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, 2006
|
OR
( )
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
|
|
For
the transition period from _______________
to
________________
|
|
|
|
Commission
file number 1-9341
|
iCAD,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
02-0377419
|
(State
or other jurisdiction
|
|
(I.R.S.
Employer 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:
Title
of Class
|
|
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___ 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___ 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___.
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. [ ]
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 ___
|
Accelerated
filer ___
|
Non-accelerated
filer
X .
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.) Yes___ 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, 2006 was
$47,420,979. Shares of voting stock held by each officer and director and
by each person who, as of June 30, 2006, 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, 2007, the registrant had 37,573,507 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 2007 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 its consolidated subsidiaries.
PART
I
Item
1.
Business.
General
iCAD,
Inc. was founded in 1984 as Howtek, Inc. (“Howtek”), a developer, manufacturer
and marketer of digitizing systems or scanners which converted printed,
photographic and other hard copy images to digital form for use in the graphic
arts, photo finishing and medical industries. Howtek
began development of its first scanner in 1987, a smaller, easier to use and
less costly alternative to traditional scanners at that time. Howtek
followed with a series of products continuing to improve the quality of digital
imaging while reducing the price and complexity of scanning systems.
In
2001,
foreseeing a decline in the graphic arts and photo finishing industries, the
Company elected to focus its efforts solely in the medical imaging industry
through 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. Subsequently, 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”), bringing together two of the three companies approved at that
time by the United States Food and Drug Administration (“FDA”) to market CAD
solutions for breast cancer in the United States.
The
Company today is a leader in cancer detection and helping radiologists find
more
cancers earlier. We are
an industry-leading provider of CAD solutions that enable radiologists and
other
healthcare professionals 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. CAD is also reimbursable in the
United States under federal and most third-party insurance programs. Since
receiving FDA approval for our first breast cancer detection product in January
2002, over fifteen hundred of our CAD systems have been placed in mammography
practices worldwide. We are also currently developing a CAD product for use
with
virtual colonoscopy to improve the detection of polyps.
Our
website is www.icadmed.com.
We make
available, free of charge, at this website our annual report 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 we electronically file such material with, or furnish 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’s headquarters is located in Nashua, New Hampshire, and its principal
research and development center is located in Beavercreek,
Ohio.
Strategy
The
Company intends to apply its core competencies in pattern recognition and
algorithm development in disease detection. Our focus is on the development
and
marketing of cancer detection products for disease states where there are
established or emerging protocols for screening as a standard of care. iCAD
will
pursue select disease states where it is clinically proven that screening has
a
significant 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.
We
believe that our efforts to develop additional commercially viable CAD products
is enhanced by steady advancement of digital imaging. We intend to broaden
our
extensive CAD capabilities across multiple imaging modalities to develop or
enhance products that will help clinicians detect disease earlier, improve
outcomes and enhance patient care. We are currently applying our patented
detection technology and algorithm platform to other diseases where pattern
recognition, artificial intelligence, and image processing will play a pivotal
role. For mammography, we are developing CAD solutions for tomosynthesis that
assists radiologists in detecting more cancers sooner and also analyze the
tremendous volume of data generated by 3-D imaging. For colon cancer imaging,
we
are augmenting CT Colonography (“CTC”) by improving the detection of polyps and
contributing to the acceptance of CTC. We expect to have a commercial product
available for marketing in the first half of 2008.
Network
connectivity, clinical workflow and patient throughput are critical issues
for
radiology departments. Healthcare providers are working to stay competitive
in a
constrained budget healthcare environment. iCAD will continue to provide
powerful and flexible Digital Imaging and Communication in Medicine (“DICOM”)
connectivity solutions. Seamless integration of CAD with leading image
processing systems, review workstations, and Picture Archiving and Communication
Systems (“PACS”), from multiple vendors, will remain a focal point of our
development efforts to provide simpler and easier integration with existing
clinical systems and connectivity benefits that support tele-radiology and
remote viewing. We expect 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 to the speed at which
high-priority images are processed through the system.
Based
on
our analysis of market opportunity and competition, we have accelerated the
development of products to support screening for colon cancer. Virtual
colonoscopy is a technology that has evolved rapidly in recent years and we
believe that the market for virtual colonoscopy will grow given the increased
number of recommendations for routine screening procedures for early detection
of colon cancer.
During
2006, we have increased our strategic emphasis on development and growth of
residual and continuing revenue sources. Fee per period and fee per procedure
models have been implemented for the delivery of CAD solutions. We are also
pursuing additional revenue sources relating to our service and extended
maintenance revenue.
Market
and Market Opportunities
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 images a radiologist reviews the CAD
results and can go back to re-examine suspicious areas that warrant a second
look before making a final interpretation of the study. The radiologist then
determines if a clinically significant abnormality exists and whether further
diagnostic evaluation is warranted. CAD is most prevalent as an adjunct to
mammography given the documented success of CAD in helping to increase breast
cancer detection rates. Other major clinical applications where CAD is of value
include breast MRI, chest, lung, and virtual colonoscopy.
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%. By enabling earlier cancer detection, patient survival rates improve and
typically allow for more effective, less invasive, and less costly treatment
options. CAD as an adjunct to mammography screening is now 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. According to the January 2007
National Electrical Manufacturers Association Forecast Report, the mammography
market in the United States is forecasted to exceed $400 million in
2007.
In
the
United States, approximately 8,800 facilities (with approximately 14,000
mammography systems) are certified to provide mammography screening.
Historically, these centers have used conventional film-based medical imaging
technologies to capture and analyze breast images. Of the 8,800 certified
facilities, approximately 15% 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 from the American College of
Radiology Imaging Network’s (ACRIN) Digital Mammographic Imaging Screening Trial
(DMIST) in 2005 in the New
England Journal of Medicine.
The
trial showed that there was no difference in accuracy of 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 mammography.
Market
Size and Share
The
total
CAD mammography market in the United States was approximately $100 million
in
2006 according to Frost and Sullivan. In 2012, the CAD mammography market in
the
United States is projected by Frost and Sullivan to reach $333.5 million,
growing at a compounded rate of approximately 20.2 percent between 2005 and
2012. We believe iCAD’s share of this mammography CAD market in 2006 was
approximately 35% with Hologic/R2 and Kodak making up the remaining share of
the
market.
New
Market Opportunities
Computed
Tomography Applications and Colonic Polyp Detection
Computed
Tomography (“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 starting with 4 slices and moving to
8,
16, 64 and beyond in just a few years has resulted in vastly improved image
quality. The increased number of slices per procedure and greatly increased
imaging speeds has 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 presents opportunities for automated image analysis
and
CAD products that the Company believes it is well positioned to develop and
promote.
According
to the American Cancer Society, colorectal cancer is the fourth most common
type
of cancer in men and women in the United States. 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. However, these
techniques remain highly under utilized.
CTC,
also
known as Virtual Colonoscopy, is a relatively new and less invasive technique
than traditional colonoscopy for imaging the colon that has gained significant
acceptance in recent years. 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, and CAD is then used to identify potential
polyps.
CTC
is
becoming more readily available and it is beginning to gain health insurance
coverage for diagnostic applications and in some limited cases for screening
application in the United States. The process of reading a CTC exam is 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. The Company is in the process of
developing solutions for the detection of polyps in CTC exams. The Company
plans
initially to deliver its solution to end users through integration with leading
vendors who provide image display and visualization technology specifically
designed for CTC images. Such vendors include Vital Images, TeraRecon, and
Viatronix.
Products
and Product Development
Products
for Computer Aided Detection (CAD) in Mammography
iCAD
actively markets and sells three CAD products for mammography: SecondLook®
Digital for digital mammography and, SecondLook 300 and SecondLook 200 for
film-based mammography. Each of these products utilizes iCAD’s SecondLook
detection algorithm platform. This platform is comprised of patented detection
algorithms that analyze features and characteristics of screening and diagnostic
mammogram images to recognize and identify areas that may represent cancer.
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 tissues.
iCAD’s
latest SecondLook product was released in the second half of 2006 for use on
SecondLook Digital and SecondLook 300 for GE, Hologic, Siemens and IMS Giotto
mammography systems. This product delivers the highest SecondLook 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.
In
2006,
iCAD initiated development of CAD products for additional digital imaging
providers including Agfa, Kodak, Sectra and PlanMed. iCAD also initiated
research and development activities to develop the next generation of SecondLook
CAD. This next product will provide improved performance and increased ease
of
use to better support clinical decision making and improve workflow.
Developmental work has begun with PACS companies. We are focused on developing
new, more efficient ways of integrating CAD into PACS review workstations to
create a streamline workflow for mammography and potentially other
specialties.
SecondLook
Digital
The
SecondLook Digital products are used in conjunction with digital mammography
imaging systems from leading manufacturers of direct digital and CR equipment
-
including GE Healthcare, Siemens Medical, Hologic, Inc., and IMS Giotto. In
addition, we are awaiting FDA approval for our CAD product for the Fuji system.
iCAD 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. iCAD is also developing individualized product designs to enable
customized CAD functionality unique to the products of each imaging
partner.
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 review workstations. Workflow and efficiency are
critical in digital 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 partners to ensure CAD results
are
integrated and easily viewed using each review workstation’s graphical user
interface (“GUI”). 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 (“CIS”) 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 with
optional PowerLook and iReveal provides 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 powerful 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
The
TotalLookÔ
system
converts prior mammography films to digital images delivering the highest
resolution digitized images to meet the critical specifications required for
conversion of prior films. TotalLook captures all of the detail without image
artifacts - for comparative review on a single digital workstation. In moving
to
one review workstation users experience improvements in workflow, productivity
and reduced discomfort associated with switching between a light box and a
computer screen to view images.
TotalLook
provides a comprehensive film-to-digital solution making it easier for
facilities to transition from film to digital mammography. iCAD’s CIS technology
provides full image fidelity for the most accurate digitized images, high
reliability with no daily maintenance and the fastest scan time for improved
throughput. TotalLook’s comprehensive, flexible DICOM connectivity solutions
enable seamless integration with PACS and RIS systems, reducing redundant
patient data entry. The new intelligent image compression provides excellent
image quality while substantially minimizing storage requirements and improving
network transmission speed.
Products
for Computer Aided Detection of Colonic Polyps
iCAD
is
currently engaged in the development of a CAD product to support detection
of
colonic polyps in conjunction with CTC (CT Colonography or Virtual Colonoscopy).
CAD for CTC is a natural extension of iCAD’s core competencies in image analysis
and image processing. iCAD expects its system will likely be offered in
conjunction with third party display workstations and PACS vendors. The Company
will begin field testing the product in 2007 and the use of the product within
the United States will require FDA approval. Consequently the timing of the
commercial release for sale of this proposed product in the United States is
uncertain. We believe CTC is a significant market opportunity.
Sales
and Marketing
We
market
our products for digital mammography through our direct regional sales
organization as well as through our OEM partners, including GE Healthcare,
Siemens Medical, Hologic, Inc. and IMS Giotto. In early 2006, Siemens Medical
agreed to distribute our TotalLook solution for comparative reading of film
based prior images on digital mammography workstations. In 2006, we also entered
into a supplier agreement with Fuji Medical to supply our CAD product for use
with Fuji’s Computed Radiography (“CR”) system. We are currently awaiting FDA
approval on our Fuji CAD product.
Our
analog product line is sold direct through our regional sales managers and
through our expanded distributor and manufacturer representative organization.
In the later half of 2006 we also introduced a new indirect Channel Partner
Marketing Program for our distributors.
In
the
later half of 2006, we upgraded our domestic sales organization by hiring more
experienced healthcare sales professionals with significant track records of
success within the diagnostic imaging market. While retaining certain existing
sales personnel, we recruited and hired 10 new sales representatives.
Additionally, in early 2007 we hired an experienced healthcare sales manager
with significant CAD experience to run our European sales and marketing
operation based in Europe.
We
also
continue to make progress in increasing sales made to healthcare providers
that
are represented by group purchasing organizations or GPOs. In 2006 we
streamlined the GPO pricing by bringing pricing in line with the market, we
also
added new GPO agreements and participated in a group buy with a major
GPO.
Our
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. We made significant
marketing investments in 2006, focused on re-branding the Company as a leader
in
cancer detection. As part of this focused effort, we have developed a new
comprehensive, integrated communications plan, a new advertising campaign,
a
complete re-design of our website, collateral materials, on-line communications,
thought leadership activities, and the development of a new tradeshow presence.
Competition
The
healthcare industry and the market for diagnostic imaging is highly competitive
and characterized by perpetual change and steady evolution of new technologies.
Competitors in this market are highly sensitive to the introduction of new
products and competitors that can change the market with disruptive solutions.
The Company currently faces direct competition in its CAD business from Hologic,
Inc. (which acquired R2 Technology in July 2006) and, to the lesser extent,
from
Kodak, Inc. Other well known 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 also anticipates facing additional competition in the CT Colon solutions
market. We expect competition will come from both the traditional imaging CT
equipment manufacturers 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. It is expected that they would 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.
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 iCAD 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.
Manufacturing
and Customer and Professional Service
Our
products are generally manufactured and assembled for us by a subcontract
manufacturer of medical devices. Our manufacturing efforts are generally limited
to purchasing and supply chain management, planning/scheduling, manufacturing
engineering, quality assurance, inventory control and warehousing. After we
ship
our product it is usually installed at the customer site by one of our OEM
partners. If our personnel install our product, it is as part of our
installation services.
Our
professional services organization efforts generally include pre-sale product
demonstrations, product installation and applications training, product
troubleshooting, call center management and dispatch. Our service repair efforts
are generally performed at the customer site by third party service
organizations or in our repair depot by our technicians.
Government
Regulation
The
Company is subject to extensive regulation with potentially significant costs
for compliance. Our CAD systems are medical devices subject to extensive
regulation by the FDA under the Federal Food, Drug, and Cosmetic Act. The FDA’s
regulations govern, among other things, product development, product testing,
product labeling, product storage, pre-market clearance or approval, advertising
and promotion, and sales and distribution.
The
FDA’s
Quality System Regulations require that the Company's manufacturing operations
follow elaborate design, testing, control, documentation and other quality
assurance procedures during the manufacturing process. The Company is subject
to
FDA regulations covering labeling regulations, adverse event reporting, and
the
FDA’s general prohibition against promoting products for unapproved or off-label
uses.
The
Company's manufacturing facilities are subject to periodic unannounced
inspections by the FDA and corresponding state agencies and international
regulatory authorities for compliance with extensive regulatory requirements.
The Company's failure to fully comply with applicable regulations could result
in the issuance of warning letters, non-approvals, suspensions of existing
approvals, civil penalties and criminal fines, product seizures and recalls,
operating restrictions, injunctions, and criminal prosecution.
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 those
countries. These regulations, including the requirements for approvals, and
the
time required for regulatory review, vary from country to country.
Intellectual
Property
We
rely
primarily on a combination of trade secrets and copyright law, third-party
and
employee confidentiality agreements, and other protective measures to protect
our intellectual property rights pertaining to our products and technologies.
Currently
we have 19 issued patents covering our CAD and scanner technologies in the
United States, which expire at various times from December 2019 through November
2025. These patents help the Company maintain a proprietary position in these
markets. Additionally, we have 23 current patent applications pending
domestically and internationally, and we plan to file additional domestic and
foreign applications when we believe such protection will benefit the Company.
These patent applications relate to current and future uses of iCAD’s CAD and
digitizer technologies and products, including CAD for CT colon. In June 2006
we
secured a non-exclusive patent license from the National Institute of Health
(“NIH”) which relate broadly to CAD
in
colonography. In February 2003 we secured a patent license to United States,
Canadian, and Japanese patents owned by Scanis, Inc., which relate broadly
to
CAD of breast cancer. Rights to a European patent application covering similar
inventions are also included.
We
do not
own all of the software and other technologies used in our products, but we
believe we have all the necessary licenses from third parties for using that
technology in our current 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 us from supplies we obtains from a limited number
of suppliers. Critical components required to manufacture these products,
whether by outside manufacturers or directly, may be available from a sole
or
limited number of component suppliers. The Company generally does not have
long-term arrangements with any of its manufacturers or suppliers. The loss
of a
sole or key manufacturer or supplier would impair the Company's ability to
deliver products to customers in a timely manner and would adversely affect
the
Company's sales and operating results. The Company's business would be harmed
if
any of its manufacturers or suppliers could not meet the Company's quality
and
performance specifications and quantity and timing requirements.
Major
Customers
During
the year ended December 31, 2006 the Company had sales of $4,266,491 and
$2,462,225,
or 22% and 12% of sales, to GE Healthcare and Hologic, Inc., respectively.
These
were the Company’s two major customers in 2006 with accounts receivable balances
of $946,475
and $18,920,
respectively, due from these customers at December 31, 2006. For the years
ended
December 31, 2005 and 2004 the Company’s two major customers were SourceOne
Healthcare and GE Healthcare with sales of $3,725,065 and $2,913,493 or 19%
and
15% of sales in 2005 and sales of $6,871,412 and $4,983,683 or 29% and 21%
of
sales in 2004. The account receivable balances for these two major customers
were $139,816 and $430,360, respectively, due at December 31, 2005 and
$1,849,791 and $12,090, respectively, due from these customers at December
31,
2004.
Engineering
and Product Development
The
Company spent $5,260,893, $4,785,092, and $4,832,842 on research and development
activities during the years ended December, 2006, 2005 and 2004, respectively.
The research and development expenses for 2006 are primarily attributed to
the
development of the Company’s TotalLook, PowerLook, and algorithm development to
support its CAD products and development of the Company’s CAD product for CT
Colon.
Employees
At
March
1, 2007 the Company had 82 full-time and 9 part-time employees, with 24 involved
in sales and marketing, 30 in research and development, 20 in service, technical
support and operations functions, and 17 in administrative functions. None
of
the Company’s employees are represented by labor organizations. We believe our
relations with our employees are good.
Backlog
Product
backlog at December 31, 2006 was approximately $2,566,000 as compared to
approximately $788,000 on the corresponding date in 2005 and $1,401,445
at
September 30, 2006. The significant increase in backlog at the end of 2006
compared to the end of 2005 was fueled primarily by the increased demand for
our
digital CAD products, as our customers accelerate their transition from
film-based analog mammography systems to full field digital technology. We
expect that the majority of this product backlog will be shipped within the
2007
fiscal year.
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
We
market
our products for digital mammography in the United States through our direct
regional sales organization as well as through our OEM partners, including
GE
Healthcare, Siemens Medical and Hologic, Inc. Outside the United States we
market our products for digital mammography generally through our OEM partners,
GE Healthcare and Siemens Medical and IMS Giotto. Total export sales were
approximately $1,022,000 or 5% of total sales in 2006, $1,747,000 or 9% of
total
sales in 2005 and $1,331,000 or 6% of total sales in 2004.
The
Company’s principal concentration of export sales is in Europe, which accounted
for 91% of the Company’s export sales in 2006, 44% of export sales is 2005 and
78% of export sales in 2004. Of these sales 77% in 2006, 47% in 2005 and 71%
in
2004 were in France. The balance of the export sales in 2006 were into Bermuda,
Canada, Mexico and Australia.
Foreign
Regulations
International
sales of CAD 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. 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.
Product
Liability Insurance
The
Company believes that it maintains appropriate product liability insurance
with
respect to our products. We cannot be certain that with respect to our current
or future products, such insurance coverage will continue to be available on
terms acceptable to us 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 since inception and there can be no assurance
that we will be able to achieve and sustain future
profitability.
We
have
incurred significant losses since our inception, much of which were attributable
to our former business lines. We incurred a net loss of approximately $6,754,158
during the fiscal year ended December 31, 2006. We may not be able to achieve
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 who
accounted for 52.2% and
31.9% of
our
total revenue for the years
ended December 31, 2006 and 2005, respectively. Our principal distribution
channel for our analog products
is
through our distribution partners who accounted
for 33.1% and
59.1%
of our
total revenue for the years
ended December 31, 2006 and 2005, respectively. A
limited
number of large customers may continue to account for a significant portion
of
our future
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.
Our
business is dependent upon future market growth and acceptance of digital
mammography systems and other digital computer aided detection (CAD) products.
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.
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
large installed base of conventional film-based mammography systems in hospitals
and imaging centers, the significant cost associated with the procurement of
full field digital mammography systems and CAD products, and
the
reliance on third party insurance reimbursement.
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, the timing of orders from our OEM partners,
our
OEM partners ability to manufacture and ship their full field 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 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 competing
effectively.
Changes
in reimbursement 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.
There
is
no guaranty that any of the products which we contemplate developing will become
eligible for reimbursements or health insurance coverage at favorable rates
or
even at all or maintain eligibility.
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, 2006 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, 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, or
DHHS 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
healthcare provider, 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 our Company and others
in the healthcare industry. Compliance with the privacy standards became
mandatory in April 2003, compliance with the transaction standards became
mandatory in October 2003 (although full implementation was delayed with respect
to the Medicare program until October 2005), 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.
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
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.
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. There are two series of
preferred stock currently outstanding which have dividend and liquidation
preferences over our common stock. In addition, specific rights granted to
future holders of preferred stock could be used to restrict our ability to
merge
with, or sell our assets to a third party. In addition, our certificate of
incorporation provides for the classification of our board of directors into
three classes, as nearly equal in number as possible. One class of directors
is
elected at each annual meeting to serve a term of three years. At least two
annual meetings of stockholders, instead of one, will be required to effect
a
change in a majority of our board of directors.
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.
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.
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 breast 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.
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, testing,
manufacturing, quality control, labeling, and promotion of products. We may
not
be able to obtain FDA or other regulatory approval and market any further
products we may develop during the time we anticipate, or at all.
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.
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 exercise
of our outstanding convertible preferred stock and a substantial portion of
the
shares of 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 our preferred stock or 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 issued upon the exercise of our securities could also dilute the
holdings of our existing stockholders.
Item
1B. Unresolved
Staff Comments
None
Item
2. Properties
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
$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 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 a facility for its research and development group located at
2689
Commons Blvd, Suite 100, Beavercreek, Ohio for approximately $445,000 per year
pursuant to a lease which expires in December 2010. The facility consists of
approximately 23,000 square feet of research and development. 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 approximately 6,000 square feet of office space at an average rate
of
approximately $94,000 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 NH used for manufacturing and warehousing.
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.
At
the
Company’s Annual Meeting of Stockholders held on October 20, 2006, the
stockholders of the Company entitled to vote at the meeting voted to elect
the
three individuals named below to serve as Class I directors of the Company
and
to approve the Company’s option exchange program.
The
votes
cast by stockholders with respect to the election of Class I directors were
as
follows:
Names
of Nominees
|
Number
of
|
Number
of
|
Class
I
|
Votes
For
|
Votes
Withheld
|
Kenneth
Ferry
|
34,650,894
|
736,459
|
George
Farley
|
34,547,754
|
839,549
|
Dr.
Herschel Sklaroff
|
34,632,262
|
755,041
|
In
addition to the Class I directors elected at the meeting the following directors
continued to hold office after the Annual Meeting:
Class
II
directors (terms expire in 2007): James Harlan, Maha Sallam and Dr. Elliott
Sussman.
Class
III
directors (terms expire in 2008): Robert Howard, Dr. Rachel Brem and W. Scott
Parr.
Dr.
Sklaroff and Mr. Parr no longer server as directors of the Company
The
votes
cast by stockholders with respect to the Company’s option exchange program were
as follows:
Votes
Cast “For” 12,336,189, Votes Cast “Against” 2,826,830, Votes “Abstaining
98,740.
In
addition, there were 20,125,544 shares that were not voted with respect to
the
proposal to approve the option exchange program.
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 2006 and 2005.
Fiscal
year ended
|
|
High
|
|
Low
|
|
December
31, 2006
|
|
|
|
|
|
First
Quarter
|
|
|
$2.05
|
|
|
$1.20
|
|
Second
Quarter
|
|
|
2.45
|
|
|
1.31
|
|
Third
Quarter
|
|
|
2.12
|
|
|
1.28
|
|
Fourth
Quarter
|
|
|
3.38
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
Fiscal
year ended
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
$4.47
|
|
|
$3.31
|
|
Second
Quarter
|
|
|
4.51
|
|
|
3.35
|
|
Third
Quarter
|
|
|
4.10
|
|
|
2.45
|
|
Fourth
Quarter
|
|
|
2.53
|
|
|
1.01
|
|
As
of
March 1, 2007 there were 266 holders of record of the Company's common stock.
In
addition, the Company believes that there are in excess of 550 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 to the Company's
Board of Directors. There are no non-statutory restrictions on the Company's
present or future ability to pay dividends. The Company currently has two
outstanding Series of Preferred Stock that have dividend rights that are senior
to holders of common stock.
See
Item
12 of this Form 10-K for certain information with respect to the Company’s
equity compensation plans in effect at December 31, 2006.
Item
6. Selected
Financial Data.
The
financial data set forth below should be read in conjunction with “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,
2006, 2005 and 2004 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,
|
|
|
|
2006(1)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Sales
|
|
$
|
19,721,358
|
|
$
|
19,769,822
|
|
$
|
23,308,462
|
|
$
|
6,520,306
|
|
$
|
5,000,184
|
|
Gross
margin
|
|
|
15,430,540
|
|
|
15,133,765
|
|
|
16,775,166
|
|
|
3,578,643
|
|
|
(161,459
|
)
|
Total
operating expenses
|
|
|
21,869,219
|
|
|
19,888,292
|
|
|
17,042,385
|
|
|
11,662,396
|
|
|
9,208,664
|
|
Loss
from operations
|
|
|
(6,438,679
|
)
|
|
(4,754,527
|
)
|
|
(267,219
|
)
|
|
(8,083,753
|
)
|
|
(9,370,123
|
)
|
Interest
expense - net
|
|
|
199,279
|
|
|
3,961
|
|
|
561,044
|
|
|
114,655
|
|
|
48,167
|
|
Net
loss
|
|
|
(6,637,958
|
)
|
|
(4,758,488
|
)
|
|
(828,263
|
)
|
|
(8,198,408
|
)
|
|
(9,418,290
|
)
|
Net
loss available to common stockholders
|
|
|
(6,754,158
|
)
|
|
(4,880,218
|
)
|
|
(961,263
|
)
|
|
(8,342,666
|
)
|
|
(9,566,340
|
)
|
Net
loss per share
|
|
|
(0.18
|
)
|
|
(0.13
|
)
|
|
(0.03
|
)
|
|
(0.31
|
)
|
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and diluted
|
|
|
36,911,742
|
|
|
36,627,696
|
|
|
34,057,775
|
|
|
26,958,324
|
|
|
20,928,397
|
|
(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 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 6 of the Notes to Consolidated Financial Statements.
Selected
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Cash
and cash equivalents
|
|
$
|
3,623,404
|
|
$
|
4,604,863
|
|
$
|
8,008,163
|
|
$
|
5,101,051
|
|
$
|
1,091,029
|
|
Total
current assets
|
|
|
10,558,300
|
|
|
11,256,855
|
|
|
14,289,588
|
|
|
11,115,003
|
|
|
3,116,665
|
|
Total
assets
|
|
|
60,289,673
|
|
|
61,527,835
|
|
|
65,136,107
|
|
|
62,662,136
|
|
|
26,077,356
|
|
Total
current liabilities
|
|
|
6,488,511
|
|
|
8,166,756
|
|
|
5,990,562
|
|
|
7,761,506
|
|
|
4,313,690
|
|
Convertible
revolving loans payable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
party, including current portion
|
|
|
2,258,906
|
|
|
258,906
|
|
|
300,000
|
|
|
3,630,000
|
|
|
200,000
|
|
Convertible
loans payable to related parties,
|
|
|
|
|
|
|
|
|
|
|
|
|
including
current portion
|
|
|
2,784,559
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Convertible
loans payable to non-related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
parties,
including current portion
|
|
|
663,970
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Note
payable, current
|
|
|
375,000
|
|
|
1,875,000
|
|
|
3,375,000
|
|
|
4,608,390
|
|
|
173,916
|
|
Convertible
Subordinated Debentures
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,000
|
|
|
10,000
|
|
Stockholders'
equity
|
|
|
47,971,727
|
|
|
52,727,173
|
|
|
56,970,545
|
|
|
47,895,630
|
|
|
21,455,276
|
|
Item
7. Management's
Discussion and Analysis of Financial Condition and Results
of Operations.
Results
of Operations
Overview
iCAD
is
an industry-leading provider of CAD solutions that enable radiologists and
other
healthcare professionals 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. CAD is also reimbursable in the
United States under federal and most third-party insurance programs. Since
receiving FDA approval for our first breast cancer detection product in January
2002, over fifteen hundred of our 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.
iCAD’s
CAD 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. 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
will
pursue select disease states where it is clinically proven that screening has
a
significant 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. CT Colonography or CTC is emerging as an
alternative imaging procedure for evaluation of the colon. The Company has
under
development a product for computer aided detection of polyps in CTC.
Colorectal cancer has been shown to be highly preventable with early detection
and removal of polyps.
The
Company’s CAD systems include proprietary algorithm 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 manufacturing and contract manufacturing facilities in New
Hampshire and Massachusetts and a research and development facility in
Ohio.
Critical
Accounting Policies
The
Company’s discussion and analysis of our financial condition, results of
operations, and cash flows are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts
of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate these estimates,
including those related to accounts receivable allowance, inventory valuation
and obsolescence, intangible assets, income taxes, warranty obligations,
contingencies and litigation. Additionally, we use assumptions and estimates
in
calculations to determine stock-based compensation. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Our
critical accounting policies include:
-
Revenue
recognition;
-
Allowance
for doubtful accounts;
-
Inventory;
-
Valuation
of long-lived and intangible assets;
-
Goodwill;
- Product
warranties;
- Stock
based compensation;
- Income
taxes.
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 Emerging
Issues Task Force Issue 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables,
EITF
00-21 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.
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.
Allowance
for Doubtful Accounts
The
Company’s senior management reviews accounts receivable on a periodic basis to
determine if any receivables will potentially be uncollectible. The Company
includes any accounts receivable balances that are determined to be
uncollectible, along with a general reserve for estimated probable losses based
on historical experience, in its overall allowance for doubtful accounts. After
all attempts to collect a receivable have failed, the receivable is written
off
against the allowance. Based on the information available to the Company, it
believes the allowance for doubtful accounts as of December 31, 2006 is
adequate. However, actual write-offs might exceed the recorded allowance.
Inventory
Inventory
is valued at the lower of cost or market value, with cost determined by the
first-in, first-out method. At December 31, inventory consisted of raw material
and finished goods of approximately $1,764,000 and $1,354,000, respectively,
for
2006, and raw material and finished goods of approximately $1,245,000 and
$1,272,000, respectively, for 2005.
The
Company regularly reviews inventory quantities on hand and records a provision
for excess and/or obsolete inventory primarily based upon estimated utility
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, trade name and distribution agreements
purchased in the acquisition of ISSI in June 2002 and CADx in December 2003.
These assets are amortized on a straight-line basis over their estimated useful
lives of 2 to 10 years.
Goodwill
The
Company follows the provision of Financial Accounting Standards Board (FASB)
issued SFAS No. 141, “Business Combinations” and No. 142, “Goodwill and Other
Intangible Assets”. 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.
Product
Warranties
The
Company provides for the estimated cost of standard product warranty against
defects in material and workmanship based on historical warranty trends in
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 and directors. The Company grants options to employees
and directors to purchase common stock at an option price equal to the market
value of the stock at the date of grant. Prior to the effective date of
SFAS 123R, the Company applied APB 25, and related interpretations, for its
stock option grants. APB 25 provides that the compensation expense relative
to
its stock options is measured based on the intrinsic value of the stock option
at date of grant.
Effective
the beginning of the first quarter of fiscal year 2006, the Company adopted
the
provisions of SFAS 123R using the modified prospective transition method. Under
this method, prior periods are not restated. The Company used the Black-Scholes
and Lattice option pricing models which requires extensive use of accounting
judgment and financial estimates, including estimates of the expected term
participants will retain their vested stock options before exercising them,
the
estimated volatility of its common stock price over the expected term, and
the
number of options that will be forfeited prior to the completion of their
vesting requirements. Application of alternative assumptions could produce
significantly different estimates of the fair value of stock-based compensation
and consequently, the related amounts recognized in the Consolidated Statements
of Operations. The provisions of SFAS 123R apply to new stock options and stock
options outstanding, but not yet vested, on the date the Company adopted SFAS
123R. Stock-based compensation expense was included in applicable departmental
expense categories in the Consolidated Statements of Operations for the fiscal
2006 period.
Income
Taxes
The
Company follows the liability method under SFAS No. 109, “Accounting for Income
Taxes”. 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, 2006 and 2005 as it is more likely than
not
that the deferred tax asset will not be realized.
Year
Ended December 31, 2006 compared to Year Ended December 31,
2005
Revenue.
Revenue
for the year ended December 31, 2006 was $19,721,358 compared with revenue
of
$19,769,822 for the year ended December 31, 2005 for a decrease of $48,464
or
0.2%. The rapid adoption of FFDM systems and our associated digital CAD
technology led to an increase in digital product revenues of $3,984,137 or
63.2%
to $10,287,510 for the year ended December 31, 2006. This increase in digital
revenue was offset by a decrease in analog product revenue of $5,165,951 or
44.2% to $6,519,503 in fiscal 2006, compared to revenue of $11,685,454 for
the
year ended December 31, 2005.
This
rapid shift to FFDM and the associated CAD technology contributed to the decline
in film- based analog technology. While the transition to digital technology
is
expected to have a positive impact on overall financial performance, the Company
is taking actions intended to improve its future analog business, primarily
by
developing a stronger and expanded distributor channel focused exclusively
on
selling analog products.
Service
and supply revenue increased approximately $1,133,350 or 63.6% in the year
ended
December 31, 2006 to $2,914,345, compared to $1,780,995 for the year ended
December 31, 2005. The increase in the Company’s service revenue is due
primarily to focused efforts by the Company to increase its service offerings
to
its customers, resulting in an increase in sales of service contracts post
the
warranty period.
|
|
For
the years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
Change
|
|
Digital
revenue
|
|
$
|
10,287,510
|
|
$
|
6,303,373
|
|
$
|
3,984,137
|
|
|
63.2
|
%
|
Analog
revenue
|
|
|
6,519,503
|
|
|
11,685,454
|
|
|
(5,165,951
|
)
|
|
-44.2
|
%
|
Service
& supply revenue
|
|
|
2,914,345
|
|
|
1,780,995
|
|
|
1,133,350
|
|
|
63.6
|
%
|
Total
revenue
|
|
$
|
19,721,358
|
|
$
|
19,769,822
|
|
$
|
(48,464
|
)
|
|
-0.2
|
%
|
Gross
Margin. Gross
margin increased to 78.2% for the year ended December 31, 2006 compared to
76.5%
for the year ended December 31, 2005. The increase in gross margin is primarily
attributable to higher gross margins realized on the Company’s digital products.
During the third quarter of 2006 the Company increased its inventory reserve
by
approximately $263,000 for identified excess and obsolete analog inventory.
Engineering
and Product Development. Engineering
and product development costs for the year ended December 31, 2006 increased
by
$475,801 or 9.9%, from $4,785,092 in 2005 to $5,260,893 in 2006. The increase
in
engineering and product development costs for the year ended December 31, 2006
was primarily due to product enhancements related to the Company’s breast cancer
detection algorithms, and the expansion of the Company’s efforts in product
development for CAD for CT applications, primarily the early detection of
colonic polyps. In addition, approximately $150,000, relating to severance
and
recruiting costs was incurred during the second and third quarters of 2006.
The
increase in engineering and product development costs for the year ended 2006,
also includes employee bonuses of approximately $117,000 and stock based
compensation expense in the amount of approximately $87,000 due to the impact
of
SFAS 123R.
General
and Administrative. General
and administrative expenses for the year ended December 31, 2006 increased
by
$423,095 or 6.1%, from $6,956,350 in 2005 to $7,379,445 in 2006. The increase
in
general and administrative expenses for the year ended December 31, 2006 was
due
primarily to recruiting and severance expenses of approximately $843,000,
employee bonuses of $314,000, and stock-based compensation expense due to the
impact of SFAS 123R of approximately $1,002,000 associated principally with
the
Company’s transition to new management, a newly established compensation plan
for our Board of Directors and modification of the outstanding stock options
of
the Company’s former Chief Executive Officer incurred in the second quarter of
2006 in connection with his Separation Agreement. The increase in expense was
offset by a reduction in legal costs in 2006. The Company incurred approximately
$2,300,000 in legal costs during 2005 compared to approximately $830,000 in
2006, principally associated with the Company’s patent arbitration proceeding
and associated merger discussions with R2 Technology, Inc. The arbitration
proceeding was concluded in April 2006.
Marketing
and Sales. Marketing
and sales expense for the year ended December 31, 2006 increased by $1,082,030
or 13.3%, from $8,146,850 in 2005 to $9,228,881 in 2006. The increase in
marketing and sales expense for the year ended 2006, primarily results from
the
actions taken by the new Company management to revamp the direct sales
organization including the hiring of highly experienced healthcare sales
professionals, development of channel partners and lead generation programs
and
the incurrence of approximately $565,000 for
the
re-branding and repositioning of the Company. The increase in marketing and
sales expense in 2006, also includes employee bonuses of $266,000 and stock
based compensation expense in the amount of approximately $245,000 due to the
impact of SFAS 123R.
Interest
Expense.
Net
interest expense for the year ended December 31, 2006 increased from $3,961
in
2005 to $199,279 in 2006. This $195,318 increase is due primarily to the
increase in loan balances for the Convertible Promissory Notes issued by the
Company during the second and third quarters of 2006.
Net
Loss.
As a
result of the foregoing and including total stock based compensation expense
of
$1,334,485 in fiscal 2006, the Company recorded a net loss of ($6,637,958)
or
($0.18) per share for the year ended December 31, 2006 on revenue of $19,721,358
compared to a net loss of ($4,758,488) or ($0.13) per share for the same period
in 2005 on revenue of $19,769,822.
Backlog. The
Company’s product backlog (excluding service and supplies) as of December 31,
2006 totaled approximately $2,566,000 as compared to $788,000 as of December
31,
2005. Backlog as of any particular period should not be relied upon as
indicative of the Company’s net revenues for any future period.
Year
Ended December 31, 2005 compared to Year Ended December 31,
2004
Revenue.
Revenue
from the Company’s CAD and medical imaging products for the year ended December
31, 2005 were $19,769,822, compared with sales of CAD and medical imaging
products for the year ended December 31, 2004 of $23,308,462. The sales decrease
during 2005 was primarily due to a shift in customer demand towards more
affordable CAD systems, which resulted in increased sales of the Company’s lower
priced SecondLook®
300 and
200 products lines, from 106 units sold in 2004 to 165 units sold in 2005,
rather than sales of its higher priced SecondLook
700
systems, which decreased from 139 units sold in 2004 to 45 units sold in 2005,
that the Company had anticipated and resulted in an overall decrease of
approximately $3,200,000 in its film-based analog products in 2005. The Company
believed that sales of its lower priced SecondLook 300 would continue to
increase in 2006. In addition, price competition was a factor in the second
quarter of 2005 as the Company’s principal competitor lowered sale prices of its
products to a level that was either the same as or, in certain cases, lower
than
prices charged by the Company for its comparable systems. In 2005 the Company
reduced gross sales by approximately $274,000 for rebates related to sales
granted by it to certain customers to help offset increased competition from
its
principal competitor.
Furthermore,
in the third quarter of 2005 a major clinical study was published in the
New
England Journal of Medicine,
comparing the benefits of film-based and digital mammography. The study results
revealed, among other findings, that digital mammography showed superior
performance in detecting cancers in dense breasts and for younger women. The
Company believes that the release of this study delayed capital budgeting and
purchasing decisions for enough film-based clinics in the final stages of CAD
acquisition to adversely impact the Company’s sales in the third quarter of
2005.
The
Company’s sales improved in the fourth quarter of 2005 over sales recorded in
the second and third quarter, as a result of the addition of sales staff and
improvements in the Company’s marketing efforts at the end of the third quarter
of 2005. Additionally, in response to the Digital Mammography Study released
in
September 2005 the Company instituted its “Gateway to Digital” marketing
program, which the Company believed had a positive impact on potential buyers.
The
table
below presents the number of units and sales attributable to different product
and service types, in 2004 and 2005:
Product
Type
|
|
2004
|
|
2005
Q1
|
|
2005
Q2
|
|
2005
Q3
|
|
2005
Q4
|
|
2005
|
|
Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Servers
|
|
|
149
|
|
|
33
|
|
|
30
|
|
|
28
|
|
|
72
|
|
|
163
|
|
Additional
Device System Licenses
|
|
|
50
|
|
|
14
|
|
|
16
|
|
|
15
|
|
|
5
|
|
|
50
|
|
Total
Digital
|
|
|
199
|
|
|
47
|
|
|
46
|
|
|
43
|
|
|
77
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SL700
/500 /400 /402
|
|
|
139
|
|
|
25
|
|
|
5
|
|
|
8
|
|
|
7
|
|
|
45
|
|
SL300/200
|
|
|
106
|
|
|
33
|
|
|
45
|
|
|
25
|
|
|
61
|
|
|
164
|
|
TotalLook
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
5
|
|
|
5
|
|
ClickCAD
|
|
|
21
|
|
|
18
|
|
|
15
|
|
|
6
|
|
|
3
|
|
|
42
|
|
ClickCAD
Procedure Keys
|
|
|
1
|
|
|
9
|
|
|
10
|
|
|
17
|
|
|
29
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excludes
Radiologists review stations and medical digitizers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Servers
|
|
|
5,630,652
|
|
|
1,140,350
|
|
|
944,700
|
|
|
908,072
|
|
|
2,517,401
|
|
|
5,510,523
|
|
Additional
Device System Licenses
|
|
|
815,400
|
|
|
217,250
|
|
|
257,900
|
|
|
239,300
|
|
|
78,400
|
|
|
792,850
|
|
Total
Digital
|
|
|
6,446,052
|
|
|
1,357,600
|
|
|
1,202,600
|
|
|
1,147,372
|
|
|
2,595,801
|
|
|
6,303,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SL700
/500 /400 /402
|
|
|
10,633,282
|
|
|
2,054,985
|
|
|
439,400
|
|
|
379,885
|
|
|
311,610
|
|
|
3,185,880
|
|
SL300/200
|
|
|
3,209,380
|
|
|
1,523,785
|
|
|
1,756,290
|
|
|
1,144,685
|
|
|
2,282,766
|
|
|
6,707,526
|
|
TotalLook
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
151,353
|
|
|
151,353
|
|
ClickCAD
|
|
|
98,250
|
|
|
111,200
|
|
|
101,650
|
|
|
85,000
|
|
|
110,000
|
|
|
407,850
|
|
Viewers
/ Options
|
|
|
518,484
|
|
|
333,362
|
|
|
209,615
|
|
|
83,480
|
|
|
134,494
|
|
|
760,951
|
|
Total
Analog
|
|
|
14,459,396
|
|
|
4,023,332
|
|
|
2,506,955
|
|
|
1,693,050
|
|
|
2,990,223
|
|
|
11,213,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digitizers
|
|
|
1,069,763
|
|
|
158,652
|
|
|
162,144
|
|
|
139,098
|
|
|
12,000
|
|
|
471,894
|
|
Supplies
& Services
|
|
|
1,333,251
|
|
|
468,023
|
|
|
359,405
|
|
|
414,284
|
|
|
539,283
|
|
|
1,780,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
$
|
23,308,462
|
|
$
|
6,007,607
|
|
$
|
4,231,104
|
|
$
|
3,393,804
|
|
$
|
6,137,307
|
|
$
|
19,769,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin.
Gross
margin as a percentage of sales, for the year ended December 31, 2005, improved
to 77% compared to 72% for the same period in 2004. The increase in the gross
margin rate was primarily due to increases in sales, as a percentage of overall
sales, of higher margin products for digital mammography. Although
there could be no assurance of its future gross margin rate, the Company
expected that continued sales of its higher margin CAD products and increasing
production economies would support gross margins at comparable levels in 2006
to
those experienced in 2005. The Company further believed that increasing sales
of
digital mammography products would contribute to increasing gross margins over
time.
Engineering
and Product Development.
Engineering and product development costs for the year ended December 31, 2005
decreased slightly to $4,785,092 from $4,832,842 in 2004. The decrease primarily
resulted from the action taken by the Company in the first quarter of 2004,
following its merger with CADx, to reduce its workforce and close its office
and
software development group located in Tampa, Florida. In connection with these
measures, the Company incurred approximately $280,000 in engineering severance
benefits and office closure expenses. Excluding
the 2004 non-recurring expenses, engineering and product development costs
increased in 2005 due to increases related to hardware engineering associated
with completion of new products which had been announced, software engineering
related to pending improved releases of the Company’s 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 for the year ended December 31, 2005 increased
by
$1,830,240 or 36%, from $5,126,110 in 2004 to $6,956,350 in 2005. The increase
in general and administrative expenses was primarily due to the increase in
legal expense, totaling approximately $2,296,000 of which approximately
$1,843,000 was principally associated with the Company’s current patent
arbitration proceeding and $453,000 was associated with merger discussions
with
its competitor. Excluding the legal expense the Company’s general and
administrative expenses for the year ended December 31, 2005 would have been
lower than the preceding year as a result of actions taken by the Company in
2005, to reduce its staff and associated expenses.
Marketing
and Sales Expenses. Marketing
and sales expenses increased from $7,083,433 in 2004 to $8,146,850 in 2005.
The
increase in marketing and sales expenses primarily resulted from the increase
in
sales force and related travel expenses and in its advertising and promotional
costs in 2005.
Interest
Expense.
Net
interest for the year ended December 31, 2005 decreased from $561,044 in 2004
to
$3,961 in 2005. The decrease in net interest expense during 2005 was primarily
due to the repayment of $3,330,000, in December 2004, that the Company had
previously borrowed from its Chairman, Mr. Robert Howard, pursuant to a
Revolving Loan and Security Agreement with Mr. Howard (the “Loan Agreement”) and
the increase in interest income earned on its cash balance.
Net
Loss.
As a
result of the foregoing, the Company recorded a net loss of ($4,758,488) or
($0.13) per share for the year ended December 31, 2005 on sales of $19,769,822,
compared to a net loss of ($828,263) or ($0.03) per share on sales of
$23,308,462 for the year ended December 31, 2004.
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
expected to be generated from continuing operations and the availability of
a
$5,000,000 credit line under the Loan Agreement with its Chairman, Mr. Robert
Howard, of which $2,741,094 was available for borrowing at December 31, 2006.
The Loan Agreement expires March 31, 2008, subject to extension by the parties,
with an agreement from Mr. Howard that he will not request repayment of the
principal balance of the note until March 31, 2008. Outstanding advances are
collateralized by substantially all of the assets of the Company and bear
interest at the prime interest rate plus 1%, (9.25% at December 31, 2006).
Mr.
Howard has also agreed that while the Loan Agreement exists he will not convert
any outstanding advances under the Loan Agreement into shares of the Company’s
common stock that would exceed the available shares for issuance defined as
the
authorized shares of the Company’s common stock less issued and outstanding
common shares less any reserved shares for outstanding convertible preferred
stock, convertible notes payable, non-employee warrants and non-employee stock
options. The Company's ability to generate cash adequate to meet its future
capital requirements 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 $979,690 to $4,069,789 at December 31, 2006 from $3,090,099
at December 31, 2005. The ratio of current assets to current liabilities at
December 31, 2006 and 2005 was 1.6 and 1.4, respectively. The increase in
working capital is primarily due to cash realized from the loan agreements
completed in the second and third quarters of 2006 offset by the net loss of
$6,637,958 during 2006.
Net
cash
used for operating activities for the year ended December 31, 2006 was
$4,411,002 compared to $1,296,584 used for the same period in 2005. The cash
used for the year ended December 31, 2006 resulted from the net loss of
$6,637,958, an increase in inventory of $514,528 and other current assets of
$43,590, and a decrease in accounts payable of $1,693,466 offset by a decrease
in accounts receivable of $275,214 and increases in accrued expenses and
deferred revenue totaling $1,146,021, plus non-cash depreciation, amortization,
disposal of assets and interest expense associated with discount on convertible
loans payable of $1,722,820 and stock based compensation of
$1,334,485.
The
net
cash used for investing activities for the year ended December 31, 2006 was
$1,175,860 compared to $1,056,405 used for the same period in 2005. The cash
used in investing activities in 2006 included the addition of $1,175,860 for
furniture, computer equipment, software, and marketing assets.
Net
cash
provided by financing activities for the year ended December 31, 2006 was
$4,605,403, compared to net cash used for financing activities of $1,050,311
for
the same period in 2005. The increase in cash provided by financing activities
during 2006 was due primarily to proceeds realized from the issuance of
$3,500,000 of Convertible Promissory Notes, the borrowing of $2,000,000 pursuant
to the Loan Agreement with Mr. Howard, and cash received from the issuance
of
common stock relating to exercise of stock options in the amount of $605,403,
offset by payment of the note payable associated with the CADx acquisition
in
the amount of $1,500,000.
On
September 12, 14, and 19, 2006 the Company entered into Note Purchase Agreements
with respect to the purchase of a total of $3,000,000 principal amount of 7.25%
Convertible Promissory Notes (“Notes”) by a total of ten accredited investors
including the following: Mr. Robert Howard (as to $1,350,000), Mr. James Harlan
(as to $300,000), Mr. Steven Rappaport (as to $300,000) Dr. Elliott Sussman
(as
to $100,000) and Dr. Lawrence Howard, the emancipated adult son of our Chairman
of the Board (as to $100,000), all of whom are currently directors of the
Company, a total of $700,000 from two non-affiliated investors, and $50,000
by
each of the following employees and/or executive officers of the Company: Mr.
Jeffrey Barnes, Ms. Stacey Stevens and Ms. Annette Heroux. The Notes are due
two
years from the date of issue. Interest on the Notes is payable on the due date.
Principal and accrued and unpaid interest under the Notes can be converted
by
each holder into shares of the Company’s common stock at $1.70 per share.
Payment of principal under the Notes can be accelerated by the holder if the
Company files for, or is found by a court to be, bankrupt or insolvent and
the
Company can prepay the Notes prior to the due date. The Notes issued on
September 19, 2006 in the aggregate principal amount of $1,000,000 were issued
with a conversion price below the market price of $1.80 per share and the
Company recorded a discount to Notes Payable of $58,824 to reflect the
beneficial conversion feature. The Notes are recorded on the balance sheet
at
their face value of $948,529, net of the discount at December 31, 2006 of
$51,471.
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 of an aggregate of $300,000 principal amount of a 7% Convertible
Note
of the Company due June 20, 2008 (the “Ferry Note”) at a purchase price of
$300,000. Interest on the Ferry Note is payable on the due date. Principal
and
accrued and unpaid interest under the Ferry Note can be converted by the holder
into shares of the Company’s common stock at $1.50 per share. Payment of
principal under the Ferry Note can be accelerated by the holder if the Company
files for, or is found by a court to be, bankrupt or insolvent and the Company
can prepay the Ferry Note prior to the due date. Mr. Ferry has also agreed
that
he will not convert any principal amount or accrued and unpaid interest
outstanding under the Ferry Note into shares of the Company’s common stock that
would exceed the number of shares of the Company’s common stock then available
for issuance defined as the authorized shares of the Company’s common stock less
issued and outstanding common shares less any reserved shares for outstanding
convertible preferred stock, non-employee warrants and non-employee stock
options.
On
June
19, 2006, the Company and Dr. Lawrence Howard, who is currently a Director
of
the Company, entered into a Note Purchase Agreement with respect to the purchase
by Dr. Howard 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 is payable on the due date. Principal
and
accrued and unpaid interest under the Howard Note can be converted by the holder
into shares of the Company’s common stock at $1.50 per share. Payment of
principal under the Howard Note can be accelerated by the holder if the Company
files for, or is found by a court to be, bankrupt or insolvent and the Company
can prepay the Howard Note prior to the due date. Dr. Howard has also agreed
that he will not convert any principal amount or accrued and unpaid interest
outstanding under the Howard Note into shares of the Company’s common stock that
would exceed the number of shares of the Company’s common stock then available
for issuance defined as the authorized shares of the Company’s common stock less
issued and outstanding common shares less any reserved shares for outstanding
convertible preferred stock, non-employee warrants and non-employee stock
options.
On
June
13, 2006, the Company borrowed $2,000,000 from Mr. Robert Howard pursuant to
the
Loan Agreement. At December 31, 2006, $2,258,906 was owed by the Company to
Mr.
Howard pursuant to the Loan Agreement with $2,741,094 available for future
borrowings under the Loan Agreement.
The
following table summarizes as of December 31, 2006, 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
|
|
Convertible
revolving loans payable to related party
|
|
$
|
2,258,906
|
|
$
|
-
|
|
$
|
2,258,906
|
|
$
|
-
|
|
$
|
-
|
|
Convertible
loan payable to related parties
|
|
$
|
2,784,559
|
|
$
|
-
|
|
$
|
2,784,559
|
|
$
|
-
|
|
$
|
-
|
|
Convertible
loans payable to investors
|
|
$
|
663,970
|
|
$
|
-
|
|
$
|
663,970
|
|
$
|
-
|
|
$
|
-
|
|
Note
Payable
|
|
$
|
375,000
|
|
$
|
375,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Lease
Obligations
|
|
$
|
2,544,863
|
|
$
|
548,441
|
|
$
|
1,180,788
|
|
$
|
815,634
|
|
$
|
-
|
|
Other
Long-Term Obligations
|
|
$
|
414,800
|
|
$
|
292,800
|
|
$
|
122,000
|
|
$
|
-
|
|
$
|
-
|
|
Interest
Obligation*
|
|
$
|
436,750
|
|
$
|
8,743
|
|
$
|
428,007
|
|
$
|
-
|
|
$
|
-
|
|
Total
Contractual Obligations
|
|
$
|
9,478,848
|
|
$
|
1,224,984
|
|
$
|
7,438,230
|
|
$
|
815,634
|
|
$
|
-
|
|
*
Represents interest under the short term note payable agreement based on the
rate at December 31, 2006 of 9.25%. The Company’s interest obligation relating
to the Loan Agreement with Mr. Howard, its Chairman, is not included in this
table.
Effect
of New Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48,
"Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109" (FIN 48), which seeks to reduce the significant diversity in practice
associated with certain aspects of measurement and recognition in accounting
for
income taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return, and also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The provisions of FIN 48 are effective
for
fiscal years beginning after December 15, 2006. Upon adoption, the cumulative
effect of any changes in net assets resulting from the application of FIN 48
will be recorded as an adjustment to retained earnings. The Company does not
expect that FIN 48 will have a material impact on its financial position and
results of operations.
In
June
2006, the FASB ratified the consensus reached by the Emerging Issues Task Force
on Issue No. 06-3, “How Sales Taxes Collected From Customers and Remitted
to Governmental Authorities Should Be Presented in the Income Statement”
(“EITF 06-3”). EITF 06-3 requires a company to disclose its accounting
policy (i.e. gross vs. net basis) relating to the presentation of taxes within
the scope of EITF 06-3. Furthermore, for taxes reported on a gross basis,
an enterprise should disclose the amounts of those taxes in interim and annual
financial statements for each period for which an income statement is presented.
The guidance is effective for all periods beginning after December 15,
2006. The Company does not expect the adoption of this guidance to have a
material impact in its consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”).
SAB 108 provides interpretive guidance on how the effects of prior-year
uncorrected misstatements should be considered when quantifying misstatements
in
the current year financial statements. SAB 108 requires registrants to quantify
misstatements using both an income statement (“rollover”) and balance sheet
(“iron curtain”) approach and evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. If prior year errors that had been previously
considered immaterial now are considered material based on either approach,
no
restatement is required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered. If prior
years are not restated, the cumulative effect adjustment is recorded in opening
accumulated earnings (deficit) as of the beginning of the fiscal year of
adoption. SAB 108 is effective for fiscal years ending on or after
November 15, 2006, with earlier adoption encouraged. The Company adopted
the Bulletin during 2006. The adoption did not have any effect on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure of fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements and accordingly, does not require
any
new fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Company has
not determined the impact of the adoption of SFAS 157 in its consolidated
financial statements.
Item
7A. Quantitative
and Qualitative Disclosures about Market Risk.
Not
applicable
Item
8. Financial
Statements and Supplementary Data.
See
Financial Statements and Schedule attached hereto.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item
9A. 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 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.
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-(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 iCAD, Inc. has assessed the Company's internal control over
financial reporting to be effective as of December 31, 2006.
The
assessment of the Company’s management of the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2006 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
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting appearing under Item 9A
of
iCAD, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31,
2006, that iCAD, Inc. and subsidiaries (the “Company”) maintained effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’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. Our responsibility is to express
an
opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and 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 the 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 policies or procedures may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria established in
Internal
Control - Integrated Framework
issued
by COSO. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006
based on the COSO criteria.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the
Company as of December 31, 2006 and 2005 and the related consolidated
statements of operations, stockholders’ equity and cash flows for each of the
three years in the period ended December 31, 2006 and our report dated March
22,
2007 expressed an unqualified opinion thereon.
/s/
BDO
Seidman, LLP
Boston,
Massachusetts
March
22,
2007
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, 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.
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 2007 Definitive Proxy Statement
to be filed with respect to our 2007 Annual Meeting of Shareholders (“2007
Definitive Proxy Statement”) to be filed not later than 120 days following
the close of the fiscal year ended December 31, 2006.
The
Company 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 2007 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 2007 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 2007 Definitive Proxy Statement.
Item
14. Principal
Accounting Fees and Services.
The
information required under this item is hereby incorporated by reference from
our 2007 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 51.
|
|
ii.
|
Financial
Statement Schedule - See Index on page 51. 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]
|
|
3(a)
|
Certificate
of Incorporation of the Registrant filed with the Secretary of State
of
the State of Delaware on February 24, 1984 [incorporated by reference
to
Exhibit 3.1 to the Registrant's Registration Statement on Form S-18
(Commission File No. 2-94097 NY), filed on October 31,
1984]
|
|
3(b)
|
Certificate
of Amendment of Certificate of Incorporation of the Registrant, filed
with
the Secretary of State of the State of Delaware on May 31, 1984
[incorporated by reference to Exhibit 3.1(a) to the Registrant's
Registration Statement on Form S-18 (Commission File No. 2-94097-NY),
filed on October 31, 1984]
|
|
3(c)
|
Certificate
of Amendment of Certificate of Incorporation of the Registrant filed
with
the Secretary of State of the State of Delaware on August 22, 1984
[incorporated by reference to Exhibit 3.1(b) to the Registrant's
Registration Statement on Form S-18 (Commission File No. 2-94097-NY),
filed on October 31, 1984].
|
|
3(d)
|
Certificate
of Amendment of Certificate of Incorporation of the Registrant filed
with
the Secretary of State of the State of Delaware on October 22, 1987
[incorporated by reference to Exhibit 3(d) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988].
|
|
3(e)
|
Certificate
of Amendment of Certificate of Incorporation of the Registrant filed
with
the Secretary of State of the State of Delaware on September 28,
1999
[incorporated by reference to Exhibit 3(d) to the Registrant’s Annual
Report on Form 10-K for the year ended December 31,
2001].
|
|
3(f)
|
Certificate
of Amendment of Certificate of Incorporation of the Registrant filed
with
the Secretary of State of the State of Delaware on June 28, 2002
[incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly
report on Form 10-Q for the quarter ended June 30,
2002].
|
|
3(g)
|
Amended
By-laws of Registrant [incorporated by reference to Exhibit 3 to
the
Registrant's Quarterly report on Form 10Q for the quarter ended March
31,
2006].
|
|
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)
|
Certificate
of Designation of 7% Series A Convertible Preferred Stock dated December
22, 1999. [incorporated by reference to Exhibit 10(i) to the Registrant’s
Report on Form 10-K for the year ended December 31, 1999].
|
|
10(f)
|
Certificate
of Designation of 7% Series B Convertible Preferred Stock dated October
16, 2000 [incorporated by reference to Exhibit 10(j) to the Registrant’s
Report on Form 10-K for the year ended December 31, 2000].
|
|
10(g)
|
Separation
agreement dated September 24, 2002 between the Registrant and W.
Kip
Speyer [incorporated by reference to Exhibit 10.1 to the Registrant’s
quarterly report on Form 10-Q for the quarter ended September 30,
2002].*
|
|
10(h)
|
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(i)
|
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(j)
|
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(k)
|
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(l)
|
License
Agreement between Scanis, Inc. and the Registrant dated February
18, 2003
[incorporated by reference to Exhibit 10(m) to the Registrant’s Report on
Form 10-K for the year ended December 31,
2002].**
|
|
10(m)
|
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(n)
|
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(o)
|
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(p)
|
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(q)
|
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(r)
|
Separation
agreement dated February 16, 2005 between the Registrant and Steven
Rogers
[incorporated by reference to Exhibit 10.1 to the Registrant’s report on
Form 8-K filed with the SEC on February 23,
2005].*
|
|
10(s)
|
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(t)
|
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(u)
|
Lease
Agreement dated October 31, 2002 between the Registrant and 4 Townsend
West, LLC of Nashua, NH [incorporated by reference to Exhibit 10(u)
to the
Registrant’s Report on Form 10-K for the year ended December 31,
2005].
|
|
10(v)
|
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(w)
|
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(x)
|
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(y)
|
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(z)
|
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(aa)
|
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(bb)
|
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(cc)
|
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(dd)
|
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(ee)
|
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(ff)
|
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(gg)
|
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(hh)
|
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(ii)
|
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(jj)
|
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(kk)
|
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(ll)
|
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(mm)
|
Lease
Agreement dated November 22, 2006 between the Registrant and Gregory
D.
Stoyle and John J. Flatley, Trustees of the 1993 Flatley Family Trust,
of
Nashua, NH.
|
|
10(nn)
|
Employment
Agreement dated October 20, 2006 between the Registrant and Jonathan
Go.*
|
|
10(oo)
|
Option
Agreement dated September 8, 2006 between the Registrant and Jonathan
Go.*
|
|
23
|
Consent
of BDO Seidman, LLP.
|
|
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.
**
Portions of these documents were omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment of the omitted portions.
(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 22, 2007
|
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/
Robert Howard
|
|
Chairman
of the
|
|
Robert
Howard
|
|
Board,
Director
|
March
22, 2007
|
|
|
|
|
/s/
Kenneth Ferry
|
|
President,
Chief Executive
|
|
Kenneth
Ferry
|
|
Officer,
Director (Principal
|
March
22, 2007
|
|
|
Executive
Officer)
|
|
|
|
|
|
/s/
Darlene M. Deptula-Hicks
|
|
Vice
President of Finance,
|
|
Darlene
M. Deptula-Hicks
|
|
Chief
Financial Officer, Treasurer
|
|
|
|
(Principal
Accounting Officer)
|
March
22, 2007
|
|
|
|
|
/s/
James Harlan
|
|
Director
|
March
22, 2007
|
James
Harlan
|
|
|
|
|
|
|
|
/s/
Maha Sallam
|
|
Director
|
March
22, 2007
|
Maha
Sallam, PhD
|
|
|
|
|
|
|
|
/s/
Elliot Sussman
|
|
Director
|
March
22, 2007
|
Elliot
Sussman, M.D.
|
|
|
|
|
|
|
|
/s/
George Farley
|
|
Director
|
March
22, 2007
|
George
Farley
|
|
|
|
|
|
|
|
/s/
Lawrence Howard
|
|
Director
|
March
22, 2007
|
Lawrence
Howard, M.D.
|
|
|
|
|
|
|
|
/s/
Rachel Brem
|
|
Director
|
March
22, 2007
|
Rachel
Brem, M.D.
|
|
|
|
|
|
|
|
/s/
Steven Rappaport
|
|
Director
|
March
22, 2007
|
Steven
Rappaport
|
|
|
|
INDEX
TO FINANCIAL STATEMENTS AND SCHEDULE
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
52
|
|
|
|
|
Consolidated
Balance Sheets
|
|
As
of December 31, 2006 and 2005
|
53
|
|
|
|
|
Consolidated
Statements of Operations
|
|
For
the years ended December 31, 2006,
|
|
2005
and 2004
|
54
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity
|
|
For
the years ended December 31, 2006,
|
|
2005
and 2004
|
55
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
For
the years ended December 31, 2006,
|
|
2005
and 2004
|
56
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
57-82
|
|
|
|
|
Schedule
II - Valuation and Qualifying
|
|
Accounts
and Reserves
|
83
|
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
subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2006. 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 subsidiaries
as of December 31, 2006 and 2005, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2006
in
conformity with accounting principles generally accepted in the United States
of
America.
Also,
in
our opinion, the schedule listed in the accompanying index presents fairly,
in
all material respects, the information set forth therein.
As
described in Note 7 of the Notes to the Consolidated Financial Statements,
iCAD,
Inc. adopted Statement of Financial Accounting Standard No. 123(R),
“Share-Based
Payment”,
effective January 1, 2006.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of iCAD Inc.’s internal
control over financial reporting as of December 31, 2006, 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 22, 2007 expressed an unqualified opinion thereon.
/s/
BDO
Seidman, LLP
Boston,
Massachusetts
March
22,
2007
iCAD,
INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,623,404
|
|
$
|
4,604,863
|
|
Trade
accounts receivable, net of allowance for doubtful
|
|
|
|
|
|
|
|
accounts
of $88,000 in 2006 and $450,000 in 2005
|
|
|
3,683,178
|
|
|
3,958,392
|
|
Inventory,
net
|
|
|
3,031,995
|
|
|
2,517,467
|
|
Prepaid
and other current assets
|
|
|
219,723
|
|
|
176,133
|
|
Total
current assets
|
|
|
10,558,300
|
|
|
11,256,855
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
Equipment
|
|
|
3,716,247
|
|
|
2,923,501
|
|
Leasehold
improvements
|
|
|
70,164
|
|
|
120,012
|
|
Furniture
and fixtures
|
|
|
296,170
|
|
|
149,803
|
|
Marketing
assets
|
|
|
290,282
|
|
|
114,843
|
|
|
|
|
4,372,863
|
|
|
3,308,159
|
|
Less
accumulated depreciation and amortization
|
|
|
2,269,139
|
|
|
1,523,724
|
|
Net
property and equipment
|
|
|
2,103,724
|
|
|
1,784,435
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
Deposits
|
|
|
60,444
|
|
|
-
|
|
Patents,
net of accumulated amortization
|
|
|
146,394
|
|
|
224,519
|
|
Technology
intangibles, net of accumulated amortization
|
|
|
3,731,926
|
|
|
4,348,008
|
|
Tradename,
distribution agreements and other,
|
|
|
|
|
|
|
|
net
of accumulated amortization
|
|
|
173,600
|
|
|
398,733
|
|
Goodwill
|
|
|
43,515,285
|
|
|
43,515,285
|
|
Total
other assets
|
|
|
47,627,649
|
|
|
48,486,545
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
60,289,673
|
|
$
|
61,527,835
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,557,108
|
|
$
|
4,250,574
|
|
Accrued
interest
|
|
|
221,050
|
|
|
48,167
|
|
Accrued
salaries and other expenses
|
|
|
2,547,231
|
|
|
1,868,736
|
|
Deferred
revenue
|
|
|
788,122
|
|
|
499,279
|
|
Current
maturities of notes payable
|
|
|
375,000
|
|
|
1,500,000
|
|
Total
current liabilities
|
|
|
6,488,511
|
|
|
8,166,756
|
|
|
|
|
|
|
|
|
|
Convertible
revolving loans payable to related party
|
|
|
2,258,906
|
|
|
258,906
|
|
Convertible
loans payable to related parties
|
|
|
2,784,559
|
|
|
-
|
|
Convertible
loans payable to non-related parties
|
|
|
663,970
|
|
|
-
|
|
Notes
payable, less current maturities
|
|
|
-
|
|
|
375,000
|
|
Other
long term liabilities
|
|
|
122,000
|
|
|
-
|
|
Total
liabilities
|
|
|
12,317,946
|
|
|
8,800,662
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $ .01 par value: authorized
|
|
|
|
|
|
|
|
1,000,000
shares; issued and outstanding
|
|
|
|
|
|
|
|
6,295
in 2006 and 6,374 in 2005, with an aggregate liquidation
|
|
|
|
|
|
|
|
value
of $1,660,000 and $1,739,000 plus 7% annual
|
|
|
|
|
|
|
|
dividend,
in 2006 and 2005, respectively.
|
|
|
63
|
|
|
64
|
|
Common
stock, $ .01 par value: authorized
|
|
|
|
|
|
|
|
50,000,000
shares; issued 37,290,848 in 2006
|
|
|
|
|
|
|
|
and
36,931,262 shares in 2005; outstanding
|
|
|
|
|
|
|
|
37,222,971
in 2006 and 36,863,386 shares in 2005
|
|
|
372,908
|
|
|
369,312
|
|
Additional
paid-in capital
|
|
|
132,660,347
|
|
|
130,781,430
|
|
Accumulated
deficit
|
|
|
(84,111,327
|
)
|
|
(77,473,369
|
)
|
Treasury
stock at cost (67,876 shares)
|
|
|
(950,264
|
)
|
|
(950,264
|
)
|
Total
Stockholders' equity
|
|
|
47,971,727
|
|
|
52,727,173
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
60,289,673
|
|
$
|
61,527,835
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
|
|
|
|
|
|
|
|
iCAD,
INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
|
|
For
the Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
16,807,013
|
|
$
|
17,988,827
|
|
$
|
21,975,211
|
|
Service
and supplies
|
|
|
2,914,345
|
|
|
1,780,995
|
|
|
1,333,251
|
|
Total
Revenue
|
|
|
19,721,358
|
|
|
19,769,822
|
|
|
23,308,462
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
3,136,929
|
|
|
3,814,673
|
|
|
6,021,157
|
|
Service
and supplies
|
|
|
1,153,889
|
|
|
821,384
|
|
|
512,139
|
|
Total
Cost of Revenue
|
|
|
4,290,818
|
|
|
4,636,057
|
|
|
6,533,296
|
|
Gross
margin
|
|
|
15,430,540
|
|
|
15,133,765
|
|
|
16,775,166
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Engineering
and product development
|
|
|
5,260,893
|
|
|
4,785,092
|
|
|
4,832,842
|
|
General
and administrative
|
|
|
7,379,445
|
|
|
6,956,350
|
|
|
5,126,110
|
|
Marketing
and sales
|
|
|
9,228,881
|
|
|
8,146,850
|
|
|
7,083,433
|
|
Total
operating expenses
|
|
|
21,869,219
|
|
|
19,888,292
|
|
|
17,042,385
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(6,438,679
|
)
|
|
(4,754,527
|
)
|
|
(267,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
102,963
|
|
|
127,526
|
|
|
20,145
|
|
Interest
expense (includes $197,646, ($41,094)
|
|
|
|
|
|
|
|
|
|
|
and
$287,840, respectively, to related parties)
|
|
|
(302,242
|
)
|
|
(131,487
|
)
|
|
(581,189
|
)
|
Other
expense, net
|
|
|
(199,279
|
)
|
|
(3,961
|
)
|
|
(561,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(6,637,958
|
)
|
|
(4,758,488
|
)
|
|
(828,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividends
|
|
|
116,200
|
|
|
121,730
|
|
|
133,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common stockholders
|
|
$
|
(6,754,158
|
)
|
$
|
(4,880,218
|
)
|
$
|
(961,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.18
|
)
|
$
|
(0.13
|
)
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares used in
|
|
|
|
|
|
|
|
|
|
|
computing
loss per share
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
36,911,742
|
|
|
36,627,696
|
|
|
34,057,775
|
|
See
accompanying notes to consolidated financial statements.
iCAD,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2003
|
|
|
7,435
|
|
|
74
|
|
|
33,704,809
|
|
|
337,048
|
|
|
120,395,390
|
|
|
(71,886,618
|
)
|
|
(950,264
|
)
|
|
47,895,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock pursuant to stock option plans
|
|
|
-
|
|
|
-
|
|
|
593,574
|
|
|
5,936
|
|
|
966,654
|
|
|
-
|
|
|
-
|
|
|
972,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock pursuant to exercise of warrants
|
|
|
-
|
|
|
-
|
|
|
50,000
|
|
|
500
|
|
|
124,500
|
|
|
-
|
|
|
-
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock relative to conversion of loan payable to
investor
|
|
|
-
|
|
|
-
|
|
|
70,612
|
|
|
706
|
|
|
61,432
|
|
|
-
|
|
|
-
|
|
|
62,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock relative to private offerings
|
|
|
-
|
|
|
-
|
|
|
1,962,222
|
|
|
19,622
|
|
|
8,723,828
|
|
|
-
|
|
|
-
|
|
|
8,743,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for payment of dividends to investors
|
|
|
-
|
|
|
-
|
|
|
28,953
|
|
|
289
|
|
|
132,711
|
|
|
-
|
|
|
-
|
|
|
133,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(133,000
|
)
|
|
-
|
|
|
-
|
|
|
(133,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(828,263
|
)
|
|
-
|
|
|
(828,263
|
)
|
Balance
at December 31, 2004
|
|
|
7,435
|
|
|
74
|
|
|
36,410,170
|
|
|
364,101
|
|
|
130,271,515
|
|
|
(72,714,881
|
)
|
|
(950,264
|
)
|
|
56,970,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock pursuant to stock option plans
|
|
|
-
|
|
|
-
|
|
|
293,476
|
|
|
2,935
|
|
|
487,848
|
|
|
-
|
|
|
-
|
|
|
490,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock relative to conversion of preferred stock
|
|
|
(1,061
|
)
|
|
(10
|
)
|
|
130,500
|
|
|
1,305
|
|
|
(1,295
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense related to the issuance of stock options to advisory
board
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24,333
|
|
|
-
|
|
|
-
|
|
|
24,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for payment of dividends to investors
|
|
|
-
|
|
|
-
|
|
|
97,116
|
|
|
971
|
|
|
120,759
|
|
|
-
|
|
|
-
|
|
|
121,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(121,730
|
)
|
|
-
|
|
|
-
|
|
|
(121,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,758,488
|
)
|
|
-
|
|
|
(4,758,488
|
)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
|
|
iCAD,
INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
|
|
For
the Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,637,958
|
)
|
$
|
(4,758,488
|
)
|
$
|
(828,263
|
)
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
745,415
|
|
|
579,603
|
|
|
286,500
|
|
Amortization
|
|
|
919,340
|
|
|
1,052,341
|
|
|
1,052,195
|
|
Loss
on disposal of assets
|
|
|
50,712
|
|
|
-
|
|
|
21,110
|
|
Stock
based compensation expense relative to stock options
|
|
|
1,334,485
|
|
|
24,333
|
|
|
-
|
|
Non-cash
interest expense associated with discount on convertible
|
|
|
|
|
|
|
|
|
|
|
loans
payable
|
|
|
7,353
|
|
|
-
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
275,214
|
|
|
1,047,941
|
|
|
(1,749,590
|
)
|
Inventory
|
|
|
(514,528
|
)
|
|
(1,503,661
|
)
|
|
1,109,836
|
|
Prepaid
and other current assets
|
|
|
(43,590
|
)
|
|
85,153
|
|
|
185,728
|
|
Accounts
payable
|
|
|
(1,693,466
|
)
|
|
2,244,074
|
|
|
(1,972,988
|
)
|
Accrued
interest
|
|
|
172,883
|
|
|
(622,987
|
)
|
|
337,502
|
|
Accrued
expenses
|
|
|
684,295
|
|
|
495,545
|
|
|
(615,285
|
)
|
Deferred
revenue
|
|
|
288,843
|
|
|
59,562
|
|
|
223,217
|
|
Total
adjustments
|
|
|
2,226,956
|
|
|
3,461,904
|
|
|
(1,121,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used by operating activities
|
|
|
(4,411,002
|
)
|
|
(1,296,584
|
)
|
|
(1,950,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Additions
to patents, technology and other
|
|
|
(60,444
|
)
|
|
-
|
|
|
(1,446
|
)
|
Additions
to property and equipment
|
|
|
(1,115,416
|
)
|
|
(1,056,405
|
)
|
|
(347,680
|
)
|
Acquisitions,
net of cash acquired
|
|
|
-
|
|
|
-
|
|
|
(123,512
|
)
|
Net
cash used by investing activities
|
|
|
(1,175,860
|
)
|
|
(1,056,405
|
)
|
|
(472,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
|
|
605,403
|
|
|
490,783
|
|
|
9,903,178
|
|
Proceeds
from revolving convertible notes payable
|
|
|
2,000,000
|
|
|
-
|
|
|
-
|
|
Proceeds
from convertible notes payable from related parties
|
|
|
2,800,000
|
|
|
(41,094
|
)
|
|
(3,330,000
|
)
|
Proceeds
from convertible notes payable from non-related parties
|
|
|
700,000
|
|
|
-
|
|
|
-
|
|
Payment
of note payable
|
|
|
(1,500,000
|
)
|
|
(1,500,000
|
)
|
|
(1,233,390
|
)
|
Payment
of convertible subordinated debentures
|
|
|
-
|
|
|
-
|
|
|
(10,000
|
)
|
Net
cash provided (used) by financing activities
|
|
|
4,605,403
|
|
|
(1,050,311
|
)
|
|
5,329,788
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and equivalents
|
|
|
(981,459
|
)
|
|
(3,403,300
|
)
|
|
2,907,112
|
|
Cash
and equivalents, beginning of year
|
|
|
4,604,863
|
|
|
8,008,163
|
|
|
5,101,051
|
|
Cash
and equivalents, end of year
|
|
$
|
3,623,404
|
|
$
|
4,604,863
|
|
$
|
8,008,163
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
111,493
|
|
$
|
764,875
|
|
$
|
240,030
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
items from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Dividends
payable with Common Stock
|
|
$
|
116,200
|
|
$
|
121,730
|
|
$
|
133,000
|
|
Value
of beneficial conversion discount
|
|
$
|
51,471
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
(1) |
Summary
of Significant Accounting
Policies
|
(a)
Nature of Operations and Use of Estimates
iCAD,
Inc. and its subsidiaries (the "Company" or “iCAD”) designs, develops,
manufactures and markets Computer-Aided
Detection (CAD) solutions that enable healthcare professionals to better serve
patients by identifying pathologies and pinpointing cancer earlier. Performed
as
an adjunct to mammography screening, CAD has quickly become the standard of
care, helping radiologists improve clinical outcomes while enhancing workflow.
The
Company considers itself a single reportable business segment. The Company
sells
its products throughout the world through various distributors, resellers and
systems integrators. See Note 8 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
inventory, equipment and intangible assets.
(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.
(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
and deposits, and other money market instruments with original maturities of
90
days or less, which are unrestricted as to withdrawal.
iCAD,
INC. AND SUBSIDIARIES
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, accrued expenses, notes payable and
other convertible debt approximated fair value as of December 31, 2006 and
2005.
(e)
Accounts Receivable and Allowance for Doubtful Accounts
Accounts
receivable are customer obligations due under normal trade terms. The Company
performs continuing credit evaluations of its customers' financial condition
and
generally does not require collateral.
The
Company’s senior management reviews accounts receivable on a periodic basis to
determine if any receivables will potentially be uncollectible. The Company
includes any accounts receivable balances that are determined to be
uncollectible, along with a general reserve for estimated probable losses based
on historical experience, in its overall allowance for doubtful accounts. After
all attempts to collect a receivable have failed, the receivable is written
off
against the allowance. Based on the information available to the Company, it
believes the allowance for doubtful accounts as of December 31, 2006 is
adequate. However, actual write-offs might exceed the recorded allowance.
(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 raw material
and finished goods of approximately $1,719,000 and $1,313,000, respectively,
for
2006, and raw material and finished goods of approximately $1,245,000 and
$1,272,000, respectively, for 2005.
The
Company regularly reviews inventory quantities on hand and records a reserve
for
excess and/or obsolete inventory primarily based upon the estimated utility
of
its inventory as well as other factors.
(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.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(1)
|
Summary
of Significant Accounting Policies (continued)
|
(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 acquisition of ISSI in June 2002 and CADx in December 2003.
These assets are amortized on a straight-line basis over their estimated useful
lives of 2 to 10 years.
For
the years ended December 31,
|
|
2006
|
|
2005
|
|
Weighted
Average
Useful
Life
|
|
Gross
carrying amount:
|
|
|
|
|
|
|
|
Patents
|
|
$
|
390,624
|
|
$
|
390,624
|
|
|
5
years
|
|
Technology
|
|
|
6,160,822
|
|
|
6,160,822
|
|
|
10
years
|
|
Trade
name
|
|
|
248,000
|
|
|
248,000
|
|
|
10
years
|
|
Distribution
agreements
|
|
|
601,000
|
|
|
867,000
|
|
|
2-3
years
|
|
Total
amortizable intangible assets
|
|
$
|
7,400,446
|
|
$
|
7,666,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
|
|
|
|
|
|
|
|
Patent
|
|
|
244,230
|
|
|
166,105
|
|
|
|
|
Technology
|
|
|
2,428,896
|
|
|
1,812,814
|
|
|
|
|
Trade
name
|
|
|
74,400
|
|
|
49,600
|
|
|
|
|
Distribution
agreements
|
|
|
601,000
|
|
|
666,667
|
|
|
|
|
Total
Accumulated amortization
|
|
$
|
3,348,526
|
|
$
|
2,695,186
|
|
|
|
|
Amortizable
intangible assets, net
|
|
$
|
4,051,920
|
|
$
|
4,971,260
|
|
|
|
|
Amortization
expense related to intangible assets was approximately $919,000, $1,052,000
and
$1,052,000 for the years ended December 31, 2006, 2005, and 2004, respectively.
Estimated amortization of the Company’s intangible assets for the next five
fiscal years is as follows:
Estimated
amortization expense
for
the years ended December 31:
|
|
2007
|
$
699,000
|
2008
|
699,000
|
2009
|
641,000
|
2010
|
641,000
|
2011
|
641,000
|
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(1) |
Summary
of Significant Accounting Policies (continued)
|
(i)
Goodwill
The
Company follows the provision of Financial Accounting Standards Board (FASB)
issued SFAS No. 141, “Business Combinations” and No. 142, “Goodwill and Other
Intangible Assets”. 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.
Goodwill
arose in connection with the ISSI acquisition in June 2002 and with the CADx
acquisition in December 2003.
(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 Financial Accounting Standards Board’s Emerging
Issues Task Force Issue 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables,
EITF
00-21 and Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements.
iCAD’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. iCAD 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.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(1) |
Summary
of Significant Accounting Policies (continued)
|
(j)
Revenue Recognition (continued)
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.
(k)
Cost of Revenue
|
Cost
of revenue consists of the costs of products purchased for resale,
cost
relating to service including contracts sold to maintain equipment
after
the warranty period, any associated inbound and outbound freight
and duty,
any costs associated with manufacturing, warehousing, material movement
and inspection, and depreciation and amortization of capitalized
equipment.
|
The
Company provides for the estimated cost of standard product warranty against
defects in material and workmanship based on historical warranty trends in
the
volume of product returns during the warranty period. The Company established
a
warranty reserve in the amount of $299,034 in 2006 and $150,000 in
2005.
Warranty
provisions and claims for the years ended December 31, 2006 and 2005, were
as
follows:
|
|
2006
|
|
2005
|
|
Beginning
balance
|
|
$
|
150,000
|
|
$
|
150,000
|
|
Warranty
provision
|
|
|
149,034
|
|
|
295,419
|
|
Usage
|
|
|
(
-0-
|
)
|
|
(295,419
|
)
|
Ending
balance
|
|
$
|
299,034
|
|
$
|
150,000
|
|
(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, 2006, 2005 and 2004 was $660,000, $790,000 and
$620,000, respectively.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(1) |
Summary
of Significant Accounting Policies (continued)
|
(o)
Net 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. Conversion of the subordinated debentures and other
convertible debt and preferred stock and assumed exercise of options and
warrants are not included in the calculation of diluted loss per share since
the
effect would be antidilutive. Accordingly, basic and diluted net loss per share
do not differ for any period presented. The following table summarizes the
common stock equivalent of securities that were outstanding as of December
31,
2006, 2005 and 2004, but not included in the calculation of diluted net loss
per
share because such shares are antidilutive:
|
|
2006
|
|
2005
|
|
2004
|
|
Common
stock options
|
|
|
5,628,730
|
|
|
4,249,763
|
|
|
3,914,511
|
|
Common
stock warrants
|
|
|
1,003,311
|
|
|
1,003,311
|
|
|
1,010,311
|
|
Convertible
revolving Promissory Note
|
|
|
1,467,075
|
|
|
256,410
|
|
|
54,557
|
|
Convertible
loans payable
|
|
|
2,098,039
|
|
|
-
|
|
|
-
|
|
Convertible
Series A Preferred Stock
|
|
|
515,000
|
|
|
515,000
|
|
|
615,000
|
|
Convertible
Series B Preferred Stock
|
|
|
572,500
|
|
|
612,000
|
|
|
642,500
|
|
|
|
|
11,284,655
|
|
|
6,636,484
|
|
|
6,236,879
|
|
(p)
Income Taxes
The
Company follows the liability method under SFAS No. 109, “Accounting for Income
Taxes”. 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, 2006 and 2005 as it is more likely than
not
that the deferred tax asset will not be realized.
(q)
Stock-Based Compensation
Effective
January 1, 2006, the Company adopted Statement No. 123R, Share-Based
Payment
(“SFAS 123R”), which requires companies to measure and recognize compensation
expense for all share-based payment awards made to employees and directors
based
on estimated fair values. SFAS 123R is being applied on the modified
prospective basis. Prior to the adoption of SFAS 123R, the Company accounted
for
its stock-based compensation plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,
as provided by SFAS 123, “Accounting for Stock Based Compensation” (“SFAS 123”)
and accordingly, recognized no compensation expense related to the stock-based
plans as stock options exercise prices granted to employees and directors were
equal to the fair market value of the underlying stock at the date of grant.
In
March 2005,
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(1)
|
Summary
of Significant Accounting Policies (continued)
|
(q)
Stock-Based Compensation (continued)
the
SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R.
The Company has applied the provisions of SAB 107 in its adoption of SFAS
123R.
Under
the modified prospective approach, SFAS 123R applies to new awards and to awards
that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
cost recognized for fiscal year 2006 also includes compensation cost for all
share-based payments granted prior to, but not yet vested on, January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions
of SFAS 123, and compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant-date fair value estimated
in
accordance with the provisions of SFAS 123R. Prior periods were not restated
to
reflect the impact of adopting the new standard.
SFAS
123R requires the presentation of the pro forma information for the comparative
periods prior to adoption as if the Company accounted for stock-based
compensation in accordance with SFAS 123 in fiscal 2005 and 2004. The following
table illustrates the pro forma effect on net loss and net loss per
share:
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Net
loss available to common stockholders as reported
|
|
$
|
(4,880,218
|
)
|
$
|
(961,263
|
)
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based employee compensation determined under fair value
method
for all awards
|
|
$
|
(3,076,105
|
)
|
$
|
(439,458
|
)
|
Pro
forma net loss
|
|
$
|
(7,956,323
|
)
|
$
|
(1,400,721
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.13
|
)
|
$
|
(0.03
|
)
|
Pro
forma
|
|
$
|
(0.22
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
For
the
2005 and 2004 periods, 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
on
common shares; expected volatility of 78.8%; risk-free interest rate of 4.04%
and an average expected life of 5 years. The weighted-average assumptions used
for grants in 2004 were: no dividends paid on common shares; expected volatility
of 78.9%; risk-free interest rate of 3.21% and expected lives of 4
years.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(1)
|
Summary
of Significant Accounting Policies (continued)
|
(q)
Stock-Based Compensation (continued)
The
weighted average grant-date fair value per share of options granted during
the
year was $1.65 for 2005 and $2.59 for 2004.
In
December 2005, the Company’s Board of Directors approved accelerating the
vesting of unvested, “out-of-the-money” stock options to purchase approximately
836,000 shares of the Company’s common stock awarded to employees, officers and
directors under its stock option plans. The accelerated options have exercise
prices ranging from $1.64 to $5.28 and a weighted average exercise price of
$3.93. The acceleration was unconditional to the employees, officers and
directors and was applied to all outstanding, unvested options priced above
the
closing price of iCAD’s common stock on December 30, 2005. Approximately
$1,362,000 of the 2005 pro forma expense listed above relates to options
included in this acceleration group.
Commencing
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:
|
a.
|
The
number of shares of common stock subject to new options equal the
same
number of shares subject to the cancelled eligible
options.
|
|
b.
|
The
vesting schedule of the cancelled eligible options 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 equal $2.07 per share, subject
to
adjustment for any stock splits, stock dividends and similar
events.
|
|
d.
|
The
new options have a term of two
years.
|
|
e.
|
The
new options are “non qualified options” and not “incentive stock options”,
regardless of whether any of the cancelled eligible options were
incentive
stock options or non-qualified stock
options.
|
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(1)
|
Summary
of Significant Accounting Policies (continued)
|
(q)
Stock-Based Compensation (continued)
|
f.
|
The
new options otherwise contain other terms and conditions that are
substantially the same as those in the above mentioned stock option
plans,
as the case may be, that governed the eligible plan options surrendered.
|
This
offer to exchange was conditioned upon stockholder approval of the exchange
offer which was obtained at the Company’s 2006 Annual Meeting of Stockholders
held on October 20, 2006. Subject to the terms and conditions of the offer,
on
October 23, 2006, the Company granted new two-year options to purchase a total
of 1,159,750 shares of its common stock at $2.07 per share in exchange for
the
eligible options tendered for exchange. 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.
(r)
Recently Issued Accounting Standards
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48,
"Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109" (FIN 48), which seeks to reduce the significant diversity in practice
associated with certain aspects of measurement and recognition in accounting
for
income taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return, and also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The provisions of FIN 48 are effective
for
fiscal years beginning after December 15, 2006. Upon adoption, the cumulative
effect of any changes in net assets resulting from the application of FIN 48
will be recorded as an adjustment to retained earnings. The Company does not
expect that FIN 48 will have a material impact on its financial position and
results of operations.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(1)
|
Summary
of Significant Accounting Policies (continued)
|
(r)
Recently Issued Accounting Standards (continued)
In
June
2006, the FASB ratified the consensus reached by the Emerging Issues Task Force
on Issue No. 06-3, “How Sales Taxes Collected From Customers and Remitted
to Governmental Authorities Should Be Presented in the Income Statement”
(“EITF 06-3”). EITF 06-3 requires a company to disclose its accounting
policy (i.e. gross vs. net basis) relating to the presentation of taxes within
the scope of EITF 06-3. Furthermore, for taxes reported on a gross basis,
an enterprise should disclose the amounts of those taxes in interim and annual
financial statements for each period for which an income statement is presented.
The guidance is effective for all periods beginning after December 15,
2006. The Company does not expect the adoption of this guidance to have a
material impact in its consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”).
SAB 108 provides interpretive guidance on how the effects of prior-year
uncorrected misstatements should be considered when quantifying misstatements
in
the current year financial statements. SAB 108 requires registrants to quantify
misstatements using both an income statement (“rollover”) and balance sheet
(“iron curtain”) approach and evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. If prior year errors that had been previously
considered immaterial now are considered material based on either approach,
no
restatement is required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered. If prior
years are not restated, the cumulative effect adjustment is recorded in opening
accumulated earnings (deficit) as of the beginning of the fiscal year of
adoption. SAB 108 is effective for fiscal years ending on or after
November 15, 2006, with earlier adoption encouraged. The Company adopted
the Bulletin during 2006. The adoption did not have any effect on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure of fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements and accordingly, does not require
any
new fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Company has
not determined the impact of the adoption of SFAS 157 in its consolidated
financial statements.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(2) |
Restructuring
Charges
|
Closure
of Tampa Office
During
the first quarter of 2004, the Company took action following its acquisition
of
CADx to reduce its workforce and close its office located in Tampa, Florida.
In
connection with these measures, the Company incurred approximately $280,000
in
engineering severance benefits and office closure expenses with approximately
$180,000 due under the non-cancelable operating lease for the facility. The
total charge is included in engineering and product development costs in the
accompanying 2004 consolidated statement of operations. As of December 31,
2005
approximately $174,000 of severance and closing costs were paid and charged
against the liability and approximately $81,000 will be recovered through a
sublease arrangement negotiated in June 2005. Accordingly, the Company reduced
the accrual by approximately $81,000 in 2005, which was recorded as a reduction
of rent expense in fiscal 2005. The remaining facility closing cost accrued
as
of December 31, 2006 for lease payments net of sublease payments in 2007 was
$9,401.
(3) |
Financing
Arrangements
|
Convertible
Revolving Loans 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, 2008, subject to extension by the parties, with an agreement
from Mr. Howard that he will not request repayment of the principal balance
of
the note during its term. 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 December 31, 2006. Outstanding advances are
collateralized by substantially all of the assets of the Company and bear
interest at prime interest rate plus 1% (9.25% at December 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. Mr. Howard has
also
agreed that while the Loan Agreement exists, not to convert any outstanding
advances under the Loan Agreement into shares of the Company’s common stock that
would exceed the shares available for issuance, defined as the authorized shares
of the Company’s common stock less issued and outstanding common shares less any
reserved shares for outstanding convertible preferred stock, convertible notes,
non-employee warrants and non-employee stock options. On June 13, 2006 the
Company borrowed $2,000,000 from Mr. Howard pursuant to the Loan Agreement
and
at December 31, 2006, $2,258,906 was outstanding under the Loan Agreement and
$2,741,094 was available for future borrowings.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(3) |
Financing
Arrangements (continued)
|
Convertible
Loans Payable to Related Parties
On
June
19, 2006, the Company and Dr. Lawrence Howard, who is currently a Director
of
the Company, entered into a Note Purchase Agreement with respect to the purchase
by Dr. Howard 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 is payable on the due date. Principal
and accrued and unpaid interest under the Howard Note can be converted by the
holder into shares of the Company’s common stock at $1.50 per share. Payment of
principal under the Howard Note can be accelerated by the holder if the Company
files for, or is found by a court to be, bankrupt or insolvent and the Company
can prepay the Howard Note prior to the due date. Dr. Howard has also agreed
that he will not convert any principal amount or accrued and unpaid interest
outstanding under the Howard Note into shares of the Company’s common stock that
would exceed the number of shares of the Company’s common stock then available
for issuance defined as the authorized shares of the Company’s common stock less
issued and outstanding common shares less any reserved shares for outstanding
convertible preferred stock, non-employee warrants and non-employee stock
options.
On
June
20, 2006, the Company and Mr. Kenneth Ferry, the Company’s Chief Executive
Officer, entered into a Note Purchase Agreement with respect to the purchase
by
Mr. Ferry of an aggregate of $300,000 principal amount of a 7% Convertible
Note
of the Company due June 20, 2008 (the “Ferry Note”) at a purchase price of
$300,000. Interest on the Ferry Note is payable on the due date. Principal
and accrued and unpaid interest under the Ferry Note can be converted by the
holder into shares of the Company’s common stock at $1.50 per share. Payment of
principal under the Ferry Note can be accelerated by the holder if the Company
files for, or is found by a court to be, bankrupt or insolvent and the Company
can prepay the Ferry Note prior to the due date. Mr. Ferry has also agreed
that
he will not convert any principal amount or accrued and unpaid interest
outstanding under the Ferry Note into shares of the Company’s common stock that
would exceed the number of shares of the Company’s common stock then available
for issuance defined as the authorized shares of the Company’s common stock less
issued and outstanding common shares less any reserved shares for outstanding
convertible preferred stock, non-employee warrants and non-employee stock
options.
On
September 12, 14 and 19, 2006 the Company entered into Note Purchase Agreements
with respect to the purchase of a total of $2,300,000 principal amount of 7.25%
Convertible Promissory Notes (the “Notes”) from directors, officers and
employees of the Company, including the following: Mr. Robert Howard (as to
$1,350,000), Mr. James Harlan (as to $300,000), Mr. Steven Rappaport (as to
$300,000), Dr. Elliott Sussman (as
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(3) |
Financing
Arrangements (continued)
|
Convertible
Loans Payable to Related Parties (continued)
to
$100,000) and Dr. Lawrence Howard (as to $100,000), all of whom are directors
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 are due two years from the date of issue subject to the right
of the Company to prepay the Notes and the right of the holders of the Notes
to
accelerate payment of their respective Notes upon the Company filing for or
being adjudicated bankrupt or insolvent. The holders of the Notes may convert
the principal and accrued and unpaid interest under the Notes into shares of
the
Company’s common stock at a price of $1.70 per share, which conversion price is
subject to adjustment under certain circumstances such as common stock splits,
or combinations or common stock dividends. The Note issued to Mr. Steven
Rappaport on September 19, 2006 in the aggregate principal amount of $300,000
was issued with a conversion price below the market price of $1.80 per share
on
the date of the Note and the Company recorded a discount to Note Payables of
$17,647 to reflect the beneficial conversion feature. This loan is recorded
on
the balance sheet at its face value net of the discount at December 31, 2006
of
$15,441 at $284,559.
Convertible
Loans Payable to Non-Related Parties
On
September 19, 2006 the Company entered into Note Purchase Agreements with
respect to an aggregate of $700,000 principal amount (the “September Notes”)
from two accredited outside investors, pursuant to Note Purchase Agreements
between the Company and each of the investors. The loans are evidenced by Notes
issued by the Company in favor of the non-related parties. The September Notes
mature two years from the date of issue subject to the right of the Company
to
prepay the September Notes and the right of the holders of the September Notes
to accelerate payment of their respective Notes upon the Company filing for
or
being adjudicated bankrupt or insolvent. The holders of the September Notes
may
convert the principal and accrued and unpaid interest under the September Notes
into shares of the Company’s common stock at a price of $1.70 per share, which
conversion price is subject to adjustment under certain circumstances such
as
common stock splits, or combinations or common stock dividends. The September
Notes issued on September 19, 2006 in the aggregate principal amount of $700,000
were issued with a conversion price below the market price of $1.80 per share
on
the date of the Note and the Company recorded a discount to Note Payables of
$41,177 to reflect the beneficial conversion feature. These loans are recorded
on the balance sheet at their face value net of the discount at December 31,
2006 of $36,030 at $663,970.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
Accrued
expenses consist of the following at December 31, 2006 and 2005:
|
|
2006
|
|
2005
|
|
Accrued
salary and related expenses
|
|
$
|
1,335,943
|
|
$
|
754,943
|
|
Accrued
accounting and consulting services
|
|
|
346,073
|
|
|
235,000
|
|
Accrued
warranty expense
|
|
|
299,034
|
|
|
150,000
|
|
Accrued
dividends
|
|
|
116,200
|
|
|
-
|
|
Accrued
state taxes
|
|
|
110,331
|
|
|
125,284
|
|
Accrued
legal fees
|
|
|
43,469
|
|
|
272,380
|
|
Accrued
restructuring
|
|
|
9,401
|
|
|
25,505
|
|
Other
accrued expenses
|
|
|
629,830
|
|
|
353,791
|
|
|
|
$
|
2,890,281
|
|
$
|
1,916,903
|
|
To
complete the acquisition of CADx in 2003, the Company executed a secured
promissory note in the amount of $4,500,000 to purchase Qualia’s shares, issued
in favor of CADx Canada which is payable in quarterly installments over a 3
year
period commencing April 2004 and bears interest at the rate per annum equal
to
the greater of (i) 6.25% or (iii) the prime rate plus 1%, (9.25% at December
31,
2006). The note is secured by the assets of iCAD. The balance of the scheduled
maturity of the note payable at December 31, 2006 is $375,000 with the final
payment on the note due in 2007.
(a)
Preferred Stock
7%
Series A Convertible Preferred Stock.
On
December 22, 1999 the Company, pursuant to the authority of the Company's Board
of Directors, adopted a resolution creating a series of preferred stock
designated as 7.0% Series A Convertible Preferred Stock (the “Series A Preferred
Stock”). The number of shares initially constituting the Series A Preferred
Stock was 10,000, par value $.01 per share, which may be decreased (but not
increased) by the Board of Directors without a vote of stockholders, provided,
however, that such number may not be decreased below the number of then
outstanding shares of Series A Preferred Stock. The holders of the shares of
Series A Preferred Stock vote together
with the common stock as a single class on all actions to be voted on by the
stockholders of the Company. Each share of Series A Preferred Stock entitle
the
holder thereof to such number of votes per share on each such action as shall
equal the number of whole shares of common stock into which each share of Series
A Preferred Stock is then convertible. The holders are entitled to notice of
any
stockholder’s meeting in accordance with the By-Laws of the Company. Each share
of Series A Preferred Stock is
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(6) |
Stockholders’
Equity (continued)
|
(a)
Preferred Stock (continued)
convertible
into that number of shares of common stock determined by dividing the aggregate
liquidation preference of the number of shares of Series A Preferred Stock
being
converted by $1.00 (the “Conversion Rate”). The Conversion Rate is subject to
appropriate adjustment by stock split, dividend or similar division of the
common stock or reverse split or similar combinations of the common stock prior
to conversion. The Company may at any time after the date of issuance, at the
option of the Board of Directors, redeem in whole or in part the Series A
Preferred Stock by paying cash equal to $100 per share together with any accrued
and unpaid dividends (the “Redemption Price”). The Redemption Price is subject
to appropriate adjustment by the Board of Directors of similar division of
shares of Series A Preferred Stock or reverse split or similar combination
of
the Series A Preferred Stock. In the event the Company liquidates, dissolves
or
winds up, no distribution will made to the holders of shares of common stock
unless, prior thereto the holders of shares of Series A Preferred Stock have
received $100 per share (as adjusted for any stock dividends, combinations
or
splits) plus all declared or accumulated but unpaid dividends. The holders
of
shares of Series A Preferred Stock, in preference to the holders of shares
of
common stock, are entitled to receive cumulative dividends of $7.00 per annum
per share, payable annually, subject to appropriate adjustment by the Board
of
Directors of the Company in the event of any stock split, dividend or similar
division of shares of Series A Preferred. Dividends are payable annually, in
arrears, on the last day of December in each year.
In
March
2005, 1,000 shares of the Company’s 7% Series A Preferred Stock were converted
by unrelated parties into 100,000 shares of the Company’s common stock. As of
December 31, 2006 and 2005 the Company had 5,150 shares of its 7% Series A
Preferred Stock issued and outstanding, with an aggregate liquidation value
of
$515,000
The
Company has reserved 515,000 shares of common stock issuable upon conversion
of
the Convertible Series A Preferred Stock.
7%
Series B Convertible Preferred Stock.
On
October 19, 2000 the Company, pursuant to the authority of the Company's Board
of Directors, adopted a resolution creating a series of preferred stock
designated as 7.0% Series B Convertible Preferred Stock (the “Series B Preferred
Stock”). The number of shares initially constituting the Series B Preferred
Stock was 2,000, par value $.01 per share, which may be decreased (but not
increased) by the Board of Directors without a vote of stockholders, provided,
however, that such number may not be decreased below the number of then
outstanding shares of Series B Preferred Stock. The holders of the shares of
Series B Preferred Stock have no voting rights other than is required by law.
Each share of Series B Preferred Stock is convertible into that number of shares
of common stock determined by dividing the aggregate liquidation preference
of
the number of shares of Series B Preferred Stock
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(6)
|
Stockholders’
Equity (continued)
|
(a)
Preferred Stock (continued)
being
converted by $2.00 (the “Conversion Rate”). The Conversion Rate is subject to
appropriate adjustment by stock split, dividend or similar division of the
common stock or reverse split or similar combinations of the common stock prior
to conversion. The Company may at any time after the date of issuance, at the
option of the Board of Directors, redeem in whole or in part the Series B
Preferred Stock by paying cash equal to $1,000
per share together with any accrued and unpaid dividends (the “Redemption
Price”). The Redemption Price is subject to appropriate adjustment by the Board
of Directors of similar division of shares of Series B Preferred Stock or
reverse split or similar combination of the Series B Preferred Stock. In the
event the Company liquidates, dissolves or winds up, no distribution will be
made to the holders of shares of common stock unless, prior thereto, the holders
of shares of Series B Preferred Stock have
received $1,000 per share (as adjusted for any stock dividends, combinations
or
splits) plus all declared or accumulated but unpaid dividends. The holders
of
shares of Series B Preferred Stock, in preference to the holders of shares
of
common stock, are entitled to receive cumulative dividends of $70.00 per annum
per share, payable annually, subject to appropriate adjustment by the Board
of
Directors of the Company in the event of
any
stock split, dividend or similar division of shares of Series B Preferred.
Dividends are payable annually, in arrears, on the last day of December in
each
year.
In
October 2000 the Company sold, in private transactions, a total of 1,400 shares
of its 7% Series B Preferred Stock at $1,000 per share, consisting of 1,350
shares to unrelated parties, and 50 shares to Mr. W. Scott Parr, the Company’s
former Chief Executive Officer, for gross proceeds of $1,400,000. The 1,400
shares of 7% Series B Preferred Stock were issued with a conversion price below
the Company’s common stock quoted value and as a result accreted dividends of
$996,283 were recorded and included in the net loss per share calculation for
the year ended December 31, 2000. In 2003, 115 shares of the Company’s Series B
Preferred Stock were converted by unrelated parties into 57,500 shares of the
Company’s common stock. In March 2005, 61 shares of the Company’s Series B
Preferred Stock were converted by unrelated parties into 30,500 shares of the
Company’s common stock.
In
May
2006, 79 shares of the Company’s Series B Preferred Stock were converted by Dr.
Herschel Sklaroff, a director at the time of conversion, into 39,500 shares
of
the Company’s common stock. As of December 31, 2006 and 2005 the Company’s had
1,145 and 1,224 shares, respectively, of its 7% Series B Preferred Stock issued
and outstanding, with an aggregate liquidation value of $1,145,000 and
$1,224,000, respectively. The Company has reserved 572,500 shares of common
stock issuable upon conversion of the Convertible Series B Preferred
Stock.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(6) |
Stockholders’
Equity (continued)
|
(b)
Stock Options
The
Company has five 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 shall 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 no 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, 2006
there
are no further options available for grant under this plan.
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 not later than ten years after the date of grant, except for 10% holders
whose options expire no 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, 2006, there were 4,000
shares available for issuance under the 2002 Plan.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(6) |
Stockholders’
Equity (continued)
|
(b)
Stock Options (continued)
Intelligent
Systems Software 2001 Stock Option Plan.
In
connection with iCAD’s acquisition of Intelligent Systems Software, Inc.
(“ISSI”) in June 2002, iCAD assumed options granted under ISSI’s 2001 Stock
Option Plan to purchase 400,000 shares of ISSI’s common stock, which options
were converted upon such acquisition into the right to purchase 500,000 shares
of iCAD’s common stock in accordance with the terms and conditions set forth in
such 2001 Stock Option 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 no 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, 2006 there were 93,750
options available for issuance under the 2004 Plan.
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 of which at December 31, 2006, 219,612 shares are
eligible for future grants.
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
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(6)
|
Stockholders’
Equity (continued)
|
(b)
Stock Options (continued)
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 no later than five years after
the date of grant. Non-qualifying options granted under the 2005 Plan are
generally exercisable over a five year period, vesting on the date of
grant.
A
summary
of stock option activity is as follows:
|
Option
|
Price
range
|
Weighted
|
|
Shares
|
per
share
|
Average
|
Outstanding,
January 1, 2004
|
3,688,551
|
$0.80-$4.91
|
$2.12
|
Granted
|
1,334,000
|
$2.59-$5.28
|
$4.74
|
Exercised
|
(593,574)
|
$0.80-$3.49
|
$1.64
|
Forfeited
|
(514,466)
|
$1.55-$5.28
|
$2.52
|
Outstanding,
December 31, 2004
|
3,914,511
|
$0.80-$5.28
|
$3.04
|
Granted
|
1,162,500
|
$1.06-$3.92
|
$3.54
|
Exercised
|
(293,476)
|
$0.80-$3.49
|
$1.67
|
Forfeited
|
(533,772)
|
$1.13-$5.28
|
$4.89
|
Outstanding,
December 31, 2005
|
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
|
Exercisable
at year-end
|
|
|
|
2004
|
2,414,182
|
$0.80-$3.49
|
$2.28
|
2005
|
4,161,763
|
$0.80-$5.28
|
$3.08
|
2006
|
4,053,230
|
$0.80-$5.28
|
$2.22
|
Available
for future grants
|
|
|
|
2006
|
317,362
|
|
|
The
weighted-average remaining contractual life of stock options outstanding for
all
plans at December 31, 2006 was 4.3 years.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(6) |
Stockholders’
Equity (continued)
|
(b)
Stock Options (continued)
During
the year ended December 31, 2006, the Company recorded $1,334,485 for
share-based compensation in accordance with SFAS 123R.
Included in the stock based compensation charge is approximately $258,000
relating
to modified outstanding stock options of the Company’s former Chief Executive
Officer.
As of December 31, 2006, there was approximately
$968,834 of
total unrecognized compensation costs related to unvested options. That cost
is
expected to be recognized over a weighted average period of 3
years.
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%. 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. During 2006 the forfeiture rate approximated 2%.
Under the true-up provisions of SFAS123R, the Company will record additional
expense if the actual forfeiture rate is lower than the Company’s estimate, and
will record a recovery of prior expense if the actual forfeiture rate is higher
than the Company’s estimate. The aggregate intrinsic value of options
outstanding at December 31, 2006, 2005 and 2004 was $5,467,459, $124,285 and
$6,371,812. The Company used the market price of $2.95, $1.17 and $4.47 at
December 31, 2006, 2005 and 2004 versus the exercise price of each option,
respectively.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(6)
|
Stockholders’
Equity (continued)
|
(c)
Private Placement
On
December 24, 2004, the Company sold 1,872,222 shares of its common stock for
$4.50 per share in a private placement to institutional investors. The net
proceeds to the Company for the 1,872,222 shares sold were approximately
$8,325,000. In connection with these transactions the Company issued warrants
to
purchase 936,111 shares of the Company’s common stock. The warrants are
exercisable for a period of five years from the closing of the offering at
an
exercise price of $5.50 per share.
In
February 2004 a total of 90,000 shares of the Company’s common stock were issued
in connection with the additional investment rights which were issued in 2003
(see below). The remaining shares expired unexercised. The net proceeds to
the
Company for the 90,000 shares sold were approximately $418,000. Ladenburg
Thalmann & Co. Inc. served as placement agent for these transactions for
which it received compensation in the amount of approximately $404,000 and
a
five year warrant to purchase 67,200 shares of the Company’s common stock at
$5.00 per share.
(d) Stock
Subscription Warrants
In
December 2004, in connection with a private placement transaction the Company
issued to the investors in the private placement common stock purchase warrant
(the “2004 Warrant”) under a Subscription Agreement. The 2004 Warrant entitles
the holders to purchase from the Company up to an aggregate of 936,111 shares
of
the Company’s common stock at $5.50 per share. The 2004 Warrants are exercisable
for a period of five years from the closing of the offering and expire on
December 15, 2009.
On
November 24, 2003 the Company issued a common stock purchase warrant (the “2003
Warrant”) to Ladenburg Thalmann & Co., Inc. (the “Agent”), that served as a
placement agent for the private placement transaction. The warrants were issued
for placement services, for which the Agent received a five-year warrant. The
2003 Warrant entitles the Agent to purchase from the Company up to 67,200 shares
of the Company’s common stock at $5.00 per share. The Agent may exercise the
Warrant at any time or from time to time on or prior to November 24, 2008.
The
Company has reserved 1,003,311 shares of common stock issuable upon exercise
of
the warrants. At December 31, 2006 there are warrants to purchase 1,003,311
of
the Company’s common stock that are exercisable at the following
prices:
Warrants
|
Exercise
Price
|
67,200
|
$5.00
|
936,111
|
$5.50
|
No
warrants were issued or exercised in 2006 or 2005.
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
As
a
result of the 2006, 2005, 2004 losses, no income tax expense was incurred for
these years.
Deferred
income taxes reflect the impact of “temporary differences” between the amount of
assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. The Company has fully reserved the
deferred tax asset as it is more likely than not that the deferred tax
assets will not be utilized. Deferred tax liabilities (assets) are
comprised of the following at December 31:
|
|
2006
|
|
2005
|
|
2004
|
|
Inventory
(Section 263A)
|
|
$
|
(279,000
|
)
|
$
|
(258,000
|
)
|
$
|
(72,000
|
)
|
Inventory
reserves
|
|
|
(142,000
|
)
|
|
(150,000
|
)
|
|
(102,000
|
)
|
Receivable
reserves
|
|
|
(30,000
|
)
|
|
(153,000
|
)
|
|
(153,000
|
)
|
Other
accruals
|
|
|
(435,000
|
)
|
|
(142,000
|
)
|
|
(33,000
|
)
|
Accumulated
depreciation/amortization
|
|
|
1,398,000
|
|
|
1,718,000
|
|
|
2,246,000
|
|
Stock
options
|
|
|
(337,000
|
)
|
|
-
|
|
|
-
|
|
Tax
credits
|
|
|
(2,632,000
|
)
|
|
(2,632,000
|
)
|
|
(1,998,000
|
)
|
NOL
carryforward
|
|
|
(13,771,000
|
)
|
|
(13,592,000
|
)
|
|
(12,983,000
|
)
|
Net
deferred tax assets
|
|
|
(16,228,000
|
)
|
|
(15,209,000
|
)
|
|
(13,095,000
|
)
|
Valuation
allowance
|
|
$
|
16,228,000
|
|
$
|
15,209,000
|
|
$
|
13,095,000
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
As
of
December 31, 2006, the Company has net operating loss carryforwards totaling
approximately $40,300,000 expiring between 2007 and 2026. The amount of the
net
operating loss carryforwards, which may be utilized in any future period, may
be
subject to certain limitations based upon changes in the ownership of the
Company’s common stock.
In
addition the Company has available tax credit carryforwards (adjusted to reflect
provisions of the Tax Reform Act of 1986) of approximately $2,632,000, which
are
available to offset future taxable income and income tax liabilities, when
earned or incurred. These amounts expire in various years through
2026.
(8) |
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
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(8) |
Segment
Reporting, Geographical Information and Major Customers
(continued)
|
(a)
Segment Reporting (continued)
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 operated
in
one segment for all years presented.
|
(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 were approximately $1,022,000 or 5% of total sales in 2006,
$1,747,000 or 9% of total sales in 2005 and $1,331,000 or 6% of total sales
in
2004.
As
of
December 31, 2006 and 2005 the Company had outstanding receivables of $239,660
and $303,339, respectively, from distributors of its products who are located
outside of the United States.
(c)
Major Customers
During
the year ended December 31, 2006 the Company had sales of $4,266,491 and
$2,462,225,
or 22% and 12% of sales, to GE Healthcare and Hologic, Inc., respectively.
These
were the Company’s two major customers in 2006 with accounts receivable balances
of $946,475
and $18,920,
respectively, due from these customers at December 31, 2006. For the years
ended
December 31, 2005 and 2004 the Company’s two major customers were SourceOne
Healthcare and GE Healthcare. with sales of $3,725,065 and $2,913,493 or 19%
and
15% of sales in 2005 and sales of $6,871,412 and $4,983,683 or 29% and 21%
of
sales in 2004. The account receivable balances for these two major customers
were $139,816 and $430,360, respectively, due at December 31, 2005 and
$1,849,791 and $12,090, respectively, due from these customers at December
31,
2004.
(d)
Product Information
The
Company’s revenues by product line are as follows:
For
the year ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
Products
|
|
$
|
16,807,013
|
|
$
|
17,988,827
|
|
$
|
21,975,211
|
|
Service
and supplies
|
|
|
2,914,345
|
|
|
1,780,995
|
|
|
1,333,251
|
|
Total
|
|
$
|
19,721,358
|
|
$
|
19,769,822
|
|
$
|
23,308,462
|
|
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(9) |
Commitments
and Contingencies
|
(a)
Lease Obligations
As
of
December 31, 2006, the Company had three lease obligations related to its
facilities. The Company recently relocated its principal executive offices
and
on November 22, 2006 the Company signed a lease (the “Lease”) for office
space located in Nashua, New Hampshire (the “Premises”). 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).
Rental
expense for all leases for the years ended December 31, 2006, 2005 and 2004
was
$553,181, $528,681 and $781,855, net of sublease income of $112,278, $41,297,
and $0, respectively.
Future
minimum rental payments due under these agreements and sublease agreements
as of
December 31, 2006 are as follows:
|
|
Operating
|
|
Sublease
|
|
Net
|
|
Fiscal
Year
|
|
Leases
|
|
Amount
|
|
Amount
|
|
2007
|
|
|
658,319
|
|
|
109,878
|
|
|
548,441
|
|
2008
|
|
|
678,789
|
|
|
98,083
|
|
|
580,706
|
|
2009
|
|
|
703,560
|
|
|
103,478
|
|
|
600,082
|
|
2010
|
|
|
701,244
|
|
|
105,930
|
|
|
595,314
|
|
2011
|
|
|
220,320
|
|
|
-0-
|
|
|
220,320
|
|
|
|
$
|
2,962,232
|
|
$
|
417,369
|
|
$
|
2,544,863
|
|
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(9) |
Commitments
and Contingencies (continued)
|
(b)
Litigation
On
April
18, 2005, the Company received a letter from R2 Technology, Inc. (“R2”),
advising the Company of R2’s position that the Company’s Second Look® product
lines allegedly infringed on US Patents 6,266,435, 6,477,262 and 6,574,357,
which are licensed to R2. A three member arbitration panel was named and
the
Company's patent dispute with R2, including counterclaims by the Company that
R2
infringes on US Patents 6,115,488, 6,556,699 and 6,650,766, which are owned
by
the Company, proceeded to a hearing before the panel on October 18 and 19,
2005.
On
April 19, 2006 the panel of arbitrators in the case entitled R2 Technology
and Shih-Ping Wang vs. iCAD, Inc. found that the Company did not infringe any
patents asserted by R2. The arbitrators also found that R2 did not infringe
any
of the patents asserted by the Company.
|
(c)
|
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 one (1) year plus the pro rata portion of any annual bonus
earned in any employment year through the date of termination.
(10) |
Quarterly
Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
per
share
|
|
|
|
|
|
|
|
|
|
available
|
|
|
|
Net
|
|
Gross
|
|
Net
|
|
to
common
|
|
2006
|
|
sales
|
|
profit
|
|
income
(loss)
|
|
stockholders
|
|
First
quarter
|
|
$
|
4,373,650
|
|
$
|
3,454,771
|
|
$
|
(1,605,894
|
)
|
$
|
(0.04
|
)
|
Second
quarter
|
|
$
|
3,869,693
|
|
$
|
3,032,285
|
|
$
|
(2,558,299
|
)
|
$
|
(0.07
|
)
|
Third
quarter
|
|
$
|
5,038,336
|
|
$
|
3,844,162
|
|
$
|
(1,094,482
|
)
|
$
|
(0.03
|
)
|
Fourth
quarter
|
|
$
|
6,439,679
|
|
$
|
5,099,322
|
|
$
|
(1,379,283
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
6,007,607
|
|
$
|
4,734,034
|
|
$
|
641,929
|
|
$
|
0.02
|
|
Second
quarter
|
|
$
|
4,231,104
|
|
$
|
3,215,740
|
|
$
|
(1,083,662
|
)
|
$
|
(0.03
|
)
|
Third
quarter
|
|
$
|
3,393,804
|
|
$
|
2,467,762
|
|
$
|
(2,562,831
|
)
|
$
|
(0.07
|
)
|
Fourth
quarter
|
|
$
|
6,137,307
|
|
$
|
4,716,229
|
|
$
|
(1,753,924
|
)
|
$
|
(0.05
|
)
|
iCAD,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements (continued)
(10) |
Quarterly
Financial Data (unaudited)
(continued)
|
The
fourth quarter results of fiscal 2006 includes discretionary bonuses of
approximately $482,000 which were determined in the fourth quarter, the adoption
of a Board Compensation plan in the fourth quarter resulting in expense of
$163,000 and a reduction in expense of approximately $291,000 for the change
in
estimate related to accounts receivable reserve due to improved collections
as a
percentage of accounts receivable balance.
iCAD,
INC. AND SUBSIDIARIES
Schedule
II - Valuation and Qualifying Accounts and Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
Charged
to
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
Cost
and
|
|
|
|
|
|
at
end
|
|
Description
|
|
of
Year
|
|
Expenses
|
|
Deductions
|
|
|
|
of
Year
|
|
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
|
|
$
|
149,034
|
|
$
|
-
|
|
|
|
|
$
|
299,034
|
|
Restructuring
Reserve
|
|
$
|
25,505
|
|
$
|
(16,104
|
)
|
$
|
-
|
|
|
|
|
$
|
9,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
End December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
|
|
$
|
450,000
|
|
$
|
40,338
|
|
$
|
40,338
|
|
|
(1
|
)
|
$
|
450,000
|
|
Inventory
Reserve
|
|
$
|
300,000
|
|
$
|
120,782
|
|
$
|
20,782
|
|
|
(2
|
)
|
$
|
400,000
|
|
Warranty
Reserve
|
|
$
|
150,000
|
|
$
|
295,419
|
|
$
|
295,419
|
|
|
|
|
$
|
150,000
|
|
Restructuring
Reserve
|
|
$
|
140,945
|
|
$
|
(34,784
|
)
|
$
|
80,656
|
|
|
|
|
$
|
25,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
End December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
|
|
$
|
105,000
|
|
$
|
187,450
|
|
$
|
(157,550
|
)
|
|
(1
|
)
|
$
|
450,000
|
|
Inventory
Reserve
|
|
$
|
115,000
|
|
$
|
(64,063
|
)
|
$
|
(249,063
|
)
|
|
(2
|
)
|
$
|
300,000
|
|
Warranty
Reserve
|
|
$
|
100,000
|
|
$
|
252,178
|
|
$
|
202,178
|
|
|
|
|
$
|
150,000
|
|
Restructuring
Reserve
|
|
$
|
-
|
|
$
|
140,945
|
|
$
|
-
|
|
|
|
|
$
|
140,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents the amount of accounts charged off.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Represents inventory written off and disposed of.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|