SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 31, 2003
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iCAD, INC.
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(Exact name of registrant as specified in its charter)
Delaware 1-9341 02-0377419
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
4 Townsend West, Suite 17, Nashua, NH 03063
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (603) 882-5200
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(Former name or former address, if changed since the last report)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
Qualia Computing, Inc. and Subsidiaries
Financial Page No.
Fiscal Year ended March 31, 2003 ------------------
Report of Independent Auditors 1
Consolidated Balance Sheet 2
Consolidated Statements of Operations 3
Consolidated Statement of Comprehensive Loss 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7-14
Independent Auditors' Report on Consolidated Supplmentary Information 15
Consolidated Schedule of Selling, General and Administrative Expenses 16
Nine Months Ended December 31, 2003
Report of Independent Auditors 1
Consolidated Balance Sheet 2
Consolidated Statement of Operations 3
Consolidated Statement of Changes in Stockholders' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6-13
Independent Auditors' Report on Consolidated Supplmentary Information 14
Consolidated Schedule of Selling, General and Administrative Expenses 15
(b) Pro forma financial information.
Unaudited Pro Forma Combined Condensed Balance
Sheet as of September 30, 2003 PF1-PF2
Unaudited Pro Forma Combined Condensed Statement
of Operations for year ended December 31, 2002 PF3
Unaudited Pro Forma Combined Condensed Statement
of Operations for the Nine Months ended September 30, 2003 PF4
Notes to Pro Forma Combined Condensed Financial Statements PF5-PF7
(c) Exhibits
23.1 Consent of Brady Ware & Schoenfeld, Inc.
QUALIA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2003
QUALIA COMPUTING, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
YEAR ENDED MARCH 31, 2003
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Page
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INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Consolidated Balance Sheet 2
Consolidated Statement of Operations 3
Consolidated Statement of Comprehensive Loss 4
Consolidated Statement of Changes in Stockholders' Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7-14
SUPPLEMENTARY INFORMATION
Independent Auditors' Report on Consolidated Supplementary Information 15
Consolidated Schedule of Selling, General and Administrative Expenses 16
Pushing the Possibilities
[BRADY WARE LOGO]
INDEPENDENT AUDITORS'REPORT
-------------------------------------------------------
One South Main Street
Suite 600
Dayton, Ohio 45402 Board of Directors
(937) 223-5247 Qualia Computing and Subsidiaries
(800) 893-4283 Beavercreek, Ohio
Fax (937) 223-0300
We have audited the accompanying consolidated balance
One Woodside Drive sheet of QUALIA COMPUTING, Inc. and Subsidiaries as of
Richmond, Indiana 47374 March 31, 2003, and the related consolidated statements
(765) 966-0531 of operations, comprehensive loss. changes in
(800) 515-5536 stockholders' equity and cash flows for the year then
Fax (765) 962-5015 ended. These consolidated financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
www.bradyware.com consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing
standards generally accepted in the United States of
America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall financial statement presentation. We believe
that our audit provides 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 Qualia Computing,
Inc. and Subsidiaries as of March 31, 2003, and the
results of its operations and its cash flows for the
year then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ BRADY WARE & SCHOENFELD, INC.
---------------------------------
Dayton, Ohio
August 26, 2003
1
QUALIA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,339,669
Accounts receivable 2,632,643
Inventory 1,742,234
Prepaid expenses 213,602
Prepaid income taxes 64,250
Investments 256,729
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7,249,127
PROPERTY AND EQUIPMENT, NET 1,020,956
OTHER ASSETS 565,449
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$ 8,835,532
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 596,063
Accrued expenses 766,952
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1,363,015
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STOCKHOLDERS' EQUITY
Common stock 15
Cumulative translation adjustment 27,498
Paid-in capital 36,260,994
Accumulated deficit (28,817,326)
Accumulated other comprehensive income 1,336
---------------
7,472,517
---------------
$ 8,835,532
===============
See notes to financial statements. 2
QUALIA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 2003
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NET SALES $ 5,092,340
COST OF SALES 2,216,179
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GROSS MARGIN 2,876,161
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,829,308
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LOSS FROM OPERATIONS (6,953,147)
OTHER INCOME (EXPENSE) - NET 215,772
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LOSS BEFORE INCOME TAXES (6,737,375)
INCOME TAX EXPENSE (8,759,473)
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NET LOSS $ (15,496,848)
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See notes to financial statements. 3
QUALIA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
YEAR ENDED MARCH 31, 2003
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NET LOSS $ (15,496,848)
OTHER COMPREHENSIVE LOSS
Unrealized gain on investment securities 163
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COMPREHENSIVE LOSS $ (15,496,685)
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See notes to financial statements. 4
QUAUA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EOUITY
YEAR ENDED MARCH 31, 2003
PREFERRED CUMULATIVE
COMMON PREFERRED STOCK Translation PAID-IN
STOCK STOCK SUBSCRIBED Adjustments CAPITAL
-------- ----------- ------------ ------------- ------------
Balance - March 31, 2002 $ 8,470 $ 193 $ 1,350,000 $ - $23,353,913
Net loss - - - - -
Sale of treasury stock - - - - -
Unrealized gain on investments - - - - -
Gain on translation of currency - - - 37,200 -
Issuance of 3,000 shares of common
stock - - - - 3,000
Issuance of 1,350 preferred shares,
previously subscribed - 13 (1,350,000) - 1,350,000
Issuance of 2,075 preferred shares - 21 - - 5,997,193
Recapitalization/acquisition of
subsidiaries (8,455) (227) - (9,702) 5,556,888
-------- ----------- ------------ ------------- ------------
Balance - March 31, 2003 $ 15 $ - $ - $ 27,498 $36,260,994
======== =========== ============ ============= ============
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCK INCOME DEFICIT EQUITY (DEFICIT)
---------- --------------- -------------- ------------------
Balance - March 31, 2002 $(350,000) $ 1,173 $ (13,026,478) $ 11,337,271
Net loss - - (15,496,848) (15,496,848)
Sale of treasury stock 350,000 - (294,000) 56,000
Unrealized gain on investments - 163 - 163
Gain on translation of currency - - - 37,200
Issuance of 3,000 shares of common
stock - - - 3,000
Issuance of 1,350 preferred shares,
previously subscribed - - - 13
Issuance of 2,075 preferred shares - - - 5,997,214
Recapitalization/acquisition of
subsidiaries - - - 5,538,504
---------- --------------- -------------- ------------------
Balance - March 31, 2003 $ - $ 1,336 $ (28,817,326) $ 7,472,517
========== =============== ============== ==================
See notes to financial statements. 5
QUALIA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31, 2003
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OPERATING ACTIVITIES
Net loss $ (15,496,848)
Adjustments to reconcile net loss to
not cash used by operating activities:
Depreciation and amortization 419,393
Deferred income taxes 8,762,889
Cumulative translation adjustments 37,200
Inventory reserve 100,000
Allowance for doubtful accounts 930,000
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(5,247,366)
Changes in operating assets and liabilities:
Accounts receivable 551,187
Inventory 328,219
Prepaid expenses (63,538)
Other assets (85,377)
Accounts payable 253,412
Accrued expenses (7,404)
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Net cash used by operating activities (4,270,867)
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INVESTING ACTIVITIES
Proceeds from sale of assets 14,282
Purchases of property and equipment (389,164)
Purchase of investments (7,528)
Inventory deposits 38,182
Note receivable - related party (1,000,000)
Cash received in acquisition of subsidiaries 188,714
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Net cash used by investing activities (1,155,514)
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FINANCING ACTIVITIES
Issuance of common stock 3,000
Issuance of preferred stock 5,997,227
Sale of treasury stock 56,000
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Net cash provided by financing activities 6,056,227
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NET INCREASE IN CASH AND CASH EQUIVALENTS 629,846
CASH AND CASH EQUIVALENTS
Beginning of year 1,709,823
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End of year $ 2,339,669
===============
See notes to financial statements. 6
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - COMPANY OPERATIONS AND FINANCIAL VIABILITY
QUALIA COMPUTING, INC. AND SUBSIDIARIES is a software research and development
organization specializing in computer-aided intelligence amplification, with
applications in the fields of human decision making, including computer-aided
cancer detection, intelligent drug and vaccine discovery, text categorization
and time-series prediction. The Company's market is global with its headquarters
located in Dayton, Ohio. The Company incurred research and development costs of
$2,838,490 during the year.
During September 2002, Qualia Computing, Inc. acquired the subsidiaries of Cadx
Systems, Inc (Cadx USA), Cadx Medical Systems Inc (Cadx Canada), Cadx Medical
Systems Limited (Cadx Ireland), and Cadx Medical Systems SARL (Cadx France) in
exchange for giving Cadx Canada Inc. (owned by Shire Pharmaceuticals) 138,164
additional Qualia Computing, Inc. class B shares to bring their total ownership
to 50%. The operations of the subsidiaries is being reported from September 26,
2002 through March 31, 2003.
Prior to the recapitalization of the capital (See Note M), the Company had been
funding its operations with the sale of preferred shares of stock to Cadx Canada
Inc. (Shire Pharmaceuticals). This capital was to be used to finance operations
until an investor could be found to acquire Shire's shares- As of the date of
these financial statements, investors have been found and negotiations are
taking place. (See Note Q). As part of the acquisition of these shares, the
investors intend to contribute $10 million in cash to finance operations.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of Qualia Computing, Inc. and its wholly owned
subsidiaries, Cadx Systems, Inc (Cadx USA), Cadx Medical Systems Inc (Cadx:
Canada), Cadx Medical Systems Limited (Cadx Ireland), and Cadx Medical Systems
SARL (Cadx France). All significant inter-company transactions and balances have
been eliminated in the accompanying consolidated financial statements.
FINANCIAL ESTIMATES - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION - Sales revenue is recognized at the time title changes. A
technician installs the unit after shipment, however, the cost associated with
the installation is de minimis. Contract service revenue is recognized over the
life of the contract. The unearned revenue is accounted for in the balance sheet
account, "deferred revenue."
CONCENTRATIONS - Financial instruments that potentially subject the Company to
credit risk consist principally of trade accounts receivable. In addition, from
time to time, the Company has funds on deposit with a financial institution in
excess of FDIC insurance limits.
ACCOUNTS RECEIVABLE - The Company uses the allowance method for receivables. An
allowance for doubtful accounts is established to give recognition to the
receivable amounts that may become uncollectible in the future. The allowance is
reviewed annually to determine that the amount is appropriate. The allowance for
the year ended March 31, 2003 was $100,000.
7
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
INVENTORIES - Inventories are valued at the lower of cost (first-in, first-out
method) or market. An Inventory reserve of $100,000 has been set up as of March
31, 2003 to account for future obsolescence.
PROPERTY AND EQUIPMENT - PROPERTY and equipment are stated at cost and
depreciated over their estimated useful lives using both straight-line and
accelerated methods. Routine repairs and maintenance are charged to expense when
incurred. Renewals and betterments which substantially increase the life of the
property and equipment are capitalized. At retirement or sale, the costs of the
assets, less related accumulated depreciation or amortization, are removed from
the accounts and resulting gains and losses are included in income.
INVESTMENTS - The Company classifies its marketable equity securities as
available for sale. Securities classified as available for sale are carried in
the financial statements at fair value. Realized gains and losses, determined
using the first-in, first-out (FIFO) method, are included in earnings.
Unrealized holding gains and losses are reported in other comprehensive income.
CASH EQUIVALENTS - Cash equivalents include amounts in money market funds and
financial instruments with a maturity of less than three months at the date of
purchase.
PATENTS - The costs associated with the registration of new patents are being
amortized over a period of 15 years. The amortization expense for the year ended
March 31, 2003 was $15,274.
INCOME TAXES - The Company utilizes the asset and liability approach to
accounting for income taxes. The objective of the asset and liability method is
to establish deferred tax assets and liabilities for temporary differences
between the financial reporting and the tax bases of the Company's assets and
liabilities at enacted tax rates expected to be In effect when such amounts are
realized or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
ADVERTISING EXPENSE - ADVERTISING costs are expensed as incurred. Advertising
expense was $280,468 for the year ended March 31, 2003.
NOTE C - ACCOUNTS RECEIVABLE
Trade $ 2,553,201
Employees 36,002
Miscellaneous 43,440
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$ 2,632,643
===============
8
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE D - INVENTORY
Finished goods $ 1,308,214
Parts 534,020
Inventory reserve (100,000)
---------------
$ 1,742,234
===============
NOTE E - INVESTMENTS
The following table reflects the cost and estimated fair values of equity
securities held at March 31, 2003. In addition, gross unrealized gains and
losses are disclosed as of March 31, 2003.
Gross Gross
Unrealized Unrealized Estimated Fair
COST Gains Losses Value
----------- ---------- ---------- --------------
Equity securities $ 255,393 $ 1,336 $ - $ 256,729
=========== ========== ========== ==============
Realized gains and losses for securities classified as available-for-sale are
reported in earnings based on the adjusted cost of the specific security sold.
There were no sales of securities for the year ended March 31,2003.
NOTE F - PROPERTY AND EQUIPMENT
Leasehold improvements $ 54,431
Furniture, fixtures, and equipment 423,401
Computer equipment 171,828
Research equipment 1,344,348
Software 263,678
-----------
Total cost 2,257,686
Less accumulated depreciation and amortization 1,236,730
-----------
$ 1,020,956
===========
NOTE G - OTHER ASSETS
Deposits $ 166,007
Cash surrender value of life insurance 13,501
Patent cost 253,677
Accumulated amortization - patents (37,736)
Note receivable - related party 170,000
-----------
$ 565,449
===========
9
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The note receivable of $1,000,000 as of March 31, 2003 is due in full on
December 31, 2007, Interest is being charged at the prime rate as identified by
the bank (4-25% as of March 31, 2003) and is due annually on August 21, the
anniversary date of the note. An allowance for doubtful accounts of $830,000 has
been recorded against this note as of March 31, 2003.
NOTE H - ACCRUED EXPENSES
Wages, bonuses, and commissions $ 311,204
Vacation 92,966
Payroll taxes 66,306
401 K and profit sharing 132,588
Personal property, sales, and other miscellaneous taxes 14,788
Warranty reserve 140,600
Deferred revenue 8,500
---------------
$ 766,952
===============
The Second Look machines are under warranty for one year. The warranty reserve
is based on the costs to cover the labor and the travel costs associated with
the warranty service. All parts are under manufactures warranty for a year.
NOTE I - OPERATING LEASES
The Company leases its facilities for $32,960 per month, The lease expires in
December 2010. The Company is also responsible for utilities, real estate taxes,
common area maintenance, cleaning and security. 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 connection with this lease, the Company
is paying an additional $1,727 per month for additional build out costs incurred
by the lessor for the Company.
The Company also leases additional equipment and storage space as needed during
the year.
The lease expense for the year ended March 31, 2003 was $524,784.
Future minimum lease payments are as follows:
2004 $ 419,212
2005 431,166
2006 438,298
2007 435,438
2008 448,501
Thereafter 1,302,600
---------------
$ 3,475,215
===============
10
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE J - RELATED PARTY TRANSACT1ONS
During the year, the Company engaged non-employee stockholders in consulting
agreements to perform work an behalf of the Company. The total consulting fees
paid under these agreements was $228,487 for the year ended March 31, 2003.
The Company has a note receivable due from a related party in the amount of
$1,000,000 at March 31, 2003 (see Note G). An allowance for doubtful accounts of
$830,000 has been recorded against this note as of March 31, 2003.
NOTE K - 401 (K) PLAN
The Company sponsors a contributory defined contribution pension plan as defined
by IRS Code Section 401(k). All employees who have attained 21 years of age are
eligible to participate in the plan. The Company will match 50% of the first 6%
of each employee's wages deferred. An employee is vested in these matching and
discretionary funds on a schedule of 20% each year until fully vested after
completing five years of service with the Company. At the discretion of the
board of directors, the Company may make discretionary contributions to the
plan. Total matching and discretionary contributions made by the Company for the
year ended March 31, 2003 amounted to $312,073.
NOTE L - INCOME TAXES
The Company provides income taxes on items included in the statement of
operations regardless of the period when such taxes were payable. Deferred
income taxes result from timing differences in the recognition of income and
expense for tax and financial statement purposes.
Income tax expense differs from the amount currently payable because income is
reported in the statement of operations in periods which differed from those in
which they were subject to taxation. These timing differences result principally
from net operating loss carryforwards and research and development credit
carryforwards. The differences between income tax expense and taxes currently
payable are reflected in deferred tax accounts in the balance sheets.
The Income tax provision consists of the following:
Current federal tax benefit $ (3,416)
Deferred federal tax benefit (2,772,044)
Net change in valuation allowance 11,534,933
---------------
Income tax expense $ 8,759,473
===============
Components of the deferred tax accounts are as follows:
Total long-term deferred tax assets 11,534,933
Net change in valuation allowance (11,534,933)
---------------
Net deferred tax asset $ -
===============
The Company has loss carryforwards totaling $25,897,482 that may be offset
against future taxable income, which expire beginning in 2013 through 2023. The
Company has research tax credits totaling $1,461,298
11
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE L - INCOME TAXES - CONTINUED
which expire beginning in 2013 through 2023. The Company also has a capital loss
carryforward totaling $3,644 that may be offset against future capital gains, If
not used, the capital loss carryforward will expire in 2004. The deferred tax
asset increased to $11,534,933 in 2003 because of additional net operating loss
carryforwards and research credits. Management now believes it is more likely
than not that the deferred tax asset will not be realized due to ownership
changes which could limit the loss carryforwards available. Accordingly, in
2003, a valuation allowance of $11,534,933 was provided through charges of
$11,534,933 to the deferred tax provision.
NOTE M - STOCKHOLDERS' EQUITY
On September 26, 2002, Qualia Computing entered into a recapitalization
agreement with Cadx Canada Inc. (owned by Shire Pharmaceuticals) to restructure
the capital of the Company. In the recapitalization. two classes of common
shares were defined, Class A and Class B. Cadx Canada Inc. owned all the
preferred shares of Qualia Computing, Inc, prior to the recapitalization. These
preferred shares were exchanged 1 for 1 for Class B common shares at the
recapitalization. At the recapitalization, Qualia Computing, Inc. acquired the
subsidiaries of Cadx Systems, Inc (Cadx USA), Cadx Medical Systems Inc (Cadx
Canada), Cadx Medical Systems Limited (Cadx Ireland), and Cadx Medical Systems
SARL (Cadx France) in exchange for giving Cadx Canada Inc. 138,164 additional
Qualia Computing, Inc. Class B shares to bring their total ownership to 50%. The
investment in the subsidiaries was recorded at the fair market value of the net
assets at the time of the recapitalization.
As of March 31, 2003, the following shares of stock were authorized, issued and
outstanding:
Authorized IS&W Outstanding
------------ ------ -------------
Common shares (Class A, $.0001 par value) 1,905,554 730,000 730,000
Common shares (Class B $.0001 par value) 952,777 730,000 730,000
Class A and B shares have voting rights and are entitled to receive dividends
pro rata. Class B shares shall upon a triggering event, be converted without
cost into class A shares. Also, upon a triggering event, all stock options
exercisable into Class B shares shall be converted automatically into the right
to exercise Class A shares. A triggering event shall include a merger,
consolidation, reorganization, recapitalization, or any sale, lease, assignment
or transfer of all or substantially all assets of the Company.
NOTE N - STOCK OPT1ONS
The Company initiated a stock option plan approved by the stockholders in
February 2001. All options issued to date vest in equal installments over a
period of four years with the first installment beginning twelve months
following the date of grant. The compensation committee, as delegated by the
board, determines the vesting schedule of the options. Prior to September 2002,
the term of each option could not exceed ten years from the date of the grant
of the option. During September 2002, the plan was amended to have no
expiration date. The number of shares of Class A shares available for options
is 222,777. The number of shares of Class B shares available for options is
222,777. The option plan does not allow the issuance of options in an aggregate
amount that would result in the outstanding options being greater than 10% of
the total number of Class A and B shares outstanding at the time of the option
grant.
12
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE N - STOCK OPTIONS - CONTINUED
Stock option activity is presented as follows:
Optioned
Shares Option Price
(Class A) per Share Total
----------- ------------ ------------
Balance, March 31, 2002 50,700 $ 1.00 $ 50,700
Options issued 74,600 1.00 74,600
----------- ------------
Balance, March 31, 2003 125,300 1.00 $ 125,300
=========== ============
The Company did not record an expense for the options issued during the year. If
the Company had used fair value based method of accounting for its employee
stock option plan, as prescribed by Statement of Financial Accounting Standards
No. 123, compensation cost in net loss for the year ended March 31, 2003 would
have increased by $74,600 with a corresponding increase in paid-in capital. Net
loss for the year ended March 31, 2003 would have been $15,571,448.
NOTE 0 - SPIN OFF
Qualia Financial Services, LLC was spun off from Qualia Computing, Inc. August
21, 2002. Hardware and software, along with cash of $500,000 and licensed
technology for use in online commodities trading of NASDAQ 100 and S & P 500
futures were transferred from Qualia Computing, Inc. in exchange for a
promissory note for $1,000,000. See Note G.
NOTE P - CONTINGENCIES
The Company is involved in a lawsuit with another company over patent
Infringement. The case has not been settled and no amounts have been accrued as
of the date of these financial statements,
NOTE Q - SUBSEQUENT EVENTS
The shareholder who owns the Class B shares is currently in negotiations with
individuals concerning the purchase of these Class 8 shares. A letter of intent
has been signed as of the date of this report. As part of the purchase of these
shares, these individuals intend to contribute cash of approximately $10 million
to the Company.
The Company has signed agreements with GE to distribute the digital and analog
digital products and with Source One to distribute the analog products. With the
completion of these two agreements, it is the Company's intent to use
distributors as the primary sales vehicle, however, the Company has retained the
right to execute direct sales activities as necessary to achieve revenue
targets.
One of the subsidiaries, Cadx France, is in the process of being dissolved. Any
remaining assets after dissolution will be retained by the parent. No estimates
can be made as to the effect of this item on the financial statements.
13
OUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE R - FOREIGN CURRENCY ITEMS
Cadx Canada, Cadx France and Cadx Ireland transacted a portion of their business
using foreign currency. The transactions have been recorded in accordance with
FASB 52 using the current rate of exchange, as applicable, on the transaction
date. Gains or losses from the settlement of the foreign currency transactions
are reported in other income (expense), as applicable on the payment date.
Foreign currency losses amounting to $7,593 have been reported in the other
income (expense) for the year ended March 31, 2003.
Cadx Canada, Cadx France, and Cadx Ireland use foreign currency as their
functional currency. Translation adjustments result from the process of
translating those entities' financial statements into the reporting currency of
Qualia Computing. In accordance with FASB 52, those translation adjustments are
not included in determining net income but are reported separately and
accumulated in a separate component of equity called cumulative translation
adjustments.
NOTE S - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for
Interest paid $ 185
===============
Non cash investing and financing activities:
Acquisition of subsidiaries
Cash received $ 188,714
Accounts receivable 3,104,649
Inventory 2,315,899
Property and equipment 480,852
Other assets 35,901
Accounts payable assumed (46,447)
Accrued expenses assumed (532,382)
Cumulated translation adjustment 9,702
Equity (5,556,888)
---------------
Cash paid to acquire the subsidiaries $ -
===============
14
Pushing the Possibilities
[BRADY WARE LOGO]
INDEPENDENT AUDITORS'REPORT ON CONSOLIDATED
SUPPLEMENTARY INFORMATION
-------------------------------------------------------
One South Main Street
Suite 600 Board of Directors
Dayton, Ohio 45402 QUALIA COMPUTING, INC. AND SUBSIDIARIES
(937) 223-5247 Beavercreek, Ohio
(800) 893-4283
Fax (937) 223-0300 Our report on our audit of the basic financial
statements of QUALIA COMPUTING, INC. AND SUBSIDIARIES as
of March 31, 2003 appears on page one. Our audit was
One Woodside Drive conducted for the purpose of forming an opinion on the
Richmond, Indiana 47374 basic financial statements taken as a whole. The
(765) 966-0531 supplementary information (shown on page 16) is
(800) 515-5536 presented for purposes of additional analysis of the
Fax (765) 962-5015 financial statements rather than to present the
consolidated balance sheet, results of operations and
cash flows of the Company. Such information has been
www.bradyware.com subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our
opinion is fairly stated in all material respects in
relation to the financial statements taken as a whole
for the year ended March 31, 2003.
/s/ BRADY WARE & SCHOENFELD, INC.
---------------------------------
Dayton, Ohio
August 26,2003
15
QUAUA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
YEAR ENDED MARCH 31, 2003
--------------------------------------------------------------------------------
Wages 4,416,604
Bonuses 208,045
Payroll taxes 337,795
Employee benefits 433,173
401 (k) match and profit sharing 312,073
Bank charges 7,239
Computer supplies 47,166
Repair and maintenance 26,195
Consulting fees 490,770
Legal and professional fees 737,785
Meals and entertainment 146,632
Contributions 25,250
Travel 710,971
Training and seminars 28,941
Office expense 63,443
Postage and freight 126,245
Rent 524,784
Research 12,406
Dues and subscriptions 27,852
Advertising 280,468
Depreciation expense 404,119
Amortization expense 15,274
Insurance 75,660
Miscellaneous taxes 56,074
Telephone and utilities 120,461
Personal property taxes (5,007)
Licenses 37,511
Tuition assistance 11,407
Bad Debt 930,000
Relocation expense 19,252
Expenses allocated to cost of sales (799,280)
------------
$ 9,829,308
============
See independent auditors' report on consolidated supplementary information. 16
QUALIA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2003
QUALIA COMPUTING, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
NINE MONTHS ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Consolidated Balance Sheet 2
Consolidated Statement of Operations 3
Consolidated Statement of Changes in Stockholders' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6-13
SUPPLEMENTARY INFORMATION
Independent Auditors' Report on Consolidated Supplementary Information 14
Consolidated Schedule of Selling, General and Administrative Expenses 15
Pushing the Possibilities
[BRADY WARE LOGO]
INDEPENDENT AUDITORS'REPORT
-------------------------------------------------------
One South Main Street Board of Directors
Suite 600 QUALIA COMPUTING, INC. AND SUBSIDIARIES
Dayton. Ohio 45402 Beavercreek, Ohio
(937) 223-5247
(800) 893-4283
Fax (937)223-0300 We have audited the accompanying consolidated balance
sheet of QUALIA COMPUTING, INC. and Subsidiaries as of
December 31, 2003, and the related consolidated
statements of operations, changes in stockholders!
One Woodside Drive equity and cash flows for the nine months then ended.
Richmond, Indiana 47374 These consolidated financial statements are the
(765)966-0531 responsibility of the Company's management. our
(800)515-5536 responsibility is to express an opinion on these
Fax (765)962-5015 consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing
standards generally accepted in the United States of
America. Those standards require that we plan and
www.bradyware.com perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall financial statement presentation. We believe
that our audit provides 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 Qualia Computing,
Inc. and Subsidiaries as of December 31, 2003, and the
results of its operations and its cash flows for the
nine months then ended in conformity with accounting
principles generally accepted in the United States of
America.
/s/ BRADY WARE & SCHOENFELD, INC
--------------------------------
Dayton, Ohio
February 3, 2004
1
QUALIA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 446,031
Accounts receivable 2,479,089
Inventory 1,457,636
Prepaid expenses 63,523
----------------
4,446,279
PROPERTY AND EQUIPMENT, NET 850,241
OTHER ASSETS 634,592
----------------
$ 5,931.112
LIABILITIES AND STOCKHOLDERS'EQUITY
================
CURRENT LIABILITIES
Accounts payable $ 2,722,133
Accrued expenses 1,156,678
----------------
3,878,811
----------------
STOCKHOLDERS'EQUITY
Common stock 17
Cumulative translation adjustments 95,043
Paid-in capital 36,488,492
Accumulated deficit (34,531,251)
----------------
2,052,301
----------------
$ 5,931,112
================
See notes to financial statements. 2
QUALIA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------
NETSALES $ 10,325,256
COST OF SALES 4,990,485
----------------
GROSS MARGIN 5,334,771
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,813,972
----------------
LOSS FROM OPERATIONS (5,479,201)
OTHER INCOME (EXPENSE) - NET (234,724)
LOSS BEFORE INCOME TAXES (5,713,925)
INCOME TAX EXPENSE -
----------------
NET LOSS $ (5,713.92
================
See notes to financial statements. 3
QUALIA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------
TOTAL
OTHER STOCKHOLDERS'
COMMON TRANSLATION PAID-IN COMPREHENSIVE ACCUMULATED EQUITY
STOCK ADJUSTMENT CAPITAL INCOME (LOSS) DEFICIT (DEFICIT)
--------- ------------- ------------- ---------------- ------------- ---------------
Balance - April 1, 2003 $ 15 $ 27,498 $ 36,260,994 $ 1,336 $ (28,817,326) $ 7,472,517
Net loss - - - - (5,713,925) (5,713,925)
Unrealized loss on investments - - - (1,336) - (1,336)
Gain on translation of currency - 67,545 - - - 67,545
Stock options exercised $ 2 - 227,498 - - 227,500
--------- ------------- ------------- ---------------- ------------- ---------------
Balance - December 31, 2003 $ 17 $ 95,043 $ 36,488,492 $ - $ (34,531,251) $ 2,052,301
========= ============= ============= ================ ============= ===============
See notes to financial statements. 4
QUALIA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (5,713,925)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 309,721
Loss on disposal of assets 164,325
Loss on sale of investments 5,545
Cumulative translation adjustments 67,545
Change in inventory reserve 1,054,163
Change in allowance for doubtful accounts 271,557
---------------
(3,841,069)
Changes in operating assets and liabilities:
Accounts receivable (118,003)
Inventory (933,065)
Prepaid expenses 214,329
Other assets (84,372)
Accounts payable 2,126,070
Accrued expenses 389,726
---------------
Net cash used by operating activities (2,246-384)
---------------
INVESTING ACTIVITIES
Purchases of property and equipment (178,485)
Proceeds from sale of investments 256,410
Purchase of investments (6,564)
---------------
Net cash provided by Investing activities 71,361
---------------
FINANCING ACTIVITIES
Issuance of common stock 227,500
---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,947,523)
CASH AND CASH EQUIVALENTS
Beginning of period 2,339,669
---------------
End of period $ 446,031
===============
See notes to financial statements, 5
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE A - COMPANY OPERATIONS AND FINANCIAL VIABILITY
QUALIA COMPUTING, INC. AND SUBSIDIARIES (the "Company') is a software research
and development organization specializing in computer-aided intelligence
amplification, with applications in the fields of human decision-making,
including computer-aided cancer detection, intelligent drug and vaccine
discovery, text categorization and time-series prediction. The Company's
market is global with its headquarters located in Dayton, Ohio. The Company
incurred research and development costs of $1,896,896 during the period.
On December 31, 2003, Qualia Computing, Inc, was acquired through a stock
purchase by iCad, a Delaware corporation which develops, engineers, and
manufactures CAD products in the medical imaging and women's health markets.
Qualia Computing, Inc. was merged into Qualia Acquisition Corp., a wholly
owned subsidiary of !Cad. As a result of the merger, shares of Qualia class A
and B common stock were deemed cancelled and converted into shares of iCad
common stock, except for class B shares owned by CadX Canada, Inc. (Shire
Pharmaceuticals) and class A shares owned by Brianna Biotech, Inc., who
received cash and notes in lieu of iCad stock. These consolidated financial
statements have been prepared on a basis consistent with prior years and do
not reflect any adjustments from the application of purchase accounting.
Since inception, the Company had been funding its operations with the sale of
preferred shares of stock to Cadx: Canada Inc. (Shire Pharmaceuticals). As
described above, the Company has merged with iCad on December 31, 2003. The
principal stockholder of iCad has indicated that he will continue to supply the
necessary working capital to enable the Company to continue as a going concern.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Qualia Computing, Inc. and its wholly owned
subsidiaries, Cadx: Systems, Inc (Cadx USA), Cadx Medical Systems, Inc (Cadx
Canada), Cadx Medical Systems Limited (Cadx Ireland), and Cadx Medical Systems
SARL (Cadx France). All significant inter-company transactions and balances
have been eliminated in the accompanying consolidated financial statements.
Qualia Computing, Inc., the parent, has a March fiscal tax year end. The
subsidiaries all have December tax year ends.
FINANCIAL ESTIMATES - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted 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 consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION - Sales revenue on units that are sold through a
distributor is recognized upon shipment to the distributor. The distributor has
responsibility for installation. The Company is providing training after
installation on Source One contracts and on GE contracts of analog units;
however, the cost of this training is de minimus and insignificant to the
overall sale transaction. Sales revenue on units sold directly by the Company
is recognized upon installation. Contract service revenue is recognized over
the life of the contract. The unearned revenue is accounted for in the balance
sheet account, "unearned revenue."
6
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - SUMMARY OF SIGINIFICANT ACCOUNTING POLICIES - CONTINUED
CONCENTRATIONS - Financial instruments that potentially subject the Company to
credit risk consist principally of trade accounts receivable. In addition,
from time to time, the Company has funds on deposit with a financial
institution in excess of FDIC insurance limits.
ACCOUNTS RECEIVABLE - The Company uses the allowance method in accounting for
bad debts. An allowance for doubtful accounts is established to give
recognition to the receivable amounts that may become uncollectible in the
future. The allowance is reviewed annually to determine that the amount is
appropriate. The allowance as of December 31, 2003 was slel,400.
INVENTORIES - Inventories are valued at the lower of cost (first-in, first-out
method) or market. An inventory reserve of $1,154,163 has been set up as of
December 31, 2003 to account for obsolescence. The inventory reserve increased
by $1,054,163 for the nine months ended December 31, 2003. This accounts for
approximately 21 % of the cost of sales for the nine months ended December 31,
2003.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and
depreciated over their estimated useful lives using both straight-line and
accelerated methods. Routine repairs and maintenance are charged to expense
when incurred. Renewals and betterments which substantially increase the life
of the property and equipment are capitalized. At retirement or sale, the costs
of the assets, less related accumulated depreciation or amortization, are
removed from the accounts and resulting gains and losses are included in
income.
PATENTS - The costs associated with the registration of patents are being
amortized over a period of 15 years on a straight-line method. The amortization
expense for the nine months ended December 31, 2003 was $15,229.
INCOME TAXES - The Company utilizes the asset and liability approach to
accounting for income taxes. The objective of the asset and liability method is
to establish deferred tax assets and liabilities for temporary differences
between the financial reporting and the tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
ADVERTISING EXPENSE - Advertising costs are expensed as incurred. Advertising
expense was $779,398 for the nine months ended December 31, 2003.
SHIPPING AND HANDLING EXPENSE - Shipping and handling costs are included in the
cost of sales.
WARRANTY EXPENSE - The Companies offer a warranty for one year on the Second
Look units which coincides with the warranty offered by the manufacturer. Since
substantially all warranty claims submitted to the Company are covered by the
manufacturers warranty, no additional warranty reserve has been recorded as of
December 31, 2003.
7
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE C - ACCOUNTS RECEIVABLE
Trade $ 2,382,904
Employees 686
Miscellaneous 31,666
Related party (Note J) 63,833
---------------
$ 2,479,089
===============
NOTE D - INVENTORY
Finished goods $ 1,640,031
Inventory on consignment 971,768
Inventory reserve (1,154,163)
---------------
$ 1,457,636
---------------
NOTE E - PROPERTY AND EQUIPMENT
Leasehold improvements $ 9,729
Furniture, fixtures, and equipment 201,074
Computer equipment 195,579
Research equipment 1,065,506
Manufacturing equipment 219,590
Software 103,119
---------------
Total cost 1,792,597
Less accumulated depreciation and amortization 942,356
---------------
$ 8501241
===============
NOTE F - OTHER ASSETS
Deposits $ 245,414
Premium advance receivable - life insurance 100,000
Patent cost 342,143
Accumulated amortization - patents (52,965)
---------------
$ 634,592
===============
8
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE G - ACCRUED EXPENSES
Wages, bonuses, and commissions $ 747,291
Vacation 91,841
Payroll taxes 9,436
401 K 63,543
Personal property, sales, and other miscellaneous taxes 28,067
Unearned revenue 216,500
---------------
$ 1,156,678
===============
NOTE H - OPERATING LEASES
The Company leases its facilities for $32,960 per month. The lease expires in
December 2010. The Company is also responsible for utilities, real estate taxes,
common area maintenance, cleaning and security. 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 connection with this lease, the Company
is paying an additional $1,727 per month for additional build out costs incurred
by the lessor for the Company.
The Company is leasing a copier for $654 per month. The lease expires in
February 2008.
The Company assumed operating leases for computers leased from Shire Biochem. At
the end of the lease, the computers are to be returned to Shire. The lease
payment is set in Canadian dollars and varies each month as the number of
computers leased varies monthly, The final lease payment is due in February
2005.
The Company also leases additional equipment and storage space as needed during
the period. The lease expense for the nine months ended December 31, 2003 was
$382.161. Future minimum lease payments are as follows:
2004 $ 426,494
2005 428,211
2006 440,039
2007 453,005
2008 459,171
Thereafter 958,712
---------------
$ 3,165,632
===============
9
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE I - CUSTOMER LEASES
The Company has entered into leasing arrangements with customers for the lease,
with an option to purchase the Second Look units. The lease agreements require
the lessees to pay to the Company a percentage of the revenue generated by the
units. At the end of the lease, the lessees have the option to purchase the unit
for an agreed-upon sales price, less the amount already paid to the company.
NOTE J - RELATED PARTY TRANSACTIONS
The Company engaged non-employee stockholders in consulting agreements to
perform work on behalf of the Company. The total consulting fees paid under
these agreements was $137,502 for the nine months ended December 31, 2003.
The Company has accounts receivable due from a related party in the amount of
$165,390 at December 31, 2003. An allowance for doubtful accounts of $101,557
has been recorded against this as of December 31, 2003.
The Company has a note receivable due from a related party in the amount of
$1,000,000 at December 31, 2003. The note is due in full on December 31, 2007.
Interest is being charged at the prime rate as identified by the bank (4.00% as
of December 31, 2003) and is due annually on August 21, the anniversary date of
the note. The note is being reserved for the full amount due to substantial
doubt about the ability of the borrower to repay the debt.
NOTE K - 401 (K) PLAN
The Company sponsors a contributory defined contribution pension plan as defined
by IRS Code Section 401 (k). All employees who have attained 21 years of age are
eligible to participate in the plan. The Company will match 50% of the first 6%
of each employee's wages deferred. An employee is vested in these matching and
discretionary funds on a schedule of 20% each year until fully vested after
completing five years of service with the Company. At the discretion of the
board of directors, the Company may make discretionary contributions to the
plan. Total matching and discretionary contributions made by the Company for the
nine months ended December 31, 2003 amounted to $91,673.
NOTE L - INCOME TAXES
The Company records a provision for federal income taxes on items included in
the statement of operations regardless of the period when such taxes are
payable. Deferred income taxes result from timing differences in the recognition
of income and expense for tax and financial statement purposes.
The Company has loss carryforwards totaling $30,316,963 that may be offset
against future taxable income, which expire beginning in 2013 through 2023. The
Company has research tax credits totaling $1,650,988 which expire beginning in
2013 through 2023. The Company also has a capital loss carryforward totaling
$3,644 that may be offset against future capital gains. If not used, the capital
loss carryforward will expire in 2004. The deferred tax asset increased to
$13,552,233 at December 31, 2003 because of additional net operating loss
carryforwards and research credits.
10
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE L - INCOME TAXES - continued
Management now believes it is more likely than not that the deferred tax asset
will not be realized due to ownership changes which will limit a portion of the
loss carryforwards available (See Note A). Accordingly, in 2003, a valuation
allowance of $13,552,233 was recorded against the deferred tax asset. No amounts
were charged to the provision for federal income taxes for the nine months ended
December 31, 2003.
NOTE M - STOCKHOLDERS' EQUITY
As of December 31, 2003, prior to the acquisition and merger into Qualia
Acquisition Corp. (See Note A), the following shares of stock were authorized,
issued and outstanding:
AUTHORIZED ISSUED OUTSTANDING
--------------- ---------- -------------
Common shares (Class A, $.00001 par value) 1,905,554 907,500 907,500
Common shares (Class B, $.00001 par value) 952,777 780,000 780,000
Class A and B shares have voting rights and are entitled to receive dividends on
a pro rata basis. Class B shares shall upon a triggering event, be converted
without cost into class A shares. Also, upon a triggering event, all stock
options exercisable into Class B shares shall be converted automatically into
the right to exercise Class A shares. A triggering event shall include a merger,
consolidation, reorganization, recapitalization, or any sale, lease, assignment
or transfer of all or substantially all assets of the Company. The merger as
describe in Note A is a triggering event.
NOTE N - STOCK OPTIONS
The Company initiated a stock option plan approved by the stockholders in
February 2001. All options issued to date vest in equal installments over a
period of four years with the first installment beginning twelve months
following the date of grant. The compensation committee, as delegated by the
board, determines the vesting schedule of the options. Prior to September 2002,
the term of each option could not exceed ten years from the date of the grant of
the option. During September 2002, the plan was amended to have no expiration
date. The option plan does not allow the issuance of options in an aggregate
amount that would result in the outstanding options being greater than 10% of
the total number of Class A and B shares outstanding at the time of the option
grant. As a condition of the merger as described in Note A, the stock option
plan was terminated on December 31, 2003.
Stock option activity is presented as follows:
OPTIONED OPTION
SHAMS PRICE
(CLASS A) PER SHARE TOTAL
---------- ----------- ----------
Balance, March 31, 2003 125,300 1.00 125,300
Options issued 52,200 1.00 52,500
Options exercised (177,500) 1.00 (177,500)
---------- ----------- ----------
Balance, December 31, 2003 - -
---------- ----------
11
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE N - STOCK OPTIONS - CONTINUED
OPTIONED OPTION
SHARES PRICE
(CLASS B) PER SHARE TOTAL
------------ ------------- ----------
Balance, March 31, 2003 - 1.00 -
Options issued 50,000 1.00 50,000
options exercised (50.00 1.00 (50,000)
------------ ----------
Balance, December 31, 2003 - -
============ ==========
NOTE 0 - DISTRIBUTION AGREEMENTS
The Company signed an agreement with General Electric Company (GE) in June 2003
to distribute digital and analog digital products. The agreement expires
December 31, 2007 with options to renew for one year terms. The Company signed a
three year agreement with Source One in September 2003 to distribute analog
products. The agreement states that there are minimum targets for each of the
three years. If the minimums are not met, the Company has the right to convert
the agreement to a nonexclusive agreement or terminate the agreement. With the
completion of these two agreements, it is the Company's intent to use
distributors as the primary sales vehicle, however, the Company has retained the
right to execute direct sales activities as necessary to achieve revenue
targets.
NOTE P - ACCELERATED PAYMENT AGREEMENT
The Company has entered into an accelerated payment program with General
Electric Capital Corporation (GE Capital). The agreement provides payment to the
Company upon shipment of goods to GE as provided in the purchase orders. There
is a discount associated with the payment of the invoices to the Company. The
discount percentage decreases daily from the date of the shipment until the
invoice is paid by GE Capital. The agreement expires in October 2004.
NOTE Q - FOREIGN CURRENCY ITEMS
Cadx Canada, Cadx France and Cadx Ireland transacted a portion of their business
using foreign currency. The transactions have been recorded in accordance with
FASB 52 using the current rate of exchange, as applicable, on the transaction
date. Gains or losses from the settlement of the foreign currency transactions
are reported in other income (expense), as applicable on the payment date.
Foreign currency losses amounting to $56,667 have been reported in the other
income (expense) for the nine months ended December 31, 2003.
Cadx Canada, Cadx France, and Cadx Ireland use foreign currency as their
functional currency. Translation adjustments result from the process of
translating those entities' financial statements into the reporting currency of
Qualia Computing, Inc. In accordance with FASB 52, those translation adjustments
are not included in determining net income but are reported separately and
accumulated in a separate component of equity called cumulative translation
adjustments.
12
QUALIA COMPUTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE R - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the nine months for:
Interest paid $ 53,579
===============
Noncash investing and financing activities:
Net book value of assets abandoned $ 164,325
===============
13
Pushing the Possibilities
[BRADY WARE LOGO]
INDEPENDENT AUDITORS'REPORT ON CONSOLIDATED
SUPPLEMENTARY INFORMATION
-------------------------------------------------------
One South Main Street
Suite 600
Dayton. Ohio 45402
(937) 223-5247 Board of Directors
(800) 893-4283 QUALIA COMPUTING, INC. AND SUBSIDIARIES
Fax (937)223-0300 Beavercreek, Ohio
One Woodside Drive
Richmond, Indiana 47374 Our report on our audit of the basic financial
(765)966-0531 statements of Qualia Computing, Inc. and Subsidiaries as
(800)515-5536 of December 31, 2003 appears on page one. Our audit was
Fax (765)962-5015 conducted for the purpose of forming an opinion on the
basic financial statements Fax ( taken as a whole. The
supplementary information (shown on page 15) is
presented for purposes of additional analysis and is not
a required part of the basic financial statements. Such
www.bradyware.com information has been subjected to the auditing
procedures applied in the audit of the basic financial
statements and, in our opinion is fairly stated in all
material respects in relation to the basic financial
statements taken as a whole for the nine months ended
December 31, 2003.
/s/ BRADY WARE & SCHOENFELD, INC.
---------------------------------
Dayton, Ohio
February 3, 2004
14
QUALIA COMPUTING, INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------------------------------------------
NINE MONTHS ENDED DECEMBER 31, 2003
Wages $ 4,691,594
Bonuses 429.516
Payroll taxes 236,371
Employee benefits 426,653
401(k) match and profit sharing 91,673
Bank charges 11,796
Computer supplies 32,853
Repair and maintenance 28,341
Consulting fees 350,225
Legal and professional fees 1,192,851
Meals and entertainment 178,915
Contributions 11,399
Travel 831,844
Training and seminars 4,691
Office expense 59,141
Postage and freight 215,849
Rent and lease expense 382,161
Market research 73,160
Dues and subscriptions 23,601
Advertising 779,398
Depreciation expense 294,492
Amortization expense 15,229
Insurance 131,504
Miscellaneous taxes 73,864
Telephone and utilities 174,839
Personal property taxes 16,660
Licenses 32,302
Tuition assistance 4,898
Bad Debt 332,957
Relocation expense 30,346
Expenses allocated to cost of sales (344,951)
----------------
$ 10,813,972
----------------
See independent auditors' report on consolidated supplementary information. 15
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial
statements give effect to the merger of iCAD, Inc. ("iCAD) and Qualia Computing,
Inc. ("Qualia") using the purchase method of accounting, as required by
Statement of Financial Accounting Standard No. 141, "Business Combinations."
Under this method of accounting, iCAD allocated the purchase price to the fair
value of assets acquired, including identified intangible assets and goodwill
based on estimates it believes to be reasonable. The purchase price allocation
is subject to revision when iCAD obtains additional information regarding asset
valuation. The unaudited pro forma combined condensed balance sheet assumes the
merger took place on September 30, 2003 and reflects the net proceeds of
approximately $5,900,000 from iCAD's November 2003 private placement of
1,260,000 shares of its common stock and additional investment rights which gave
the investors in the offering the right to purchase, for a limited period, up to
315,000 additional shares of common stock at $5.00 per share. The unaudited pro
forma combined condensed statements of operations assume that the merger took
place as of January 1, 2002. The unaudited pro forma information is presented
for illustration purposes only in accordance with the assumptions set forth
below. This information is not necessarily indicative of the operating results
or of the financial position that would have occurred if the merger had been
consummated on the dates indicated nor is it necessarily indicative of future
operating results or financial position of the combined enterprise. The
unaudited pro forma combined condensed financial information does not reflect
any adjustments to reflect any cost savings or other synergies anticipated as a
result of the merger.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2003
Proforma
iCAD (1) Qualia (2) Adjustments Total
------------ ----------- ------------ ------------
Current assets:
Cash and equivalents $ 587,879 $ 446,031 $ (1,550,000) (a) $ 5,383,910
5,900,000 (a)
Trade accounts receivable, net of allowance
for doubtful accounts 1,027,266 2,479,089 (225,883) (c) 3,280,472
Inventory 531,402 1,457,636 1,989,038
Prepaid and other 177,713 63,523 241,236
------------ ----------- ------------ ------------
Total current assets 2,324,260 4,446,279 4,124,117 10,894,656
------------ ----------- ------------ ------------
Property and equipment:
Equipment 953,722 1,581,794 2,535,516
Leasehold improvements 21,250 9,729 30,979
Furniture and fixtures 35,569 201,074 236,643
------------ ----------- ------------ ------------
1,010,541 1,792,597 - 2,803,138
Less accumulated depreciation and amortization 666,583 942,356 - 1,608,939
------------ ----------- ------------ ------------
Net property and equipment 343,958 850,241 - 1,194,199
------------ ----------- ------------ ------------
Other assets:
Identifiable intangible assets 3,387,125 289,178 3,404,822 (b) 7,081,125
Goodwill 17,415,723 - 25,789,497 (b) 43,205,220
Other assets - 345,414 345,414
Patents, net 94,643 94,643
------------ ----------- ------------ ------------
Total other assets 20,897,491 634,592 29,194,319 50,726,402
------------ ----------- ------------ ------------
Total assets $ 23,565,709 $ 5,931,112 $ 33,318,436 $62,815,257
============ =========== ============ ============
PF1
Current liabilities:
Accounts payable $ 1,765,368 $ 2,722,133 (225,883) (c) $ 4,261,618
Accrued interest 262,834 262,834
Accrued expenses 1,309,821 1,156,678 686,620 (a) 3,153,119
Loans payable to sellers - -
Note Payable - -
Convertible subordinated debentures 10,000 - 10,000
Current maturities of note payable 69,048 - 1,125,000 (a) 1,194,048
------------ ----------- ------------ ------------
Total current liabilities 3,417,071 3,878,811 1,585,737 8,881,619
Convertible promissory notes payable 2,930,000 - 2,930,000
Note payable, less current maturities 56,155 - 3,375,000 (a) 3,431,155
------------ ----------- ------------ ------------
Total liabilities 6,403,226 3,878,811 4,960,737 15,242,774
------------ ----------- ------------ ------------
Stockholders' equity:
Convertible preferred stock 86 - 86
Common stock 273,978 17 (17) (d) 329,578
43,000 (a)
12,600 (a)
Additional paid-in-capital 88,130,846 36,488,492 (36,488,492) (d) 118,485,246
24,467,000 (a)
5,887,400 (a)
Accumulated deficit (70,292,163) (34,531,251) 34,531,251 (d) (70,292,163)
Cumulative translation adjustment 95,043 (95,043) (d)
Treasury stock, at cost (950,264) (950,264)
------------ ----------- ------------ ------------
Stockholders' equity 17,162,483 2,052,301 28,357,699 47,572,483
------------ ----------- ------------ ------------
Total liabilities and stockholders' equity $23,565,709 $ 5,931,112 $ 33,318,436 $ 62,815,257
============ =========== ============ ============
(1) The iCAD balance sheet is as of September 30, 2003.
(2) The Qualia balance sheet is as of December 31, 2003.
PF2
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
Proforma
ICAD (1) Qualia (2) Adjustments Total
------------ ----------- ------------ ------------
Sales $ 6,246,432 $ 9,889,027 $ (23,309) (e) $ 16,112,150
Government grant revenue - 101,847 101,847
------------ ----------- ------------ ------------
Total revenues 6,246,432 9,990,874 (23,309) 16,213,997
Cost of sales 5,585,384 4,604,632 (11,188) (e) 10,178,828
------------ ----------- ------------ ------------
Gross margin 661,048 5,386,242 (12,121) 6,035,169
------------ ----------- ------------ ------------
Operating expenses:
Engineering and product development 1,950,171 5,186,105 7,136,276
General and administrative 7,715,085 3,454,961 616,000 (f) 11,786,046
Marketing and sales 987,587 9,535,139 10,522,726
------------ ----------- ------------ ------------
Total operating expenses 10,652,843 18,176,205 616,000 29,445,048
------------ ----------- ------------ ------------
Loss from operations (9,991,795) (12,789,963) (628,121) (23,409,879)
------------ ----------- ------------ ------------
Interest and other income (expense),net (48,167) 215,772 (246,094) (h) (78,489)
------------ ----------- ------------ ------------
Net loss before taxes (10,039,962)
(12,574,191) (874,215) (23,488,368)
Income tax provision (expense) - (8,766,361) 8,766,361 (i) -
------------ ----------- ------------ ------------
Net loss (10,039,962) (21,340,552) 7,892,146 (23,488,368)
Preferred dividends 148,050 - 148,050
------------ ----------- ------------ -------------
Net income (loss) available to common
shareholders $(10,188,012) $(21,340,552) $ 7,892,146 $(23,636,418)
============ ============ ============ =============
Net loss per share basic and diluted $ (0.39) $ (0.78)
Weighted average number of shares used in
computing earnings per share 26,000,177 4,300,000 (g) 30,300,177
(1) The iCAD financial statements for the year ended December 31, 2002
include the results of iCAD for the twelve months ended December 31,
2002 as adjusted to include twelve months results of ISSI which was
acquired on June, 2002 (See Note 3).
(2) The Qualia financial statements for the year ended December 31, 2002
include the results of Qualia for the 12 months ended March 31, 2003,
the Company's fiscal year-end as adjusted to include the twelve-months
results of CADx which was acquired on September 26, 2002. (See Note 4).
PF3
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Pro Forma
iCAD Qualia Adjustments Total
------------ ----------- ------------ ------------
Sales $ 4,938,629 $ 10,325,256 $ (237,789) (e) $ 15,026,096
------------ ----------- ------------ ------------
Total revenues 4,938,629
10,325,256 (237,789) 15,026,096
Cost of sales 2,233,775 4,990,485 (114,139) (e) 7,110,121
------------ ----------- ------------ ------------
Gross margin 2,704,854 5,334,771 (123,650) 7,915,975
------------ ----------- ------------ ------------
Operating expenses:
Engineering and product development 1,813,560 2,727,329 4,540,889
General and administrative 6,370,414 2,682,668 462,000 (f) 9,515,082
Marketing and sales 1,077,189 5,403,975 6,481,164
------------ ----------- ------------ ------------
Total operating expenses 9,261,163 10,813,972 462,000 20,537,135
------------ ----------- ------------ ------------
Loss from operations (6,556,309) (5,479,201) (585,650) (12,621,160)
------------ ----------- ------------ ------------
Interest and other (income) expense,net 47,644 234,724 184,571 (h) 466,939
------------ ----------- ------------ ------------
Net loss (6,603,953) (5,713,925) (770,221) (13,088,099)
Preferred dividends 110,733 - 110,733
------------ ----------- ------------ ------------
Net loss available to common shareholders $ (6,714,686) $(5,713,925) $ (770,221) $(13,198,832)
============ =========== ============ ============
Net loss per share basic and diluted $ (0.25) $ (0.43)
Weighted average number of shares used in
computing earnings per share 26,531,177 4,300,000 (g) 30,831,177
PF4
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRO FORMA PRESENTATION
The unaudited pro forma combined condensed financial statements of iCAD
have been prepared on the basis of assumptions relating to the allocation of
consideration paid to the acquired assets and liabilities of Qualia based on
management's best preliminary estimates. The actual allocation of the amount of
the consideration may differ from that reflected in these unaudited pro forma
combined condensed financial statements after a third party valuation and other
procedures have been completed.
Below are tables of the estimated acquisition costs and estimated purchase price
allocation for Qualia:
Fair value of iCAD common stock issued $24,510,000
Cash consideration and promissory note 6,050,000
Direct acquisition costs 686,620
-----------
Total purchase price $31,246,620
===========
Net tangible assets acquired $ 1,763,123
Estimated fair value of identifiable intangible assets 3,694,000
Goodwill 25,789,497
-----------
Total Acquisition Cost $31,246,620
===========
2. PRO FORMA ADJUSTMENTS
(a) Reflects the components of the purchase consideration and related
transaction costs which consist of iCAD common stock with a market value of
$24,510,000, $1,550,000 cash and a $4,500,000 promissory note and direct
acquisition costs of $686,620. The value of iCAD common stock was based upon a
per share value of $5.70, equal to the closing price on November 28, 2003, the
day the acquisition was announced. Also reflects the net proceeds of
approximately $5,900,000 for iCAD's November 2003 private placement of 1,260,000
shares of its common stock and additional investment rights to purchase up to
315,000 additional shares of common stock.
(b) Represents adjustments to increase the carrying values of
identifiable intangible assets and record goodwill acquired.
(c) Reflects the elimination of amounts owed between iCAD and Qualia.
(d) Reflects the elimination of existing stockholders' equity of
Qualia.
(e) Reflects the elimination of sales between iCAD and Qualia.
(f) Represents amortization of increase in value of acquired
identifiable intangible assets of Qualia based upon average estimated useful
lives of six years (3,694,000/6 years = $616,000 per year)
(g) Reflects the increase in weighted average basic and diluted shares
outstanding for the common stock issued in connection with the merger. Pro forma
basic and diluted loss per share was calculated assuming that the 4,300,000
shares of iCAD common stock issued in connection with the merger were issued at
the beginning of the period presented.
(h) Reflects the interest associated with the note payable of
$4,500,000 issued in connection with the Acquisition at an assumed expected
average interest of 6.25%. Year ended December 31, 2002 - Average Borrowings of
$3,937,500 x 6.25% = $246,094.
(i) Elimination of Qualia tax provision due to loss of combined
entities.
PF5
3. ADJUSTMENTS TO ICAD FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENT ICAD
FOR THE YEAR ENDED DECEMBER 31, 2002
Proforma
iCAD ISSI Adjustments Total
------------ ----------- ------------ ------------
Sales $ 5,000,184 $ 1,602,452 $ (356,204) (3a) $ 6,246,432
------------ ----------- ------------ ------------
Total revenues 5,000,184 1,602,452 (356,204) 6,246,432
Cost of sales 5,161,643 603,156 (179,415) (3a) 5,585,384
------------ ----------- ------------ ------------
Gross margin (161,459) 999,296 (176,789) 661,048
------------ ----------- ------------ ------------
Operating expenses:
Engineering and product development 1,626,001 324,170 1,950,171
General and administrative 6,595,076 938,509 181,500 (3b) 7,715,085
Marketing and sales 987,587 - 987,587
------------ ----------- ------------ ------------
Total operating expenses 9,208,664 1,262,679 181,500 10,652,843
------------ ----------- ------------ ------------
Loss from operations (9,370,123) (263,383) (358,289) (9,991,795)
------------ ----------- ------------ ------------
Interest and other income (expense),net (48,167) - (48,167)
------------ ----------- ------------ ------------
Net income (loss) before tax (9,418,290) (263,383) (358,289) (10,039,962)
Income tax provision (expense) - - -
------------ ----------- ------------ ------------
Net loss (9,418,290) (263,383) (358,289) (10,039,962)
Preferred dividends 148,050 - 148,050
------------ ----------- ------------ ------------
Net income (loss) available
to common shareholders $ (9,566,340) $ (263,383) $ (358,289) $(10,188,012)
============ =========== ============ ============
Net loss per share basic and diluted $ (0.46) $ (0.39)
Weighted average number of shares used in
computing earnings per share 20,928,397 5,071,780 26,000,177
Pro Forma Adjustments
(3a) Reflects the elimination of sales between iCAD and ISSI.
(3b) Reflects the amortization of intangible asset.
PF6
4. ADJUSTMENTS TO QUALIA FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENT QUALIA
FOR THE YEAR ENDED DECEMBER 31, 2002
Proforma
Qualia CADx Adjustments Total
------------ ----------- ------------ ------------
Sales 4,990,493 $ 5,196,534 $ (298,000) (4a) $ 9,889,027
Government grant revenue 101,847 - 101,847
------------ ----------- ------------ ------------
Total revenues 5,092,340 5,196,534 (298,000) 9,990,874
Cost of sales 2,216,179 2,388,453 4,604,632
------------ ----------- ------------ ------------
Gross margin 2,876,161 2,808,081 (298,000) 5,386,242
------------ ----------- ------------ ------------
Operating expenses:
Engineering and product development 2,478,993 2,707,112 5,186,105
General and administrative 2,438,235 1,016,726 3,454,961
Marketing and sales 4,911,917 4,921,222 (298,000) (4a) 9,535,139
------------ ----------- ------------ ------------
Total operating expenses 9,829,145 8,645,060 (298,000) 18,176,205
------------ ----------- ------------ ------------
Loss from operations (6,952,984) (5,836,979) - (12,789,963)
------------ ----------- ------------ ------------
Interest and other income (expense),net 215,772 - 215,772
------------ ----------- ------------ ------------
Net loss before tax (6,737,212) (5,836,979) - (12,574,191)
Income tax provision (expense) (8,759,473) (6,888) (8,766,361)
------------ ----------- ------------ ------------
Net loss (15,496,685) (5,843,867) - (21,340,552)
Preferred dividends - - -
------------ ----------- ------------ ------------
Net income (loss) available
to common shareholders (15,496,685) $(5,843,867) $ - $(21,340,552)
============ =========== ============ ============
Net loss per share basic and diluted $ (10.61) $ (14.62)
Weighted average number of shares used in
computing earnings per share 1,460,000 1,460,000
PRO FORMA ADJUSTMENTS
(4a) Reflects the elimination of Royalty between Qualia and CADx.
PF7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
iCAD, INC.
By /s/ W. Scott Parr
------------------------------------
W. Scott Parr, President &
Chief Executive Officer
Dated: March 15, 2004