118,832) $ .81-$1.72 $1.28
Cancelled (27,068) $ .81-$1.75 $1.42
--------------------------------------------------------------
Outstanding, December 31, 2001 1,476,589 $ .81-$3.00 $1.28
Granted 2,483,445 $ .80-$3.49 $2.42
Exercised (150,454) $ .80-$1.75 $1.07
Cancelled (34,832) $1.72-$3.49 $2.24
--------------------------------------------------------------
Outstanding, December 31, 2002 3,774,748 $ .80-$3.49 $2.04
==============================================================
Exercisable at year-end
2000 678,417 $ .81-$1.81 $1.28
2001 1,078,641 $ .81-$3.00 $1.27
2002 2,976,918 $ .80-$3.49 $2.05
Available for future grants
2002 771,305
The weighted-average fair value of options granted during the year was
$1.49 per option for 2002, $0.61 per option for 2001 and $1.15 per
option for 2000.
The weighted-average remaining contractual life of stock options
outstanding for all plans at December 31, 2002 was 7.8 years.
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ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(b) Stock Options (continued)
The following table summarizes information about stock options
outstanding at December 31, 2002:
$.80 $1.00 $1.50
to to to
Range of Exercise Prices: $.95 $1.13 $3.49
-------------------------------
Outstanding options:
Number outstanding at December 31, 2002 851,668 374,756 2,548,324
Weighted average remaining contractual life (years) 6.9 5.1 8.5
Weighted average exercise price $.83 $1.12 $2.58
Exercisable options:
Number outstanding at December 31, 2002 761,950 374,756 1,840,212
Weighted average remaining contractual life (years) 6.8 5.1 8.1
Weighted average exercise price $.82 $1.12 $2.74
(c) Earnings per Share
The Company follows Statement of Financial Accounting Standards No.
128, "Earnings per Share", which requires the presentation of both
basic and diluted earning per share on the face of the Statements of
Operations. Conversion of the subordinated debentures and other
convertible debt and preferred stock and assumed exercise of options
and warrants are not included in the calculation of diluted loss per
share since the effect would be antidilutive. Accordingly, basic and
diluted net loss per share do not differ for any period presented. The
following table summarizes the common stock equivalent of securities
that were outstanding as of December 31, 2002, 2001 and 2000, but not
included in the calculation of diluted net loss per share because such
shares are antidilutive:
2002 2001 2000
---- ---- ----
Stock options 3,774,748 1,476,589 1,425,489
Stock warrants 57,000 57,000 57,000
Convertible Subordinated Debentures - - 6,158
Convertible Revolving Promissory Note 80,000 - 393,607
Convertible Promissory Note - - 310,000
Convertible Series A Preferred Stock 715,000 815,000 815,000
Convertible Series B Preferred Stock 700,000 700,000 700,000
78
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8) Stockholders' Equity (continued)
(d) Stock Subscription Warrants
In December, 1999 the Company issued a common stock purchase warrant
(the "Warrant") to the company (the "Manufacturer") responsible for the
assembly of the Company's MultiRAD(TM) medical film digitizer, as part
of its manufacturing agreement. The Warrant entitles the Manufacturer
to purchase from the Company up to 50,000 shares of the Company's
common stock at $2.50 per share. The Manufacturer may exercise the
Warrant at any time or from time to time on or prior to December 31,
2004. The Company estimated the fair value of the Warrant at the date
of issue to be $54,000 using the Black-Scholes option-pricing model.
Accordingly, the value of the Warrant was expensed over the two- year
period of the agreement.
During 2000 the Company issued a common stock purchase warrant (the
"New Warrant") to the company (the "Supplier") responsible for software
development of certain of the Company's software, as part of its
development agreement entered into in 2000. The 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 Warrant at any time or from time to time on or prior to February
28, 2005. The Company estimated the fair value of the Warrant at the
date of issue to be $12,818 using the Black-Scholes option-pricing
model. The value of the Warrant was expensed in 2000.
(9) Income Taxes
As a result of the 2002, 2001 and 2000 losses, no income tax expense
was incurred for these years.
Deferred income taxes reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations.
Deferred tax liabilities (assets) are comprised of the following at
December 31:
2002 2001
---- ----
Inventory (Section 263A) $ (393,000) $ (155,000)
Inventory reserves ( 24,000) (136,000)
Receivable reserves ( 14,000) ( 56,000)
Other accruals ( 24,000) ( 18,000)
Accumulated depreciation 9,000 1,000
Acquisition related intangibles 2,102,000 -
Tax credits (2,459,000) (2,388,000)
NOL carry forward (14,351,000) (14,222,000)
------------ ------------
Gross deferred tax asset (15,154,000) (16,974,000)
Deferred tax assets valuation allowance $ 15,154,000 $ 16,974,000
------------ ------------
Net deferred tax assets $ - 0 - $ - 0 -
============ ============
79
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(9) Income Taxes (continued)
As of December 31, 2002, the Company has net operating loss
carryforwards totaling approximately $42,300,000. The amount of the net
operating loss carryforwards, which may be utilized in any future
period, may be subject to certain limitations based upon changes in the
ownership of the Company's common stock. The following is a breakdown
of the net operating loss expiration period:
Expiration date Amount of remaining NOL
2003 3,300,000
2004 4,200,000
2005 2,200,000
2006 2,200,000
2007 300,000
2008 600,000
2009 100,000
2010 4,000,000
2011 4,400,000
2012 2,300,000
2018 3,600,000
2019 2,200,000
2020 1,400,000
2021 2,100,000
2022 9,400,000
In addition the Company has available tax credit carryforwards
(adjusted to reflect provisions of the Tax Reform Act of 1986) of
approximately $2,459,000, which are available to offset future taxable
income and income tax liabilities, when earned or incurred. These
amounts expire in various years through 2022.
(10) Sales Information
(a) Geographic Information
The Company's sales are made to U.S. distributors, dealers and to
foreign distributors of computer and related products. Total export
sales, which includes sales made to a U.S. based international
distributor of computer and related products, were $301,000 or 6% of
total sales in 2002, $944,000 or 20% of total sales in 2001 and
$3,243,000 or 42% of total sales in 2000.
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ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(10) Sales Information (continued)
(a) Geographic Information (continued)
The Company's principal concentration of export sales was in Europe,
which accounted for 26% of 2002 export sales. In 2001, Australia
accounted for 35% of the Company's export sales and in 2000, with the
addition of a large OEM customer, the Company's principal concentration
of export sales was in Canada, which accounted for 71% of export sales.
The balance of the export sales was into the Far East, Mexico and
Central America.
As of December 31, 2002 and 2001 the Company had outstanding
receivables of $15,000 and $136,000, respectively, from distributors of
its products who are located outside of the United States.
(b) Major Customers
During the year ended December 31, 2002 the Company had one major
customer with sales of $2,631,709 (or 53% of sales) and an accounts
receivable balance of $1,190,990 at December 31, 2002. The Company did
not have any major customers in 2001. In 2000 the Company had one major
customer that operated as an OEM, with sales of $2,062,955 (or 26% of
sales) and an accounts receivable balance of $428,994 at December 31,
2000.
(c) Product Information
The Company's revenues by product line are as follows:
For the year ended December 31, 2002 2001 2000
---- ---- ----
CAD $2,628,135 $ - $ -
Medical imaging 1,660,493 2,315,738 2,256,312
FotoFunnel 274,169 988,199 2,217,798
Graphic arts 437,387 1,531,360 3,319,407
---------- ---------- ----------
Total $5,000,184 $4,835,297 $7,793,517
========== ========== ==========
(11) Commitments and Contingencies
(a) Lease Obligations
As of December 31, 2002, the Company had two lease obligations related
to its facilities. The Company's principal executive offices and
research and development laboratory in Hudson, New Hampshire was leased
by the Company from Mr. Robert Howard, Chairman of the Board of
Directors pursuant to a lease which expired January 31, 2003. The lease
obligation for 2003 is approximately $6,542.
81
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(11) Commitments and Contingencies (continued)
(a) Lease Obligations (continued)
In addition, as a result of its acquisition of ISSI, the Company leases
a facility for its software research and development group located at
4902 Eisenhower Blvd, Suite 185, Tampa, Florida. The facility consists
of 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.
Rental expense for all leases for the years ended December 31, 2002,
2001 and 2000 was $198,429, $78,500 and $78,500, respectively.
In January 2003, the Company relocated its principal executive offices
and research and development laboratory to 4 Townsend West, Suite 17,
Nashua, New Hampshire, from its previous location in Hudson, 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 $40,200.
Future minimum rental payments due under these agreements as of
December 31, 2002 are approximately as follows:
Fiscal Year Amount
----------- ------
2003 $ 90,600
2004 92,400
2005 95,500
2006 98,600
2007 32,400
--------
$409,500
========
(b) Litigation
During 2002, a complaint was filed against the Company and 213 other
defendants in the United States District Court for the Eastern District
of Texas, entitled The Massachusetts Institute of Technology and
Electronics for Imaging, Inc. v. Abacus Software Inc. et al., Case No.
501CV344. The plaintiff claims the Company and other defendants have
infringed a United States patent alleged to cover color reproduction
system technology. With respect to the Company, the alleged
infringement involves certain of the Company scanners and other
products sold to customers in the graphic arts/prepress and
photographic markets. The plaintiff seeks unspecified damages together
with interest, injunctive relief and recovery of reasonable attorney's
fees.
82
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(11) Commitments and Contingencies (continued)
(b) Litigation (continued)
Based upon management's review of the claim, it is estimated that the
Company's probable and estimable infringement liability for this claim
will range between $383,000 and $639,000. As of December 31, 2002, the
Company has recorded an accrual of $383,000 related to this claim.
While it is not possible to predict the ultimate outcome of the
infringement claim, the Company believes that resolution of this matter
is not expected to have a material adverse effect on the Company's
financial position. The Company cautions, however, that these estimates
for infringement claims are difficult to predict and may be influenced
by many factors. Accordingly, this matter, if resolved in a manner
different from the estimate, could have a material effect on the
Company's financial position.
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 alleges that ISSI's MammoReader device infringes certain
patents owned by R2 Technology, Inc. The complaint requests treble
damages, but does not specify the amount of damages sought. The
complaint also seeks to enjoin ISSI from further infringement. On July
11, 2002, subsequent to the acquisition of ISSI by Howtek, the
plaintiffs amended their complaint to add iCAD, Inc. (formerly, Howtek
Inc.) and its subsidiary ISSI Acquisition Corp. as additional parties.
The Company believes the lawsuit is without merit and intents to
vigorously defend itself. On November 8, 2002, the Company filed an
initial answer to the lawsuit, denying all claims and asserting a
counterclaim challenging the validity of the patents in question.
(12) Financial instruments
The carrying amounts of financial instruments, including cash and
equivalents, accounts receivable, accounts payable, accrued expenses,
demand notes payable to related parties and convertible debentures and
other convertible debt approximated fair value as of December 31, 2002
and 2001, due to either short maturity or terms similar to those
available to similar companies in the open market.
83
ICAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(13) Quarterly Financial Data (unaudited)
Net Gross Net (Loss)
2002 sales profit income (loss) per share
---- ---------- ---------- ------------- ---------
First quarter $ 775,633 $ 180,221 $ (521,122) $(0.04)
Second quarter $ 776,600 $(2,665,747) $(7,359,510) $(0.47)
Third quarter $1,286,966 $ 727,887 $(1,640,665) $(0.06)
Fourth quarter $2,160,985 $ 1,596,180 $ 103,007 $ 0.00
2001
----
First quarter $1,513,604 $ 392,141 $ (639,591) $(0.05)
Second quarter $ 932,160 $ 146,627 $ (797,943) $(0.06)
Third quarter $1,139,025 $ 302,348 $ (548,205) $(0.04)
Fourth quarter $1,250,508 $ 57,775 $ (635,032) $(0.05)
The above totals are reflective of the Company's decision in the second
quarter of 2002 to no longer support its graphic arts and photographic
product lines. In connection with the discontinuance, the Company
recorded charges related to the write off of inventory, fixed assets
and intangible assets related to those product lines. Total charges
incurred during the second quarter of 2002 related to the write off
amounted to $2,786,540. Results for the third and fourth quarters of
2002 include the operations of ISSI which was acquired on June 28,
2002. During the fourth quarter of 2002, the Company recorded sales of
$188,177 related to the licensing and divestiture of discontinued
product lines.
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ICAD, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts and Reserves
Col. A Col. B Col. C Col. D Col. E
- ------------------------------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning Cost and at end
Description of Year Expenses Deductions of Year
- ------------------------------------------------------------------------------------------------------
Year End December 31, 2002:
Allowance for Doubtful Accounts $ 165,000 $ 26,560 $ 151,560 (1) $ 40,000
Inventory Reserve $ 700,000 $ 2,622,151 $ 3,252,151 (2) $ 70,000
Year End December 31, 2001:
Allowance for Doubtful Accounts $ 255,999 $ 50,845 $ 141,844 (1) $ 165,000
Inventory Reserve $ 361,931 $ 379,285 $ 41,216 (2) $ 700,000
Year End December 31, 2000:
Allowance for Doubtful Accounts $ 150,500 $ 105,499 $ - (1) $ 255,999
Inventory Reserve $ 200,175 $ 289,370 $ 127,614 (2) $ 361,931
(1) Represents the amount of accounts charged off.
(2) Represents inventory written off and disposed of.
85