Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM
10-K
(Mark
One)
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31,
2008
OR
o
|
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 Identification No.)
|
of
incorporation or organization)
|
|
|
98
Spit Brook Road, Suite 100, Nashua, New Hampshire
|
|
03062
|
(
Address of principal executive offices)
|
|
(
Zip
Code)
|
Registrant's
telephone number, including area code: (603)
882-5200
Securities
registered pursuant to Section 12(b) of the Act:
|
|
Name
of each exchange on which registered
|
Common
Stock, $.01 par value
|
|
The
Nasdaq Stock Market
LLC
|
Securities
registered pursuant to Section 12 (g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
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
o
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
Accelerated filer o
Accelerated filer x.
Non-accelerated
filer o. Smaller
reporting company o
(do not check if a smaller
reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No x.
The
aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price for the registrant's Common Stock on
June 30, 2008 was $97,833,906. Shares of voting stock held by
each officer and director and by each person who, as of June 30, 2008,
may be deemed to have beneficially owned more than 5% of the outstanding voting
stock have been excluded. This determination of affiliate status is not
necessarily a conclusive determination of affiliate status for any other
purpose.
As of
March 1, 2009, the registrant had 45,348,218 shares of Common Stock
outstanding.
Documents
Incorporated by Reference: Certain portions of the registrant’s
definitive proxy statement for its Annual Meeting of Stockholders to be held in
2009 to be filed with the Commission are incorporated by reference into Part III
of this report.
“Safe
Harbor” Statement under the Private Securities Litigation Reform Act of
1995:
Certain
information included in this report on Form 10-K that are not historical facts
contain forward looking statements that involve a number of known and unknown
risks, uncertainties and other factors that could cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievement expressed or implied by such forward
looking statements. These risks and uncertainties include, but are
not limited to, uncertainty of future sales levels, protection of patents and
other proprietary rights, the impact of supply and manufacturing constraints or
difficulties, product market acceptance, possible technological obsolescence of
products, increased competition, litigation and/or government regulation,
changes in Medicare reimbursement policies, competitive factors, the effects of
a decline in the economy in markets served by the Company and other risks
detailed in this report and in the Company’s other filings with the
United States Securities and Exchange Commission (“SEC”). 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. Unless the context otherwise requires, the terms “iCAD”,
“Company”, “we”, “our” and “us” means iCAD, Inc. and any consolidated
subsidiaries.
PART I
Item
1. Business.
General
iCAD was
founded in 1984 as Howtek, Inc. (“Howtek”). Howtek developed,
manufactured and marketed digitizing systems, also referred to as
scanners. The scanners converted printed, photographic and other hard
copy images to digital form for use in the graphic arts, photo finishing and
medical industries. In 1987 Howtek began development of its first
scanner with the goals of delivering a smaller, easier to use and less costly
alternative to traditional scanners on the market at that
time. Howtek followed with a series of products further improving the
quality of digital imaging while reducing the price and complexity of digitizing
systems.
In 2001,
foreseeing a decline in the graphic arts and photo finishing industries, the
Company elected to focus its efforts solely on the medical imaging industry with
increased product offerings. This goal was advanced in June 2002 with the
Company’s acquisition of Intelligent Systems Software, Inc. (“ISSI”), a
privately held company based in Florida offering an approved Computer-Aided
Detection system (“CAD”) for breast cancer. In December 2003, the Company also
acquired Qualia Computing, Inc. (“Qualia”), a privately held company based in
Ohio, and its subsidiaries, including CADx Systems, Inc. (together
“CADx”). These acquisitions brought together two of the three
companies with clearance by the United States Food and Drug Administration
(“FDA”) to market CAD solutions for breast cancer in the United
States.
Over the
next four years the Company established itself as an industry-leading provider
of CAD solutions for mammography. iCAD offers a comprehensive range of
high-performance upgradeable products for use with mammography (digital
radiography, computed radiography and film-based). These solutions enable
radiologists to better serve patients by identifying pathologies and pinpointing
cancer earlier. Early detection of cancer is the key to better prognosis, less
invasive and lower treatment costs, and higher survival rates. Performed as an
adjunct to mammography screening, CAD has quickly become the standard of care in
breast cancer detection, helping radiologists improve clinical outcomes while
enhancing workflow. Since iCAD received FDA clearance for its first
breast cancer detection product in January 2002, nearly 3,000 iCAD systems have
been placed in mammography facilities worldwide.
iCAD is
also applying its patented detection technology and algorithms to the
development of CAD solutions for use with virtual colonoscopy or CT Colonography
(“CTC”) to improve the detection of colonic polyps. The Company’s pattern
recognition and image analysis expertise are readily applicable to colonic polyp
detection and the Company is developing a CTC CAD solution. The Company
completed clinical testing of its CTC CAD product in the first quarter of 2009
and the Company is in the process of preparing a 510K premarket notification
which we anticipate submitting to the FDA in March or April 2009.
In July
2008, iCAD expanded its portfolio of products with the acquisition of
substantially all of the assets of 3TP LLC, dba CAD Sciences (“CAD Sciences”).
The technology acquired is a pharmacokinetic based CAD technology that aids in
the interpretation of contrast enhanced Magnetic Resonance Imaging (“MRI”)
images. This transaction extends iCAD’s position beyond mammography CAD and
provides the Company with a portfolio of advanced image analysis and workflow
solutions for the early detection of some of the most prevalent cancers using
digital mammography, MRI and Computed Tomography (“CT”). iCAD
believes that advances in MRI and CT are creating opportunities in the medical
imaging sector. There is also significant synergy regarding customer call
points, providing the iCAD sales team with additional products to
sell.
Today the
Company is an industry-leading provider of advanced medical image analysis and
workflow solutions. iCAD's solutions aid the radiologist in the early detection
of the most prevalent and treatable cancers, including breast and prostate
cancer, and the Company anticipates that its future products will aid
in the detection of colon and lung cancer.
The iCAD
website is www.icadmed.com. At
this website the following documents are available at no charge: annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 ("Exchange Act"), as soon as
reasonably practicable after the Company electronically files such material
with, or furnishes it to, the SEC. The information on the website listed above,
is not and should not be considered part of this annual report on Form 10-K and
is not incorporated by reference in this document.
The
Company is headquartered in Nashua, New Hampshire with its principal research
and development (“R&D”) center located in Beavercreek, Ohio, and a satellite
R&D office in White Plains, New York.
Strategy
The
Company intends to continue the extension of its superior image analysis and
clinical decision support solutions for MRI and CT imaging. iCAD
believes that advances in digital imaging techniques should bolster its efforts
to develop additional commercially viable CAD advance image analysis and
workflow products. In the future, the Company expects to pursue the development
of CAD products for select disease states that demonstrate one or more of the
following attributes: it is clinically proven that screening has a significant
impact on patient outcomes; there is an opportunity to lower health care costs;
screening is non-invasive or minimally invasive; and public awareness of the
disease is high or growing.
The
Company is currently applying its patented detection technology,
pharmacokinetics, and algorithms to products used to detect disease states where
pattern recognition, image analysis, and clinical efficiency play a pivotal
role. For breast imaging the Company is developing CAD solutions for
tomosynthesis (3-D mammography) and enhanced breast MRI to help radiologists
find cancer earlier and work more efficiently. The Company believes that CAD for
tomosynthesis has the potential to help radiologists better detect cancer and
manage the workflow issues created by large 3D tomosynthesis datasets. The
pharmacokinetics or second generation kinetics technology complements iCAD’s
core competency in morphology (anatomy) based CAD solutions providing a platform
for iCAD to produce next-generation MRI products delivering both kinetics and
morphology technology in a single CAD solution. For colorectal cancer screening,
iCAD is developing a CAD solution to help radiologists detect colonic polyps
during their review of CTC exams. These same technology principles
are being used in iCAD’s development of a CT lung CAD solution.
CAD for
prostate imaging is an emerging growth opportunity. Nearly one in six men over
age 40 is afflicted with prostate cancer in the U.S. and 10% of those new cases
are expected to be fatal. Current standards for detecting prostate cancer are
antiquated and subject to accuracy issues. The current Prostate Specific Antigen
blood test has a false negative rate approaching 15%, while only approximately
12% of men with abnormal tests actually have cancer. Biopsies miss at least 20%
of all malignancies and underestimate the disease aggressiveness in up to 30% of
men. Scientific evidence is growing that advanced imaging technologies will
improve early detection, eliminate unnecessary procedures, and provide accurate
image guidance for biopsies. Leaders from the medical field and academia are
urging the current Presidential Administration, Congress, the National
Institutes of Health and the Department of Defense to increase federal funding
for research into imaging technologies for less invasive and more accurate
diagnosis of prostate cancer. Workflow efficiencies and interpretation benefits
associated with MRI CAD are also being realized in the emerging area of prostate
MRI.
The
Company is also exploring the role of MRI CAD in the early monitoring of cancer
treatment. Today, monitoring of therapy is solely based on tumor size and the
response is assessed “after the fact”, often resulting in patients and payers
having to deal with ineffective treatment. The Company believes that an
early-stage therapy monitoring solution that is simple and widely available
could result in more effective cancer treatment plans.
Network
connectivity, clinical workflow and timely processing of patient information are
critical issues for radiology departments. Healthcare providers are working to
stay competitive in a healthcare environment experiencing significant budget
constraints. iCAD expects to continue to provide powerful and
flexible Digital Imaging and Communication in Medicine (“DICOM”) connectivity
solutions. Seamless integration of image analysis solutions with
leading image processing systems, review workstations, and Picture Archiving and
Communication Systems (“PACS”), from multiple vendors, will remain a focal point
of its product development efforts. Simpler and easier integration
with existing clinical systems and connectivity benefits that support
tele-radiology and remote viewing also remain focal points of its product
development efforts. The Company expects to continue to deliver
digital technology workflow advantages by improving the efficiencies of key
processes, from the ease in which radiologists can read and interpret studies or
images to the speed at which large image datasets are managed, and high-priority
images are processed through the system.
The
Company, in 2008, increased its emphasis on the development and growth of
residual and continuing revenue sources. Fee per procedure purchase
options have been implemented for the delivery of CAD solutions and the Company
is also pursuing additional revenue sources related to service and extended
maintenance revenue.
Market
and Market Opportunities
Mammography
CAD systems use sophisticated algorithms to analyze image data and mark
suspicious areas in the image that may indicate cancer. The locations
of the abnormalities are marked in a manner that allows the reader of the image
to reference the same areas in the original mammogram for further
review. The intent of CAD is to aid in the detection of potential
abnormalities for the radiologist to review. After initially
reviewing the case films or digital images a radiologist reviews the CAD results
and subsequently re-examines suspicious areas that warrant a second look before
making a final interpretation of the study. The radiologist
determines if a clinically significant abnormality exists and whether further
diagnostic evaluation is warranted. As a medical imaging tool, CAD is
most prevalent as an adjunct to mammography given the documented success of CAD
for detecting breast cancer.
Approximately
36 million mammograms were performed in the United States in 2008. Although
mammography is the most effective method for early detection of breast cancer;
studies have shown that an estimated 20% or more of all breast cancers go
undetected in the screening stage. More than half of the cancers missed are due
to observational errors. CAD, when used in conjunction with
mammography, has been proven to help reduce the risk of these observational
errors by as much as 20%. Earlier cancer detection typically leads to more
effective, less invasive, and less costly treatment options which ultimately
should translate into improved patient survival rates. CAD as an
adjunct to mammography screening is reimbursable in the United States under
federal and most third party insurance programs. This reimbursement
provides economic support for the acquisition of CAD products by women’s
healthcare providers. Market growth has also been driven in recent
years by the introduction of full field digital mammography (“FFDM”)
systems.
In the
United States, approximately 8,800 facilities (with approximately 13,000
mammography systems) were certified to provide mammography screening in 2008.
Historically, these centers have used conventional film-based medical imaging
technologies to capture and analyze breast images. Of the 8,800 certified
facilities, approximately 45% have acquired FFDM systems. A FFDM system
generates a digital image eliminating film used in conventional
mammography. The number of facilities converting to digital
mammography systems continues to grow and has been fueled by the results
reported in 2005 in the New
England Journal of Medicine from the American College of Radiology
Imaging Network’s (“ACRIN”) Digital Mammographic Imaging Screening Trial
(“DMIST”). The trial showed that there was no difference in accuracy
between the two modalities for screening asymptomatic women in general. But for
three subgroups of women (which represent over 60% of the population in the
study), digital mammography performed better than film-based
mammography.
While a
double reading protocol is currently advocated as a standard of care in most
European countries this is not the case in the United States. Double
reading requires substantially more resources, which are often not available
considering the shortage of mammographers across the country. In view of the
frequency of missed cancers and of the lack of resources for double reading as a
standard of care, CAD in combination with review by a single radiologist is an
alternative to double reading of mammography and may further reduce breast
cancer mortality.
Breast
cancer is one of the most prevalent forms of cancer and it is also responsible
for the most number of cancer-related deaths among women in the European Union
(“EU”). The number of expected cancer cases will continue to rise as
the incidence of cancer increases steeply with age and life
expectancy. According to the European Parliamentary Group on Breast
Cancer, they expect approximately 269,000 new breast cancer cases will be
reported and over 87,000 deaths per year. On average 1 out of every
10 women in the EU is expected to develop breast cancer at some point in their
life. As a result, most countries in Western Europe have or are
planning to implement Mammography screening programs resulting in an expected
increase in the number of mammograms performed in the coming years.
Market
Size and Share
The total
CAD mammography market in the United States was projected to exceed $100 million
in 2007 according to a 2006 Market Report from the Millennium Research Group.
According to this same report, iCAD had 45% of the U.S. digital mammography CAD
market with Hologic/R2 holding a 54% share. Frost and Sullivan
projects the CAD mammography market in the United States will reach $333.5
million in 2012, growing at a compounded rate of approximately
20.2% between 2005 and 2012.
The use
of MRI in the management of breast cancer has doubled since 2003, from 314,000
to 645,000 procedures as reported in a study published in 2008 by IMV Medical
Information Division of Des Plaines, IL. Confirma and InVivo are
the market leaders in breast MRI CAD.
New
Market Opportunities
Computed Tomography
Applications and Colonic Polyp Detection
CT is a
well-established and widely used imaging technology that has evolved rapidly
over the last few years. CT equipment is used to image cross-sectional “slices”
of various parts of the human body. When combined, these “slices” provide
detailed volumetric representations of the imaged areas. The use of
multi-detectors in CT equipment has progressed in just a few years from 4 slices
to 8, 16, 64 slices and beyond, resulting in vastly improved image quality. The
image quality improvements resulting from the increased number of slices per
procedure and greatly increased imaging speeds have expanded the use of CT
imaging in both the number of procedures performed as well as the applications
for which it is utilized. It was estimated by Frost and Sullivan that over 70
million CT procedures would be performed in 2006 in the United States alone with
an installed base of approximately 9,600 machines. While the increased number of
cross sectional slices provides important and valuable diagnostic information,
it adds to the challenge of managing and interpreting the large volume of data
generated. These challenges in CT imaging present opportunities for
automated image analysis and clinical decision support solutions that the
Company believes it is well positioned to develop and promote.
According
to the American Cancer Society over 50,000 Americans will die from colon cancer
and 140,000 people will be diagnosed with colon cancer this year. It is also the
second leading cause of cancer deaths in spite of being highly preventable with
early identification and removal of colorectal polyps. Several techniques
including optical colonoscopy, which involves visualizing the inside of the
colon with a specialized scope, exist for the early identification of polyps.
More than 82 million Americans are over age 50, the recommended age for
colorectal cancer screening, are eligible for colorectal cancer screening,
however this technique remains highly under utilized with less than half of this
population being tested. This reluctance can be directly linked to patients’
general discomfort with the invasive nature of this screening
procedure.
Abundant
research has been performed and CT techniques have evolved over more than a
decade, to the point where CTC, as it is now performed today, has demonstrated
itself as a valid and highly effective screening tool for colorectal cancer.
ACRIN’s large multi-center National CT Colonography Trial of a screening
population published in the September 18th, 2008
issue of the New England Journal of Medicine demonstrated that CTC is highly
accurate for the detection of intermediate and large polyps and that the
accuracy of CTC is similar to colonoscopy. In March of 2008, new
consensus guidelines for screening for colorectal cancer (”CRC”) were jointly
issued by the American Cancer Society (“ACS”), the American College of Radiology
(ACR), and the U.S. Multi-Society Task Force on CRC. The guidelines
include recommendations for the use of CTC for CRC screening. Most surveys of
patients that have had both traditional colonoscopy and CTC have also shown
greater patient preference for CTC with most patients preferring continued CTC
surveillance over traditional colonoscopic surveillance. The Company
believes that the ACRIN Study coupled with the 2008 consensus guidelines for
screening for CRC are likely to increase the utilization of
CTC.
CTC is a
less invasive technique than traditional colonoscopy for imaging the
colon. CTC is performed with standard CT imaging of the abdomen while
the colon is distended after subjecting the patient to a colon cleansing
regimen. Specialized software from third party display workstation
and PACS vendors is then used to reconstruct and visualize the internal surface
of the colon and review the CT slices. The process of reading a CTC exam can be
lengthy and tedious as the interpreting physician is often required to traverse
the entire length of the colon multiple times. CAD technology can play an
important role in improving the accuracy and efficiency of reading CTC cases by
automatically identifying potential polyps. CAD technology has been developed to
aid radiologists in their review of CTC images as a means of improving polyp
detection. The Company anticipates that CAD will become an important adjunct to
CTC.
Magnetic Resonance Imaging
Applications - Breast and Prostate Cancer Detection
In
addition to mammography and CT imaging modalities, the interpretation of MRI
exams also benefits from advanced image analysis and clinical decision support
tools. Radiologists turn to MRI to examine the soft tissues, blood vessels, and
organs in the head, neck, chest, abdomen, and pelvis to help them diagnose and
monitor tumors, heart problems, liver diseases and other organs, such as breast
and prostate for possible links to cancer. MRI uses magnets and radio waves
instead of x-rays to produce very detailed, cross-sectional images of the body,
and can be used to look specifically at those areas.
MRI is an
excellent tool to detect breast cancer as well as prostate cancer. While MRI is
a more expensive option than traditional mammography, it enables physicians to
view tumors which may have been missed during routine screenings. The first
breast MRI product received FDA clearance in 1991 for use as an adjunct to
mammography. The ACS published new guidelines in the March/April 2007 CA: A Cancer Journal of
Clinicians, recommending that women at high risk for breast cancer
augment their annual mammogram with an annual breast MRI. The guidelines
recommended MRI scans for women with a lifetime risk of breast cancer of 20%-25%
or greater, including women with a strong family history of breast or ovarian
cancer and women who were treated for Hodgkin’s disease.
The
latest figures for prostate cancer, published in a Diagnostic Imaging article in
January 2008, revealed that as many as 1 in 6 men over their lifetime will be
affected by this disease and it was estimated that nearly 28,000 men will die
from prostate cancer each year. Current prostate diagnostic tests have been
shown to have high false positive and high false negative rates. MRI may be
helpful in the detection of prostate cancer and CAD analysis can assist
clinicians by colorizing areas of concern.
Products
and Product Development
The table
below presents the revenue and percentage of revenue attributable to our
different product and services, in 2008, 2007 and 2006:
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
Digital
revenue
|
|
$ |
26,735,782 |
|
|
|
71.3%
|
|
|
$ |
16,429,450 |
|
|
|
61.7%
|
|
|
$ |
10,287,510 |
|
|
|
52.2%
|
|
Film
based revenue
|
|
|
7,436,529 |
|
|
|
19.8%
|
|
|
|
6,768,846 |
|
|
|
25.4%
|
|
|
|
6,519,503 |
|
|
|
33.1%
|
|
Service
& supply revenue
|
|
|
3,319,237 |
|
|
|
8.9%
|
|
|
|
3,414,116 |
|
|
|
12.8%
|
|
|
|
2,914,345 |
|
|
|
14.8%
|
|
Total
revenue
|
|
$ |
37,491,548 |
|
|
|
|
|
|
$ |
26,612,412 |
|
|
|
|
|
|
$ |
19,721,358 |
|
|
|
|
|
Advanced
Image Analysis and Workflow Solutions in Breast Imaging
(Mammography)
iCAD
develops and actively markets a comprehensive range of high-performance CAD
solutions for both digital and film-based mammography systems. iCAD’s
SecondLook systems are based on sophisticated patented algorithms that analyze
the data; automatically identifying and marking suspicious regions in the
images. The system provides the radiologist with a “second look”
which helps the radiologist detect up to 72% of actionable missed cancers an
average of 15 months earlier than screening mammography alone. SecondLook
detects and identifies suspicious masses and micro-calcifications utilizing
image processing, pattern recognition and artificial intelligence techniques.
Knowledge from thousands of mammography images are incorporated in these
algorithms enabling the product to distinguish between characteristics of
cancerous and normal tissue. The result is earlier detection of
hard-to-find cancers, improved workflow for radiologists, and higher quality
patient care.
The
current version of the SecondLook product delivers the highest CAD performance
in the Company’s history and provides clinical and workflow enhancements by
improving mass detection performance and reducing the number of false positive
CAD marks.
iCAD
continues to develop CAD products for additional digital imaging (FFDM and
computed radiography) providers including the release of solutions for Agfa
Corporation, Sectra Medical Systems and Planmed in Europe at the end of
2008. The Company is currently developing the next generation of
SecondLook Digital CAD. Under development are advances in performance and
“lesion metrics” that provide insight into CAD’s decision making process.
Developmental work continues with PACS companies and iCAD is focused on
developing new, more efficient ways of integrating CAD into PACS review
workstations to create a streamlined workflow for mammography and potentially
other specialties.
SecondLook
Digital
SecondLook
Digital is designed to function with leading digital mammography systems (FFDM
and computed radiography) – including systems sold by GE Healthcare, Siemens
Medical, Hologic, Inc., Sectra Medical Systems, Philips, IMS Giotto, Agfa
Corporation, Planmed Oy, and enables optimal workflow for high volume clinics
and facilities reading studies locally or remotely. In addition, iCAD
received FDA approval for its CAD product for use with Fuji’s Computer
Radiography (“CR”) system in April 2008. iCAD believes it has strong development
partnerships with leading imaging providers. The algorithms in SecondLook
Digital products have been fine-tuned and optimized for each digital imaging
provider based upon characteristics of their unique detectors.
SecondLook
Digital is a computer server residing on a customer’s network that receives
patient studies from the imaging modality, performs CAD analysis and sends the
CAD results to PACS and/or review workstations. Workflow and efficiency are
critical in digital imaging environments therefore iCAD has developed flexible,
powerful DICOM integration capabilities that enable SecondLook Digital to
integrate seamlessly with leading PACS archives and review workstations from
multiple providers. iCAD has worked with its OEM partners to ensure
CAD results are integrated and easily viewed using each review workstation’s
graphical user interface. To further improve efficiency and clinical efficacy,
the most urgent or important patient studies can be prioritized and analyzed
with CAD first.
SecondLook 300 and
SecondLook 200
The
SecondLook 300 and SecondLook 200 products are powerful film-based CAD systems
combining patented Clinical Information System digitizer technology with
industry-leading cancer detection algorithms. The compact design of
these SecondLook systems provides flexibility and convenience to meet
constrained space requirements. These systems install quickly on-site
and are supported by iCAD’s customer support and service teams. The
SecondLook 300 viewer offers optional features such as PowerLook® and iReveal®
technology that provide soft-copy reading and touch screen control of the image
for fast, precise image assessment. Flexible DICOM integration
options enable customized configurations with leading PACS and Radiology
Information System (“RIS”) systems.
The
SecondLook 200 is a CAD solution providing early, accurate cancer detection for
use at smaller facilities with lower case volumes. iCAD’s ClickCAD
program offers an alternative fee-per-procedure financing option for SecondLook
200 users, enabling facilities of all sizes to provide the benefits of CAD to
their patients.
Products
for Converting Mammography Films to Digital Images
TotalLook
MammoAdvantage™
The
TotalLook MammoAdvantage (“TLMA”) system is iCAD’s second generation mammography
specific digitizer. TLMA provides a comprehensive film-to-digital solution
making it easier for facilities to transition from film to digital mammography.
The product converts prior mammography films to digital images delivering high
resolution digitized images to meet the critical specifications required for
conversion of prior films. TLMA’s unique software offers configurable image
resolution settings that enable the digitized and newly acquired digital images
to be displayed at the same time. In moving to one review workstation for
comparative review, users experience improvements in workflow, productivity and
reduced discomfort associated with switching between a light box and a computer
screen to view images.
The
software provides flexible DICOM connectivity for seamless integration with
leading review workstations, PACS and RIS systems. Specialized image compression
techniques reduce files sizes up to 80%, minimizing long-term storage
requirements.
Advanced
Image Analysis and Workflow Solutions in MRI Imaging – Breast and
Prostate
SpectraLook and
VividLook™
iCAD’s
breast and prostate MRI analysis solutions, SpectraLook and VividLook, provide
radiologists with more diagnostic information by creating colorized images based
on signal changes defined by tumor physiology. Innovative model-based algorithms
provide radiologists with accurate, timely, and efficient contrast kinetic
assessment of lesions.
The
Company’s All Time Point (“ATP”) analysis is a second-generation algorithm that
uses near continuous data sampling versus the prior generation that uses only
three fixed time points, which may omit critical data from the analysis. The ATP
analysis is based on an advanced pharmacokinetic model that calculates numerical
values of key physiological parameters, allowing the user to assess the
different biological processes taking place in malignant versus benign tumors.
These key physiological markers can aid in the analysis of large MRI
datasets.
CADvue™
CADvue
image review and analysis software facilitates the analysis of ATP colorized
images and quantitative data. The user can create standard and customized
reports used by radiologists to communicate time-sensitive breast and prostate
MRI study results to referring physicians. The reports provide detailed and
comprehensive information used in the identification and analysis of
abnormalities in the breast or prostate.
Advanced
Image Analysis and Workflow Solutions in CT Colonography
VeraLook™
iCAD is
currently engaged in the development of a CAD solution, VeraLook, to support
detection of colonic polyps in conjunction with CTC. iCAD believes that CAD for
CTC is a natural extension of iCAD’s core competencies in image analysis and
image processing. The Company expects this system will likely be
offered in conjunction with third party display workstations and PACS
vendors. Field testing of the product was initiated in 2008 and iCAD
executed an agreement with ACR Image Metrix, a division of the American College
of Radiology (“ACR”), to conduct a multi-reader clinical study of iCAD’s CT
Colon CAD product, for use with CTC. With this partnership, iCAD worked with ACR
Image Metrix to develop and execute a clinical study to support FDA approval of
a CT Colon CAD product. ACR Image Metrix was launched by the ACR to
leverage their thirty years of experience in conducting clinical research in
part through ACRIN. Both ACR and ACRIN have a proven history
in developing trials that standardize the use of imaging
technologies, image transmission and archive, reduce the size and cost of trials
and produce more reliable results.
iCAD
believes this partnership represents a major step forward in its development and
commercialization of its Colon CAD product. The Company’s expectation
is that working with ACR Image Metrix, a group with significant expertise in
radiology clinical trial management, will help put the Company in a position to
submit required clinical data to the FDA in March or April 2009 and meet the
Company goals for marketing this proposed product line.
Sales
and Marketing
iCAD’s
products for digital mammography are sold through its direct regional sales
organization in the United States as well as through its OEM partners, including
GE Healthcare, Fuji Medical Systems and Siemens Medical. In Europe,
iCAD distributes its mammography CAD solutions through OEM partners such as GE
Healthcare, Siemens Medical, Agfa Corporation, Sectra Medical Systems, Planmed
Oy, Fuji Medical Systems and IMS Giotto. In 2006, iCAD entered into a
supplier agreement with Fuji Medical Systems to supply its SecondLook Digital
CAD product for use with Fuji’s CR system and received FDA approval in April
2008. Additionally, Siemens Medical, GE Healthcare, and Fuji Medical Systems
distribute the TotalLook MammoAdvantage digitizer solution for comparative
reading of prior films.
In 2008
iCAD expanded its domestic sales team by adding two experienced Sales Managers
as well as two sales veterans who will drive the breast and prostate MRI
business. In 2008, iCAD bolstered its technical presence in Europe by
adding a clinical applications person.
The
Company’s products are marketed on the basis of their clinical superiority and
their ability to help radiologists detect more cancers earlier, while seamlessly
integrating into the clinical workflow of the radiologist. In 2008
the Company launched a new branding campaign signifying its expansion beyond
mammography CAD with the addition of MRI and CTC advanced image analysis and
clinical decision support solutions. As part of its marketing efforts, iCAD has
developed and executed a variety of public relations and local outreach programs
with numerous iCAD customers and has created a new corporate video. Further
investments were made in cultivating relationships with the leaders in breast,
colon, and prostate CAD at national trade shows, including hosting a Physician
Advisory Dinner held at the Radiological Society of North American (“RSNA”)
meeting in December 2008, where industry leaders discussed the future of CAD in
these modalities. Funding supported attendance at more regional trade
shows as well as the 7th Annual
Symposium on Advances in Breast MRI in Las Vegas this past October. The Company
expanded and further enhanced its presence at the RSNA 2008 while
maintaining a presence in the booths of the Company’s OEM partners.
Competition
The
Company currently faces direct competition in its mammography CAD business from
Hologic, Inc. (which acquired R2 Technology, Inc. in July 2006) and, to a lesser
extent from Carestream Health, Inc. Imaging equipment manufacturers
such as GE Healthcare, Siemens Medical, Philips Medical Systems and other
medical imaging equipment manufacturers have explored the possibility of
introducing their own versions of CAD and comparative reading products into the
market, but thus far have not had a significant impact in the
market. The Company believes that current regulatory requirements
present a significant barrier to entry in this market.
Confirma,
Inc. and InVivo Corporation are the market leaders in breast MRI CAD. While they
both have beta versions of a prostate MRI CAD solution, iCAD has the only
commercial prostate MRI CAD solution in the U.S. at this time. The Company
believes that its market leadership in mammography CAD provides it with a
competitive advantage with the breast imaging community.
The
Company anticipates additional competition in the CT Colon solutions market that
it intends to enter. It expects competition will come from the traditional
imaging CT equipment manufacturers such as, 3D Rendering and Analysis firms, as
well as from emerging CAD companies. Siemens Medical, GE Healthcare,
and Philips Medical Systems currently offer or are in the process of developing
polyp detection products. The Company expects that these companies
will offer a colonic polyp detection solution as an advanced feature of their
image management and display products typically sold with their CT equipment.
Several emerging CAD companies have also introduced solutions for colorectal
polyp detection. Medicsight has a commercial product available in Europe and
Asia. In January 2009, the FDA requested additional information from Medicsight
on its Colon CAD product that had been submitted to the FDA at the end of
2008.
iCAD
operates in highly competitive and rapidly changing markets with competitive
products available from nationally and internationally recognized companies.
Many of these competitors have significantly greater financial, technical and
human resources than iCAD and they are well established in the healthcare
market. In addition, some companies have developed or may develop technologies
or products that could compete with the products we manufacture and distribute
or that would render our products obsolete or noncompetitive. Moreover,
competitors may achieve patent protection, regulatory approval, or product
commercialization prior to us that would limit our ability to compete with them.
These and other competitive pressures could have a material adverse effect on
the Company’s business.
Manufacturing
and Customer and Professional Services
The
Company’s products are manufactured and assembled for it by a contract
manufacturer of medical devices. The Company’s manufacturing efforts are
generally limited to purchasing and supply chain management,
planning/scheduling, manufacturing engineering, service repairs, quality
assurance, inventory management, and warehousing. Once the product
has shipped, it is usually installed by one of the Company’s OEM partners at the
customer site. When a product sale is taken direct from the end
customer by iCAD, the product is installed by iCAD personnel at the customer
site.
iCAD’s
Professional Services staff is comprised of a team of trained and specialized
individuals providing comprehensive product support on a pre-sales and
post-sales basis. This includes pre-sale product demonstrations, product
installations, applications training, and call center management (or technical
support). The support center is the single point of contact for the customer,
providing remote diagnostics, troubleshooting, training, and service dispatch.
Service repair efforts are generally performed at the customer site by
third party service organizations or in the Company’s repair depot by the
Company’s repair technicians.
Government
Regulation
The
Company’s CAD systems are medical devices subject to extensive regulation by the
FDA under the Federal Food, Drug, and Cosmetic Act with potentially significant
costs for compliance. 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. The Company’s devices are subject to FDA clearance or approval
before they can be marketed in the United States and may be subject to
additional regulatory approvals before they can be marketed outside the United
States. There is no guarantee that future products or product modifications will
receive the necessary approvals.
The FDA’s
Quality System Regulations require that the Company's manufacturing operations
follow extensive design, testing, control, documentation and other quality
assurance procedures during the manufacturing process. The Company is
subject to FDA regulations covering labeling regulations and adverse event
reporting including the FDA’s general prohibition of 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. Compliance
with international regulatory authorities with extensive regulatory requirements
is required. Failure to fully comply with applicable regulations
could result in the Company receiving warning letters, non-approvals,
suspensions of existing approvals, civil penalties and criminal fines, product
seizures and recalls, operating restrictions, injunctions, and criminal
prosecution.
Additionally,
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 each specific country. These
regulations, including the requirements for approvals, and the time required for
regulatory review vary by country.
Intellectual
Property
The
Company primarily relies on a combination of patents, trade secrets and
copyright law, third-party and employee confidentiality agreements, and other
protective measures to protect its intellectual property rights pertaining to
our products and technologies.
Currently
the Company has 25 issued patents covering its CAD and scanner technologies in
the United States expiring between 2018 and 2025. These patents help the
Company maintain a proprietary position in these markets.
Additionally, the Company has 15 patent applications pending domestically, some
of which have been also filed internationally, and it plans to file additional
domestic and foreign patent applications when it believes such protection will
benefit the Company. These patents and patent applications relate to current and
future uses of iCAD’s CAD and digitizer technologies and products, including CAD
for CT colon and lung and CAD for MRI breast and prostate. In June 2006,
the Company secured a non-exclusive patent license from the National Institute
of Health which relates broadly to CAD in colonography. In February 2003
the Company secured a patent license to United States, European, Canadian, and
Japanese patents owned by Scanis, Inc., which relate broadly to CAD for breast
cancer.
The
Company believes it has all the necessary licenses from third parties for
software and other technologies in its products.
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 it 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 its ability to deliver products to customers in a timely manner and would
adversely affect its sales and operating results. The Company’s
business would be harmed if any of its manufacturers or suppliers could not meet
its quality and performance specifications and quantity and delivery
requirements.
Major
Customers
In 2008
the Company had two major customers GE Healthcare and Fuji Medical Systems,
which accounted for $9,986,179 and $7,063,325 or 27% and 19% of the Company’s
revenues, respectively. The Company’s major customer in 2007 was GE
Healthcare which accounted for $7,609,313 or 29% of the Company’s
revenues. During the year ended December 31, 2006 the Company had two
major customers GE Healthcare and Hologic, Inc., which accounted for $5,077,091
and $2,462,225, or 26% and 12% of the Company’s revenues,
respectively.
Engineering
and Product Development
The
Company spent $7,121,334, $4,504,000, and $5,260,893 on research and development
activities during the years ended December 2008, 2007 and 2006,
respectively. The research and development expenses for 2008 are primarily
attributed to the increase in personnel to support the Company’s new product
development efforts, subcontracting services relating to the clinical testing
for our CT Colon product and patent development.
Employees
At March
1, 2009 the Company had 115 employees, 109 full-time, 4 co-ops and 2 part-time
employees, with 39 involved in sales and marketing, 35 in research and
development, 25 in service, technical support and operations functions, and 16
in administrative functions. None of the Company’s employees are
represented by labor organizations. The Company believes its
relations with its employees are good.
Backlog
The
Company’s product backlog (excluding service and supplies) was approximately
$1,137,000 at December 31, 2008 as compared to $1,869,000 on the corresponding
date in 2007 and $1,019,000 at September 30, 2008. The Company
expects that the majority of the backlog at December 31, 2008 will be shipped
within the 2009 fiscal year. Backlog as of any particular period should not be
relied upon as indicative of the Company’s net revenues for any future period as
a large amount of the Company’s product is booked and shipped within the same
quarter.
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 markets its products for digital mammography in the United States
through its direct regional sales organization as well as through its OEM
partners, including GE Healthcare, Fuji Medical Systems and Siemens Medical.
Outside the United States the Company markets its products for digital
mammography generally through its OEM partners, GE Healthcare, Siemens Medical,
Agfa Corporation, Sectra Medical Systems, Planmed Oy, Fuji Medical Systems and
IMS Giotto. Total export sales increased to approximately $2,930,000 or 8% of
sales in 2008 as compared to $2,655,000 or 10% of total sales in 2007 and
$1,022,000 or 5% of total sales in 2006.
The
Company’s principal concentration of export sales is in Europe, which accounted
for 61% of the Company’s export sales in 2008, 81% of export sales in 2007, and
91% of export sales is 2006. Of these sales 33% in 2008, 70% in 2007 and 77% in
2006 were in France. The balance of the export sales in 2007 were
primarily into Asia, Canada, Spain and Mexico.
Foreign
Regulations
International
sales of the Company’s products are subject to foreign government regulation,
the requirements of which vary substantially from country to
country. The time required to obtain approval by a foreign country
may be longer or shorter than that required for FDA approval, and the
requirements may differ. 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 it fails to receive such approvals, its ability to
generate revenue may be significantly diminished.
Product
Liability Insurance
The
Company believes that it maintains appropriate product liability insurance with
respect to its products. The Company cannot be certain that with
respect to its current or future products, such insurance coverage will continue
to be available on terms acceptable to the Company or that such coverage will be
adequate for liabilities that may actually be incurred.
Item
1A. Risk
Factors.
We
operate in a changing environment that involves numerous known and unknown risks
and uncertainties that could materially adversely affect our operations. The
following highlights some of the factors that have affected, and/or in the
future could affect, our operations.
We
have incurred significant losses from inception through 2007 and there can be no
assurance that we will be able to achieve and sustain future
profitability.
We have
incurred significant losses from inception through 2007, much of which were
attributable to our former business lines. Although we incurred net
income of $4,356,189 during the fiscal year ended December 31, 2008 we may not
be able to sustain profitability.
A
limited number of customers account for a significant portion of our total
revenues. The loss of a principal customer could seriously hurt our
business.
Our
principal sales
distribution channel for our digital products is through our OEM partners. Our
digital product revenue accounted for 71% and 62% of our total revenue for the
years ended December 31, 2008 and 2007, respectively. In 2008 we had two major
customers, GE Healthcare and Fuji Medical Systems, with 27% and 19% of our
revenues, respectively. In 2007 GE Healthcare was our major
customer with 29% of our revenues. A limited number of major customers have in
the past and may continue in the future to account for a significant portion of
our revenues. The loss of our relationships with principal customers
or a decline in sales to principal customers could materially adversely affect
our business and operating results.
Disruptions
in the capital and credit markets related to the current national and worldwide
financial crisis, which may continue indefinitely or intensify, could adversely
affect our results of operations, cash flows and financial condition, or those
of our customers and suppliers.
The
current disruptions in the capital and credit markets may continue indefinitely
or intensify, and adversely impact our results of operations, cash flows and
financial condition, or those of our customers and suppliers. These disruptions
could adversely affect our ability to draw on our revolving credit facility,
which is dependent on the ability of the banks that are parties to the facility
to meet their funding commitments. Those banks may not be able to meet their
funding commitments to us if they experience shortages of capital and liquidity.
Disruptions in the capital and credit markets as a result of uncertainty,
changing or increased regulation, reduced alternatives or failures of
significant financial institutions could adversely affect our access to
liquidity needed to conduct or expand our business, conduct acquisitions or make
other discretionary investments. Such disruptions may also adversely
impact the capital needs of our customers and suppliers, which, in turn, could
adversely affect our results of operations, cash flow and financial
condition.
If
goodwill and/or other intangible assets that we have recorded in connection with
our acquisitions become impaired, we could have to take significant charges
against earnings.
In
connection with the accounting for our acquisitions we have recorded, or will
record, a significant amount of goodwill and other intangible assets. Under
current accounting guidelines, we must assess, at least annually and potentially
more frequently, whether the value of goodwill and other intangible assets has
been impaired. Any reduction or impairment of the value of goodwill or other
intangible assets will result in a charge against earnings which could
materially adversely affect our reported results of operations in future
periods.
Our
business is dependent upon future market growth and acceptance of full field
digital mammography systems and digital computer aided detection products and
advanced image analysis and workflow solutions for use with CT and
MRI.
Our
future business is substantially dependent on the continued growth in the market
for full field digital mammography systems and digital computer aided detection
products and advanced image analysis and workflow solutions for use with CT and
MRI. The market for these products may not continue to develop or may
develop at a slower rate than we anticipate due to a variety of factors,
including, the significant cost associated with the procurement of full field
digital mammography systems and CAD products and CT and MRI systems, the
generally weak economic conditions and the reliance on third party insurance
reimbursement. In addition we may not be able to successfully develop
or obtain FDA clearance for our proposed product.
We
may not be able to obtain regulatory approval for any of the other products that
we may consider developing.
We have
received FDA approvals only for our currently offered CAD
products. Before we are able to commercialize any other product, we
must obtain regulatory approvals for each indicated use for that
product. The process for satisfying these regulatory requirements is
lengthy and costly and will require us to comply with complex standards for
research and development, clinical trials, testing, manufacturing, quality
control, labeling, and promotion of products. We may not be able to
obtain FDA or other required regulatory approval and market any further products
we may develop during the time we anticipate, or at all.
Our
quarterly operating and financial results and our gross margins are likely to
fluctuate significantly in future periods.
Our
quarterly and annual operating and financial results are difficult to predict
and may fluctuate significantly from period to period. Our revenues and results
of operations may fluctuate as a result of a variety of factors that are outside
of our control including, but not limited to, general economic conditions, the
timing of orders from our OEM partners, our OEM partners ability to manufacture
and ship their digital mammography systems, our timely receipt by the FDA for
the clearance to market our products, our ability to timely engage other OEM
partners for the sale of our products, the timing of product enhancements and
new product introductions by us or our competitors, the pricing of our products,
changes in customers’ budgets, competitive conditions and the possible deferral
of revenue under our revenue recognition policies.
We
may need additional financing to implement our strategy and expand our
business.
We may
need additional debt or equity financing beyond any amounts generally available
to us to pursue our strategy and increase revenue or to finance our
business. Any additional financing that we need may not be available
and, if available, may not be available on terms that are acceptable to us. Our
failure to renew our existing credit facility or obtain any additional financing
on a timely basis, or on economically favorable terms, could prevent us from
continuing our strategy or from responding to changing business or economic
conditions, and could cause us to experience difficulty in withstanding adverse
operating results or prevent us from competing effectively.
Changes
in or non-reimbursement of procedures by Medicare or other third-party payers
may adversely affect our 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, reduced 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. In 2006, the Center for Medicare
Services announced an approximately 10% reduction for mammography CAD
reimbursement beginning in 2007. We anticipate there is a risk of
further reductions. As a result, healthcare providers may be
unwilling to purchase our CAD products or any of our future products, which
could significantly harm our business, financial condition and operating
results.
With
respect to our proposed CTC CAD solution, we believe that the ACRIN Study
coupled with the 2008 consensus guidelines for screening for CRC are likely to
increase the utilization of CTC. The U.S. Centers for Medicare and
Medicaid has initiated a National Coverage Determination process for
CTC. A favorable determination is likely to increase the utilization
of virtual colonoscopy or CTC while an unfavorable determination will likely not
increase the utilization or increase the utilization at a slower pace which
could adversely affect our proposed CTC CAD solution.
There is
no guaranty that any of the products which we are developing or are
contemplating developing will become eligible for reimbursements or health
insurance coverage at favorable rates or even at all or maintain
eligibility.
We
cannot be certain of the future effectiveness of our internal controls over
financial reporting or the impact of the same on our operations or the market
price for our common stock.
Pursuant
to Section 404 of
the Sarbanes-Oxley Act of 2002,
we are required to include in our Annual
Report on Form 10-K our assessment of the effectiveness of our
internal controls over financial reporting. Furthermore, our independent
registered public accounting firm is required to audit our assessment of the
effectiveness of our internal controls over financial reporting and separately
report on whether it believes we maintain, in all material respects, effective
internal controls over financial reporting. We have dedicated a
significant amount of time and resources to ensure compliance with this
legislation for the year ended December 31, 2008 and will continue to
do so for future fiscal periods. Although we believe that
we currently have adequate internal control procedures in place, we cannot be
certain that future material changes to our internal controls over financial
reporting will be effective. If we cannot adequately maintain the effectiveness
of our internal controls over financial reporting, we might be subject to
sanctions or investigation by regulatory authorities, such as the SEC. Any such
action could adversely affect our financial results and the market price of our
common stock.
Our
business is subject to The Health Insurance Portability and Accountability Act
of 1996, or HIPAA, and changes to or violations of these regulations could
negatively impact our revenues.
HIPAA
mandates, among other things, the adoption of standards to enhance the
efficiency and simplify the administration of the nation’s healthcare system.
HIPAA requires the United States Department of Health and Human Services to
adopt standards for electronic transactions and code sets for basic healthcare
transactions such as payment, eligibility and remittance advices, or
“transaction standards,” privacy of individually identifiable health
information, or “privacy standards,” security of individually identifiable
health information, or “security standards,” electronic signatures, as well as
unique identifiers for providers, employers, health plans and individuals and
enforcement. Final regulations have been issued by DHHS for the privacy
standards, certain of the transaction standards and security
standards.
As a
covered entity, we are required to comply in our operations with these standards
and are subject to significant civil and criminal penalties for failure to do
so. In addition, in connection with providing services to customers that also
are healthcare providers, we are required to provide satisfactory written
assurances to those customers that we will provide those services in accordance
with the privacy standards and security standards. HIPAA has and will require
significant and costly changes for us and others in the healthcare industry.
Compliance with the privacy standards became mandatory in April 2003 and
compliance with the security standards became mandatory in April
2005.
Like
other businesses subject to HIPAA regulations, we cannot fully predict the total
financial or other impact of these regulations on us. The costs associated with
our ongoing compliance could be substantial, which could negatively impact our
profitability.
The
markets for many of our products are subject to changing
technology.
The
markets for many products we sell are subject to changing technology, new
product introductions and product enhancements, and evolving industry standards.
The introduction or enhancement of products embodying new technology or the
emergence of new industry standards could render our existing products obsolete
or result in short product life cycles or our inability to sell our products
without offering a significant discount. Accordingly, our ability to
compete is in part dependent on our ability to continually offer enhanced and
improved products.
We
depend upon a limited number of suppliers and manufacturers for our products,
and certain components in our products may be available from a sole or limited
number of suppliers.
Our
products are generally either manufactured and assembled for us by a sole
manufacturer, by a limited number of manufacturers or assembled by us from
supplies we obtain from a limited number of suppliers. Critical components
required to manufacture our products, whether by outside manufacturers or
directly by us, may be available from a sole or limited number of component
suppliers. We generally do not have long-term arrangements with any
of our manufacturers or suppliers. The loss of a sole or key
manufacturer or supplier would impair our ability to deliver products to our
customers in a timely manner and would adversely affect our sales and operating
results. Our business would be harmed if any of our manufacturers or
suppliers could not meet our quality and performance specifications and quantity
and delivery requirements.
Our
products and manufacturing facilities are subject to extensive regulation with
potentially significant costs for compliance.
Our CAD
systems for the computer aided detection of cancer are medical devices subject
to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic
Act. In addition, our manufacturing operations are subject to FDA
regulation and we are also subject to FDA regulations covering labeling, adverse
event reporting, and the FDA’s general prohibition against promoting products
for unapproved or off-label uses.
Our
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. Moreover, unanticipated
changes in existing regulatory requirements or adoption of new requirements
could increase our application, operating and compliance burdens and adversely
affect our business, financial condition and results of operations.
Sales of
our CAD products in certain countries outside of the United States are also
subject to extensive regulatory approvals. Obtaining and maintaining
foreign regulatory approvals is an expensive and time consuming
process. We cannot be certain that we will be able to obtain the
necessary regulatory approvals timely or at all in any foreign country in which
we plan to market our CAD products, and if we fail to receive such approvals,
our ability to generate revenue may be significantly
diminished.
Our
products may be recalled even after we have received FDA or other governmental
approval or clearance.
If the
safety or efficacy of our products is called into question, the FDA and similar
governmental authorities in other countries may require us to recall our
products, even if our product received approval or clearance by the FDA or a
similar governmental body. Such a recall would divert the focus of
our management and our financial resources and could materially and adversely
affect our reputation with customers and our financial condition and results of
operations.
We
rely on intellectual property and proprietary rights to maintain our competitive
position and may not be able to protect these rights.
We rely
heavily on proprietary technology that we protect primarily through licensing
arrangements, patents, trade secrets, proprietary know-how and non-disclosure
agreements. There can be no assurance that any pending or future patent
applications will be granted or that any current or future patents, regardless
of whether we are an owner or a licensee of the patent, will not be challenged,
rendered unenforceable, invalidated, or circumvented or that the rights will
provide a competitive advantage to us. There can also be no assurance that our
trade secrets or non-disclosure agreements will provide meaningful protection of
our proprietary information. There can also be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by us or that our technology will not infringe upon patents or other rights
owned by others.
In
addition, in the future, we may be required to assert infringement claims
against third parties, and there can be no assurance that one or more parties
will not assert infringement claims against us. Any resulting litigation or
proceeding could result in significant expense to us and divert the efforts of
our management personnel, whether or not such litigation or proceeding is
determined in our favor. In addition, to the extent that any of our intellectual
property and proprietary rights were ever deemed to violate the proprietary
rights of others in any litigation or proceeding or as a result of any claim, we
may be prevented from using them, which could cause a termination of our ability
to sell our products. Litigation could also result in a judgment or monetary
damages being levied against us.
We
may be exposed to significant product liability for which we may not be able to
procure sufficient insurance coverage.
Our
business exposes us to potential product liability risks which are inherent in
the testing, manufacturing, marketing and sale of medical devices. If
available at all, product liability insurance for the medical device industry
generally is expensive. Our product liability and general liability
insurance coverage may not be adequate for us to avoid or limit our liability
exposure and adequate insurance coverage may not be available in sufficient
amounts or at a reasonable cost in the future. In any event,
extensive product liability claims could be costly to defend and/or costly to
resolve and could harm our reputation and business.
Our
future prospects depend on our ability to retain current key employees and
attract additional qualified personnel.
Our
success depends in large part on the continued service of our executive officers
and other key employees. We may not be able to retain the services of
our executive officers and other key employees. The loss of executive
officers or other key personnel could have a material adverse effect on
us.
In
addition, in order to support our continued growth, we will be required to
effectively recruit, develop and retain additional qualified
personnel. If we are unable to attract and retain additional
necessary personnel, it could delay or hinder our plans for
growth. Competition for such personnel is intense, and there
can be no assurance that we 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 our
business, financial condition and results of operations.
We
distribute our products in highly competitive markets.
We
operate in highly competitive and rapidly changing markets that contain
competitive products available from nationally and internationally recognized
companies. Many of these competitors have significantly greater financial,
technical and human resources than us and are well established. In addition,
some companies have developed or may develop technologies or products that could
compete with the products we manufacture and distribute or that would render our
products obsolete or noncompetitive. In addition, our competitors may achieve
patent protection, regulatory approval, or product commercialization that would
limit our ability to compete with them. These and other competitive pressures
could have a material adverse effect on our business.
Our
international operations expose us to various risks, any number of which could
harm our business.
During
the past year our sales of product outside of the United States has increased.
We are subject to the risks inherent in conducting business across national
boundaries, any one of which could adversely impact our business. In addition to
currency fluctuations, these risks include, among other
things: economic downturns; changes in or interpretations of local
law, governmental policy or regulation; restrictions on the transfer of funds
into or out of the country; varying tax systems; and government
protectionism. One or more of the foregoing factors could
impair our current or future operations and, as a result, harm our overall
business.
We
do not anticipate paying cash dividends on our common stock.
We have
not paid cash dividends on our common stock in the past, and we do not intend to
do so in the foreseeable future. Any payment of dividends will be in the sole
discretion of our Board of Directors.
The
market price of our common stock has been, and may continue to be, volatile
which could reduce the market price of our common stock.
The
publicly traded shares of our common stock have experienced, and may experience
in the future, significant price and volume fluctuations. This market volatility could reduce the market
price of our common stock without regard to our operating
performance. In addition, the trading price of our common stock could
change significantly in response to actual or anticipated variations in our
quarterly operating results, announcements by us or our competitors, factors
affecting the medical imaging industry generally, changes in national or
regional economic conditions, changes in securities analysts' estimates for us
or our competitors' or industry's future performance or general market
conditions, making it
more difficult for shares of our common stock to be sold at a favorable price or
at all. The market price of our common stock could also be reduced by
general market price declines or market volatility in the future or future
declines or volatility in the prices of stocks for companies in our
industry.
Future sales of shares of our common
stock may
cause the prevailing market price of our shares to decrease and could harm our ability to raise additional
capital.
We have
previously issued a substantial number of shares of common stock, which are
eligible for resale under Rule 144 of the Securities Act of 1933, and may become
freely tradable. In addition, shares of our common stock issuable upon
conversion of our convertible debt are also eligible for sale under Rule
144. We have also registered shares that are issuable upon the
exercise of options and warrants. If holders of options or warrants
choose to exercise their purchase rights and sell shares of common stock in the
public market, or if holders of currently restricted common stock or common
stock issuable upon conversion of convertible debt choose to sell such shares of
common stock in the public market under Rule 144 or otherwise, or attempt to
publicly sell such shares all at once or in a short time period, the prevailing
market price for our common stock may decline. The sale of shares of common
stock issued upon the exercise of our securities could also dilute the holdings
of our existing stockholders.
Provisions in our corporate charter and in Delaware law could make it more difficult for a third
party to acquire us, discourage a takeover and adversely affect existing
stockholders.
Our
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 our 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. Although there are currently no shares of preferred stock
outstanding, future holders of preferred stock may have rights superior to our
common stock and such rights could also be used to restrict our ability to merge
with, or sell our assets to a third party.
We are also subject to the
provisions of Section 203 of the Delaware General Corporation
Law, which could prevent
us from engaging in
a “business combination” with a 15% or greater stockholder” for a
period of three years from the date such
person acquired that status unless appropriate board or stockholder approvals
are obtained.
These
provisions could deter unsolicited takeovers or delay or prevent changes in our
control or management, including transactions in which stockholders might
otherwise receive a premium for their shares over the then current market price.
These provisions may also limit the ability of stockholders to approve
transactions that they may deem to be in their best interests.
Item1B.
|
Unresolved Staff
Comments.
|
None.
The
Company’s executive offices are leased pursuant to a five-year lease (the
“Lease”) that commenced on December 15, 2006, consisting
of approximately 11,000 square feet of office space located at 98
Spit Brook Road, Suite 100 in Nashua, New Hampshire (the “Premises”). The Lease
also provides for annual base rent of $161,568 for the first year; $187,272 for
the second year; $198,288 for the third year; $209,304 for the fourth year and
$220,320 for the fifth year. Additionally, the Company is required to
pay its proportionate share of the building and real estate tax expenses and
obtain insurance for the Premises. The Company also has the right to extend the
term of the Lease for an additional three year period at the then current market
rent rate (but not less than the last annual rent paid by the
Company).
The
Company leases an approximately 23,000 square foot facility for its research and
development group located at 2689 Commons Blvd, Suite 100, Beavercreek, Ohio for
approximately $446,000 per year pursuant to a lease which expires in December
2010. The lease may be renewed for two additional terms of five years
each. In November 2005, the Company subleased approximately
6,000 square feet of office space at the facility at an average rate of
approximately $93,000 per year through December 2010. In August 2007
the Company subleased approximately another 6,000 square feet of office
space at the facility at an average rate of approximately $84,000 per year
through December 2010.
In
addition to the foregoing leases relating to its principal properties, the
Company also has a lease for an additional facility in Nashua, New Hampshire
used for product repairs, manufacturing and warehousing and office space in
White Plains, New York as a result of the asset acquisition of CAD Sciences in
July 2008.
If the
Company is required to seek additional or replacement facilities, it believes
there are adequate facilities available at commercially reasonable
rates.
Item
3.
|
Legal
Proceedings.
|
The
Company is not currently party to any material legal proceedings.
Item
4.
|
Submission of Matters
to a Vote of Security
Holders.
|
None.
PART
II
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities.
|
The
Company's common stock is traded on the NASDAQ Capital Market under the symbol
“ICAD”. The following table sets forth the range of high and
low sale prices for each quarterly period during 2008 and 2007.
Fiscal year ended
|
|
|
|
|
|
|
December 31, 2008
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$ |
2.78 |
|
|
$ |
1.62 |
|
Second
Quarter
|
|
|
3.85 |
|
|
|
2.40 |
|
Third
Quarter
|
|
|
4.60 |
|
|
|
2.51 |
|
Fourth
Quarter
|
|
|
3.16 |
|
|
|
0.90 |
|
Fiscal year ended
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
5.06 |
|
|
$ |
2.85 |
|
Second
Quarter
|
|
|
4.24 |
|
|
|
2.47 |
|
Third
Quarter
|
|
|
4.21 |
|
|
|
2.59 |
|
Fourth
Quarter
|
|
|
3.35 |
|
|
|
1.65 |
|
As of
March 1, 2009 there were 257 holders of record of the Company's common
stock. In addition, the Company believes that there are in
excess of 525 holders of its 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 expect to pay 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
by the Company's Board of Directors. There are no non-statutory restrictions on
the Company's present ability to pay dividends.
See Item
12 of this Form 10-K for certain information with respect to the Company’s
equity compensation plans in effect at December 31, 2008.
Item
6.
|
Selected Financial
Data.
|
The
financial data set forth below should be read in conjunction with Item 7 -
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our audited financial statements as of and for the years ended
December 31, 2008, 2007 and 2006 and the related notes included elsewhere in
this report and in our prior reports on Form 10-K. The historical
results of operations are not necessarily indicative of future
results.
Selected Statement of
Operations Data
|
|
Year Ended December 31,
|
|
|
|
2008 (1)
|
|
|
2007 (1)
|
|
|
2006 (1)
|
|
|
2005
|
|
|
2004
|
|
Total
Revenue
|
|
$ |
37,491,548 |
|
|
$ |
26,612,412 |
|
|
$ |
19,721,358 |
|
|
$ |
19,769,822 |
|
|
$ |
23,308,462 |
|
Gross
margin
|
|
|
31,315,518 |
|
|
|
21,355,308 |
|
|
|
15,430,540 |
|
|
|
15,133,765 |
|
|
|
16,775,166 |
|
Gross
margin %
|
|
|
83.5 |
% |
|
|
80.2 |
% |
|
|
78.2 |
% |
|
|
76.5 |
% |
|
|
72.0 |
% |
Total
operating expenses
|
|
|
26,549,729 |
|
|
|
22,459,111 |
|
|
|
21,869,219 |
|
|
|
19,888,292 |
|
|
|
17,042,385 |
|
Income
(loss) from operations
|
|
|
4,765,789 |
|
|
|
(1,103,803 |
) |
|
|
(6,438,679 |
) |
|
|
(4,754,527 |
) |
|
|
(267,219 |
) |
Interest
expense - net
|
|
|
174,600 |
|
|
|
434,729 |
|
|
|
199,279 |
|
|
|
3,961 |
|
|
|
561,044 |
|
Provision
for income taxes
|
|
|
235,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
income (loss)
|
|
|
4,356,189 |
|
|
|
(1,538,532 |
) |
|
|
(6,637,958 |
) |
|
|
(4,758,488 |
) |
|
|
(828,263 |
) |
Net
income (loss) available to common stockholders
|
|
|
4,356,189 |
|
|
|
(1,606,292 |
) |
|
|
(6,754,158 |
) |
|
|
(4,880,218 |
) |
|
|
(961,263 |
) |
Net
income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.10 |
|
|
|
(0.04 |
) |
|
|
(0.18 |
) |
|
|
(0.13 |
) |
|
|
(0.03 |
) |
Diluted
|
|
|
0.10 |
|
|
|
(0.04 |
) |
|
|
(0.18 |
) |
|
|
(0.13 |
) |
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,704,374 |
|
|
|
38,351,345 |
|
|
|
36,911,742 |
|
|
|
36,627,696 |
|
|
|
34,057,775 |
|
Diluted
|
|
|
42,748,052 |
|
|
|
38,351,345 |
|
|
|
36,911,742 |
|
|
|
36,627,696 |
|
|
|
34,057,775 |
|
(1) iCAD,
Inc. adopted the provision of SFAS 123R, "Share Based Payment", effective Janury
1, 2006, the beginning of fiscal 2006. As a
result, the results of operations for fiscal 2008, 2007 and 2006 included
incremental share-based payments over what would have been recorded
had the Company continued to account for share-based compensensation under APB
No. 25 "Accounting for Stock Issued to Employees". See
Note 5 of the Notes to Consolidated Financial Statements.
Selected Balance Sheet
Data
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Cash
and cash equivalents
|
|
$ |
13,115,715 |
|
|
$ |
4,348,729 |
|
|
$ |
3,623,404 |
|
|
$ |
4,604,863 |
|
|
$ |
8,008,163 |
|
Total
current assets
|
|
|
20,585,813 |
|
|
|
12,950,759 |
|
|
|
10,558,300 |
|
|
|
11,256,855 |
|
|
|
14,289,588 |
|
Total
assets
|
|
|
73,189,731 |
|
|
|
61,730,678 |
|
|
|
60,289,673 |
|
|
|
61,527,835 |
|
|
|
65,136,107 |
|
Total
current liabilities
|
|
|
6,897,406 |
|
|
|
10,624,085 |
|
|
|
6,488,511 |
|
|
|
8,166,756 |
|
|
|
5,990,562 |
|
Convertible
revolving loans payable to related party, including current
portion
|
|
|
- |
|
|
|
2,258,906 |
|
|
|
2,258,906 |
|
|
|
258,906 |
|
|
|
300,000 |
|
Convertible
loans payable to related parties, including current
portion
|
|
|
- |
|
|
|
2,793,382 |
|
|
|
2,784,559 |
|
|
|
- |
|
|
|
- |
|
Convertible
loans payable to non-related parties, including current
portion
|
|
|
- |
|
|
|
684,559 |
|
|
|
663,970 |
|
|
|
- |
|
|
|
- |
|
Note
payable, current
|
|
|
- |
|
|
|
- |
|
|
|
375,000 |
|
|
|
1,875,000 |
|
|
|
3,375,000 |
|
Stockholders'
equity
|
|
|
66,292,325 |
|
|
|
48,847,687 |
|
|
|
47,971,727 |
|
|
|
52,727,173 |
|
|
|
56,970,545 |
|
Item7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Results
of Operations
Overview
iCAD is
an industry-leading provider of advanced image analysis and workflow solutions
that enable radiologists and other healthcare professionals to better serve
patients by identifying pathologies and pinpointing cancer earlier. iCAD offers
a comprehensive range of high-performance, expandable Computer-Aided Detection
(CAD) systems and workflow solutions for mammography (film-based, digital
radiography (DR) and computed radiography (CR), Magnetic Resonance Imaging
(MRI), and Computed Tomography (CT)). iCAD’s solutions aid in the early
detection of the most prevalent cancers including breast, prostate and colon
cancer. Early detection of cancer is the key to better prognosis,
less invasive and lower treatment costs, and higher survival rates. Performed as
an adjunct to mammography screening, CAD has quickly become the standard of care
in breast cancer detection, helping radiologists improve clinical outcomes while
enhancing workflow. Computer-enhanced breast and prostate MRI analysis
streamlines case interpretation workflow and generates more robust information
for more effective patient treatment. CAD for mammography screening
is also reimbursable in the United States under federal and most third-party
insurance programs. Since receiving FDA approval for the Company’s
first breast cancer detection product in January 2002, nearly three thousand of
iCAD’s CAD systems have been placed in mammography practices
worldwide. iCAD is the only stand alone company offering CAD
solutions for the early detection of breast cancer.
In late
2005, the Company began to see a shift in sales from its film based analog CAD
technology to its digital CAD technology. This shift has been
primarily fueled by the results reported in 2005 in the New England Journal of
Medicine from the American College of Radiology Imaging Network’s (ACRIN)
Digital Mammographic Imaging Screening Trial (DMIST). The trial
showed that there was no difference in accuracy between the two modalities for
screening asymptomatic women in general. But for three subgroups of women (which
represent over 60% of the population), digital mammography performed better than
film-based analog mammography. Additionally, digital mammography offers better
clinical images combined with significant workflow improvements for the
radiologist. CAD technology is more often purchased for use with
digital mammography equipment than is purchased for use with analog mammography
equipment.
iCAD’s
CAD mammography products have been shown to detect up to 72 percent of the
cancers that biopsy proved were missed on the previous mammogram, an average of
15 months earlier. Our advanced pattern recognition technology
analyzes images to identify patterns and then uses sophisticated mathematical
analysis to mark suspicious areas.
The
Company intends to apply its core competencies in pattern recognition and
algorithm development in disease detection to its product development efforts.
Our focus is on the development and marketing of cancer detection products for
disease states where there are established or emerging protocols for screening
as a standard of care. iCAD expects to pursue development or
acquisition of products for select disease states that demonstrate one or more
of the following: it is clinically proven that screening has a significant
positive impact on patient outcomes, where there is an opportunity to lower
health care costs, where screening is non-invasive or minimally invasive and
where public awareness is high. Virtual colonoscopy (CTC) is a technology that
has evolved rapidly in recent years. We expect that the market for
virtual colonoscopy will grow for the procedures for early detection of colon
cancer, combined with the recent results of the National CT Colonography
Trial. This Trial demonstrated that CTC is highly accurate for the
detection of intermediate and large polyps and that the accuracy of CTC is
similar to colonoscopy. CT Colonography or CTC is emerging as an
alternative imaging procedure for evaluation of the colon. The Company has
developed a product for computer aided detection of polyps in the colon using
CTC and is currently in clinical trials. The clinical trial is expected to
be concluded in the first quarter of 2009. Colorectal cancer has been shown to
be highly preventable with early detection and removal of
polyps.
The
Company’s CAD systems include proprietary algorithm and other technology
together with standard computer and display equipment. CAD systems for the
film-based analog mammography market also include a radiographic film digitizer,
manufactured by the Company and others for the digitization of film-based
medical images. In July 2008, the Company acquired pharmaco-kinetic
based CAD products that aid in the interpretation of contrast enhanced MRI
images of the breast and prostate and began marketing these products in the
fourth quarter of 2008.
The
Company’s headquarters are located in southern New Hampshire, with manufacturing
and contract manufacturing facilities in New Hampshire and Massachusetts and
research and development facilities in Ohio and New York.
Critical
Accounting Policies
The
Company’s discussion and analysis of its financial condition, results of
operations, and cash flows are based on its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
these estimates, including those related to accounts receivable allowance,
inventory valuation and obsolescence, intangible assets, income taxes, warranty
obligations, contingencies and litigation. Additionally, the Company uses
assumptions and estimates in calculations to determine stock-based compensation.
The Company bases its estimates on historical experience and on various other
assumptions that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The
Company’s critical accounting policies include:
|
-
|
Allowance
for doubtful accounts;
|
|
-
|
Valuation
of long-lived and intangible
assets;
|
|
-
|
Stock
based compensation;
|
Revenue
Recognition
Revenue
is generally recognized when the product ships provided title and risk of loss
has passed to the customer, persuasive evidence of an arrangement exists, fees
are fixed or determinable, collectability is probable and there are no
uncertainties regarding customer acceptance. The Company considers the guidance
for revenue recognition in the Financial Accounting Standards Board’s (“FASB”)
Emerging Issues Task Force Issue 00-21, “Accounting for Revenue Arrangements
with Multiple Deliverables” and Staff Accounting Bulletin No. 104, “Revenue
Recognition in Financial Statements”. The Company’s revenue
transactions can on occasion include product sales with multiple element
arrangements, generally for installation. The elements are considered
separate units of accounting because the delivered product has stand alone value
to the customer and there is objective and reliable evidence of the fair value
of the undelivered items. Revenue under these arrangements is
allocated to each element based on its estimated relative fair market value.
Fair market value is determined using entity specific and third party evidence.
A portion of the arrangement consideration is recognized as revenue when the
product is shipped and a portion of the arrangement consideration is recognized
as revenue when the installation service is performed. The value of
the undelivered elements includes the fair value of the
installation.
If the
terms of the sale include customer acceptance provisions, and compliance with
those provisions cannot be demonstrated, all revenues are deferred and not
recognized until such acceptance occurs. The Company considers all
relevant facts and circumstances in determining when to recognize revenue,
including contractual obligations to the customer, the customer’s post-delivery
acceptance provisions, if any, and the installation process. There
are no significant estimates or assumptions used in the Company’s revenue
recognition.
The
Company defers revenue for extended service contracts related to future periods
and recognizes revenue on a straight-line basis in accordance with FASB
Technical Bulletin No. 90-1, "Accounting for Separately Priced Extended Warranty
and Product Maintenance Contracts." The Company provides for estimated
warranty costs on original product warranties at the time of sale.
The
Company believes that revenue recognition is a critical accounting policy
because it is governed by multiple complex accounting rules and it is important
for readers of our financial statements to understand the basis upon which our
revenues are recorded. In addition, the Company believes that its
investors value the Company and track its progress based to a large extent upon
revenues.
Allowance
for Doubtful Accounts
The
Company’s policy is to maintain allowances for estimated losses from the
inability of its customers to make required payments. Credit limits
are established through a process of reviewing the financial history and
stability of each customer. Where appropriate, the Company obtains
credit rating reports and financial statements of customers when determining or
modifying credit limits. The Company’s senior management reviews
accounts receivable on a periodic basis to determine if any receivables may
potentially be uncollectible. The Company includes any accounts
receivable balances that it determines may likely be uncollectible, along with a
general reserve for estimated probable losses based on historical experience, in
its overall allowance for doubtful accounts. An amount would be
written off against the allowance after all attempts to collect the receivable
had failed. Based on the information available to the Company, it
believes the allowance for doubtful accounts as of December 31, 2008 is
adequate.
Inventory
Inventory
is valued at the lower of cost or market value, with cost determined by the
first-in, first-out method. The Company regularly reviews inventory quantities
on hand and records a provision for excess and/or obsolete inventory primarily
based upon estimated usage of its inventory as well as other
factors.
Long
Lived Assets
Long-lived
assets, other than goodwill, 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 primarily of patents, technology intangibles and trade name purchased in
the acquisition of ISSI in June 2002, CADx in December 2003 and the acquisition
of assets from CAD Sciences in July 2008. These assets are amortized
on a straight-line basis over their estimated useful lives of 5 to 10
years.
Goodwill
The
Company follows the provision of FASB issued Statement of Financial Accounting
Standard (“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
addresses the accounting for acquired goodwill and intangible assets. Goodwill
and indefinite-lived intangible assets are no longer amortized and are tested
for impairment at least annually.
The
Company’s goodwill arose in connection with the acquisition of ISSI in June 2002
and with the acquisition of CADx in December 2003. The Company
operates in one segment and as one reporting unit since its products perform the
same basic function, have common sales channels and resellers, and are developed
and supported by one central staff. Therefore, the Company assumes
market capitalization is the best evidence of fair value (market capitalization
is calculated using the quoted closing share price of the Company’s common stock
at its annual impairment date of October 1, multiplied by the number of common
shares outstanding) of the Company. The Company tests goodwill for
impairment by comparing its market capitalization (fair value) to its carrying
value in accordance with paragraph 23 of SFAS 142, which notes that quoted
market prices in active markets are the best evidence of fair value and shall be
used as the basis for the measurement. The fair value of the
Company is compared to the carrying amount at the same date as the basis to
determine if an impairment exists.
No
goodwill impairment loss was recorded in 2008 or 2007. For 2008 and
2007, the Company performed the step one fair value comparison as of October 1,
2008 and October 1, 2007. At both dates the Company’s market capitalization
exceeded its carrying value. A control premium was not a determining
factor in the outcome of step one of the impairment assessment.
At
December 31, 2008, the Company’s market capitalization fell below its
carrying value. The Company applied a reasonable control premium to
its market capitalization at that time to determine a reasonable fair value,
which exceeded the Company’s carrying value as of that date. The inclusion of a
control premium of at least 30% of the Company’s marketable
capitalization was needed or its carrying value at December 31, 2008 would
have exceeded fair value. The Company believes that including a
control premium at or above this level is supported by recent transaction data
in its industry.
Considering that
inherent market fluctuations may affect any individual closing price, the
Company also used a 40-day duration to determine fair value by multiplying
the shares outstanding by the average market price of its common stock over
a 20-day period before and a 20-day period after its lowest closing stock price
in the fourth quarter. While the market capitalization was
below the Company’s carrying value at both 20 day periods, the
inclusion of a control premium of at least 10% and 13% respectively, for the
20-day period before and the 20-day period after its lowest closing stock price
in the fourth quarter, fair value would have exceeded carrying
value.
As
evidenced above, the Company’s stock price and control premium are significant
factors in assessing its fair value for purposes of the goodwill impairment
assessment. The Company
believes that its market capitalization alone does not fully capture the fair
value of its business as a whole, or the substantial value that an acquirer
would obtain from its ability to obtain control of the Company. As
such, in determining fair value, the Company adds a control premium to its
market capitalization, which seeks to give effect to the increased consideration
a potential acquirer would be required to pay in order to gain sufficient
ownership to set policies, direct operations and make decisions related to the
Company.
The
Company’s stock price can be affected by, among other things, changes in
industry or market conditions, economic conditions, changes in its results of
operations, and changes in its forecasts or market expectations relating to
future results. Significant events in the financial markets and in
macroeconomic conditions globally have recently contributed to volatility in the
Company’s stock price and a significant decline in its stock price during the
fourth quarter of 2008. On numerous occasions during the fourth quarter, the
Company’s stock price was high enough that its market capitalization exceeded
its carrying value without giving effect to a control premium. The current
macroeconomic environment, however, continues to be challenging and the Company
cannot be certain of the duration of these conditions and their potential impact
on its stock price performance or operations.
Product
Warranties
The
Company provides for the estimated cost of standard product warranty against
defects in material and workmanship based on historical warranty trends and
costs, and the volume of product returns during the warranty
period.
Stock
Based Compensation
The
Company maintains stock-based incentive plans, under which it provides stock
incentives to employees, directors and contractors. The Company
grants to employees, directors and contractors, restricted stock and/or options
to purchase common stock at an option price equal to the market value of the
stock at the date of grant. Prior to the effective date of Statement No.
123R, “Share-Based Payment” (“SFAS 123R”), the Company applied Accounting
Principles Board (“APB”) opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), and related interpretations, for its stock option grants.
APB 25 provides that the compensation expense relative to its stock options is
measured based on the intrinsic value of the stock option at date of
grant.
Effective
January 1, 2006, the Company adopted the provisions of SFAS 123R using the
modified prospective transition method. Under this method, prior periods are not
restated. The Company used the Black-Scholes and Lattice option pricing models
which requires extensive use of accounting judgment and financial estimates,
including estimates of the expected term participants will retain their vested
stock options before exercising them, the estimated volatility of its common
stock price over the expected term, and the number of options that will be
forfeited prior to the completion of their vesting requirements. Application of
alternative assumptions could produce significantly different estimates of the
fair value of stock-based compensation and consequently, the related amounts
recognized in the Consolidated Statements of Operations. The provisions of SFAS
123R apply to new stock options and stock options outstanding, but not yet
vested, on the date the Company adopted SFAS 123R. Stock-based
compensation expense was included in applicable departmental expense categories
in the Consolidated Statements of Operations for the fiscal 2008, 2007 and 2006
periods.
Income
Taxes
The
Company follows the liability method under SFAS No. 109, “Accounting for Income
Taxes” (“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. The Company has provided a full
valuation allowance against its deferred tax assets at December 31, 2008, 2007
and 2006 as it is more likely than not that the deferred tax asset will not be
realized.
The
Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48") on January
1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The adoption of FIN 48 did not have a material impact on the
Company’s consolidated financial statements.
Year Ended December 31, 2008
compared to Year Ended December 31, 2007
Revenue. Revenue for the year
ended December 31, 2008 was $37,491,548 compared with revenue of $26,612,412 for
the year ended December 31, 2007 for an increase of $10,879,136 or
40.9%. In 2008 sales of iCAD’s digital CAD solutions increased
$10,306,332 or 62.7% to $26,735,782 compared to sales of $16,429,450 in
2007. This increase is due primarily to the release, early in the
second quarter of 2008, of the Company’s SecondLook® Digital
CAD for sale with Fujifilm Computed Radiography for Mammography (“FCRm”) systems, of approximately
$7,063,325, as well as an increase in business from the Company’s other OEM
customers due to the continued increased global demand for Full Field Digital
Mammography (“FFDM”) systems and digital CAD technology for the detection of
breast cancer.
In April
2008 the Company announced that its SecondLook Digital CAD system for
mammography received approval from the FDA for sale with Fuji’s FCRm
system. SecondLook Digital for FCRm is the first CAD product
approved and available in the U.S. for use with computer
radiography.
Revenue
from iCAD’s film based product increased 9.9% or $667,683 for the year ended
December 31, 2008, to $7,436,529 in 2008 compared to $6,768,846 in
2007. While the transition to digital technology has had a
significant positive impact on overall performance, the film based products are
a mature product line. However, film based product revenue has
benefited from demand for the Company’s TotalLook Mammo Advantage product that
is used for digitizing film based prior mammography exams for comparative
reading with current mammography exams. In addition, a new version of
the Company’s TotalLook product, the TotalLook Mammo Advantage, was introduced
late in the first quarter of 2008 and the Company has received favorable
customer response to this product.
Service
and supply revenue decreased 2.8% for the year ended December 31, 2008, to
$3,319,237 compared to $3,414,116 in 2007. The decrease in the
Company’s service revenue in 2008 is due primarily to a reduction in time and
material billings for repair services and related parts sales due in part to
certain of its older film based analog products no longer being supported,
offset by increased service contract revenue on the Company’s digital and
TotalLook products.
The table
below presents the revenue attributable to different product and service, in
2008 and 2007:
|
|
For the year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
%
Change
|
|
Digital
revenue
|
|
$ |
26,735,782 |
|
|
$ |
16,429,450 |
|
|
$ |
10,306,332 |
|
|
|
62.7 |
% |
Film
based revenue
|
|
|
7,436,529 |
|
|
|
6,768,846 |
|
|
|
667,683 |
|
|
|
9.9 |
% |
Service
& supply revenue
|
|
|
3,319,237 |
|
|
|
3,414,116 |
|
|
|
(94,879 |
) |
|
|
-2.8 |
% |
Total
revenue
|
|
$ |
37,491,548 |
|
|
$ |
26,612,412 |
|
|
$ |
10,879,136 |
|
|
|
40.9 |
% |
Gross Margin. Gross margin
increased to 83.5% for the year ended December 31, 2008 compared to 80.2% for
the year ended December 31, 2007. The increase in gross margin is
primarily attributable to increased volume of the Company’s digital products
which have a higher gross margin than its film based products which include more
hardware components and the realization of some average selling price increases
and some component cost reductions.
Engineering and Product
Development. Engineering and product development costs for the
year ended December 31, 2008 increased by $2,617,334 or 58.1%, from $4,504,000
in 2007 to $7,121,334 in 2008. The increase in engineering and
product development costs was primarily due to an increase in personnel and
related costs of $1,267,000, resulting from staff increases to support the
Company’s product development efforts, including its new MRI products, $847,000
in subcontracting services relating to the clinical trial for its CT Colon
product, $234,000 in amortization expense and $47,000 in rent expense relating
to the asset acquisition of CAD Sciences in the third quarter of 2008 and
$67,000 in stock based compensation expense. In addition, during the 2008 period
the Company experienced an increase in rent, travel, telephone, data collection,
depreciation, legal and computer supplies totaling $246,000. These
expenses were offset by decreases of $48,000 in relocation expense and $34,000
in recruiting expense.
Marketing and Sales.
Marketing and sales expense for the year ended December 31, 2008
increased by $1,181,603 or 11.0%, from $10,780,304 in 2007 to $11,961,907 in
2008. The increase in marketing and sales expense primarily resulted
from an increase in personnel and related costs of $810,000, increased sales
commissions due to increased revenue of $515,000, increased advertising, trade
show and travel expenses of $348,000, rebranding cost associated with our new
MRI CAD products of $202,000 and stock based compensation of $82,000, which were
offset by decreases in consulting and subcontracted services of $451,000,
warranty related costs of $200,000 and freight and depreciation expenses
totaling $105,000.
General and Administrative.
General and administrative expenses for the year ended December 31, 2008
increased by $291,681 or 4.1%, from $7,174,807 in 2007 to $7,466,488 in
2008. The increase in general and administrative expenses for the
year ended December 31, 2008 was primarily due to an increase in stock based
compensation expense of approximately $462,000, additional wage related and
fringe benefit expenses of $102,000 and consulting services of $73,000, offset
by decreases in legal fees of $152,000, travel and telephone expenses of
$119,000 and recruiting fees of $74,000.
Other (Income) Expense Net.
Net interest expense for the year ended December 31, 2008 decreased from
$434,729 in 2007 to $174,600 in 2008. This decrease is due primarily to the
conversion of the Company’s outstanding convertible loans during the second and
third quarters of 2008 and the decrease in the interest rate on the Company’s
Prior Loan Agreement with its former Chairman which bore interest at the prime
rate plus 1%. The interest rate decreased from approximately 9.25% in
2007 to approximately 6.25% in 2008.
Provision for Income Taxes.
The provision for income taxes for the year ended December 31, 2008 of
$235,000 consists of an estimate for federal alternative minimum tax expense and
various state income taxes based upon the estimated effective income tax rate
for the full fiscal year.
Net Income/(Loss). As a result of the
foregoing, the Company recorded net income of $4,356,189 or $0.10 per basic and
diluted share for the year ended December 31, 2008 on revenue of $37,491,548,
compared to a net loss of ($1,606,292) or ($0.04) per basic share on revenue of
$26,612,412 for the year ended December 31, 2007.
Backlog. The
Company’s product backlog (excluding service and supplies) was approximately
$1,137,000 at December 31, 2008 as compared to $1,869,000 on the corresponding
date in 2007 and $1,019,000 at September 30, 2008. The Company
expects that the majority of the backlog at December 31, 2008 will be shipped
within the 2009 fiscal year. Backlog as of any particular period should not be
relied upon as indicative of the Company’s net revenues for any future period as
a large amount of the Company’s product is booked and shipped within the same
quarter.
Year Ended December 31, 2007
compared to Year Ended December 31, 2006
Revenue. Revenue for the year
ended December 31, 2007 was $26,612,412 compared with revenue of $19,721,358 for
the year ended December 31, 2006 for an increase of $6,891,054 or
34.9%. In 2007 sales of iCAD’s digital CAD products increased
$6,141,940 or 59.7% to $16,429,450, compared to sales of $10,287,510 in
2006. This was due to a substantial increase in the market adoption
of FFDM equipment and strong continued demand for digital CAD technology for the
detection of breast cancer used in conjunction with FFDM.
This
shift in sales to FFDM and the associated CAD technology had generally slowed
sales of the Company’s film based analog technology. While the
transition to digital technology had a significant positive impact on the
Company’s overall financial performance in 2007, the Company’s film based analog
products was a mature product line. Despite the overall market shift to digital
CAD equipment during 2007 the Company realized a strong demand for its
TotalLookÔ product that is
used for digitizing the results of prior film based mammography exams, for
comparative reading with current digital mammography exams. The TotalLook
product, which was included in the Company’s film based analog revenue, provides
a comprehensive film-to-digital solution making it easier for mammography
facilities to transition from film to digital mammography. Sales of
iCAD’s film based analog products increased 3.8% or $249,343 to $6,768,846 for
the year ended December 31, 2007 compared to $6,519,503 for the year ended
December 31, 2006.
Service
and supply revenue increased approximately $499,771 or 17.1% in the year ended
December 31, 2007 to $3,414,116 compared to $2,914,345 for the year ended
December 31, 2006. The increase in the Company’s service revenue was
due primarily to focused efforts by the Company to increase its service
offerings to its customers, resulting in an increase in sales of contracts that
provide service on products beyond its warranty period.
The table
below presents the revenue attributable to different product and service, in
2007 and 2006:
|
|
For the year ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
% Change
|
|
Digital revenue
|
|
$ |
16,429,450 |
|
|
$ |
10,287,510 |
|
|
$ |
6,141,940 |
|
|
|
59.7 |
% |
Film
based revenue
|
|
|
6,768,846 |
|
|
|
6,519,503 |
|
|
|
249,343 |
|
|
|
3.8 |
% |
Service
& supply revenue
|
|
|
3,414,116 |
|
|
|
2,914,345 |
|
|
|
499,771 |
|
|
|
17.1 |
% |
Total
revenue
|
|
$ |
26,612,412 |
|
|
$ |
19,721,358 |
|
|
$ |
6,891,054 |
|
|
|
34.9 |
% |
Gross Margin. Gross margin
increased to 80.2% for the year ended December 31, 2007 compared to 78.2% for
the year ended December 31, 2006. The increase in gross margin was
primarily attributable to increased sales of the Company’s digital products,
which have a slightly higher gross margin than its film based analog products
which include more hardware components.
Engineering and Product
Development. Engineering and product development costs for the
year ended December 31, 2007 decreased by $756,893 or 14.4%, from $5,260,893 in
2006 to $4,504,000 in 2007. The decrease in engineering and product
development costs for the year ended December 31, 2007 was primarily due to a
decrease in overall personnel and recruiting costs resulting from staff
reductions and a shift in personnel to the Company’s marketing department and a
decrease travel expense that was partially offset by an increase in bonus
expense of approximately $459,000. In addition, during the 2007
period the Company experienced a decrease in consulting, prototype and
regulatory expenses of approximately $390,000. The decrease in expenses were
partially offset by an increase in stock based compensation expense for the year
ended December 31, 2007 of approximately $79,000 to $166,000 in 2007 compared to
$87,000 for the same period in 2006.
Marketing and Sales.
Marketing and sales expense for the year ended December 31, 2007
increased by $1,551,423 or 16.8%, from $9,228,881 in 2006 to $10,780,304 in
2007. The increase in marketing and sales expense for the year ended
2007, primarily resulted from the actions taken by the Company’s new management
to revamp the sales efforts including the hiring of highly experienced sales and
marketing professionals and a shift of several personnel from engineering to
product marketing, which resulted in increased personnel and related expenses of
approximately $1,352,000. In addition, the Company incurred additional expenses
of approximately $282,000 for public relations, advertising, travel, collateral
and training materials. The increase in marketing and sales expense were
partially offset by a decrease in stock based compensation expense for the year
ended December 31, 2007 of approximately $83,000 to $162,000 in 2007 compared to
$245,000 for the same period in 2006.
General and Administrative.
General and administrative expenses for the year ended December 31, 2007
decreased by $204,639 or 2.8%, from $7,379,446 in 2006 to $7,174,807 in
2007. The decrease in general and administrative expenses for the
year ended December 31, 2007 was due primarily to severance and related
separation costs of approximately $700,000 in 2006 in connection with the
resignation of the Company’s former Chief Executive Officer in May
2006. These costs included $258,000 in share-based compensation under
SFAS 123R due to the modification of options in connection with his separation
agreement with the Company. The decrease in general and
administrative expense in 2007, also included a reduction of approximately
$489,000 in legal expenses principally associated with the Company’s patent
arbitration proceeding with R2 Technology, Inc. which was settled in April of
2006 and a decrease of $200,000 in amortization expense due to fully amortized
assets associated with the Company’s acquisition of CADx in
2003. These decreases in expenses were partially offset by
increases in personnel and salaries, employee bonus accrual and expenses
associated with the Company’s new office facility totaling approximately
$854,000 and an increase of approximately $136,000 in stock-based compensation
expense, to $880,000 in 2007 compared to $744,000 for the same period in
2006.
Interest Expense Net. Net
interest expense for the year ended December 31, 2007 increased from $199,279 in
2006 to $434,729 in 2007. This increase was due primarily to a
full year of interest expense realized on the Convertible Promissory Notes
issued by the Company in June 2006 and September 2006 offset by interest income
of $74,145 and $102,963 in 2007 and 2006, respectively.
Net Loss. As a
result of the foregoing and including total stock based compensation expense of
$1,242,155 in fiscal 2007, the Company recorded a net loss of ($1,538,208) or
($0.04) per share for the year ended December 31, 2007 on revenue of
$26,612,412, compared to stock based compensation expense of $1,334,485 with a
net loss of ($6,637,958) or ($0.18) per share for the same period in 2006 on
revenue of $19,721,358.
Backlog. The
Company’s product backlog (excluding service and supplies) as of December 31,
2007 totaled approximately $1,731,000 as compared to $2,566,000 as of December
31, 2006. As expected that the majority of the backlog at
December 31, 2007 was shipped within the 2008 fiscal year. Backlog as
of any particular period should not be relied upon as indicative of the
Company’s net revenues for any future period, as much of the Company’s product
is booked and shipped within the same quarter.
Liquidity
and Capital Resources
The
Company believes that its current liquidity and capital resources are sufficient
to sustain operations through at least the next 12 months, primarily due to cash
on hand, cash expected to be generated from continuing operations, as well as
the anticipated availability of a credit line under the RBS Loan Agreement.
At this point in time, our liquidity has not been materially impacted by
the recent and unprecedented disruption in the current capital and credit
markets and we do not expect that it will be materially impacted in the near
future. We will continue to closely monitor our liquidity and the capital and
credit markets.
The RBS
Loan Agreement replaces the Prior Loan Agreement with Mr. Robert Howard, the
Company’s former Chairman of the Board of Directors, which was fully repaid and
terminated on June 30, 2008. The RBS Loan Agreement established a
secured revolving credit facility with a line of credit of up to $5,000,000. The
borrowing base under the RBS Loan Agreement is limited to 80% of eligible
accounts receivable or, if adjusted EBITDA (EBITDA is defined in the agreement
as earnings before interest expense, income tax expense, depreciation,
amortization and SFAS 123R stock option expense) for the quarter is greater than
or equal to $1,250,000, then the Company will not be subject to a restriction as
to availability of credit upon the borrowing base. In this event, the
Company will be subject to compliance with a Total Funded Debt to Adjusted
EBITDA covenant. As of December 31, 2008, the Company had $5,000,000 of
available borrowing capacity. Unless earlier repaid, all amounts due and owing
under the RBS Loan Agreement are required to be repaid on June 30, 2009, the
stated termination date of the RBS Loan Agreement. The Company expects to renew
the loan agreement at June 30, 2009.
The RBS
Loan Agreement contains certain financial and non-financial covenants relating
to the Company. The RBS Loan Agreement also contains certain events
of default. Amounts due under the RBS Loan Agreement and the related Revolving
Note made by the Company in favor of RBS, may be prepaid at any time, in whole
or in part, at the option of the Company, provided, however, that for any
portion of the loan accruing interest as a “LIBOR Rate Loan” (as defined the in
the RBS Loan Agreement), the Company is responsible to pay any LIBOR Breakage
Fee as defined and further described in the Revolving Note. All
amounts outstanding under the RBS Loan Agreement and the associated Revolving
Note will bear interest, at the Company’s option, at a fluctuating per annum
rate of interest equal to (i) Prime Rate (as defined in the Revolving Note) plus
one-half of one percent or (ii) the Adjusted LIBOR Rate (as defined in the
Revolving Note) plus the LIBOR Rate Margin (as defined in the Revolving
Note).
In
connection with the RBS Loan Agreement and the Revolving Note, the Company
entered into a Negative Pledge Agreement dated June 30, 2008 and made in favor
of RBS. Pursuant to the Negative Pledge Agreement, the Company
agreed, among other things, (i) not to incur any liens, other than as permitted
under the RBS Loan Agreement, with respect to the Company’s intellectual
property and (ii) not to sell or assign, other than for fair consideration in
the ordinary course of business, the Company’s intellectual
property. In addition, the Company assigned all its assets to RBS
wherever located and whether now owned or hereafter acquired, including, without
limitation, all inventory, machinery, equipment, fixtures and other
goods.
The
Company's ability to generate cash adequate to meet its future capital
requirements will depend primarily on operating cash flow. If sales
or cash collections are reduced from current expectations, or if expenses and
cash requirements are increased, the Company may require additional
financing.
Working
capital increased by $11,361,733 to $13,688,407 at December 31, 2008 from
$2,326,674 at December 31, 2007. The ratio of current assets to
current liabilities at December 31, 2008 and 2007 was 3.0 and 1.2,
respectively. The increase in working capital is primarily due to the
increase in cash generated from operations and a reduction of convertible loans
payable.
Net cash
provided by operating activities for the year ended December 31, 2008 was
$9,777,931 compared to net cash provided of $574,569 for the same period in
2007. The cash provided by operating activities for the year ended
December 31, 2008 resulted from the net income of $4,356,189, decrease in
accounts receivable and inventory of $1,030,295 and $349,870, respectively, and
increases in accounts payable, accrued interest and deferred revenue totaling
$473,500, plus non-cash items including, depreciation, amortization, loss on
disposal of assets and interest expense associated with discount on convertible
loans payable all totaling $1,886,962 and stock based compensation of $1,862,630
offset by an increase in other current assets of $131,233, and a decrease in
accrued expenses of $50,282.
The net
cash used for investing activities for the year ended December 31, 2008 was
$2,620,941 compared to $714,341 used for the same period in 2007. The
net cash used for investing activities during 2008 consisted of additions to
patents, technology asset and property and equipment totaling of $620,941 and
$2,000,000 for the acquisition of the assets of CAD Sciences.
Net cash
provided by financing activities for the year ended December 31, 2008 was
$1,609,996, compared to net cash provided by financing activities of $865,097
for the same period in 2007. The cash provided by financing
activities during 2008 was due to cash received from the issuance of common
stock relating to the exercise of stock options totaling $1,868,902, offset by
the payment of convertible notes payable in the amount of $258,906.
The
following table summarizes as of December 31, 2008, for the periods presented,
the Company’s future estimated cash payments under existing contractual
obligations.
Contractual Obligations
|
|
Payments due by period
|
|
|
|
|
|
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5+ years
|
|
Lease
Obligations*
|
|
$ |
1,256,856 |
|
|
$ |
567,983 |
|
|
$ |
688,873 |
|
|
$ |
- |
|
|
$ |
- |
|
Total
Contractual Obligations
|
|
$ |
1,256,856 |
|
|
$ |
567,983 |
|
|
$ |
688,873 |
|
|
$ |
- |
|
|
$ |
- |
|
* The
Company’s lease obligations is shown net of sublease amounts.
Effect
of New Accounting Pronouncements
In June
2008, the FASB ratified EITF Issue No. 07-05, “Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock”, which addresses the
accounting for certain instruments as derivatives under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities”. Under this new
pronouncement, specific guidance is provided regarding requirements for an
entity to consider embedded features as indexed to the entity’s own stock. This
Issue is effective for fiscal years beginning after December 15, 2008. The
Company is currently evaluating what the impact of adoption of this
pronouncement will have on its consolidated financial statements.
In May
2008, the FASB issued FASB Staff Position (“FSP”) Accounting Principles Board
(“APB”) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled
In Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”).
FSP APB 14-1 specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that will reflect
the entity’s nonconvertible debt borrowing rate when interest cost is recognized
in subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008 and interim periods within
those fiscal years. FSP APB 14-1 should be applied retrospectively for all
periods presented. The Company is currently evaluating what the impact of
adoption of this pronouncement will have on its consolidated financial
statements.
On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements”. This Statement defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. It
clarifies that fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. This
Statement does not require any new fair value measurements, but rather, it
provides enhanced guidance to other pronouncements that require or permit assets
or liabilities to be measured at fair value. The adoption of this standard only
resulted in additional disclosure requirements and had no impact on the
Company’s financial condition or results of operations.
In
February 2008, the FASB issued FSP 157-2, “Partial Deferral of the Effective
Date of Statement 157” (“FSP 157-2”). FSP 157-2 delays the effective
date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) to fiscal years beginning
after November 15, 2008. The Company currently evaluating the
impact of FSP 157-2 on nonfinancial assets and nonfinancial liabilities, but do
not expect the adoption to have a material impact on its consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called the
purchase method) be used for all business combinations and for an acquirer to be
identified for each business combination. SFAS 141R requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree at the acquisition date, to be measured at their fair
values as of that date, with limited exceptions specified in the Statement. That
replaces SFAS 141’s cost-allocation process, which required the cost of an
acquisition to be allocated to the individual assets acquired and liabilities
assumed based on their estimated fair values. SFAS 141R retains the guidance in
SFAS 141 for identifying and recognizing intangible assets separately from
goodwill. SFAS 141R will now require acquisition costs to be expensed as
incurred, restructuring costs associated with a business combination must
generally be expensed prior to the acquisition date and changes in deferred tax
asset valuation allowances and income tax uncertainties after the acquisition
date (including prior acquisitions) generally will affect income tax expense.
SFAS 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 except for income taxes, as noted
above. The Company is currently evaluating the impact of the adoption
of SFAS 141R on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”), including an amendment
of FASB Statement No. 115, which allows an entity to elect to record
financial assets and liabilities at fair value upon their initial recognition on
a contract-by-contract basis. Subsequent changes in fair value would be
recognized in earnings as the changes occur. SFAS 159 also establishes
additional disclosure requirements for these items stated at fair value.
SFAS 159 is effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. The Company did not
elect to adopt the fair value option under this statement.
Item7A.
|
Quantitative and
Qualitative Disclosures about Market
Risk.
|
Not applicable.
Item8.
|
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.
|
None.
Item9A.
|
Controls and
Procedures.
|
Evaluation
of Disclosure Controls and Procedures.
The
Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Exchange Act) were
effective.
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected. The Company conducts
periodic evaluations to enhance, where necessary its procedures and
controls.
Management’s
Report on Internal Control Over Financial Reporting.
The
Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer, is
responsible for the preparation and integrity of the Company's Consolidated
Financial Statements, establishing and maintaining adequate internal control
over financial reporting (as defined in Exchange Act Rule 13a-15(f)) for the
Company and all related information appearing in this Annual Report on Form
10-K.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
Company employed the Internal Control-Integrated Framework founded by the
Committee of Sponsoring Organizations of the Treadway Commission to evaluate the
effectiveness of the Company's internal control over financial
reporting. Management of the Company has assessed the Company's
internal control over financial reporting to be effective as of December 31,
2008.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008 has been audited by BDO Seidman, LLP, an independent
registered public accounting firm, as stated in its report which is included
below.
To
the Board of Directors and Stockholders of iCAD, Inc.
Nashua,
New Hampshire
To the
Board of Directors and Stockholders of iCAD, Inc.
Nashua,
New Hampshire
We have
audited iCAD, Inc.’s (the “Company”) internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). iCAD, Inc.’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Item 9A, Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, iCAD, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the COSO
criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of iCAD, Inc.
as of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2008 and our report dated March 5, 2009 expressed
an unqualified opinion thereon.
/s/ BDO
Seidman, LLP
Boston,
Massachusetts
March 5,
2009
Changes in Internal Control Over
Financial Reporting.
The
Company’s principal executive officer and principal financial officer conducted
an evaluation of the Company's internal control over financial reporting (as
defined in Exchange Act Rule 13a-15(f)) to determine whether any changes in
internal control over financial reporting occurred during the quarter ended
December 31, 2008, that have materially affected or which are reasonably likely
to materially affect internal control over financial reporting. Based
on that evaluation, there has been no such change during such
period.
Item
9B. Other
Information.
None.
PART III
Item
10. Directors, Executive
Officers and Corporate Governance.
The
information required by this item concerning our directors and executive
officers is incorporated by reference from our 2009 Definitive Proxy Statement
to be filed with respect to our 2009 Annual Meeting of Shareholders (“2009
Definitive Proxy Statement”) to be filed with the SEC not later than 120 days
following the close of the fiscal year ended December 31, 2008.
We have
developed and adopted a comprehensive Code of Business Conduct and Ethics to
cover all employees. Copies of the Code of Business Conduct and
Ethics can be obtained, without charge, upon written request, addressed
to:
iCAD,
Inc.
98 Spit
Brook Road, Suite 100
Nashua,
NH 03062
Attention:
Corporate Secretary
Item
11. Executive
Compensation.
The
information required under this item is hereby incorporated by reference from
our 2009 Definitive Proxy Statement.
Item
12.
|
Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.
|
The
information required under this item is hereby incorporated by reference from
our 2009 Definitive Proxy Statement.
Item
13. Certain Relationships and
Related Transactions, and Director Independence.
The
information required under this item is hereby incorporated by reference from
our 2009 Definitive Proxy Statement.
Item
14. Principal Accounting Fees
and Services.
The
information required under this item is hereby incorporated by reference from
our 2009 Definitive Proxy Statement.
PART
IV
Item
15. Exhibits,
Financial Statement Schedules.
a) The following documents are filed as part of this Annual Report on Form
10-K:
|
i.
|
Financial
Statements - See Index on page 56.
|
|
ii.
|
Financial
Statement Schedule - See Index on page 56. All other
schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are not applicable and, therefore, have
been omitted.
|
|
iii.
|
Exhibits
- the following documents are filed as exhibits to this Annual Report on
Form 10-K:
|
|
2(a)
|
Plan
and Agreement of Merger dated February 15, 2002, by and among the
Registrant, ISSI Acquisition Corp. and Intelligent Systems Software, Inc.,
Maha Sallam, Kevin Woods and W. Kip Speyer. [incorporated by reference to
Annex A of the Company’s proxy statement/prospectus dated May 24, 2002
contained in the Registrant’s Registration Statement on Form S-4, File No.
333-86454].
|
|
2(b)
|
Amended
and Restated Plan and Agreement of Merger dated as of December 15, 2003
among the Registrant, Qualia Computing, Inc., Qualia Acquisition Corp.,
Steven K. Rogers, Thomas E. Shoup and James Corbett [incorporated by
reference to Exhibit 2(a) to the Registrant's Current Report on Form 8-K
for the event dated December 31,
2003].
|
|
2(c)
|
Asset
Purchase Agreement as of dated June 20, 2008 between the Registrant and
3TP LLC dba CAD Sciences [incorporated by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K for the event dated July 18,
2008]. **
|
|
3
(a)
|
Certificate
of Incorporation of the Registrant as amended through July 18, 2007
[incorporated by reference to Exhibit 3(i) to the Registrant's Quarterly
report on Form 10-Q for the quarter ended June 30,
2007].
|
|
3(b)
|
Amended
and Restated By-laws of the Registrant [incorporated by reference to
Exhibit 3 (b) to the Registrant’s Report on Form 10-K for the year ended
December 31, 2007].
|
|
10(a)
|
Revolving
Loan and Security Agreement, and Convertible Revolving Credit Promissory
Note between Robert Howard and Registrant dated October 26, 1987 (the
"Loan Agreement") [incorporated by reference to Exhibit 10 to the
Registrant's Report on Form 10-Q for the quarter ended September 30,
1987].
|
|
10(b)
|
Letter
Agreement dated June 28, 2002, amending the Revolving Loan and Security
Agreement, and Convertible Revolving Credit Promissory Note between Robert
Howard and Registrant dated October 26, 1987 [incorporated by reference to
Exhibit 10(b) to the Registrant's Report on Form 10-K for the year ended
December 31, 2002].
|
|
10(c)
|
Form
of Secured Demand Notes between the Registrant and Mr. Robert Howard.
[incorporated by reference to Exhibit 10(e) to the Registrant's Report on
Form 10-K for the year ended December 31,
1998].
|
|
10(d)
|
Form
of Security Agreements between the Registrant and Mr. Robert
Howard [incorporated by reference to Exhibit 10(f) to the
Registrant’s Report on Form 10-K for the year ended December 31,
1998].
|
|
10(e)
|
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(f)
|
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(g)
|
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(h)
|
Addendum
No. 19, extending the Revolving Loan and Security Agreement, and
Convertible Revolving Credit Promissory Note between Robert Howard and
Registrant dated October 26, 1987 [incorporated by reference to Exhibit
10.1 of Registrant’s report on Form 8-K filed with the SEC on March 1,
2007].
|
|
10(i)
|
2004
Stock Incentive Plan [incorporated by reference to Exhibit B to the
Registrant’s definitive proxy statement on Schedule 14A filed with the SEC
on May 28, 2004].*
|
|
10(j)
|
Form
of Option Agreement under the Registrant’s 2001 Stock Option Plan
[incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly
report on Form 10-Q for the quarter ended September 30,
2004].*
|
|
10(k)
|
Form
of Option Agreement under the Registrant’s 2002 Stock Option Plan
[incorporated by reference to Exhibit 10.2 to the Registrant’s quarterly
report on Form 10-Q for the quarter ended September 30,
2004].*
|
|
10(l)
|
Form
of Option Agreement under the Registrant’s 2004 Stock Incentive Plan
[incorporated by reference to Exhibit 10.3 to the Registrant’s quarterly
report on Form 10-Q for the quarter ended September 30,
2004].*
|
|
10(m)
|
Form
of warrant issued to investors in connection with the Registrant’s
December 15, 2004 private financing. [incorporated by reference
to Exhibit 10(q) to the Registrant’s Report on Form 10-K for the year
ended December 31, 2004].
|
|
10(n)
|
2005
Stock Incentive Plan [incorporated by reference to Exhibit 10.1 to the
Registrant’s report on Form 8-K filed with the SEC on June 28,
2005].*
|
|
10(o)
|
Form
of Option Agreement under the Registrant’s 2005 Stock Incentive Plan
[incorporated by reference to Exhibit 10.2 to the Registrant’s report on
Form 8-K filed with the SEC on June 28,
2005].*
|
|
10(p)
|
Lease
Agreement dated October 9, 2000 between the Registrant and Mills-Morgan
Development, LTD, of Beavercreek, OH [incorporated by reference to Exhibit
10(v) to the Registrant’s Report on Form 10-K for the year ended December
31, 2005].
|
|
10(q)
|
Lease
Agreement dated October 9, 2000 between the Registrant and Mills-Morgan
Development, LTD, of Beavercreek, OH [incorporated by reference to Exhibit
10(w) to the Registrant’s Report on Form 10-K for the year ended December
31, 2005].
|
|
10(r)
|
Addendum
No. 18 to the Revolving Loan and Security Agreement, and Convertible
Revolving Credit Promissory Note between Robert Howard and the Registrant
dated October 26, 1987 [incorporated by reference to Exhibit 10.1 of
Registrant’s Quarterly report on Form 10-Q for the quarter ended March 31,
2006].
|
|
10(s)
|
Employment
Agreement dated April 19, 2006 between the Registrant and Kenneth Ferry
[incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly
report on Form 10-Q for the quarter ended June 30,
2006].*
|
|
10(t)
|
Employment
Agreement dated April 19, 2006 between the Registrant and Jeffrey Barnes
[incorporated by reference to Exhibit 10.2 of Registrant’s Quarterly
report on Form 10-Q for the quarter ended June 30,
2006].*
|
|
10(u)
|
Employment
Agreement dated April 28, 2006 between the Registrant and Stacey Stevens
[incorporated by reference to Exhibit 10.3 of Registrant’s Quarterly
report on Form 10-Q for the quarter ended June 30,
2006].*
|
|
10(v)
|
Separation
agreement dated April 19, 2006 between the Registrant and W. Scott Parr
[incorporated by reference to Exhibit 10.4 of Registrant’s Quarterly
report on Form 10-Q for the quarter ended June 30,
2006].
|
|
10(w)
|
Note
Purchase Agreement between Ken Ferry, the Registrant’s Chief Executive
Officer, and the Registrant dated June 19, 2006 [incorporated by reference
to Exhibit 10.5 of Registrant’s Quarterly report on Form 10-Q for the
quarter ended June 30, 2006].
|
|
10(x)
|
Form
of Indemnification Agreement with each of the Registrant’s directors and
officers [incorporated by reference to Exhibit 10.6 of Registrant’s
Quarterly report on Form 10-Q for the quarter ended June 30,
2006].
|
|
10(y)
|
Employment
Agreement dated September 8, 2006 between the Registrant and Darlene M.
Deptula-Hicks [incorporated by reference to Exhibit 10.1 of Registrant’s
report on Form 8-K filed with the SEC on September 13,
2006].*
|
|
10(z)
|
Option
Agreement dated September 8, 2006 between the Registrant and Darlene M.
Deptula-Hicks [incorporated by reference to Exhibit 10.2 of the
Registrant’s report on Form 8-K filed with the SEC on September 13,
2006].*
|
|
10(aa)
|
Note
Purchase Agreement between certain of the Registrant’s Directors and
Executive Officers and the Registrant dated September 12 and 14, 2006
[incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly
report on Form 10-Q for the quarter ended September 30,
2006].
|
|
10(bb)
|
Form
on Note Purchase Agreement between certain investors and the Registrant
dated September 19, 2006 [incorporated by reference to Exhibit 10.4 of the
Registrant’s Quarterly report on Form 10-Q for the quarter ended September
30, 2006].*
|
|
10(cc)
|
Option
Agreement dated April 19, 2006 between the Registrant and Kenneth Ferry
[incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly
report on Form 10-Q for the quarter ended September 30,
2006].*
|
|
10(dd)
|
Option
Agreement dated April 19, 2006 between the Registrant and Jeffrey Barnes
[incorporated by reference to Exhibit 10.6 of the Registrant’s Quarterly
report on Form 10-Q for the quarter ended September 30,
2006].*
|
|
10(ee)
|
Option
Agreement dated April 19, 2006 between the Registrant and Stacey Stevens
[incorporated by reference to Exhibit 10.7 of the Registrant’s Quarterly
report on Form 10-Q for the quarter ended September 30,
2006].*
|
|
10(ff)
|
Addendum
No. 19 dated March 1, 2007, extending the Revolving Loan and Security
Agreement, and Convertible Revolving Credit Promissory Note between Robert
Howard and the Registrant dated October 26, 1987 [incorporated by
reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed
with the SEC on March 7, 2007].
|
|
10(gg)
|
Lease
Agreement dated December 6, 2006 between the Registrant and Gregory D.
Stoyle and John J. Flatley, Trustees of the 1993 Flatley Family Trust, of
Nashua, NH [incorporated by reference to Exhibit 10(mm) to the
Registrant’s Report on Form 10-K for the year ended December 31,
2006].
|
|
10(hh)
|
Employment
Agreement dated October 20, 2006 between the Registrant and Jonathan
Go [incorporated by reference to Exhibit 10(nn) to the Registrant’s
Report on Form 10-K for the year ended December 31,
2006].*
|
|
10(ii)
|
Option
Agreement dated November 3, 2006 between the Registrant and Jonathan
Go [incorporated by reference to Exhibit 10(oo) to the Registrant’s
Report on Form 10-K for the year ended December 31,
2006].*
|
|
10(jj)
|
2007
Stock Incentive Plan [incorporated by reference to Appendix B to the
Company’s definitive proxy statement on Schedule 14A filed with the SEC on
June 13, 2007]. *
|
|
10(kk)
|
Addendum
No. 20 dated May 6, 2008, extending the Revolving Loan and Security
Agreement, and Convertible Revolving Credit Promissory Note between Robert
Howard and the Registrant dated October 26, 1987 [incorporated by
reference to Exhibit 10.1 of the Registrant’s report on Form 10-Q
filed with the SEC on May 8,
2008].
|
|
10(ll)
|
Escrow
Agreement dated as of July 18, 2008 by and among the Registrant, 3TP LLC
dba CAD Sciences and U.S. Bank National Association [incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
for the event dated July 18, 2008].
|
|
10(mm)
|
Loan
and Security Agreement dated June 30, 2008 by and between the Registrant
and RBS Citizens, N.A. [incorporated by reference to Exhibit 10.1 filed
with the Registrant’s Current Report on Form 8-K for the event dated June
30, 2008]. **
|
|
10(nn)
|
Revolving
Note dated as of June 30, 2008 made by the Registrant in favor of RBS
Citizens, N.A. [incorporated by reference to Exhibit 10.2 filed with the
Registrant’s Current Report on Form 8-K for the event dated June 30,
2008].
|
|
10(oo)
|
Negative
Pledge Agreement dated June 30, 2008 by the Registrant as accepted by RBS
Citizens, N.A. [incorporated by reference to Exhibit 10.3 filed with the
Registrant’s Current Report on Form 8-K for the event dated June 30,
2008].
|
|
10(pp)
|
Employment
Agreement entered into as of June 1, 2008 between the Registrant and
Kenneth Ferry [incorporated by reference to Exhibit 10.5 of the
Registrant’s report on Form 10-Q filed with the SEC on August 8, 2008]
*
|
|
10(qq)
|
Employment
Agreement entered into as of June 1, 2008 between the Registrant and
Darlene Deptula-Hicks [incorporated by reference to Exhibit 10.6 of the
Registrant’s report on Form 10-Q filed with the SEC on August 8, 2008]
*
|
|
10(rr)
|
Employment
Agreement entered into as of June 1, 2008 between the Registrant and
Jeffrey Barnes [incorporated by reference to Exhibit 10.7 of the
Registrant’s report on Form 10-Q filed with the SEC on August 8, 2008].
*
|
|
10(ss)
|
Employment
Agreement entered into as of June 1, 2008 between the Registrant and
Stacey Stevens [incorporated by reference to Exhibit 10.8 of the
Registrant’s report on Form 10-Q filed with the SEC on August 8, 2008].
*
|
|
10(tt)
|
Employment
Agreement dated as of June 1, 2008 between the Registrant and Jonathan Go
[incorporated by reference to Exhibit 10.9 of the Registrant’s report on
Form 10-Q filed with the SEC on August 8, 2008].
*
|
|
23
|
Consent
of BDO Seidman, LLP, Independent Registered Public Accounting
Firm.
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
* Denotes
a management compensation plan or arrangement.
** The
Registrant has omitted certain schedules and exhibits pursuant to Item 601(b)(2)
of Regulation S-K and shall furnish supplementally to the SEC copies any of the
omitted schedules and exhibits upon request by the SEC.
|
(b) Exhibits
- See (a) iii above.
|
|
(c) Financial
Statement Schedule - See (a) ii
above.
|
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 6, 2009
|
|
|
|
|
|
|
By:
|
/s/ Kenneth
Ferry
|
|
|
Kenneth
Ferry
|
|
|
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/ Lawrence
Howard
|
|
Chairman
of the Board,
|
|
|
Dr.
Lawrence Howard
|
|
Director
|
|
March
6, 2009
|
|
|
|
|
|
/s/ Kenneth
Ferry
|
|
President,
Chief Executive
|
|
|
Kenneth
Ferry
|
|
Officer,
Director (Principal
|
|
March
6, 2009
|
|
|
Executive
Officer)
|
|
|
|
|
|
|
|
/s/ Darlene M.
Deptula-Hicks
|
|
Executive
Vice President of Finance,
|
|
|
Darlene
M. Deptula-Hicks
|
|
Chief
Financial Officer, Treasurer
|
|
|
|
|
(Principal
Financial and Accounting
|
|
|
|
|
Officer)
|
|
March
6, 2009
|
|
|
|
|
|
/s/ Rachel Brem
|
|
Director
|
|
March
6, 2009
|
Rachel
Brem, M.D.
|
|
|
|
|
|
|
|
|
|
/s/ Anthony Ecock
|
|
Director
|
|
March
6, 2009
|
Anthony
Ecock
|
|
|
|
|
|
|
|
|
|
/s/ Steven
Rappaport
|
|
Director
|
|
March
6, 2009
|
Steven
Rappaport
|
|
|
|
|
|
|
|
|
|
/s/ Maha Sallam
|
|
Director
|
|
March
6, 2009
|
Maha
Sallam, PhD
|
|
|
|
|
|
|
|
|
|
/s/ Elliot
Sussman
|
|
Director
|
|
March
6, 2009
|
Elliot
Sussman, M.D.
|
|
|
|
|
INDEX
TO FINANCIAL STATEMENTS AND SCHEDULE
|
|
Page
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
57
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
As
of December 31, 2008 and 2007
|
|
|
58
|
|
|
|
|
|
|
Consolidated
Statements of Operations
For
the years ended December 31, 2008, 2007 and 2006
|
|
|
59
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity
For
the years ended December 31, 2008, 2007 and 2006
|
|
|
60
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2008, 2007 and 2006
|
|
|
61
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
62-90
|
|
|
|
|
|
|
Schedule
II - Valuation and Qualifying Accounts and Reserves
|
|
|
91
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of iCAD, Inc.,
Nashua,
New Hampshire
We have
audited the accompanying consolidated balance sheets of iCAD, Inc. and
subsidiary (the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2008. We
have also audited the financial statement schedule listed in the accompanying
index. These financial statements and schedule are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, 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 subsidiary as
of December 31, 2008 and 2007, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America.
Also, in
our opinion, the schedule listed in the accompanying index when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), iCAD Inc.’s internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 5, 2009 expressed an
unqualified opinion thereon.
/s/
BDO Seidman, LLP
Boston,
Massachusetts
March 5,
2009
Consolidated
Balance Sheets
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
13,115,715 |
|
|
$ |
4,348,729 |
|
Trade
accounts receivable, net of allowance for doubtful accounts of $50,000 in
2008 and 2007
|
|
|
5,570,323 |
|
|
|
6,483,618 |
|
Inventory,
net
|
|
|
1,448,373 |
|
|
|
1,798,243 |
|
Prepaid
and other current assets
|
|
|
451,402 |
|
|
|
320,169 |
|
Total
current assets
|
|
|
20,585,813 |
|
|
|
12,950,759 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
3,492,977 |
|
|
|
3,512,557 |
|
Leasehold
improvements
|
|
|
75,590 |
|
|
|
71,611 |
|
Furniture
and fixtures
|
|
|
358,477 |
|
|
|
330,077 |
|
Marketing
assets
|
|
|
287,456 |
|
|
|
323,873 |
|
|
|
|
4,214,500 |
|
|
|
4,238,118 |
|
Less
accumulated depreciation and amortization
|
|
|
2,714,706 |
|
|
|
2,369,590 |
|
Net
property and equipment
|
|
|
1,499,794 |
|
|
|
1,868,528 |
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
63,194 |
|
|
|
63,194 |
|
Patents,
net of accumulated amortization
|
|
|
22,349 |
|
|
|
68,269 |
|
Customer
relationships, net of accumulated amortization
|
|
|
236,634 |
|
|
|
- |
|
Technology
intangibles, net of accumulated amortization
|
|
|
7,142,662 |
|
|
|
3,115,843 |
|
Tradename,
net of accumulated amortization
|
|
|
124,000 |
|
|
|
148,800 |
|
Goodwill
|
|
|
43,515,285 |
|
|
|
43,515,285 |
|
Total
other assets
|
|
|
51,104,124 |
|
|
|
46,911,391 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
73,189,731 |
|
|
$ |
61,730,678 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
2,189,093 |
|
|
$ |
2,010,717 |
|
Accrued
salaries and other expenses
|
|
|
2,752,818 |
|
|
|
3,461,422 |
|
Deferred
revenue
|
|
|
1,955,495 |
|
|
|
1,674,005 |
|
Convertible
loans payable to related parties
|
|
|
- |
|
|
|
2,793,382 |
|
Convertible
loans payable to non-related parties
|
|
|
- |
|
|
|
684,559 |
|
Total
current liabilities
|
|
|
6,897,406 |
|
|
|
10,624,085 |
|
|
|
|
|
|
|
|
|
|
Convertible
revolving loans payable to related party
|
|
|
- |
|
|
|
2,258,906 |
|
Total
liabilities
|
|
|
6,897,406 |
|
|
|
12,882,991 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $ .01 par value: authorized 1,000,000 shares; issues and
outstanding 0 in 2008 and 2007.
|
|
|
- |
|
|
|
- |
|
Common
stock, $ .01 par value: authorized 85,000,000 shares; issued
45,403,472 in 2008 and 39,239,208 in 2007; outstanding 45,335,596 in 2008
and 39,171,332 in 2007
|
|
|
454,034 |
|
|
|
392,392 |
|
Additional
paid-in capital
|
|
|
148,082,225 |
|
|
|
135,055,418 |
|
Accumulated
deficit
|
|
|
(81,293,670 |
) |
|
|
(85,649,859 |
) |
Treasury
stock at cost (67,876 shares)
|
|
|
(950,264 |
) |
|
|
(950,264 |
) |
Total
stockholders' equity
|
|
|
66,292,325 |
|
|
|
48,847,687 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
73,189,731 |
|
|
$ |
61,730,678 |
|
See
accompanying notes to consolidated financial statements.
iCAD,
INC. AND SUBSIDIARY
Consolidated
Statements of Operations
|
|
For
the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
34,172,311 |
|
|
$ |
23,198,296 |
|
|
$ |
16,807,013 |
|
Service
and supplies
|
|
|
3,319,237 |
|
|
|
3,414,116 |
|
|
|
2,914,345 |
|
Total
revenue
|
|
|
37,491,548 |
|
|
|
26,612,412 |
|
|
|
19,721,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
5,414,009 |
|
|
|
4,271,504 |
|
|
|
3,136,929 |
|
Service
and supplies
|
|
|
762,021 |
|
|
|
985,600 |
|
|
|
1,153,889 |
|
Total
cost of revenue
|
|
|
6,176,030 |
|
|
|
5,257,104 |
|
|
|
4,290,818 |
|
Gross
margin
|
|
|
31,315,518 |
|
|
|
21,355,308 |
|
|
|
15,430,540 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
and product development
|
|
|
7,121,334 |
|
|
|
4,504,000 |
|
|
|
5,260,893 |
|
Marketing
and sales
|
|
|
11,961,907 |
|
|
|
10,780,304 |
|
|
|
9,228,881 |
|
General
and administrative
|
|
|
7,466,488 |
|
|
|
7,174,807 |
|
|
|
7,379,445 |
|
Total
operating expenses
|
|
|
26,549,729 |
|
|
|
22,459,111 |
|
|
|
21,869,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
4,765,789 |
|
|
|
(1,103,803 |
) |
|
|
(6,438,679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
106,032 |
|
|
|
74,145 |
|
|
|
102,963 |
|
Interest
expense (includes ($201,295), ($412,073) and ($197,646), respectively, to
related parties)
|
|
|
(280,632 |
) |
|
|
(508,874 |
) |
|
|
(302,242 |
) |
Other
expense, net
|
|
|
(174,600 |
) |
|
|
(434,729 |
) |
|
|
(199,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before provision for income taxes
|
|
|
4,591,189 |
|
|
|
(1,538,532 |
) |
|
|
(6,637,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
235,000 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
4,356,189 |
|
|
|
(1,538,532 |
) |
|
|
(6,637,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividends
|
|
|
- |
|
|
|
67,760 |
|
|
|
116,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common stockholders
|
|
$ |
4,356,189 |
|
|
$ |
(1,606,292 |
) |
|
$ |
(6,754,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.10 |
|
|
$ |
(0.04 |
) |
|
$ |
(0.18 |
) |
Diluted
|
|
$ |
0.10 |
|
|
$ |
(0.04 |
) |
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares used in computing income (loss) per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,704,374 |
|
|
|
38,351,345 |
|
|
|
36,911,742 |
|
Diluted
|
|
|
42,748,052 |
|
|
|
38,351,345 |
|
|
|
36,911,742 |
|
See
accompanying notes to consolidated financial statements.
iCAD,
INC. AND SUBSIDIARY
Consolidated
Statements of Stockholders' Equity
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Stockholders'
|
|
|
|
Shares
Issued
|
|
|
Par
Value
|
|
|
Shares
Issued
|
|
|
Par
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Equity
|
|
Balance
at December 31, 2005
|
|
|
6,374 |
|
|
$ |
64 |
|
|
|
36,931,262 |
|
|
$ |
369,312 |
|
|
$ |
130,781,430 |
|
|
$ |
(77,473,369 |
) |
|
$ |
(950,264 |
) |
|
$ |
52,727,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock pursuant to stock option plans
|
|
|
- |
|
|
|
- |
|
|
|
320,086 |
|
|
|
3,201 |
|
|
|
602,202 |
|
|
|
- |
|
|
|
- |
|
|
|
605,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock relative to conversion of preferred stock
|
|
|
(79 |
) |
|
|
(1 |
) |
|
|
39,500 |
|
|
|
395 |
|
|
|
(394 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
discount for conversion feature of convertible loans
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,824 |
|
|
|
|
|
|
|
|
|
|
|
58,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation related to stock options in accordance with SFAS
123R
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,334,485 |
|
|
|
- |
|
|
|
- |
|
|
|
1,334,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(116,200 |
) |
|
|
- |
|
|
|
- |
|
|
|
(116,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,637,958 |
) |
|
|
- |
|
|
|
(6,637,958 |
) |
Balance
at December 31, 2006
|
|
|
6,295 |
|
|
|
63 |
|
|
|
37,290,848 |
|
|
|
372,908 |
|
|
|
132,660,347 |
|
|
|
(84,111,327 |
) |
|
|
(950,264 |
) |
|
|
47,971,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock pursuant to stock option plans
|
|
|
- |
|
|
|
- |
|
|
|
860,860 |
|
|
|
8,609 |
|
|
|
1,231,488 |
|
|
|
- |
|
|
|
- |
|
|
|
1,240,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock relative to conversion of preferred stock
|
|
|
(6,295 |
) |
|
|
(63 |
) |
|
|
1,087,500 |
|
|
|
10,875 |
|
|
|
(10,812 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation related to stock options in accordance with SFAS
123R
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,242,155 |
|
|
|
- |
|
|
|
- |
|
|
|
1,242,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(67,760 |
) |
|
|
- |
|
|
|
- |
|
|
|
(67,760 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,538,532 |
) |
|
|
- |
|
|
|
(1,538,532 |
) |
Balance
at December 31, 2007
|
|
|
- |
|
|
|
- |
|
|
|
39,239,208 |
|
|
|
392,392 |
|
|
|
135,055,418 |
|
|
|
(85,649,859 |
) |
|
|
(950,264 |
) |
|
|
48,847,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock pursuant to stock option plans
|
|
|
- |
|
|
|
- |
|
|
|
952,612 |
|
|
|
9,526 |
|
|
|
1,859,376 |
|
|
|
- |
|
|
|
- |
|
|
|
1,868,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock relative to vesting of restricted stock, net of stock
forfeited for tax obligations
|
|
|
- |
|
|
|
- |
|
|
|
110,007 |
|
|
|
1,100 |
|
|
|
(1,100 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock relative to the asset acquisition
|
|
|
- |
|
|
|
- |
|
|
|
1,079,045 |
|
|
|
10,790 |
|
|
|
2,989,210 |
|
|
|
- |
|
|
|
- |
|
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock relative to conversion of loans payable
|
|
|
- |
|
|
|
- |
|
|
|
4,022,600 |
|
|
|
40,226 |
|
|
|
6,316,691 |
|
|
|
- |
|
|
|
- |
|
|
|
6,356,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation related to stock options in accordance with SFAS
123R
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,862,630 |
|
|
|
- |
|
|
|
- |
|
|
|
1,862,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,356,189 |
|
|
|
- |
|
|
|
4,356,189 |
|
Balance
at December 31, 2008
|
|
|
- |
|
|
$ |
- |
|
|
|
45,403,472 |
|
|
$ |
454,034 |
|
|
$ |
148,082,225 |
|
|
$ |
(81,293,670 |
) |
|
$ |
(950,264 |
) |
|
$ |
66,292,325 |
|
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Cash Flows
|
|
For
the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
4,356,189 |
|
|
$ |
(1,538,532 |
) |
|
$ |
(6,637,958 |
) |
Adjustments
to reconcile net income (loss) to net cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
898,142 |
|
|
|
982,869 |
|
|
|
745,415 |
|
Amortization
|
|
|
942,820 |
|
|
|
719,008 |
|
|
|
919,340 |
|
Loss
on disposal of assets
|
|
|
23,941 |
|
|
|
17,680 |
|
|
|
50,712 |
|
Stock
based compensation expense
|
|
|
1,862,630 |
|
|
|
1,242,155 |
|
|
|
1,334,485 |
|
Non-cash
interest expense associated with discount on convertible loans
payable
|
|
|
22,059 |
|
|
|
29,412 |
|
|
|
7,353 |
|
Changes
in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,030,295 |
|
|
|
(2,800,440 |
) |
|
|
275,214 |
|
Inventory
|
|
|
349,870 |
|
|
|
1,233,752 |
|
|
|
(514,528 |
) |
Prepaid
and other current assets
|
|
|
(131,233 |
) |
|
|
(100,446 |
) |
|
|
(43,590 |
) |
Accounts
payable
|
|
|
10,928 |
|
|
|
(546,391 |
) |
|
|
(1,693,466 |
) |
Accrued
interest
|
|
|
181,082 |
|
|
|
454,785 |
|
|
|
172,883 |
|
Accrued
expenses
|
|
|
(50,282 |
) |
|
|
(5,166 |
) |
|
|
684,295 |
|
Deferred
revenue
|
|
|
281,490 |
|
|
|
885,883 |
|
|
|
288,843 |
|
Total
adjustments
|
|
|
5,421,742 |
|
|
|
2,113,101 |
|
|
|
2,226,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by operating activities
|
|
|
9,777,931 |
|
|
|
574,569 |
|
|
|
(4,411,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to patents, technology and other
|
|
|
(38,839 |
) |
|
|
(2,750 |
) |
|
|
(60,444 |
) |
Additions
to property and equipment
|
|
|
(582,102 |
) |
|
|
(711,591 |
) |
|
|
(1,115,416 |
) |
Acquisition
of CAD Sciences
|
|
|
(2,000,000 |
) |
|
|
- |
|
|
|
- |
|
Net
cash used by investing activities
|
|
|
(2,620,941 |
) |
|
|
(714,341 |
) |
|
|
(1,175,860 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
|
|
1,868,902 |
|
|
|
1,240,097 |
|
|
|
605,403 |
|
Proceeds
from revolving convertible notes payable
|
|
|
- |
|
|
|
- |
|
|
|
2,000,000 |
|
Proceeds
from convertible notes payable from related parties
|
|
|
- |
|
|
|
- |
|
|
|
2,800,000 |
|
Proceeds
from convertible notes payable from non-related parties
|
|
|
- |
|
|
|
- |
|
|
|
700,000 |
|
Payment
of convertible notes payable
|
|
|
(258,906 |
) |
|
|
- |
|
|
|
- |
|
Payment
of note payable
|
|
|
- |
|
|
|
(375,000 |
) |
|
|
(1,500,000 |
) |
Net
cash provided by financing activities
|
|
|
1,609,996 |
|
|
|
865,097 |
|
|
|
4,605,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and equivalents
|
|
|
8,766,986 |
|
|
|
725,325 |
|
|
|
(981,459 |
) |
Cash
and equivalents, beginning of year
|
|
|
4,348,729 |
|
|
|
3,623,404 |
|
|
|
4,604,863 |
|
Cash
and equivalents, end of year
|
|
$ |
13,115,715 |
|
|
$ |
4,348,729 |
|
|
$ |
3,623,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
55,598 |
|
|
$ |
- |
|
|
$ |
111,493 |
|
Taxes
paid
|
|
$ |
425,000 |
|
|
$ |
64,000 |
|
|
$ |
45,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
items from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
market value of iCAD common stock issued to acquire assets of CAD
Sciences
|
|
$ |
3,000,000 |
|
|
$ |
- |
|
|
$ |
111,493 |
|
Conversion
of convertible notes payable and related accrued interest into common
stock
|
|
$ |
6,356,917 |
|
|
$ |
- |
|
|
$ |
111,493 |
|
Dividends
payable with common stock
|
|
$ |
- |
|
|
$ |
67,760 |
|
|
$ |
116,200 |
|
Value
of beneficial conversion discount
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
51,471 |
|
See
accompanying notes to consolidated financial statements.
iCAD,
INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(1) Summary
of Significant Accounting Policies
(a) Nature
of Operations and Use of Estimates
iCAD,
Inc. (the “Company” or “iCAD”) is a provider of Computer Aided Detection (“CAD”)
solutions that enable radiologists and other healthcare professionals to better
serve patients by identifying pathologies and pinpointing cancer earlier. CAD is
performed as an adjunct to mammography screening. CAD is reimbursable in the
United States under federal and most third-party insurance programs. In July 2008, through the
asset acquisition of CAD Sciences, the Company acquired pharmaco-kinetic based
CAD products that aid in the interpretation of contrast enhanced MRI images of
the breast and prostate. iCAD is also developing CAD solutions for
use with virtual colonoscopy to improve the detection of colonic polyps while
delivering improved workflow for the radiologists, and higher quality patient
care.
The
Company considers itself a single reportable business segment. The Company sells
its products throughout the world through its direct sales organization as well
as various OEM’s partners, distributors and resellers. See Note 7 for
geographical and major customer information.
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Many of the Company's estimates and assumptions used in
the preparation of the financial statements relate to the Company's products,
which are subject to rapid technological change. It is reasonably
possible that changes may occur in the near term that would affect management's
estimates with respect to assets and liabilities.
(b) Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, Qualia Acquisition Corporation. Any material
inter-company transactions and balances have been eliminated in consolidation.
Qualia Acquisition Corporation was dissolved in 2008.
(c) Cash
Flow Information
For
purposes of reporting cash flows, the Company defines cash and cash equivalents
as all bank transaction accounts, certificates of deposit, money market funds,
deposits and other money market instruments with original maturities of 90 days
or less, which are unrestricted as to withdrawal.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting
Policies (continued)
(d) Financial
instruments
The
carrying amounts of financial instruments, including cash and equivalents,
accounts receivable, accounts payable, notes payable and other convertible debt
approximated fair value as of December 31, 2008 and 2007.
(e) Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are customer obligations due under normal trade terms. Credit limits
are established through a process of reviewing the financial history and
stability of each customer. The Company performs continuing credit evaluations
of its customers' financial condition and generally does not require
collateral.
The
Company’s policy is to maintain allowances for estimated losses from the
inability of its customers to make required payments. Credit limits
are established through a process of reviewing the financial history and
stability of each customer. Where appropriate, the Company obtains
credit rating reports and financial statements of customers when determining or
modifying credit limits. The Company’s senior management reviews
accounts receivable on a periodic basis to determine if any receivables may
potentially be uncollectible. The Company includes any accounts
receivable balances that it determines may likely be uncollectible, along with a
general reserve for estimated probable losses based on historical experience, in
its overall allowance for doubtful accounts. An amount would be
written off against the allowance after all attempts to collect the receivable
had failed. Based on the information available to the Company, it
believes the allowance for doubtful accounts as of December 31, 2008 is
adequate. The Company reviews its reserve balance on a quarterly
basis.
(f) Inventory
Inventory
is valued at the lower of cost or market value, with cost determined by the
first-in, first-out method. At December 31, inventory consisted of
finished goods and raw material of approximately $1,158,289 and $290,084,
respectively, for 2008, and finished goods and raw material of approximately
$1,311,000 and $487,000, respectively, for 2007. The Company
regularly reviews inventory quantities on hand and records a reserve for excess
and/or obsolete inventory primarily based upon the estimated usage of its
inventory as well as other factors.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting
Policies (continued)
(g) Property
and Equipment
Property
and equipment are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the various classes of assets (ranging from 3
to 5 years) or the remaining lease term, whichever is shorter for leasehold
improvements.
(h) Long
Lived Assets
Long-lived
assets, other than goodwill, 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 primarily of patents, technology intangibles, trade name and
distribution agreements purchased in the Company’s acquisition of Intelligent
Systems Software, Inc. (“ISSI”) in June 2002, Qualia Computing, Inc. and its
subsidiaries, including CADx Systems, Inc. (“CADx”) in December 2003, and
substantially all of the assets of 3TP LLC dba CAD Sciences (“CAD Sciences”) in
July 2008. These assets are amortized on a straight-line basis or the
pattern of economic benefit over their estimated useful lives of 5 to 10
years.
For
the years ended December 31,
|
|
2008
|
|
|
2007
|
|
Weighted
Average
Useful Life
|
Gross
carrying amount:
|
|
|
|
|
|
|
|
Patents
|
|
$ |
412,829 |
|
|
$ |
390,624 |
|
5
years
|
Technology
|
|
|
11,026,170 |
|
|
|
6,160,822 |
|
10
years
|
Trade
name
|
|
|
248,000 |
|
|
|
248,000 |
|
10
years
|
Customer
relationships
|
|
|
248,000 |
|
|
|
- |
|
10 years
|
Total
amortizable intangible assets
|
|
$ |
11,934,999 |
|
|
$ |
6,799,446 |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
390,480 |
|
|
|
322,355 |
|
|
Technology
|
|
|
3,883,508 |
|
|
|
3,044,979 |
|
|
Trade
name
|
|
|
124,000 |
|
|
|
99,200 |
|
|
Customer
relationships
|
|
|
11,366 |
|
|
|
- |
|
|
Total
accumulated amortization
|
|
$ |
4,409,354 |
|
|
$ |
3,466,534 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable
intangible assets, net
|
|
$ |
7,525,645 |
|
|
$ |
3,332,912 |
|
|
Amortization
expense related to intangible assets was approximately $943,000, $719,000 and
$919,000 for the years ended December 31, 2008, 2007, and 2006,
respectively.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting
Policies (continued)
(h) Long Lived Assets
(continued)
Estimated
amortization of the Company’s intangible assets for the next five fiscal years
is as follows:
For
the years ended
December
31:
|
|
Estimated
amortization
expense
|
|
2009
|
|
|
1,152,000 |
|
2010
|
|
|
1,152,000 |
|
2011
|
|
|
1,152,000 |
|
2012
|
|
|
959,000 |
|
2013
|
|
|
765,000 |
|
(i) Goodwill
At
October 1, 2008 and October 1, 2007, the Company’s consolidated
balance sheet included $43,515,285 in goodwill. Goodwill represents the excess
purchase price over amounts assigned to tangible or identifiable intangible
assets acquired and liabilities assumed from its acquisitions.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) 142, the
Company tests its goodwill for impairment on an annual basis, which it has
determined to be the first business day of October each year. The Company also
tests its goodwill for impairment between annual tests if an event occurs or
circumstances change that would, more likely than not, reduce the fair value of
the reporting unit below its carrying value. SFAS 142 requires a two-step method
for determining goodwill impairment. Step one is to compare the fair value of
the reporting unit with the unit’s carrying amount, including goodwill. If this
test indicates that the fair value is less than the carrying value, then step
two is required to compare the implied fair value of the reporting unit’s
goodwill with the carrying amount of the reporting unit’s goodwill.
The
Company operates in one segment and as one reporting unit since its products
perform the same basic function, have common sales channels and resellers, and
are developed and supported by one central staff. Therefore the Company assumes
market capitalization is the best evidence of fair value. Market
capitalization is determined by using the quoted closing share price of the
Company’s common stock at its annual impairment date of October 1, multiplied by
the number of shares outstanding on the assessment date. The Company
tests goodwill for impairment by comparing its market capitalization (fair
value) to its carrying value in accordance with SFAS 142, which notes that
quoted market prices in active markets are the best evidence of fair value and
shall be used as the basis for the measurement. The fair value of the
Company is compared to the carrying value at the same date as the basis to
determine if impairment exists.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting
Policies (continued)
(i) Goodwill
(continued)
No
goodwill impairment loss was recorded in 2008 or 2007. For 2008 and
2007, the Company performed the step one fair value comparison as of October 1,
2008 and October 1, 2007. At both dates the Company’s market
capitalization exceeded its carrying value. A control premium was not a
determining factor in the outcome of step one of the impairment
assessment.
At
December 31, 2008, the Company’s market capitalization was
below its carrying value. The Company applied a reasonable
control premium to its market capitalization at that time to determine a
reasonable fair value, which exceeded the Company’s carrying value as of that
date. The inclusion of a control premium of at least 30% of the Company’s market
capitalization was needed or its carrying value at December 31, 2008 would
have exceeded fair value. The Company believes that including a control premium
at or above this level is supported by recent transaction data in its
industry.
Considering that
inherent market fluctuations may affect any individual closing price, the
Company also used a 40-day duration to determine fair value by multiplying
the shares outstanding by the average market price of its common stock over
a 20-day period before and a 20-day period after its lowest closing stock
price in the fourth quarter. While the market capitalization was
below the Company’s carrying value at both 20 day periods, the
inclusion of a control premium of at least 10% and 13% respectively, for the
20-day period before and the 20-day period after its lowest closing stock
price in the fourth quarter, fair value would have exceeded carrying
value.
As
evidenced above, the Company’s stock price and control premium are significant
factors in assessing its fair value for purposes of the goodwill impairment
assessment. The Company believes that its market capitalization alone does not
fully capture the fair value of its business as a whole, or the substantial
value that an acquirer would obtain from its ability to obtain control of the
Company. As such, in determining fair value, the Company adds a
control premium to its market capitalization, which seeks to give effect to the
increased consideration a potential acquirer would be required to pay in order
to gain sufficient ownership to set policies, direct operations and make
decisions related to the Company.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting
Policies (continued)
(j) Revenue
Recognition
Revenue
is generally recognized when the product ships provided title and risk of loss
has passed to the customer, persuasive evidence of an arrangement exists, fees
are fixed or determinable, collectability is probable and there are no
uncertainties regarding customer acceptance. The Company considers the guidance
for revenue recognition in the FASB’s Emerging Issues Task Force Issue 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables and Staff Accounting Bulletin No. 104, Revenue Recognition in
Financial Statements. The Company’s revenue transactions can on
occasion include product sales with multiple element arrangements, generally for
installation. The elements are considered separate units of
accounting because the delivered product has stand alone value to the customer
and there is objective and reliable evidence of the fair value of the
undelivered items. Revenue under these arrangements is allocated to
each element based on its estimated relative fair market value. Fair market
value is determined using entity specific and third party evidence. A portion of
the arrangement consideration is recognized as revenue when the product is
shipped and a portion of the arrangement consideration is recognized as revenue
when the installation service is performed. The value of the
undelivered elements includes the fair value of the installation.
If the
terms of the sale include customer acceptance provisions, and compliance with
those provisions cannot be demonstrated, all revenues are deferred and not
recognized until such acceptance occurs. The Company considers all
relevant facts and circumstances in determining when to recognize revenue,
including contractual obligations to the customer, the customer’s post-delivery
acceptance provisions, if any, and the installation process. There
are no significant estimates or assumptions used in the Company’s revenue
recognition.
The
Company defers revenue for extended service contracts related to future periods
and recognizes revenue on a straight-line basis in accordance with FASB
Technical Bulletin No. 90-1, "Accounting for Separately Priced Extended Warranty
and Product Maintenance Contracts." The Company provides for estimated
warranty costs on original product warranties at the time of sale.
iCAD,
INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting
Policies (continued)
(k) Cost
of Revenue
Cost of revenue consists
of the costs of products purchased for resale, cost relating to service
including costs of service contracts to maintain equipment after the warranty
period, inbound freight and duty, manufacturing, warehousing, material movement,
inspection, scrap, rework, depreciation and in house product warranty
repairs. The Company’s cost of revenue may not be comparable to those
of other entities, since some entities include the cost of product installation,
training and certain warranty repair costs in cost of revenue while iCAD
includes these costs in sales and marketing expenses.
(l)
Warranty Costs
The
Company provides for the estimated cost of standard product warranty against
defects in material and workmanship based on historical warranty trends,
including in the volume and cost of product returns during the warranty
period. The Company established a warranty reserve in the amount of
$146,503 in 2008 and $202,836 in 2007. Warranty provisions and claims
for the years ended December 31, 2008 and 2007, were as follows:
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
202,836 |
|
|
$ |
299,034 |
|
Warranty
provision
|
|
|
58,030 |
|
|
|
281,932 |
|
Usage
|
|
|
(114,363 |
) |
|
|
(378,130 |
) |
Ending
balance
|
|
$ |
146,503 |
|
|
$ |
202,836 |
|
(m) Engineering
and Product Development Costs
These
costs relate to research and development efforts which are expensed as
incurred.
(n)
Advertising Costs
The
Company expenses advertising costs as incurred. Advertising expense
for the years ended December 31, 2008, 2007 and 2006 was approximately $761,000,
$675,000 and $660,000, respectively.
(o) Net
Income (Loss) Per Common Share
The
Company follows SFAS No. 128, “Earnings per Share”, which requires the
presentation of both basic and diluted earning per share on the face of the
Statements of Operations. The Company’s basic earnings per share is
computed by dividing net profit or loss available to common stockholders by the
weighted average number of shares of common stock outstanding for the period
and, if there are dilutive securities, diluted earnings per share is computed by
including common stock equivalents outstanding for the period in the
denominator. Common stock equivalents include shares issuable upon the exercise
of stock options, convertible notes and warrants, net of shares assumed to have
been purchased with the proceeds, using the treasury stock
method. A summary of the Company’s calculation of earnings
(loss) per share is as follows:
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(1)
|
Summary of Significant
Accounting Policies
(continued)
|
(o) Net Income (Loss) Per
Common Share (continued)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
4,356,189 |
|
|
$ |
(1,538,532 |
) |
|
$ |
(6,637,958 |
) |
Less
preferred dividends
|
|
|
- |
|
|
|
67,760 |
|
|
|
116,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$ |
4,356,189 |
|
|
$ |
(1,606,292 |
) |
|
$ |
(6,754,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
shares used in the calculation of earnings per share
|
|
|
41,704,374 |
|
|
|
38,351,345 |
|
|
|
36,911,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1,007,428 |
|
|
|
- |
|
|
|
- |
|
Restricted
stock
|
|
|
36,250 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
shares used in the calculation of earnings per
share
|
|
|
42,748,052 |
|
|
|
38,351,345 |
|
|
|
36,911,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share :
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.10 |
|
|
$ |
(0.04 |
) |
|
$ |
(0.18 |
) |
Diluted
|
|
$ |
0.10 |
|
|
$ |
(0.04 |
) |
|
$ |
(0.18 |
) |
The
following table summarizes the number of shares of common stock for securities
that were not included in the calculation of diluted net income (loss) per share
because such shares are antidilutive:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock options
|
|
|
2,265,389 |
|
|
|
5,644,818 |
|
|
|
5,628,730 |
|
Restricted
stock
|
|
|
5,000 |
|
|
|
- |
|
|
|
- |
|
Stock
warrants
|
|
|
936,111 |
|
|
|
1,003,311 |
|
|
|
1,003,311 |
|
Convertible
Revolving Promissory Note
|
|
|
2,219,934 |
|
|
|
1,507,482 |
|
|
|
1,467,075 |
|
Convertible
loans payable
|
|
|
- |
|
|
|
2,098,039 |
|
|
|
2,098,039 |
|
Convertible
Series A Preferred Stock
|
|
|
- |
|
|
|
- |
|
|
|
515,000 |
|
Convertible
Series B Preferred Stock
|
|
|
- |
|
|
|
- |
|
|
|
572,500 |
|
|
|
|
5,426,434 |
|
|
|
10,253,650 |
|
|
|
11,284,655 |
|
The
calculation of basic earnings (loss) per share for 2008 and 2007 does not
include 814,753 and 375,000 shares, respectively, of restricted common stock
issued to executive officers and employees of the Company as they are subject to
time-based vesting. These potential shares were excluded from the computation of
basic earnings (loss) per share as these shares are not considered outstanding
until vested.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(1) Summary of Significant Accounting
Policies (continued)
(p) Income
Taxes
The
Company follows the liability method under SFAS No. 109, “Accounting for Income
Taxes” (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. The Company has provided a full valuation
allowance against its deferred tax assets at December 31, 2008 and 2007 as it is
more likely than not that the deferred tax asset will not be
realized.
The
Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48") on January
1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS 109.
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The adoption of FIN 48 did not have a
material impact on the Company’s consolidated financial statements.
(q) Stock-Based
Compensation
The
Company follows the provisions of Statement No. 123R, Share-Based Payment
(“SFAS 123R”) and Staff Accounting Bulletin 107 ("SAB 107") for all share-based
compensation that was not vested as of January 1, 2006. The Company adopted SFAS
123R using a modified prospective application, as permitted under
SFAS 123R. Accordingly, prior period amounts have not been restated. Under
this application, the Company is required to record compensation expense for all
awards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding at the date of
adoption.
On
September 22, 2006, the Company offered to its employees, members of its Board
of Directors and certain consultants of the Company, the opportunity to tender
for cancellation, all outstanding options to purchase shares of the Company’s
common stock, $0.01 par value, previously granted to them under the iCAD, Inc.
2001 Stock Option Plan, 2002 Stock Option Plan, 2004 Stock Option Plan, the
Intelligent Systems Software, Inc. 2001 Stock Option Plan and certain Non-Plan
Stock Options that were granted in connection with the Company’s acquisition of
Qualia Computing, Inc. and its CADx Systems, Inc. subsidiary, having an exercise
price in excess of $2.00 per share in exchange for new options. There
were options to purchase 1,692,065 shares of the Company’s common stock
outstanding and eligible for tender pursuant to the Offer to
Exchange. Under the option exchange program, participants who
tendered their eligible options for exchange were granted new options, some of
the key features of which included:
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(1)
|
Summary of Significant
Accounting Policies
(continued)
|
(q) Stock-Based
Compensation (continued)
|
a.
|
The
number of shares of common stock subject to new options equaled the same
number of shares subject to the cancelled eligible
options.
|
|
b.
|
The
vesting schedule of the cancelled eligible options carried over to the new
options as all options were vested and the new options vested
immediately.
|
|
c.
|
The
exercise price of the new options was $2.07 per share, subject to
adjustment for any stock splits, stock dividends and similar
events.
|
|
d.
|
The
new options had a term of two
years.
|
|
e.
|
The
new options were “non qualified options” and not “incentive stock
options”, regardless of whether any of the cancelled eligible options were
incentive stock options or non-qualified stock
options.
|
|
f.
|
The
new options otherwise contained other terms and conditions that are
substantially the same as those in the above mentioned stock option plans,
as the case may be, that governed the eligible plan options
surrendered.
|
This
offer to exchange was conditioned upon stockholder approval of the exchange
offer which was obtained at the Company’s 2006 Annual Meeting of Stockholders
held on October 20, 2006. Subject to the terms and conditions of the
offer, on October 23, 2006, the
Company granted new two-year options to purchase a total of 1,159,750 shares of
its common stock at $2.07 per share in exchange for the eligible options
tendered for exchange. The Company calculated the fair value of the option
grants immediately before and after the option exchange and determined that
there was no incremental fair value and therefore no compensation expense
associated with the tender offer exchange. All new options granted
were exercised or forfeited by October 23, 2008.
(r) Fair
Value Measurements
Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). In February 2008, the FASB issued FASB Staff
Position, FAS 157-2, “Effective Date of FASB Statement No. 157”, which
provides a one year deferral of the effective date of SFAS 157 for non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually.
Therefore, the Company has adopted the provisions of SFAS 157 with respect to
its financial assets and liabilities only. SFAS 157 establishes a
framework for measuring fair value under generally accepted accounting
principles and enhances disclosures about fair value measurements. Fair value is
defined under SFAS 157 as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to
measure fair value under SFAS 157 must maximize the use of observable inputs and
minimize the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value
which are the following:
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(1)
|
Summary of Significant
Accounting Policies
(continued)
|
(r) Fair Value
Measurements (continued)
|
§
|
Level 1 -
Quoted prices in active markets for identical assets or
liabilities.
|
|
§
|
Level
2 - Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
§
|
Level
3 - Unobservable inputs that are supported by little or no market
activity and that are significant to the fair
value.
|
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.
The
adoption of this statement did not have a material impact on the Company’s
consolidated results of operations and financial condition.
In
accordance with SFAS 157, the Company’s financial assets that are measured at
fair value on a recurring basis as of December 31, 2008 are cash
equivalents. The cash equivalents are measured using Level 1
inputs.
(s) Recently
Issued Accounting Standards
In June
2008, the FASB ratified EITF Issue No. 07-05, “Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock”, which addresses the
accounting for certain instruments as derivatives under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities”. Under this new
pronouncement, specific guidance is provided regarding requirements for an
entity to consider embedded features as indexed to the entity’s own stock. This
Issue is effective for fiscal years beginning after December 15, 2008. The
Company is currently evaluating what the impact of adoption of this
pronouncement will have on its consolidated financial statements.
In May
2008, the FASB issued FASB Staff Position (“FSP”) Accounting Principles Board
(“APB”) 14-1, “Accounting for Convertible Debt Instruments That May Be
Settled
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(1)
|
Summary of Significant
Accounting Policies
(continued)
|
(s) Recently Issued
Accounting Standard (continued)
In Cash
upon Conversion (Including Partial Cash Settlement)”. FSP APB 14-1 specifies
that issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years. This FSP
should be applied retrospectively for all periods presented. The Company is
currently evaluating what the impact of adoption of this pronouncement will have
on its consolidated financial statements.
On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements”. This Statement defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. It
clarifies that fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. This
Statement does not require any new fair value measurements, but rather, it
provides enhanced guidance to other pronouncements that require or permit assets
or liabilities to be measured at fair value. The adoption of this standard only
resulted in additional disclosure requirements and had no impact on the
Company’s financial condition or results of operations.
In
February 2008, the FASB issued FSP 157-2, “Partial Deferral of the Effective
Date of Statement 157” (“FSP 157-2”). FSP 157-2 delays the effective
date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) to fiscal years beginning
after November 15, 2008. The Company is currently evaluating the
impact of FSP 157-2 on nonfinancial assets and nonfinancial liabilities, but do
not expect the adoption to have a material impact on its consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental requirements in
Statement 141 that the acquisition method of accounting (which Statement 141
called the purchase method) be used for all business combinations and for an
acquirer to be identified for each business combination. SFAS 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, to be measured
at their fair values as of that date, with limited exceptions specified in the
Statement. That replaces Statement 141’s cost-allocation process, which required
the cost of an acquisition to be allocated to the individual assets acquired and
liabilities assumed based on their estimated fair values.
SFAS 141R
retains the guidance in Statement 141 for identifying and recognizing intangible
assets separately from goodwill. SFAS 141R will now require acquisition costs to
be expensed as incurred, restructuring costs associated with a business
combination must generally be expensed prior to the acquisition date and changes
in deferred tax asset valuation allowances and income tax uncertainties after
the acquisition date (including prior acquisitions) generally will affect income
tax expense. SFAS 141R applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 except for income taxes, as noted
above. The Company is currently evaluating the impact of the adoption
of SFAS 141R on its consolidated financial statements.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(1)
|
Summary of Significant
Accounting Policies
(continued)
|
(s) Recently Issued
Accounting Standard (continued)
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS 159”), including an
amendment of FASB Statement No. 115, which allows an entity to elect to
record financial assets and liabilities at fair value upon their initial
recognition on a contract-by-contract basis. Subsequent changes in fair value
would be recognized in earnings as the changes occur. SFAS 159 also
establishes additional disclosure requirements for these items stated at fair
value. SFAS 159 is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. The
Company did not elect to adopt the fair value option under this
statement.
(2) Acquisitions
Asset
Acquisition of CAD Sciences
On July
18, 2008, the Company completed the acquisition of substantially all of the
assets of 3TP LLC, dba CAD Sciences (“CAD Sciences”), a limited liability
company based in New York offering pharmacokinetic based CAD technology that
aids in the interpretation of contrast enhanced MRI images, pursuant to an
Asset Purchase Agreement (the “Purchase
Agreement”) dated June 20, 2008 between the Company and the
seller. The Company’s operations reflect the operations of CAD
Sciences since the date of the acquisition.
In
accordance with the terms of the Purchase Agreement, the purchase price of
$5,000,000 paid by the Company to CAD Sciences consisted of (i) $2,000,000 in
cash and (ii) $3,000,000 in stock comprised of 815,217 restricted shares of the
Company’s common stock and an additional 271,740 restricted shares of the
Company’s common stock held in escrow (“Shares”).
Simultaneously
with the closing of the transactions contemplated by the Purchase Agreement, the
Company entered into an Escrow Agreement by and among the Company, CAD Sciences
and the Escrow Agent (the “Escrow Agreement”) pursuant to which 271,740 of the
Shares were deposited by the parties into an escrow account for a period of up
to one year to secure CAD Sciences’ indemnity obligations to the Company under
the Purchase Agreement. The Escrow Agreement provided that, of the
escrowed Shares, 181,160 Shares will be held in escrow for 6 months and the
remaining escrow Shares will be held in escrow for one year, in each case
subject to earlier disbursement (in accordance with the terms of the Escrow
Agreement) to the Company in satisfaction of any indemnification obligations
arising under the terms of the Purchase Agreement.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(2)
|
Acquisitions
(continued)
|
Asset
Acquisition of CAD Sciences (continued)
The
Company believes it is probable beyond a reasonable doubt that 263,828 of the
shares in escrow will be issued and accordingly has included that number of
shares as outstanding as of the acquisition date, and included the fair
value of the shares in the purchase price. The
purchase price of $5,000,000 plus $184,082 in acquisition costs incurred, has
been allocated to net assets acquired based upon a preliminary appraisal of
their fair values, but the allocation is subject to further
adjustment.
The
following is a summary of the preliminary allocation of the total purchase price
based on the estimated fair values of the assets acquired and liabilities
assumed as of the date of the asset acquisition and the amortizable lives of the
intangible assets:
|
|
|
|
Amortizable
|
|
|
Amount
|
|
Life
|
Accounts
receivable
|
|
$ |
117,000 |
|
|
Property
and equipment
|
|
|
25,009 |
|
|
Technology
asset
|
|
|
4,865,348 |
|
10
Years
|
Customer
relationships
|
|
|
248,000 |
|
10
Years
|
Warranty
liabilities
|
|
|
(71,275 |
) |
|
Purchase
price
|
|
$ |
5,184,082 |
|
|
The
impact on operations of the acquisition was immaterial and accordingly no
proforma information has been provided for 2008 and 2007.
(3) Financing
Arrangements
Loan
and Security Agreement
On June
30, 2008, the Company entered into a Loan and Security Agreement (the “RBS Loan
Agreement”) with RBS Citizens, N.A. (“RBS”). The Loan Agreement
replaces the prior Revolving Loan and Security Agreement with Mr. Robert Howard,
the Company’s former Chairman of the Board of Directors (the “Prior Loan
Agreement”). The RBS Loan Agreement established a secured revolving
credit facility with a line of credit of up to $5,000,000. The
borrowing base under the RBS Loan Agreement is limited to 80% of eligible
accounts receivable or, if adjusted EBITDA (EBITDA is defined in the agreement
as earnings before interest expense, income tax expense, depreciation,
amortization and SFAS 123R stock option expense) for the quarter is greater than
or equal to $1,250,000, then the Company shall not be subject to a restriction
as to availability of credit upon the borrowing base. In this
event, the Company shall be subject to compliance with a Total Funded Debt to
Adjusted EBITDA covenant. As of December 31, 2008, the Company had $5,000,000 of
available borrowing capacity. Unless earlier repaid, all amounts
due and owing under the RBS Loan Agreement are required to be repaid on
June 30, 2009, the stated termination date of the RBS Loan Agreement. The
Company expects to renew the Loan Agreement at June 30, 2009.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(3) Financing
Arrangements (continued)
Loan
and Security Agreement (continued)
The RBS
Loan Agreement contains certain financial and non-financial covenants relating
to the Company. The RBS Loan Agreement also contains certain events of
default. Amounts due under the RBS
Loan Agreement and the related Revolving
Note (the “Revolving
Note”) dated June 30, 2008, may be prepaid at any time, in whole or in part, at
the option of the Company, provided, however, that for any portion of the loan
accruing interest as a “LIBOR Rate Loan” (as defined in the RBS Loan Agreement),
the Company is responsible to pay any LIBOR Breakage Fee as defined and further
described in the Revolving Note. Any amounts outstanding under the
RBS Loan Agreement and the associated Revolving Note will bear interest, at the
Company’s option, at a fluctuating per annum rate of interest equal to (i) Prime
Rate (as defined in the Revolving Note) plus one-half of one percent or (ii) the
Adjusted LIBOR Rate (as defined in the Revolving Note) plus the LIBOR Rate
Margin (as defined in the Revolving Note).
In
connection with the RBS Loan Agreement and the Revolving Note, the Company has
entered into a Negative Pledge Agreement dated June 30, 2008. Pursuant to the
Negative Pledge Agreement, the Company agreed, among other things, (i) not to
incur any liens, other than as permitted under the RBS Loan Agreement, with
respect to the Company’s intellectual property and (ii) not to sell or assign,
other than for fair consideration in the ordinary course of business, the
Company’s intellectual property. In addition, the Company assigned
all its assets to RBS wherever located and whether now owned or hereafter
acquired, including, without limitation, all inventory, machinery, equipment,
fixtures and other goods.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(3)
Financing
Arrangements (continued)
Convertible Revolving Loans Payable
to Related Party
The
Company had previously entered into the Prior Loan Agreement with Mr. Robert
Howard, the former Chairman of the Board of Directors of the Company, under
which Mr. Howard had agreed to advance funds, or to provide guarantees of
advances made by third parties in an amount up to $5,000,000. As a condition to,
and simultaneously with, the execution of the RBS Loan
Agreement, on June 30, 2008, the unpaid principal amount and accrued interest of
the Prior Loan Agreement, was extinguished as follows: (1) a total of
$2,000,000 principal amount under the Prior Loan Agreement, together with
$351,917 of accrued and unpaid interest on such principal amount, was converted
by Mr. Howard into 1,622,012 shares of the Company’s common stock per the
original terms of the Prior Loan Agreement and (2) the remaining principal
balance under the Prior Loan Agreement of $258,906, together with accrued and
unpaid interest of $55,598 on such principal amount, was paid in cash to Mr.
Howard. The outstanding indebtedness under the Prior Loan Agreement
has therefore, been fully repaid and satisfied and the Prior Loan Agreement was
terminated as of June 30, 2008.
Convertible
Loans Payable to Related Parties
On June
19, 2006, the Company and Dr. Lawrence Howard, who subsequently became a
director and is currently the Chairman of the Board of Directors of the Company,
entered into a Note Purchase Agreement with respect to the purchase by Dr.
Howard from the Company of an aggregate of $200,000 principal amount of a 7%
Convertible Note of the Company due June 19, 2008 (the “Howard Note”) at a
purchase price of $200,000. Interest on the Howard Note was payable
on the due date. On June 19, 2008, the $200,000 principal amount
under the Howard Note, together with $28,000 of accrued and unpaid interest on
such principal amount, was converted by Dr. Howard into 152,000 shares of the
Company’s common stock at $1.50 per share conversion price as set forth in the
Howard Note. The Howard Note has, therefore, been fully repaid and
satisfied and was terminated as of June 19, 2008.
On June
20, 2006, the Company and Mr. Kenneth Ferry, the Company’s Chief Executive
Officer, entered into a Note Purchase Agreement with respect to the purchase by
Mr. Ferry from the Company of an aggregate of $300,000 principal amount of a 7%
Convertible Note of the Company due June 20, 2008 (the “Ferry Note”) at a
purchase price of $300,000. Interest on the Ferry Note was payable on
the due date. On June 20, 2008, the $300,000 principal amount under
the Ferry Note, together with $42,000 of accrued and unpaid interest on such
principal amount, was converted by Mr. Ferry into 228,000 shares of the
Company’s common stock at $1.50 per share conversion price as set forth in the
Ferry Note. The Ferry Note has, therefore, been fully repaid and
satisfied and was terminated as of June 20, 2008.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(3) Financing Arrangements
(continued)
Convertible Loans Payable to Related
Parties (continued)
On
September 12, 14 and 19, 2006 the Company entered into Note Purchase Agreements
with respect to the purchase from the Company of a total of $2,300,000 principal
amount of its 7.25% Convertible Promissory Notes (the “Notes”) by directors,
former directors, officers and employees of the Company, including the
following: Mr. Robert Howard (as to $1,350,000), former Chairman of the Board
and director of the Company, Mr. James Harlan (as to $300,000), former director
of the Company and Dr. Elliott Sussman (as to $100,000), a director of the
Company, Mr. Steven Rappaport (as to $300,000) who subsequently became and is
currently a director of the Company and Dr. Lawrence Howard (as to $100,000) who
subsequently became a director and is currently Chairman of the Board and a
director of the Company, and $50,000 by each of the following executive officers
and/or employees of the Company: Mr. Jeffrey Barnes, Ms. Stacey Stevens and Ms.
Annette Heroux. The Notes were due two years from the date of issue.
On September 12, 14 and 19, 2008, the total principal amount of $2,300,000 under
the Notes, together with $333,500 of accrued and unpaid interest on such
principal amount, were converted into 1,549,117 shares of the Company’s common
stock at $1.70 per share conversion price as set forth in the
Notes. The Notes have, therefore, been fully repaid and satisfied and
were terminated as of September 12, 14 and 19, 2008, respectively.
Convertible Loans Payable to
Non-Related Parties
On
September 19, 2006 the Company entered into Note Purchase Agreements with
respect to the purchase from the Company of an aggregate of $700,000 principal
amount of its 7.25% Convertible Promissory Note (the “September Notes”) by two
accredited outside investors, pursuant to Note Purchase Agreements between the
Company and each of the investors. The loans were evidenced by the September
Notes issued by the Company in favor of the non-related parties. The
September Notes were due two years from the date of issue. On
September 19, 2008, the total principal amount of $700,000 under the September
Notes, together with $101,500 of accrued and unpaid interest on such principal
amounts, were converted into 471,471 shares of the Company’s common stock at
$1.70 per share conversion price as set forth in the September
Notes. The September Notes have, therefore, been fully repaid and
satisfied and were terminated as of September 19, 2008.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(4) Accrued
Expenses
Accrued
expenses consist of the following at December 31, 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
Accrued
salary and related expenses
|
|
$ |
1,977,745 |
|
|
$ |
1,868,953 |
|
Accrued
interest
|
|
|
0 |
|
|
|
675,835 |
|
Accrued professional
fees
|
|
|
239,670 |
|
|
|
240,552 |
|
Accrued
warranty expense
|
|
|
146,503 |
|
|
|
202,836 |
|
Accrued
dividends
|
|
|
0 |
|
|
|
67,760 |
|
|
|
|
388,900 |
|
|
|
405,486 |
|
|
|
$ |
2,752,818 |
|
|
$ |
3,461,422 |
|
(5) Stockholders’
Equity
(a) Stock
Options
The
Company has six stock option or stock incentive plans, which are described as
follows:
The 2001 Stock Option Plan
("The 2001 Plan").
The 2001
Plan was adopted by the Company’s stockholders in August 2001. 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 is determined by 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 cannot be less than the
fair market value of the Company's common stock on the date of grant, except for
options granted to 10% stockholders for whom the exercise price cannot be less
than 110% of the market price. Incentive options granted to date
under the 2001 Plan vest 100% over periods extending from six months to five
years from the date of grant and expire no later than ten years after the date
of grant, except for 10% holders whose options shall expire not later than 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. At December 31, 2008 there are no further options available
for grant under this plan.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(5)
|
Stockholders’ Equity
(continued)
|
(a) Stock
Options (continued)
The 2002 Stock Option Plan
("The 2002 Plan").
The 2002
Plan was adopted by the Company’s stockholders in June 2002. 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 is determined by 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 cannot be less than the fair market value of the
Company's common stock on the date of grant, except for options granted to 10%
stockholders for whom the exercise price cannot be less than 110% of the market
price. Incentive options granted to date under the 2002 Plan vest
100% over periods extending from six months to five years from the date of grant
and expire no later than ten years after the date of grant, except for 10%
holders whose options expire not later than five years after the date of
grant. Non-qualifying options granted under the 2002 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. At December 31,
2008, there were no shares available for issuance under the 2002
Plan.
The 2004 Stock Incentive
Plan ("The 2004 Plan").
The 2004
Plan was adopted by the Company’s stockholders in June 2004. The 2004
Plan provides for the granting of non-qualifying and incentive stock options to
employees and other persons to purchase up to an aggregate of 1,000,000 shares
of the Company's common stock. The purchase price of each share for which an
option is granted is determined by the Board of Directors or the Committee
appointed by the Board of Directors provided that the purchase price of each
share for which an option is granted cannot be less than the fair market value
of the Company's common stock on the date of grant, except for incentive options
granted to 10% stockholders for whom the exercise price cannot be less than 110%
of the market price. Incentive options granted under the 2004 Plan
generally vest 100% over periods extending from the date of grant to five years
from the
date of grant and expire not later than ten years after the date of grant,
except for 10% holders whose options expire not later than five years after the
date of grant. Non-qualifying options granted under the 2004 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. At December 31,
2008 there were 3,999 options available for issuance under the 2004
Plan.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(5)
|
Stockholders’ Equity
(continued)
|
(a) Stock
Options (continued)
The 2005 Stock Incentive
Plan ("The 2005 Plan").
The 2005
Plan was adopted by the Company’s stockholders in June 2005. The 2005
Plan provides for the granting of non-qualifying and incentive stock options to
employees and other persons to purchase up to an aggregate of 600,000 shares of
the Company's common stock. The purchase price of each share for which an option
is granted is determined by the Board of Directors or the Committee appointed by
the Board of Directors provided that the purchase price of each share for which
an option is granted cannot be less than the fair market value of the Company's
common stock on the date of grant, except for incentive options granted to 10%
stockholders for whom the exercise price cannot be less than 110% of the market
price. Incentive options granted under the 2005 Plan generally vest
100% over periods extending from the date of grant to three years from the date
of grant and expire not later than five years after the date of grant, except
for 10% stockholders whose options expire not later than five years after the
date of grant. Non-qualifying options granted under the 2005 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. At December 31,
2008 there were 50,420 options available for issuance under the 2005
Plan.
The 2007 Stock Incentive
Plan ("The 2007 Plan").
The 2007
Plan was adopted by the Company’s stockholders in July 2007. The 2007
Plan provides for the grant of any or all of the following types of awards: (a)
stock options, (b) restricted stock, (c) deferred stock and (d) other
stock-based awards. Awards may be granted singly, in combination, or in tandem.
Subject to anti-dilution adjustments as provided in the 2007 Plan, (i) the 2007
Plan provides for a total of 2,250,000 shares of the Company’s common
stock to be available for distribution pursuant to the 2007 Plan, and
(ii) the maximum number of shares of the Company’s common stock with respect to
which stock options, restricted stock, deferred stock, or other stock-based
awards may be granted to any participant under the 2007 Plan during any calendar
year or part of a year may not exceed 800,000
shares.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(5)
|
Stockholders’ Equity
(continued)
|
(a) Stock Options
(continued)
The 2007
Plan provides that it will be administered by the Company’s Board of Directors
(“Board”) or a committee of two or more members of the Board appointed by the
Board.
The
administrator will generally have the authority to administer the 2007 Plan,
determine participants who will be granted awards under the 2007 Plan, the size
and types of awards, the terms and conditions of awards and the form and content
of the award agreements representing awards. Awards under the 2007
Plan may be granted to employees, directors, consultants and advisors of the
Company and its subsidiaries. However, only employees of the Company and its
subsidiaries will be eligible to receive options that are designated as
incentive stock options.
With
respect to options granted under the 2007 Plan, the exercise price must be at
least 100% (110% in the case of an incentive stock option granted to
a 10% stockholder) of the fair market value of the common stock subject to the
award, determined as of the date of grant. Restricted stock awards are shares of
common stock that are awarded subject to the satisfaction of the terms and
conditions established by the administrator. In general, awards that do not
require exercise may be made in exchange for such lawful consideration,
including services, as determined by the administrator. At December
31, 2008 there were 140,766 shares available for issuance under the 2007
Plan.
A summary
of stock option activity for all stock option plans is as follows:
|
|
Option
|
|
|
Price
range
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
per
share
|
|
|
Average
|
|
Outstanding,
January 1, 2006
|
|
|
4,249,763 |
|
|
$ |
0.80-$5.28 |
|
|
$ |
3.04 |
|
Granted
|
|
|
2,405,000 |
|
|
$ |
1.45-$3.18 |
|
|
$ |
1.80 |
|
Exercised
|
|
|
(320,086 |
) |
|
$ |
0.95-$2.07 |
|
|
$ |
1.89 |
|
Forfeited
|
|
|
(705,947 |
) |
|
$ |
1.06-$5.28 |
|
|
$ |
3.82 |
|
Outstanding,
December 31, 2006
|
|
|
5,628,730 |
|
|
$ |
0.80-$5.28 |
|
|
$ |
2.08 |
|
Granted
|
|
|
1,133,529 |
|
|
$ |
2.00-$4.88 |
|
|
$ |
3.76 |
|
Exercised
|
|
|
(860,860 |
) |
|
$ |
0.81-$2.82 |
|
|
$ |
1.51 |
|
Forfeited
|
|
|
(250,688 |
) |
|
$ |
1.06-$4.88 |
|
|
$ |
2.82 |
|
Outstanding,
December 31, 2007
|
|
|
5,650,711 |
|
|
$ |
0.80-$5.28 |
|
|
$ |
2.47 |
|
Granted
|
|
|
558,501 |
|
|
$ |
1.37-$4.10 |
|
|
$ |
2.45 |
|
Exercised
|
|
|
(952,612 |
) |
|
$ |
1.06-$3.49 |
|
|
$ |
2.01 |
|
Forfeited
|
|
|
(97,874 |
) |
|
$ |
1.06-$3.90 |
|
|
$ |
2.73 |
|
Outstanding,
December 31, 2008
|
|
|
5,158,726 |
|
|
$ |
0.80-$5.28 |
|
|
$ |
2.55 |
|
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(5)
|
Stockholders’ Equity
(continued)
|
(a) Stock Options
(continued)
Exercisable at year-end
|
|
Option
Shares
|
|
|
Price
range
per share
|
|
|
Weighted
Average
|
|
2006
|
|
|
3,998,230 |
|
|
$ |
0.80-$5.28 |
|
|
$ |
2.23 |
|
2007
|
|
|
4,023,658 |
|
|
$ |
0.80-$5.28 |
|
|
$ |
2.28 |
|
2008
|
|
|
3,979,248 |
|
|
$ |
0.80-$5.28 |
|
|
$ |
2.41 |
|
Available
for future grants at December 31, 2008 from all plans:
195,185
The
weighted-average remaining contractual life of stock options outstanding for all
plans at December 31, 2008 was 3.3 years.
During
the year ended December 31, 2008, 2007 and 2006, the Company recorded
$1,862,630, $1,242,155 and $1,334,485, respectively, for share-based
compensation in accordance with SFAS 123R. The Company’s stock-based
compensation expense included $42,408, $33,211 and $0 in cost of revenue,
$232,724, $166,068 and $86,704 in engineering and product development, $241,187,
$162,347 and $245,446 in marketing and sales and $1,346,311, $880,529 and
$1,002,335 in general and administrative expense for the year ended December 31,
2008, 2007 and 2006, respectively. As of December 31, 2008 there was
$3,346,909 of total unrecognized compensation costs related to unvested options
and restricted stock. That cost is expected to be recognized over a
weighted average period of 3 years.
The
Company issued 558,501 stock options and 564,750 restricted shares in the year
ended December 31, 2008. The option grants issued during 2008 had a
weighted average exercise price of $2.45. The weighted average fair
value of options granted during the year ended December 31, 2008 was $1.06 and
was estimated on the grant date using the Black-Scholes option-pricing model
with generally the following weighted average assumptions: expected volatility
of 62.8%, expected term of 3.5 years, risk-free interest rate of 2.92%, and
expected dividend yield of 0%. The Company issued 1,133,529 stock
options and 375,000 restricted shares in the year ended December 31,
2007. The option grants issued during 2007 had a weighted average
exercise price of $3.76. The weighted average fair value of options
granted during the year ended December 31, 2007 was $1.80 and was estimated on
the grant date using the Black-Scholes option-pricing model with generally the
following weighted average assumptions: expected volatility of 62.8%, expected
term of 3.5 years, risk-free interest rate of 4.57%, and expected dividend yield
of 0%. The Company issued 2,405,000 stock options in the year ended
December 31, 2006. The
options granted during 2006 had a weighted average exercise price
of $1.80. The weighted average fair value of options
granted during the year ended December 31, 2006 was $0.94 and was estimated on
the grant date using the Black-Scholes and Lattice option-pricing models with
generally the following weighted average assumptions: expected volatility of
62.5%, expected term of 3.5 years, risk-free interest rate of 4.78%, and
expected dividend yield of 0%.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(5)
|
Stockholders’ Equity
(continued)
|
(a) Stock Options
(continued)
The
Company’s expected volatility is based on the average of peer group volatility,
which includes the Company’s historical volatility within the peer
group. The average expected life was calculated using the simplified
method under SAB 107 and other methods. The risk-free rate is based on the rate
of U.S. Treasury zero-coupon issues with a remaining term equal to the expected
life of option grants.
The
aggregate intrinsic value of options outstanding at December 31, 2008, 2007 and
2006 was $50,459, $1,020,940 and $5,467,459. The aggregate intrinsic
value of the options exercisable at December 31, 2008, 2007 and 2006 was
$49,864, $795,206 and $3,457,814. The aggregate intrinsic value of stock options
exercised during 2008, 2007 and 2006 was $490, $465,076 and $338,851 The
Company used the market price of $1.13, $2.02 and $2.95 at December 31, 2008,
2007 and 2006 versus the exercise price of each option,
respectively.
(b) Restricted
Stock
The
Company granted 564,750 and 375,000 shares of restricted shares in the year
ended December 31, 2008 and 2007, respectively, under the 2007 Plan. Each of
these restricted stock awards vests in three equal annual installments with the
first installment vesting one year from grant date. At December 31, 2008 there
were 814,753 restricted stock awards outstanding.
The
aggregate intrinsic value of restricted stock outstanding at December 31, 2008,
2007 and 2006 was $920,671, $757,500 and $0. The aggregate intrinsic
value of restricted stock vested during 2008, 2007 and 2006 was $124,308, $0 and
$0 The Company used the market price of $1.13, $2.02 and $2.95 at December
31, 2008, 2007 and 2006, respectively.
(c) Stock Subscription
Warrants
The
Company has reserved 936,111 shares of common stock issuable upon exercise of
common stock purchase warrants. At December 31, 2008 there are
warrants outstanding to purchase 936,111 of the Company’s common stock that are
exercisable at the following prices:
Warrants
|
|
Exercise Price
|
|
Expiration Date
|
936,111
|
|
$ |
5.50 |
|
December 15, 2009
|
No
warrants were issued or exercised in 2008, 2007 or 2006, and 67,200 warrants
expired on November 24, 2008.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of net operating loss carryforwards, tax credits and temporary
differences between the financial statement carrying amounts and the income tax
bases of assets and liabilities. A valuation allowance is applied against any
net deferred tax asset if, based on the weighted available evidence, it is more
likely than not that the deferred tax assets will not be realized.
The
Company's federal and blended state statutory income tax rates for 2008 and 2007
approximate 40%, as opposed to solely a federal statutory tax rate of 34%,
previously presented in 2007. The Company’s taxable income in 2008 was offset by
approximately $5.7 million of allowable net operating loss carryfowards
available for use to minimize federal income taxes. The provision for income
taxes for 2008 is principally comprised of federal alternative minimum taxes for
federal purposes, which is subject to net operating loss limitations, and state
income taxes due in the states that the Company is subject to income tax. The
Company incurred losses from operations during 2007 and 2006 and did not record
an income tax benefit. The Company recorded a valuation allowance against its
net operating losses and other net deferred tax assets due to uncertainties
related to the realizability of these tax assets.
The
significant components of income tax expense for the years ended December 31,
2008, 2007 and 2006 are as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current
provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
145,000 |
|
|
$ |
- |
|
|
$ |
- |
|
State
|
|
|
90,000 |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
235,000 |
|
|
$ |
- |
|
|
$ |
- |
|
Deferred
income taxes reflect the impact of “temporary differences” between the amount of
assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. The Company has fully reserved the
deferred tax assets, as it is more likely than not that the deferred tax assets
will not be utilized. Deferred tax assets (liabilities) are comprised of the
following at December 31:
|
|
2008
|
|
|
2007
|
|
Inventory
(Section 263A)
|
|
$ |
135,000 |
|
|
$ |
307,000 |
|
Inventory
reserves
|
|
|
24,000 |
|
|
|
36,000 |
|
Receivable
reserves
|
|
|
20,000 |
|
|
|
20,000 |
|
Other
accruals
|
|
|
156,000 |
|
|
|
426,000 |
|
Accumulated
depreciation/amortization
|
|
|
(793,000 |
) |
|
|
(1,145,000 |
) |
Stock
options
|
|
|
1,336,000 |
|
|
|
775,000 |
|
Tax
credits
|
|
|
1,184,000 |
|
|
|
1,071,000 |
|
NOL
carryforward
|
|
|
25,082,000 |
|
|
|
27,821,000 |
|
Net
deferred tax assets
|
|
|
27,144,000 |
|
|
|
29,311,000 |
|
Valuation
allowance
|
|
|
(27,144,000 |
) |
|
|
(29,311,000 |
) |
|
|
$ |
- |
|
|
$ |
- |
|
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(6)
|
Income
Taxes (continued)
|
During
2008, the Company performed a formal review of its net operating loss
carryfowards available from prior years, which included approximately $30
million in net operating losses from an acquisition that took place in 2003. The
acquired company has since been dissolved, but based on all available
information, the Company has determined that certain adjustments are required to
net operating losses previously presented in order to comply with the most
recent federal rules, regulations and limitations for net operating losses
available to the Company. The following represents a summary of the deferred tax
assets available from net operating losses, as previously presented, and the
adjustments required in prior periods as a result of the net operating losses
that have been determined to be available from the Company’s acquisition in
2003:
|
|
2007
|
|
Net
operating losses as previously stated
|
|
$ |
16,104,000 |
|
Adjustment
|
|
|
11,717,000 |
|
Net
operating losses as adjusted
|
|
$ |
27,821,000 |
|
As of
December 31, 2008, the Company has net operating loss carryforwards totaling
approximately $66,552,000 expiring between 2010 and 2027. For the year ended
December 31, 2008, the Company utilized approximately $5,664,000 of available
net operating losses. 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. In the event of a deemed
changed in control, an annual limitation imposed on the utilization of the net
operating losses may result in the expiration of all or a portion of the net
operating loss carryforwards. The Company currently has approximately
$13,227,000 in net operating losses that are subject to limitations and
approximately $1,481,000 subject to be released from restriction annually
through 2017 and available to offset taxable income.
During
2008, the Company performed a formal review of its tax credits previously
calculated and available from prior years. Based on all available information,
the Company has determined that certain adjustments are required to tax credits
in order to comply with the most recent federal rules and regulations. The
following represents a summary of tax credits previously presented and
adjustments required in prior periods:
|
|
2007
|
|
Tax
credits previously stated
|
|
$ |
1,763,000 |
|
Adjustment
|
|
|
(692,000 |
) |
Tax
credits as adjusted
|
|
$ |
1,071,000 |
|
The
Company has available tax credit carryforwards (adjusted to reflect provisions
of the Tax Reform Act of 1986) to offset future income tax liabilities. The
credits expire in various years through 2028 and management believes
approximately $1,184,000 will be available to offset income tax in future
periods.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(6)
|
Income
Taxes (continued)
|
The
Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes” (“FIN 48”) on January 1, 2007. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return and
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
At the
adoption date and as of December 31, 2008, the Company had no material
unrecognized tax benefits and no adjustments to liabilities or operations were
required under FIN 48. The Company's practice was and continues to be to
recognize interest and penalty expenses related to uncertain tax positions in
income tax expense, which were zero at the adoption date and for the years ended
December 31, 2008, 2007 and 2006. Tax years 2005 through 2008 are subject to
examination by federal and state taxing authorities, as well as, the tax years
generating net operating loss and credit carryfowards. There are no income tax
examinations currently in process.
The
Company does not anticipate that it is reasonably possible that unrecognized tax
benefits as of December 31, 2008 will significantly change within the next 12
months.
(7)
|
Segment
Reporting, Geographical Information and Major
Customers
|
(a) Segment
Reporting
The
Company follows SFAS No. 131 “Disclosures About Segments of a Business
Enterprise and Related Information”, which establishes standards for reporting
information about operating segments. Operating segments are defined
as components of a company about which the chief operating decision maker
evaluates regularly in deciding how to allocate resources and in assessing
performance. The Company’s chief operating decision maker is the Chief Executive
Officer. The Company operates in one segment and as one reporting
unit for all years presented since its products perform the same basic function,
have common sales channels and resellers, and are developed and supported by one
central staff.
(b) Geographic
Information
The
Company's sales are made to distributors and dealers of mammography and other
medical equipment, and to foreign distributors of mammography medical
equipment. Total export sales increased to approximately $2,930,000
or 8% of sales in 2008 as compared to $2,655,000 or 10% of total sales in 2007
and $1,022,000 or 5% of total sales in 2006.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(7)
|
Segment Reporting, Geographical
Information and Major Customers
(continued)
|
(b) Geographic Information
(continued)
As of
December 31, 2008 and 2007 the Company had outstanding receivables of $703,574
and $760,453, respectively, from distributors of its products who are located
outside of the United States.
(c) Major
Customers
In 2008
the Company had two major customers, GE Healthcare and Fuji Medical Systems,
with revenues of $9,986,179 and $7,063,325 or 27% and 19% of its revenues,
respectively, with accounts receivable balances of $2,297,377 and $598,134,
respectively. The Company’s major customer in 2007 was GE
Healthcare with revenues of $7,609,313 or 29% of its revenues, with an
accounts receivable balance of $1,865,747 due December 31,
2007. During the year ended December 31, 2006 the Company had two
major customers GE Healthcare and Hologic, Inc., with revenues of $5,077,091 and
$2,462,225, or 26% and 12% of revenues, respectively, with accounts receivable
balances of $1,150,975 and $18,920, respectively, due from these customers at
December 31, 2006.
(8)
|
Commitments
and Contingencies
|
(a) Lease
Obligations
As of
December 31, 2008, the Company had three lease obligations related to its
facilities. The Company’s principal executive offices are located in
Nashua, New Hampshire. The lease provides for a five (5) year term commencing on
the December 15, 2006. The lease also provides for annual base rent of $176,256
for the first year (with a one month rent allowance of $14,688 to be applied
against the first month’s base rent payment); $187,272 for the second year;
$198,288 for the third year; $209,304 for the fourth year and $220,320 for the
fifth year. Additionally, the Company is required to pay its proportionate share
of the building and real estate tax expenses and obtain insurance for the
premises. The lease provides for the Company to pay the base rent and
proportionate building and real estate tax expenses in equal monthly
installments. The Company also has the right to extend the term of the lease for
an additional three year period at the then current market rent rate (which
shall not be less than the last annual rent paid by the Company).
The
Company leases a facility for its research and development group located in
Beavercreek, Ohio for approximately $446,000 per year pursuant to a lease which
expires in December 2010. The lease amount increases annually
throughout the life of the lease. The lease may be renewed for two
additional terms of five years each. In November 2005, the
Company subleased some of this office space at an average rate of approximately
$93,000 per year through December 2010. In August 2007 the Company
subleased additional office space at an average rate of approximately $84,000
per year through December 2010.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(8)
|
Commitments and
Contingencies (continued)
|
(a) Lease Obligations
(continued)
In
addition to the foregoing leases relating to its principal properties, the
Company also has a lease for an additional facility in Nashua NH used for
product repairs, manufacturing and warehousing and office space in White Plains
NY as a result of the asset acquisition of CAD Sciences in July
2008.
Rent
expense for all leases for the years ended December 31, 2008, 2007 and 2006 was
$797,283, $730,062 and $553,181, net of sublease income of $170,789, $135,711,
and $112,278, respectively.
Future
minimum rental payments due under these agreements and sublease agreements as of
December 31, 2008 are as follows:
|
|
Operating
|
|
|
Sublease
|
|
|
Net
|
|
Fiscal Year
|
|
Leases
|
|
|
Amount
|
|
|
Amount
|
|
2009
|
|
|
794,530 |
|
|
|
226,547 |
|
|
|
567,983 |
|
2010
|
|
|
701,244 |
|
|
|
232,691 |
|
|
|
468,553 |
|
2011
|
|
|
220,320 |
|
|
|
- |
|
|
|
220,320 |
|
|
|
$ |
1,716,094 |
|
|
$ |
459,238 |
|
|
$ |
1,256,856 |
|
(b)
Employment
Agreements
The
Company has entered into employment agreements with certain key
executives. The employment agreements provide for minimum annual
salaries and performance-based annual bonus compensation as defined in their
respective agreements. In addition, the employment agreements provide that if
employment is terminated without cause, the executive will receive an amount
equal to their respective base salary then in effect for the greater of the
remainder of the original term of employment or for Mr. Ferry a period of two
years from the date of termination and for all other executives a period of one
year from the date of termination plus the pro rata portion of any annual bonus
earned in any employment year through the date of termination.
(c) Foreign
Tax Claim
In July
2007, a dissolved former Canadian subsidiary of the Company, CADx Medical
Systems Inc. (“CADx Medical”), received a tax re-assessment of
approximately $6,800,000 from the Canada Revenue Agency (“CRA”) resulting from
CRA’s audit of CADx Medical’s Canadian federal tax return for the year ended
December 31, 2002. The Company believes that it is not be liable for
the re-assessment against CADx Medical and no accrual was recorded as of
December 31, 2008. The Company responded to the notice outlining its
grounds of objection with respect to the re-assessment. The CRA
responded acknowledging receipt of the correspondence and advised that they
intend to schedule a review on the matter.
iCAD,
INC. AND SUBSIDIARY
Notes to
Consolidated Financial Statements (continued)
(9)
|
Quarterly Financial Data
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
available
|
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
to common
|
|
2008
|
|
sales
|
|
|
profit
|
|
|
income (loss)
|
|
|
stockholders
|
|
First
quarter
|
|
$ |
6,432,016 |
|
|
$ |
5,293,831 |
|
|
$ |
(445,853 |
) |
|
$ |
(0.01 |
) |
Second
quarter
|
|
$ |
10,549,489 |
|
|
$ |
8,815,648 |
|
|
$ |
2,386,598 |
|
|
$ |
0.06 |
|
Third
quarter
|
|
$ |
11,193,631 |
|
|
$ |
9,411,680 |
|
|
$ |
2,094,575 |
|
|
$ |
0.05 |
|
Fourth
quarter
|
|
$ |
9,316,411 |
|
|
$ |
7,794,359 |
|
|
$ |
320,869 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
6,147,486 |
|
|
$ |
4,938,858 |
|
|
$ |
(553,937 |
) |
|
$ |
(0.02 |
) |
Second
quarter
|
|
$ |
6,104,736 |
|
|
$ |
4,886,543 |
|
|
$ |
(839,611 |
) |
|
$ |
(0.02 |
) |
Third
quarter
|
|
$ |
6,259,541 |
|
|
$ |
5,011,536 |
|
|
$ |
(670,045 |
) |
|
$ |
(0.02 |
) |
Fourth
quarter
|
|
$ |
8,100,649 |
|
|
$ |
6,518,371 |
|
|
$ |
525,061 |
|
|
$ |
0.01 |
|
iCAD,
INC. AND SUBSIDIARY
Schedule
II - Valuation and Qualifying Accounts and Reserves
|
|
Balance
at
|
|
|
Additions
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Charged
to
|
|
|
Deductions
|
|
|
at
End
|
|
Description
|
|
of
Year
|
|
|
Expense
|
|
|
from
Reserve
|
|
|
of
Year
|
|
Year
End December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
|
|
$ |
50,000 |
|
|
$ |
9,450 |
|
|
$ |
9,450 |
(1) |
|
$ |
50,000 |
|
Inventory
Reserve
|
|
$ |
92,339 |
|
|
$ |
396,632 |
|
|
$ |
431,260 |
(2) |
|
$ |
57,711 |
|
Warranty
Reserve
|
|
$ |
202,836 |
|
|
$ |
58,030 |
|
|
$ |
114,363 |
|
|
$ |
146,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
End December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
|
|
$ |
88,347 |
|
|
$ |
(32,662 |
) |
|
$ |
5,685 |
(1) |
|
$ |
50,000 |
|
Inventory
Reserve
|
|
$ |
418,662 |
|
|
$ |
306,760 |
|
|
$ |
633,083 |
(2) |
|
$ |
92,339 |
|
Warranty
Reserve
|
|
$ |
299,034 |
|
|
$ |
281,932 |
|
|
$ |
378,130 |
|
|
$ |
202,836 |
|
Restructuring
Reserve
|
|
$ |
9,401 |
|
|
$ |
- |
|
|
$ |
9,401 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
End December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
|
|
$ |
450,000 |
|
|
$ |
(248,482 |
) |
|
$ |
113,171 |
(1) |
|
$ |
88,347 |
|
Inventory
Reserve
|
|
$ |
400,000 |
|
|
$ |
413,227 |
|
|
$ |
394,565 |
(2) |
|
$ |
418,662 |
|
Warranty
Reserve
|
|
$ |
150,000 |
|
|
$ |
637,354 |
|
|
$ |
488,320 |
|
|
$ |
299,034 |
|
Restructuring
Reserve
|
|
$ |
25,505 |
|
|
$ |
- |
|
|
$ |
16,104 |
|
|
$ |
9,401 |
|
(1)
Represents the amount of accounts charged off.
(2)
Represents inventory written off and disposed of.