UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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.
(Exact name of registrant as specified in its charter)
Delaware 02-0377419
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
21 Park Avenue, Hudson, New Hampshire 03051
(Address of principal executive offices) (Zip Code)
(603) 882-5200
(Registrant's telephone number, including area code)
6405 Congress Avenue, Boca Raton, Florida 33487
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES |X| NO |_|.
As of the close of business on November 8, 2002 there were 26,239,428
shares outstanding of the issuer's Common Stock, $.01 par value.
ICAD, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001 3
Consolidated Statements of Operations for the
three and nine month periods ended September 30, 2002
and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8K 14
Signatures 15
Certifications 16-17
2
ICAD, INC.
Consolidated Balance Sheets
September 30, 2002 December 31, 2001
------------------ -----------------
(unaudited) (unaudited)
Assets
Current assets:
Cash and equivalents $ 1,527,767 $ 495,360
Trade accounts receivable, net of allowance
for doubtful accounts of $97,510 in 2002 and
$165,000 in 2001 789,582 691,415
Inventory 298,726 2,363,237
Prepaid and other 105,488 36,590
------------ ------------
Total current assets 2,721,563 3,586,602
------------ ------------
Property and equipment:
Equipment 793,315 1,408,347
Leasehold improvements -- 41,721
------------ ------------
793,315 1,450,068
Less accumulated depreciation and amortization 544,669 1,118,685
------------ ------------
Net property and equipment 248,646 331,383
------------ ------------
Other assets:
Software development costs, net -- 230,247
Patents, net -- 12,893
Technology intangible, net 3,805,069 --
Distribution agreement, net 1,539,328 --
Goodwill 17,282,973 --
------------ ------------
Total other assets 22,627,370 243,140
------------ ------------
Total assets $ 25,597,579 $ 4,161,125
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,394,664 $ 1,026,335
Accrued interest 223,783 203,299
Accrued expenses 2,330,351 203,064
Loans payable to related party -- 500,000
Convertible subordinated debentures 10,000 10,000
Current maurities of note payable 64,393 61,109
------------ ------------
Total current liabilities 4,023,191 2,003,807
Note payable, less current maturities 125,202 117,761
Loans payable to related party 250,000 --
------------ ------------
Total liabilities 4,398,393 2,121,568
------------ ------------
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 aggregated
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 26,307,304 in 2002
and 15,241,833 shares in 2001; outstanding
26,239,428 in 2002 and 15,173,957 shares in 2001 263,073 152,418
Additional paid-in capital 85,677,508 57,107,227
Accumulated deficit (63,791,217) (54,269,920)
Treasury stock, at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Total stockholders' equity 21,199,186 2,039,557
------------ ------------
Total liabilities and stockholders' equity $ 25,597,579 $ 4,161,125
============ ============
See accompanying notes to consolidated financial statements.
3
ICAD, INC.
Consolidated Statements of Operations
(unaudited)
Three Months Nine Months
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
Sales $ 1,286,966 $ 1,139,025 $ 2,839,199 $ 3,584,789
Cost of Sales 559,079 836,677 4,596,838 2,743,673
------------ ------------ ------------ ------------
Gross Margin 727,887 302,348 (1,757,639) 841,116
------------ ------------ ------------ ------------
Operating expenses:
Engineering and product development 478,720 199,736 1,005,615 562,600
General and administrative 1,698,084 282,070 5,982,671 876,209
Marketing and sales 181,739 346,150 736,134 1,312,033
------------ ------------ ------------ ------------
Total operating expenses 2,358,543 827,956 7,724,420 2,750,842
------------ ------------ ------------ ------------
Loss from operations (1,630,656) (525,608) (9,482,059) (1,909,726)
Interest expense - net 10,009 22,597 39,238 76,013
------------ ------------ ------------ ------------
Net loss $ (1,640,665) $ (548,205) $ (9,521,297) $ (1,985,739)
Preferred dividend 37,316 39,624 110,732 117,580
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (1,677,981) $ (587,829) $ (9,632,029) $ (2,103,319)
============ ============ ============ ============
Net loss per share
Basic and diluted $ (0.06) $ (0.04) $ (0.50) $ (0.15)
Weighted average number of shares used
in computing loss per share
Basic and diluted 26,141,091 14,017,592 19,134,031 13,739,375
See accompanying notes to consolidated financial statements.
4
ICAD, INC.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Nine Months
September 30, 2002 September 30,2001
------------------ -----------------
Cash flows from operating activities:
Net loss $ (9,521,297) $ (1,985,739)
------------ ------------
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation 108,934 177,403
Amortization 155,455 187,103
Loss on disposal of assets 476,850 --
Compensation expense relative to issue of
stock at merger 2,800,000 --
Changes in operating assets and liabilities, net
of effects from acquisition of ISSI:
Accounts receivable 593,323 64,745
Inventory 2,298,772 (489,312)
Prepaid and other (16,342) 62,732
Accounts payable 200,776 261,286
Accrued expenses 987,314 165,496
------------ ------------
Total adjustments 7,605,082 429,453
------------ ------------
Net cash used for operating activities (1,916,215) (1,556,286)
------------ ------------
Cash flows from investing activities:
Additions to patents, software development and other -- (101,875)
Additions to property and equipment (76,146) (75,320)
Acquisition of ISSI, net of cash acquired 2,202,040 --
------------ ------------
Net cash provided by (used for) investing activities 2,125,894 (177,195)
------------ ------------
Cash flows from financing activities:
Issuance of common stock for cash 118,158 152,258
Proceeds from investor 500,000 --
Proceeds of convertible note payable to principal
stockholders 750,000 --
Proceeds of loan from related parties -- 200,000
Payment of demand note payable to principal
stockholders (500,000) --
Proceeds (payments) of note payable (45,430) 128,995
------------ ------------
Net cash provided by financing activities 822,728 481,253
------------ ------------
Increase (decrease) in cash and equivalents 1,032,407 (1,252,228)
Cash and equivalents, beginning of period 495,360 1,444,771
------------ ------------
Cash and equivalents, end of period $ 1,527,767 $ 192,543
============ ============
Supplemental disclosure of non-cash items from
investing and financing activities:
Conversion of loan to related party into
Common Stock $ 500,000 $ --
============ ============
Accrued dividends on convertible preferred stock $ 110,732 $ --
============ ============
Fair market value of icad common stock and common
stock options issued to acquire capital stock of ISSI $ 27,673,500 $ --
============ ============
Net tangible assets of ISSI acquired, excluding cash
acquired of $2,202,040 $ 406,433 $ --
============ ============
Fair market value of indentifiable intangible assets
acquired from ISSI $ 5,437,000 $ --
============ ============
See accompanying notes to consolidated financial statements.
5
ICAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2002
(1) Accounting Policies
In the opinion of management all adjustments and accruals (consisting only
of normal recurring adjustments), which are necessary for a fair
presentation of operating results are reflected in the accompanying
consolidated financial statements. Reference should be made to Howtek,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001 for
a summary of significant accounting policies. Interim period amounts are
not necessarily indicative of the results of operations for the full
fiscal year.
(2) Loan Payable to Related Party
The Company has a Revolving Loan and Security Agreement (the "Loan
Agreement") with Mr. Robert Howard, Chairman of the Board of Directors of
the Company, under which Mr. Howard has agreed to advance funds, or to
provide guarantees of advances made by third parties in an amount up to
$3,000,000. 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. During the second quarter of 2002 the
Company borrowed $250,000 pursuant to the Loan Agreement.
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. At September 30, 2002, $250,000 was outstanding under the Loan
Agreement and $2,750,000 was available for future borrowings.
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.
6
ICAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2002
(3) Litigation
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 case seeks unspecified damages together with
interest, injunctive relief and recovery of reasonable attorney's fees.
The Company believes it is fully reserved for any potential liability
under the suit.
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.
(4) Acquisition
On June 28, 2002, the Company completed the acquisition of Intelligent
Systems Software, Inc. ("ISSI") pursuant to the 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 the corporation immediately prior
to the merger, as approved by the Company's shareholders and in accordance
with the provisions of the merger agreement. 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 represents 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
7
ICAD, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2002
(4) Acquisition (continued)
since the effective date, the close of business on June 28, 2002. The
purchase price has been allocated to net assets acquired based on the
preliminary estimate of their fair values. The excess of the purchase
price over net assets acquired has been allocated to Goodwill for
approximately $17,283,000.
The consolidated statements of operations and cash flows for the three and
nine month periods ended September 30, 2002 include the results of
operations and cash flows of ISSI from June 29, 2002 through September 30,
2002.
The unaudited pro forma combined results of operations of the Company and
the ISSI business acquired in June 2002 for the nine month period ended
September 30, 2002 and 2001, assuming that the transaction had occurred on
January 1, 2001 and after giving effect to certain pro forma adjustments
are as follows:
Nine months ended September 30, 2002 2001
--------------------------------------------------------------------------
Sales $ 4,441,651 $ 3,985,410
Loss from operations $(9,745,442) $(8,861,086)
Net loss $(9,784,680) $(8,937,099)
Net loss per share:
Basic and diluted $ (0.38) $ (0.37)
(5) Closure of Boca Raton, Florida Facility
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 two members of
senior management, and took action to close the Company's office in Boca
Raton, Florida by the end of January 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 on the accompanying consolidated
statement of operations. These measures are expected to reduce operating
costs by approximately $770,000 per year.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Certain information included in this Item 2 and elsewhere in this Form
10-Q that are not historical facts contain forward looking statements that
involve a number of known and unknown risks, uncertainties and other factors
that could cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievement
expressed or implied by such forward looking statements. These risks and
uncertainties include, but are not limited to, uncertainty of future sales
levels, protection of patents and other proprietary rights, the impact of supply
and manufacturing constraints or difficulties, product market acceptance,
possible technological obsolescence of products, increased competition,
litigation and/or government regulation, changes in Medicare reimbursement
policies, the effect of costs and accounting charges related to the merger of
Howtek's and ISSI's businesses, 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", and similar expressions identify forward-looking statements. Readers
are cautioned not to place undue reliance on those forward-looking statements,
which speak only as of the date the statement was made.
Results of Operations
Overview
Early detection of breast cancer saves lives. iCAD, Inc., formerly Howtek, Inc.,
("the Company") designs, develops, manufactures and markets Computer Aided
Detection (CAD) imaging technology for mammography applications. Computer-aided
detection from iCAD, Inc. can detect 23% of breast cancers, an average of 14
months earlier than screening mammography alone. iCAD offers the fastest CAD
system available, the only system to look for asymmetries, and the most
effective system available to detect breast masses.
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.
iCAD, the only vertically integrated company in its market, also manufactures
medical film digitizers for a variety of medical imaging and other applications.
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.
Merger with ISSI
On June 28, 2002, the Company completed the acquisition of Intelligent Systems
Software, Inc. ("ISSI") pursuant to the 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
9
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.
The Company's plan is to concentrate its sales efforts in the imaging and
scanning business on the computer-aided detection of breast cancer market, and
on complementary markets for its medical film digitizers. The Company's
MammoReader(TM) product includes proprietary software technology developed by
the Company and a radiographic film digitizer manufactured by the Company,
together with standard computer and display equipment. This continued shift in
business focus, from graphic arts and photographic product lines to CAD imaging
and medical digitizer products, was largely responsible for reduced overall
sales during the first and second quarter of 2002.
At the end of the second quarter of 2002, consistent with the Company's
intention to concentrate its efforts in the imaging and scanning business on
higher margin medical and computer assisted detection applications and seek
licensees for its graphic arts and photographic product lines, the Company
established non-cash reserves and took inventory adjustments associated with
these products, which total approximately $3 million as of the end of September
30, 2002.
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 two members of senior management, and took action to close
the Company's office in Boca Raton, Florida by the end of January 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 on the accompanying
consolidated statement of operations. These measures are expected to reduce
operating costs by approximately $770,000 per year.
Subsequent to September 30, 2002, the Company has announced an update to its CAD
software, which improves speed, usability and workflow, and expanded its line of
iCAD(TM) systems for computer-aided detection of breast cancer. The MammoReader
II(TM) is a very high-speed CAD system with twin mammography film digitizers,
while the new MammoWriter(TM) is a lower priced system that provides CAD results
in printed form for radiologist review. The Company's Howtek Devices Corporation
subsidiary has introduced a new high-speed film digitizer, the Fulcrum(TM), with
the ability to detect and reproduce structural detail and improved optical
densities. Working through its exclusive United States distributor, the Company
has also announced its CADLease(TM)
10
operating lease program for iCAD systems, which allows customer's to acquire and
offer the Company's CAD solutions without having to fund large capital outlays.
The Company recently concluded the licensing and divestiture of its graphic arts
and prepress business line, and is no longer directly active in this area.
Because the Company is fully reserved for the liquidation of this business line,
any future sale of former Howtek products by the Company's graphic arts licensee
will contribute to the Company's earnings in future periods.
Quarter Ended September 30, 2002 compared to Quarter Ended September 30, 2001
and Nine Months Ended September 30, 2002 compared to Nine Months Ended September
30, 2001
Sales. Sales of the Company's CAD and medical imaging products for the three
months ended September 30, 2002 were $1,286,966, compared with sales of medical
imaging products and total sales for the quarter ended September 30, 2001 of
$590,231 and $1,139,025, respectively. Sales for the nine months ended September
30, 2002, including CAD sales from June 28, 2002, were $2,839,199, compared with
medical imaging and total sales of $1,644,100 and $3,584,789, respectively, for
the comparable period in 2001. Increased sales during the third quarter were a
result of the addition of the CAD product line through acquisition of ISSI on
June 28, 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 reduced overall sales during the first and second
quarters of 2002. Sales are expected to increase in future periods as a result
of increased sales of CAD products.
Gross Margins. Gross margin increased in the three months ended September 30,
2002 to 57% compared to 27% in the comparable period in 2001. The increase in
gross margin is due primarily to sales of the Company's CAD product, which
carries a higher gross margin than the Company's previous product lines. For the
nine month period ended September 30, 2002, gross margins decreased as a result
of the June 30, 2002 write-offs of inventory relating to graphic arts and
photographic products. Before the write-offs, gross margins for the nine month
period ended September 30, 2002 increased to 38% from 23% in the comparable
period in 2001. Exclusive of the write-offs, gross margin increased as a result
of sales of CAD and medical imaging products and reduced production overhead and
indirect production expenses. The Company expects margins to improve further as
a result of increasing sales of its CAD systems and recent introduction of a
higher margin model of its CAD system.
Engineering and Product Development. Engineering and product development costs
for the three and nine month periods ended September 30, 2002 increased from
$199,736 and $562,600, respectively, in 2001 to $478,720 and $1,005,615 in 2002.
The increase in engineering and product development costs results primarily from
the Company's addition, as a result of its acquisition of ISSI, of a software
technology development group to support its Computer Aided Detection products.
Additionally, the Company continues its development of its new Fulcrum medical
film digitizer product. The Company expects engineering and product development
costs to increase for the remainder of 2002 over the comparable period of 2001.
11
General and Administrative. Primarily as a result of non-recurring severance
benefits and write-offs of facility costs and fixed assets resulting from the
Company's decision to reduce staff and close its Boca Raton office, general and
administrative expenses in the three month period ended September 30, 2002
increased by $1,416,014, from $282,070 in 2001 to $1,698,084, in 2002. General
and administrative expenses for the nine month period ended September 30, 2002
increased $5,106,462, from $876,209 in 2001 to $5,982,671 in 2002. The increase
in general and administrative expenses for the nine month period 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 iCAD. Pursuant to the acquisition
agreement between the two companies, which was approved by the Company's
shareholders, 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 made possible by the
combination of ISSI and Howtek, a write-off of fixed assets, including test
equipment and software development costs, relating to its graphic arts and
photographic product lines, an increase in provision for doubtful accounts, and
an accrued litigation cost in connection with the complaint filed against the
Company by The Massachusetts Institute of Technology and Electronics for
Imaging, Inc. See Part II, Item 1 - Legal Proceedings.
Marketing and Sales Expenses. Marketing and sales expenses for the three and
nine month periods ended September 30, 2002 decreased 47% and 44%, respectively,
from $346,150 and $1,312,033, respectively, in 2001 to $181,739 and $736,134,
respectively, in 2002. This decrease is due primarily to a significant reduction
in expenses related to the Company's traditional graphic arts and FotoFunnel
product lines. With the release of its MammoReader product and the introduction
of its new medical film digitizer product, the Company expects marketing and
sales expenses to increase over the remainder of 2002 over the comparable period
of 2001.
Interest Expense. Net interest expense for the three and nine month periods
ended September 30, 2002 decreased to $10,009 and $39,238, respectively, from
$22,597 and $76,013, respectively, in 2001. This decrease is due primarily to a
decrease in loan balances and interest rates.
As a result of the foregoing, the Company recorded a net loss of $1,640,665 or
$0.06 per share for the three month period ended September 30, 2002 on sales of
$1,286,966 compared to a net loss of $548,205 or $0.04 per share from the same
period in 2001 on sales of $1,139,025. The loss for the nine months ended
September 30, 2002 was $9,521,297 or $0.50 per share on sales of $2,839,199
compared with a net loss of $1,985,739 or $0.15 per share on sales of $3,584,789
for the nine months ended September 30, 2001.
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
$2,750,000 was available at September 30, 2002.
12
At September 30, 2002 the Company had current assets of $2,721,563, current
liabilities of $4,023,191 and working capital deficit of $1,301,628. The ratio
of current assets to current liabilities was 0.7:1
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures
Based upon an evaluation conducted by the Company's Chief Executive Officer and
Chief Financial Officer of the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934) as of a date within 90 days of the filing date of this Quarterly Report on
Form 10-Q, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities Exchange Commission's rules and forms.
b) Changes in internal controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluation.
13
PART II OTHER INFORMATION
Item 1. 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 case seeks
unspecified damages together with interest, injunctive relief and recovery of
reasonable attorney's fees. The Company believes it is fully reserved for any
potential liability under the suit.
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 counterclaims challenging the validity of the R2
patents in question.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Separation agreement with the Company's former Chief Executive
Officer.
10.2 Separation agreement with the Company's former Vice President
of Finance.
99.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) During the quarter ended September 30, 2002 a Form 8-K was filed
under items 2, 5 and 7 to report the consummation of the merger
between Howtek and ISSI, and increase in the Company's authorized
common stock and change in the Company's corporate name to iCAD,
Inc.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
iCAD, Inc.
-----------------
(Company)
Date: November 14, 2002 By: /s/ W. Scott Parr
------------------------- --------------------------------------
W. Scott Parr
Chief Executive Officer,
Director
Date: November 14, 2002 By: /s/ Annette L. Heroux
------------------------- --------------------------------------
Annette L. Heroux
Chief Financial Officer, Controller
15
CERTIFICATION
I, W. Scott Parr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of iCAD, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: November 14, 2002 By: /s/ W. Scott Parr
-------------------------- ----------------------------------
W. Scott Parr
Chief Executive Officer
16
CERTIFICATION
I, Annette L. Heroux, certify that:
1. I have reviewed this quarterly report on Form 10-Q of iCAD, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly report is being prepared;
d) 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 quarterly report (the "Evaluation Date"); and
e) presented in this quarterly 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
quarterly 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: November 14, 2002 By: /s/ Annette L. Heroux
--------------------------- ----------------------------------
Annette L. Heroux
Chief Financial Officer
17