Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended March
31, 2006
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
of
incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
4
Townsend West, Suite 17, Nashua, NH
|
|
03063
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(603)
882-5200
(Registrant's
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement
for
the past 90 days. YES x
NO
o.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
Accelerated filer o
Accelerated
filer x
Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) YES o
NO x.
As
of the
close of business on May 5, 2006 there were 36,863,386 shares outstanding of
the
registrant 's Common Stock, $.01 par value.
iCAD,
INC.
INDEX
|
|
|
PAGE
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1
|
Consolidated
Financial Statements
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2006 (unaudited)
and December 31, 2005
|
|
4
|
|
|
|
|
|
Consolidated
Statements of Operations for the three
month periods ended March 31, 2006 and
2005 (unaudited)
|
|
5
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the three month
periods ended March 31, 2006 and 2005 (unaudited)
|
|
6
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
|
7-10
|
|
|
|
|
Item
2
|
Management’s
Discussion and Analysis of Financial
Condition and Results of Operations
|
|
11-16
|
|
|
|
|
Item
3
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
16
|
|
|
|
|
Item
4
|
Controls
and Procedures
|
|
16
|
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1
|
Legal
Proceedings
|
|
17
|
|
|
|
|
Item
5
|
Other
Information |
|
17
|
|
|
|
|
Item
6
|
Exhibits
|
|
17
|
|
|
|
|
Signatures
|
|
|
18
|
iCAD,
INC.
Consolidated
Balance Sheets
|
|
March
31,
2006
|
|
December
31,
2005
|
|
Assets
|
|
(unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,233,402
|
|
$
|
4,604,863
|
|
Trade
accounts receivable, net of allowance for doubtful
|
|
|
|
|
|
|
|
accounts
of $463,000 in 2006 and $450,000 in 2005
|
|
|
2,814,555
|
|
|
3,958,392
|
|
Inventory
|
|
|
3,097,089
|
|
|
2,517,467
|
|
Prepaid
and other current assets
|
|
|
274,111
|
|
|
176,133
|
|
Total
current assets
|
|
|
9,419,157
|
|
|
11,256,855
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
Equipment
|
|
|
3,140,901
|
|
|
3,038,344
|
|
Leasehold
improvements
|
|
|
120,012
|
|
|
120,012
|
|
Furniture
and fixtures
|
|
|
149,803
|
|
|
149,803
|
|
|
|
|
3,410,716
|
|
|
3,308,159
|
|
Less
accumulated depreciation and amortization
|
|
|
1,691,121
|
|
|
1,523,724
|
|
Net
property and equipment
|
|
|
1,719,595
|
|
|
1,784,435
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
Patents,
net of accumulated amortization
|
|
|
204,988
|
|
|
224,519
|
|
Technology
intangibles, net of accumulated amortization
|
|
|
4,193,987
|
|
|
4,348,008
|
|
Tradename,
distribution agreements and other,
|
|
|
|
|
|
|
|
net
of accumulated amortization
|
|
|
342,450
|
|
|
398,733
|
|
Goodwill
|
|
|
43,515,285
|
|
|
43,515,285
|
|
Total
other assets
|
|
|
48,256,710
|
|
|
48,486,545
|
|
Total
assets
|
|
$
|
59,395,462
|
|
$
|
61,527,835
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,546,868
|
|
$
|
4,250,574
|
|
Accrued
interest
|
|
|
55,169
|
|
|
48,167
|
|
Accrued
salaries and other expenses
|
|
|
1,256,949
|
|
|
1,868,736
|
|
Deferred
revenue
|
|
|
679,002
|
|
|
499,279
|
|
Current
maturities of note payable
|
|
|
1,500,000
|
|
|
1,500,000
|
|
Total
current liabilities
|
|
|
8,037,988
|
|
|
8,166,756
|
|
|
|
|
|
|
|
|
|
Loans
payable to related party
|
|
|
258,906
|
|
|
258,906
|
|
Note
payable, less current maturities
|
|
|
—
|
|
|
375,000
|
|
Total
liabilities
|
|
|
8,296,894
|
|
|
8,800,662
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $ .01 par value: authorized
|
|
|
|
|
|
|
|
1,000,000
shares; issued and outstanding
|
|
|
|
|
|
|
|
6,374
in 2006 and 2005, with an aggregate liquidation value
|
|
|
|
|
|
|
|
of
$1,739,000 in 2006 and 2005, plus 7% annual dividend
|
|
|
64
|
|
|
64
|
|
Common
stock, $ .01 par value: authorized
|
|
|
|
|
|
|
|
50,000,000
shares; issued 36,931,262 shares in 2006 and
|
|
|
|
|
|
|
|
2005;
outstanding 36,863,386 shares in 2006 and 2005
|
|
|
369,312
|
|
|
369,312
|
|
Additional
paid-in capital
|
|
|
130,758,719
|
|
|
130,781,430
|
|
Accumulated
deficit
|
|
|
(79,079,263
|
)
|
|
(77,473,369
|
)
|
Treasury
stock at cost (67,876 common shares)
|
|
|
(950,264
|
)
|
|
(950,264
|
)
|
Total
stockholders' equity
|
|
|
51,098,568
|
|
|
52,727,173
|
|
Total
liabilities and stockholders’
equity
|
|
$
|
59,395,462
|
|
$
|
61,527,835
|
|
See
accompanying notes to consolidated financial statements.
iCAD,
INC.
Consolidated
Statements of Operations
(unaudited)
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
March
31, 2006
|
|
March
31, 2005
|
|
|
|
|
|
|
|
Sales
|
|
$
|
4,373,650
|
|
$
|
6,007,607
|
|
Cost
of sales
|
|
|
918,879
|
|
|
1,273,573
|
|
Gross
margin
|
|
|
3,454,771
|
|
|
4,734,034
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Engineering
and product development
|
|
|
1,319,198
|
|
|
1,016,048
|
|
General
and administrative
|
|
|
1,749,053
|
|
|
1,222,208
|
|
Marketing
and sales
|
|
|
1,985,687
|
|
|
1,750,966
|
|
Total
operating expenses
|
|
|
5,053,938
|
|
|
3,989,222
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(1,599,167
|
)
|
|
744,812
|
|
|
|
|
|
|
|
|
|
Interest
expense - net
|
|
|
6,727
|
|
|
32,883
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before provision for income taxes
|
|
|
(1,605,894
|
)
|
|
711,929
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(1,605,894
|
)
|
|
641,929
|
|
|
|
|
|
|
|
|
|
Preferred
dividend
|
|
|
30,432
|
|
|
30,432
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
(1,636,326
|
)
|
$
|
611,497
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.04
|
)
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares used in
|
|
|
|
|
|
|
|
computing
income (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
36,863,386
|
|
|
36,384,185
|
|
Diluted
|
|
|
36,863,386
|
|
|
38,754,414
|
|
See
accompanying notes to consolidated financial statements.
iCAD,
INC.
Consolidated
Statements of Cash Flows
(unaudited)
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
March
31, 2006
|
|
March
31, 2005
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,605,894
|
)
|
$
|
641,929
|
|
Adjustments
to reconcile net income (loss)
|
|
|
|
|
|
|
|
to
net cash used for operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
167,397
|
|
|
112,948
|
|
Amortization
|
|
|
229,835
|
|
|
263,085
|
|
Stock
based compensation
|
|
|
7,721 |
|
|
—
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
1,143,837
|
|
|
(710,942
|
)
|
Inventory
|
|
|
(579,622
|
)
|
|
(37,265
|
)
|
Prepaid
and other current assets
|
|
|
(97,978
|
)
|
|
(38,946
|
)
|
Accounts
payable
|
|
|
296,294
|
|
|
71,205
|
|
Accrued
interest
|
|
|
7,002
|
|
|
(617,758
|
)
|
Accrued
salaries and other expenses
|
|
|
(642,219
|
)
|
|
87,022
|
|
Deferred
revenue
|
|
|
179,723
|
|
|
(31,731
|
)
|
|
|
|
|
|
|
|
|
Net
cash used for operating activities
|
|
|
(893,904
|
)
|
|
(260,453
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(102,557
|
)
|
|
(275,241
|
)
|
Net
cash used for investing activities
|
|
|
(102,557
|
)
|
|
(275,241
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
|
|
—
|
|
|
119,265
|
|
Payment
of note payable
|
|
|
(375,000
|
)
|
|
(375,000
|
)
|
Net
cash used for financing activities
|
|
|
(375,000
|
)
|
|
(255,735
|
)
|
|
|
|
|
|
|
|
|
Decrease
in cash and equivalents
|
|
|
(1,371,461
|
)
|
|
(791,429
|
)
|
Cash
and equivalents, beginning of period
|
|
|
4,604,863
|
|
|
8,008,163
|
|
Cash
and equivalents, end of period
|
|
$
|
3,233,402
|
|
$
|
7,216,734
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
37,654
|
|
$
|
617,834
|
|
|
|
|
|
|
|
|
|
Non-cash
items from investing and financing activities:
|
|
|
|
|
|
|
|
Accrued
dividends on convertible preferred stock
|
|
$
|
30,432
|
|
$
|
30,432
|
|
See
accompanying notes to consolidated financial statements.
iCAD,
INC.
Notes
to Consolidated Financial Statements
(Unaudited)
March
31, 2006
(1) |
Significant
Accounting Policies and Basis of
Presentation
|
Reference
should be made to iCAD, Inc.'s (“iCAD” or “Company”) Annual Report on Form 10-K
for the year ended December 31, 2005 for a comprehensive summary of significant
accounting policies.
The
accompanying consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the United States
of America. In the opinion of management, these unaudited interim consolidated
financial statements reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position at
March 31, 2006, the results of operations for the three month periods ended
March 31, 2006 and 2005, and cash flows for the three month periods ended March
31, 2006 and 2005. Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information normally included in the footnotes prepared
in
accordance with generally accepted accounting principles in the United States
of
America has been omitted as permitted by the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company’s Annual Report on Form 10−K for the fiscal year ended
December 31, 2005 filed with the Securities and Exchange Commission on March
31,
2006. The results for the three month period ended March 31, 2006 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2006, or any future period. Interim period amounts are
not
necessarily indicative of the results of operations for the full fiscal
year.
(2) |
Convertible
Loan Payable to Related
Party
|
The
Company has a Revolving Loan and Security Agreement (the “Loan Agreement”) with
Mr. Robert Howard, Chairman of the Board of Directors of the Company, under
which Mr. Howard has agreed to advance funds, or to provide guarantees of
advances made by third parties in an amount up to $5,000,000. The Loan Agreement
expires March 31, 2007, subject to extension by the parties, with an agreement
from Mr. Howard that he will not call in the principal balance of the note
any
earlier than March 31, 2008. Accordingly, the outstanding borrowings related
to
the loan payable have been classified as a long-term liability in the Company’s
consolidated balance sheet as of March 31, 2006. Outstanding advances are
collateralized by substantially all of the assets of the Company and bear
interest at prime interest rate plus 1% (8.75% at March 31, 2006). Mr. Howard
is
entitled to convert outstanding advances made by him under the Loan Agreement
into shares of the Company's common stock at any time based on the closing
market price of the Company's common stock at the lesser of the market price
at
the time each advance is made or at the time of conversion. At March 31, 2006,
$258,906 was outstanding under the Loan Agreement and $4,741,094 was available
for future borrowings.
iCAD,
INC.
Notes
to Consolidated Financial Statements
(Unaudited)
March
31, 2006
(3) |
Acquisition
of Qualia Computing, Inc.
|
On
December 31, 2003, the Company completed the acquisition of Qualia Computing,
Inc., a privately-held company based in Beavercreek, Ohio, and its subsidiaries,
including CADx Systems, Inc. (together “CADx”). To complete the acquisition,
iCAD issued 4,300,000 shares of its common stock, representing approximately
13%
of the outstanding shares of iCAD common stock after the merger. The value
of
the Company’s common stock issued was based upon a per share value of $5.70,
equal to the closing price on November 28, 2003, the day the acquisition was
announced. Additionally, iCAD paid $1,550,000 in cash and executed a 36-month
secured promissory note in the amount of $4,500,000 at prime interest rate
plus
1% (8.75% at March 31, 2006) to purchase Qualia shares that were owned by two
institutional investors. The note is payable in quarterly installments of
$375,000 plus accrued interest. At March 31, 2006, $1,500,000 was outstanding
under the secured promissory note and the entire amount is classified as a
short
term liability.
(4) |
Stock-Based
Compensation
|
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 123R, “Share-Based Payment” (“FAS 123R”). FAS 123R is a
revision of FASB Statement No. 123, “Accounting for Stock-Based
Compensation” (“FAS 123”). The Company adopted the provisions of FAS 123R on
January 1, 2006, using the fair value method of SFAS No. 123, “Accounting for
Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for
Stock-Based Compensation - Transition and Disclosure”. This statement
establishes standards for and requires the recognition of the cost of
employment-related services settled in share-based payment.
As
a
result of adopting the new standard, the stock-based compensation
charge,
included
in general and administration expense during the three months ended March 31,
2006, totaled approximately $7,700. The effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FAS
123R to stock-based compensation for the three months ended March 31, 2005
was
as follows:
iCAD,
INC.
Notes
to Consolidated Financial Statements
(Unaudited)
March
31, 2006
(4) |
Stock-Based
Compensation
(continued)
|
|
|
2005
|
|
Net
income attributable to common
|
|
|
|
stockholders,
as reported
|
|
$
|
611,497
|
|
|
|
|
|
|
Deduct:
Total stock-based
|
|
|
|
|
employee
compensation
|
|
|
|
|
determined
under the fair value
|
|
|
|
|
method
for all awards
|
|
|
(415,689
|
)
|
Pro
forma net income
|
|
$
|
195,808
|
|
|
|
|
|
|
Basic
and diluted income per share
|
|
|
|
|
As
reported
|
|
$
|
.02
|
|
Pro
forma
|
|
$
|
.01
|
|
The
Company calculated the fair value of each grant of options at the grant date,
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 2005: no dividends paid; expected volatility of 80.6%;
risk-free interest rate of 3.69, 3.91% and 4.18% and an average expected life
of
5 years. The Company did not grant any options during the three month period
ended March 31, 2006.
At
the
beginning of the second quarter of 2006, the Company granted options to purchase
1,175,000 of its common stock to new employees of which approximately 470,000
of
the options will be exercisable in 2006. The Company expects that these grants
will have a material impact on the Company’s consolidated results of operations
and earnings per share in future periods.
(5) |
Intellectual
Property
|
On
April
18, 2005, the Company received a letter from R2 Technology, Inc. (“R2”),
advising the Company of R2’s position that the Company’s Second Look® product
lines allegedly infringed on US Patents 6,266,435, 6,477,262 and 6,574,357,
which are licensed to R2. A three member arbitration panel was named and
the
Company's patent dispute with R2, including counterclaims by the Company that
R2
infringes on US Patents 6,115,488, 6,556,699 and 6,650,766, which are owned
by
the Company, proceeded to a hearing before the panel on October 18 and 19,
2005.
On
April 19, 2006 the panel of arbitrators in the case entitled R2 Technology
and Shih-Ping Wang vs. iCAD, Inc. found that the Company did not infringe any
patent asserted by R2. The arbitrators also found that R2 did not infringe
any
of the patents asserted by the Company.
iCAD,
INC.
Notes
to Consolidated Financial Statements
(Unaudited)
March
31, 2006
On
April 19, 2006, W. Scott Parr resigned as Chief Executive Officer and
President of the Company effective May 15, 2006. Mr. Parr will remain as a
Director of the Company and was appointed by the Board as its non-executive
Vice
Chairman. On that same day, the Board of Directors of the Registrant appointed
Kenneth M. Ferry as the Company’s President, Chief Executive Officer and a Class
I member of the Company’s Board of Directors, also effective May 15,
2006.
The
description of Mr. Ferry’s employment agreement was contained in Item 1.01 of
the Company’s Form 8-K filed with the Securities and Exchange Commission on
April 25, 2006.
On
April
27, 2006, Hologic, Inc., (“Hologic)” one of the Company’s OEM customers for CAD
for digital mammography, and R2, the Company’s principal competitor in the
mammography CAD market, announced that Hologic would acquire R2 and that R2
would become
a
wholly-owned subsidiary of Hologic. It was indicated by both parties that the
transaction is subject to a variety of conditions, and it was indicated by
Hologic that a closing is anticipated within a few months. The Company believes
that this transaction, if completed, will result in substantially all of
Hologic’s future mammography CAD orders and business being directed to R2. Sales
by the Company to Hologic represented approximately $1.5 million, or 8% of
the
Company’s sales, in the fiscal year 2005, and approximately $700,000, or 16% of
the Company’s sales, in the first quarter of 2006.
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
"Safe
Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
Certain
information included in this Item 2 and elsewhere in this Form 10-Q that are
not
historical facts contain forward looking statements that involve a number of
known and unknown risks, uncertainties and other factors that could cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievement expressed or
implied by such forward looking statements. These risks and uncertainties
include, but are not limited to, uncertainty of future sales levels, protection
of patents and other proprietary rights, the impact of supply and manufacturing
constraints or difficulties, product market acceptance, possible technological
obsolescence of products, increased competition, litigation and/or government
regulation, changes in Medicare reimbursement policies, competitive factors,
the
effects of a decline in the economy in markets served by the Company and other
risks detailed in the Company’s other filings with the Securities and Exchange
Commission. The words “believe”, “demonstrate”, “intend”, “expect”, “estimate”,
“anticipate”, “likely”, “seek”, “should” and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance
on
those forward-looking statements, which speak only as of the date the statement
was made.
Results
of Operations
Overview
iCAD
develops computer aided detection (CAD) products for the early detection of
breast cancer and other healthcare related applications. The Company’s Second
Look ® products for early detection of breast cancer are currently available for
use with film based and digital mammography practices. Early detection of breast
cancer can save lives and often permits less costly, less invasive and less
disfiguring cancer treatment options than when the cancer is detected at a
later
stage.
iCAD
is
the only independent, integrated digitizer hardware and CAD software company
offering computer aided detection solutions for the detection of breast cancer.
As such, the Company believes it is able to reduce costs at each step in the
CAD
product design, production and assembly process. The Company believes that
its
vertical integration of CAD and hardware development results in better
integration of software and film digitizer components, lower production costs
and reduced administrative overhead. These factors have allowed iCAD to enhance
its CAD product line, while reducing the costs of the Company’s CAD products to
many customers and allowing more women to realize the benefits inherent in
the
early detection of breast cancer.
The
Company’s CAD systems include proprietary software technology together with
standard computer and display equipment. CAD systems for the film-based
mammography market also include a radiographic film digitizer manufactured
by
the Company that utilizes the Company’s proprietary technology and offers what
the Company believes is superior performance for the digitization of film based
medical images. The Company’s headquarters are located in southern New
Hampshire, with contract manufacturing facilities in New Hampshire and
Massachusetts.
Critical
Accounting Policies
The
Company’s critical accounting policies are set forth in its Annual Report on
Form 10-K for the fiscal year ended December 31, 2005.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 123R, “Share-Based Payment” (“FAS 123R”). FAS 123R is a
revision of FASB Statement No. 123, “Accounting for Stock-Based
Compensation” (“FAS 123”). The Company adopted the provisions of FAS 123R on
January 1, 2006, using the fair value method of SFAS No. 123, “Accounting for
Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for
Stock-Based Compensation - Transition and Disclosure”. This statement
establishes standards for and requires the recognition of the cost of
employment-related services settled in share-based payment.
In
November 2004, the FASB issued SFAS 151, “Inventory Costs”, an amendment of
Accounting Research Bulletin (“ARB”) 43, Chapter 4, “Inventory Pricing”. SFAS
151 amends previous guidance regarding treatment of abnormal amounts of idle
facility expense, freight, handling costs, and spoilage. This statement requires
that those items be recognized as current period charges regardless of whether
they meet the criterion of “so abnormal” specified in ARB 43. In addition, this
Statement requires that allocation of fixed production overhead to the cost
of
the production be based on normal capacity of the production facilities. This
pronouncement became effective for the Company beginning January 1, 2006. The
adoption of SFAS 151 by the Company did not have a material impact on the
Company’s consolidated financial statements.
Quarter
Ended March 31, 2006 compared to Quarter Ended March 31, 2005
Sales.
Sales
of the Company’s CAD and medical imaging products for the quarter ended March
31, 2006 were $4,373,650, compared with sales of $6,007,607 for the quarter
ended March 31, 2005. The Company believes that sales in the first quarter
of
2006 were significantly and adversely affected by discussions underway at the
time, regarding a potential merger with R2, its principal competitor. The
possibility of such a merger required that the Company defer hiring to fill
key
sales and marketing management positions and caused a significant distraction
to
its field sales force. In February 2006 the Company’s Board of Directors made
the decision to terminate such merger discussions. Since this decision, the
Company believes it has made substantial progress in correcting these problems,
and has taken action to improve its sales and marketing management and
capabilities.
On
April
27, 2006, Hologic, one of the Company’s OEM customers for CAD for digital
mammography, and R2, the Company’s principal competitor in the mammography CAD
market, announced that Hologic would acquire R2 and that R2 would become a
wholly-owned subsidiary of Hologic. It was indicated by both parties that the
transaction is subject to a variety of conditions, and it was indicated by
Hologic that a closing is anticipated within a few months. The Company believes
that this transaction, if completed, will result in substantially all of
Hologic’s future mammography CAD orders and business being directed to R2. Sales
by the Company to Hologic represented approximately $1.5 million, or 8% of
the
Company’s sales, in 2005, and approximately $700,000, or 16% of the Company’s
sales, in the first quarter of 2006.
During
the first quarter of 2006, primarily due to customer demand towards more
affordable CAD systems, the Company sold more of its lower priced SecondLook®
300 and
200 systems over its higher priced SecondLook
700
systems. The table below presents the number of units and sales attributable
to
different product and service types for the quarters ended March 31, 2005
and
2006.
Product
Type
|
|
2005 Q1
|
|
2006 Q1
|
|
Units
|
|
|
|
|
|
Digital
Servers
|
|
|
33
|
|
|
54
|
|
Additional
Device System Licenses
|
|
|
14
|
|
|
17
|
|
Total
Digital
|
|
|
47
|
|
|
71
|
|
|
|
|
|
|
|
|
|
SL700
/500 /400 /402
|
|
|
25
|
|
|
4
|
|
SL300/200
|
|
|
33
|
|
|
22
|
|
TotalLook
|
|
|
—
|
|
|
7
|
|
ClickCAD
|
|
|
18
|
|
|
6
|
|
ClickCAD
Procedure Keys
|
|
|
9
|
|
|
22
|
|
|
|
|
|
|
|
|
|
Excludes
Radiologists review stations and medical digitizers.
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
Digital
Servers
|
|
|
1,140,350
|
|
|
1,689,160
|
|
Additional
Device System Licenses
|
|
|
217,250
|
|
|
274,900
|
|
Total
Digital
|
|
$
|
1,357,600
|
|
$
|
1,964,060
|
|
|
|
|
|
|
|
|
|
SL700
/500 /400 /402
|
|
|
2,054,985
|
|
|
276,860
|
|
SL300/200
|
|
|
1,523,785
|
|
|
1,056,782
|
|
TotalLook
|
|
|
|
|
|
183,505
|
|
ClickCAD
|
|
|
111,200
|
|
|
102,500
|
|
Viewers
/ Options
|
|
|
333,362
|
|
|
140,260
|
|
Total
Analog
|
|
$
|
4,023,332
|
|
$
|
1,759,907
|
|
|
|
|
|
|
|
|
|
Digitizers
|
|
|
158,652
|
|
|
|
|
Supplies
& Services
|
|
|
468,023
|
|
|
649,683
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
$
|
6,007,607
|
|
$
|
4,373,650
|
|
Gross
Margin. Gross
margin was 79% of sales for both the three month period ended March 31, 2006
and
2005. The Company’s sales of its higher margin CAD products and continued
production economies supported gross margins at comparable levels experienced
in
2005. The Company believes that increasing sales of products for digital
mammography can contribute to increasing gross margins over time because
these
products are primarily software in nature and therefore, have lower cost
than
certain of the Company’s analog products which have higher cost hardware
components.
Engineering
and Product Development. Engineering
and product development costs for the three month period ended March 31,
2006
increased by $303,150, from $1,016,048 in 2005 to $1,319,198 in 2006. The
increase in engineering and product development costs was primarily due to
software engineering related to pending releases of the Company’s improved
breast cancer detection algorithms, and the expansion of the Company’s efforts
in product development for computed tomographic applications, especially
early
detection of colonic polyps.
General
and Administrative. General
and administrative expenses in the three months ended March 31, 2006 increased
by $526,845 from $1,222,208 in 2005 to $1,749,053 in 2006. The increase in
general and administrative expenses is primarily due to an increase in legal
expenses, totaling approximately $500,000, principally associated with the
Company’s recently concluded patent arbitration proceeding with R2, as well as
professional and other expenses associated with merger discussions with R2.
Excluding these increases in legal and professional expenses, the Company’s
general and administrative expenses for the quarter ended March 31, 2006
would
have been lower than the preceding year as a result of actions taken by the
Company in 2005 to reduce its administrative staff and associated expenses.
Marketing
and Sales Expenses. Marketing
and sales expenses for the three months ended March 31, 2006 increased by
$234,721 from $1,750,966 in 2005 to $1,985,687 in 2006. The increase in
marketing and sales expenses primarily results from the actions taken by
the
Company during the third quarter of 2005 to increase its sales force and
improve
its advertising and marketing efforts.
Interest
Expense.
Net
interest expense for the three months ended March 31, 2006 decreased from
$32,883 in 2005 to $6,727 in 2006. This decrease was primarily due to a decrease
in loan balances and the action taken during the fourth quarter of 2005,
based
on a previous agreement from the Company’s Chairman, Mr. Robert Howard, to
reduce the interest rate pursuant to the Loan Agreement to prime rate plus
1%
from prime rate plus 2%.
Net
Income (Loss).
As a
result of the foregoing, the Company recorded a net loss of ($1,605,894)
or
($0.04) per share for the three month period ended March 31, 2006 on sales
of
$4,373,650, compared to net income of $641,929 or $0.02 per share from the
same
period in 2005 on sales of $6,007,607.
Liquidity
and Capital Resources
The
Company believes that its current liquidity and capital resources are sufficient
to support and sustain operations through at least the next 12 months, primarily
due to cash expected to be generated from continuing operations and the
availability of a $5,000,000 credit line under the Loan Agreement with its
Chairman, Mr. Robert Howard, of which $4,741,094 was available at March 31,
2006. The Loan Agreement expires March 31, 2007, subject to extension by
the
parties. Outstanding advances are collateralized by substantially all of
the
assets of the Company and bear interest at prime interest rate plus 1%, (8.75%
at March 31, 2006). The Company's ability to generate cash adequate to meet
its
future capital requirements beyond the next 12 months will depend primarily
on
operating cash flow. If sales or cash collections are reduced from current
expectations, or if expenses and cash requirements are increased, the Company
may require additional financing.
At
March
31, 2006 the Company had current assets of $9,419,157, current liabilities
of
$8,037,988 and working capital of $1,381,169. The ratio of current assets
to
current liabilities was 1.2:1
Net
cash
used for operating activities for the three months ended March 31, 2006 was
$893,904, compared to $260,453 for the same period in 2005. The cash used
for
the three months ended March 31, 2006 resulted from the net loss of $1,605,894,
increases in inventory of $579,622 and other current assets of $97,978, and
a
decreased in accrued expenses of $642,219, offset by the decrease in accounts
receivable of $1,143,837 and increases in accounts payable, accrued interest
and
deferred revenue totaling $483,019, plus non-cash depreciation, amortization
and
stock based compensation of $404,953.
The
net
cash used for investing activities, which consisted of additions to property
and
equipment, for the three month period ended March 31, 2006 was $102,557,
compared to $275,241 for the comparable period in 2005.
Net
cash
used for financing activities in the three months ended March 31, 2006 was
$375,000 compared to $255,735 for the same period in 2005. The increase in
cash
used for financing activities during the three months ended March 31, 2006
was
due to the absence of common stock issuance in 2006 compared to the same
period
in 2005.
Contractual
Obligations
The
following table summarizes, for the periods presented, the Company’s future
estimated cash payments under existing contractual obligations.
Contractual
Obligations
|
|
Payments
due by period
|
|
|
|
Total
|
|
Less
than 1 year
|
|
1-3
years
|
|
3-5
years
|
|
More
than 5 years
|
|
Long-Term
Debt Obligations
|
|
$
|
1,758,906
|
|
$
|
1,500,000
|
|
$
|
258,906
|
|
$
|
|
|
$
|
|
|
Lease
Obligations
|
|
$
|
2,256,985
|
|
$
|
385,090
|
|
$
|
1,385,455
|
|
$
|
486,440
|
|
$
|
|
|
Interest
Obligation*
|
|
$
|
99,069
|
|
$
|
99,069
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Total
Contractual Obligations
|
|
$
|
4,114,960
|
|
$
|
1,984,159
|
|
$
|
1,644,361
|
|
$
|
486,440
|
|
$
|
|
|
*
Interest based on rate at March 31, 2006 of 8.75%. The Company’s interest
obligation relating to its Convertible Revolving Loan Agreement with Mr.
Howard,
its Chairman, is not included in this table.
Subsequent
Events
On
April
18, 2005, the Company received a letter from R2, advising the Company of
R2’s
position that the Company’s Second Look® product lines allegedly infringed on US
Patents 6,266,435, 6,477,262 and 6,574,357, which are licensed to R2. A three
member arbitration panel was named and the
Company's patent dispute with R2, including counterclaims by the Company
that R2
infringes on US Patents 6,115,488, 6,556,699 and 6,650,766, which are owned
by
the Company, proceeded to a hearing before the panel on October 18 and 19,
2005.
On
April 19, 2006 the panel of arbitrators in the case entitled R2 Technology
and Shih-Ping Wang vs. iCAD, Inc. found that the Company did not infringe
any
patent asserted by R2. The arbitrators also found that R2 did not infringe
any
of the patents asserted by the Company.
On
April 19, 2006, W. Scott Parr resigned as Chief Executive Officer and
President of the Company effective May 15, 2006. Mr. Parr will remain as a
Director of the Company and was appointed by the Board as its non-executive
Vice
Chairman. On that same day, the Board of Directors of the Registrant appointed
Kenneth M. Ferry as the Company’s President, Chief Executive Officer and a Class
I member of the Company’s Board of Directors, also effective May 15, 2006.
On
April
27, 2006, Hologic one of the Company’s OEM customers for CAD for digital
mammography, and R2, the Company’s principal competitor in the mammography CAD
market, announced that Hologic would acquire R2 and that R2 would become
a
wholly-owned subsidiary of Hologic. It was indicated by both parties that
the
transaction is subject to a variety of conditions, and it was indicated by
Hologic that a closing is anticipated within a few months. The Company believes
that this transaction, if completed, will result in substantially all of
Hologic’s future mammography CAD orders and business being directed to R2. Sales
by the Company to Hologic represented approximately $1.5 million, or 8% of
the
Company’s sales, in 2005, and approximately $700,000, or 16% of the Company’s
sales, in the first quarter of 2006.
Item
3.
Quantitative
and Qualitative Disclosures about Market Risk
Not
applicable.
Item 4.
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 Securities Exchange Act
of 1934
(”Exchange Act”)) were effective at the reasonable level of assurance.
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met.
Further, the design of a control system must reflect the fact that there
are
resource constraints, and the benefits of controls must be considered
relative
to their costs. Because of the inherent limitations in all control systems,
no
evaluation of controls can provide absolute assurance that all control
issues
and instances of fraud, if any, within the Company have been detected.
Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected. The Company conducts
periodic evaluations to enhance, where necessary its procedures and
controls.
The
Company’s principal executive officer and principal financial officer conducted
an evaluation of the Company's internal control over financial reporting
(as
defined in Exchange Act Rule 13a-15(f)) to determine whether any changes
in
internal control over financial reporting occurred during the quarter ended
March 31, 2006, 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.
PART
II OTHER INFORMATION
Item
1. Legal Proceedings
See
Part
1, Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Intellectual Property for a description of the
arbitration between the Company and R2 Technology, Inc.
Item
5. Other Information
On
May 9,
2006, Mr. Robert Howard signed an addendum to his Loan Agreement with the
Company confirming that he does not intend to call the principal balance
of the
note, issued pursuant to the Loan Agreement, any earlier than March 31,
2008.
Item
6. Exhibits
Exhibit
No.
|
Description
|
|
|
3
|
Amended
By-Laws
|
|
|
10.1
|
Addendum
No. 18, to the Revolving Loan and Security Agreement, and Convertible
Revolving Credit Promissory Note between Robert Howard and the
Company dated October 26, 1987.
|
|
|
11
|
Earnings
per Share Calculation
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
Date:
May 10, 2006 |
By: |
/s/
W.
Scott Parr |
|
W.
Scott Parr |
|
President,
Chief
Executive Officer, |
|
Director |
|
|
|
Date:
May 10, 2006 |
By: |
/s/
Annette L. Heroux |
|
Annette
L. Heroux |
|
Vice
President of Finance, |
|
Chief Financial Officer |