UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
(Amendment No. 1)
to
CURRENT REPORT
Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 15, 2014
ICAD, INC.
(Exact name of registrant as specified in its charter)
Delaware | 1-9341 | 02-0377419 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
98 Spit Brook Road, Suite 100, Nashua, New Hampshire | 03062 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code (603) 882-5200
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Explanatory Note
On July 18, 2014, iCAD, Inc., a Delaware Corporation (the Registrant), filed a Current Report on Form 8-K (the Initial Form 8-K) reporting its entrance into an Asset Purchase Agreement (the Radion Purchase Agreement) by and between the Registrant and Radion, Inc., a Delaware corporation (Radion) and its entrance into an Asset Purchase Agreement (the DermEbx Purchase Agreement and, together with the Radion Purchase Agreement, the Purchase Agreements) by and among the Registrant, Radion Capital Partners, LLC, a California limited liability company (RCP) and DermEbx, a series of RCP (DermEbx and, together with Radion, the Sellers).
This Amendment No. 1 on Form 8-K/A amends and supplements the Initial Form 8-K and is being filed to provide the historical financial information required and the pro forma financial information required pursuant to Items 9.01(a) and 9.01(b) of Form 8-K, respectively. In accordance with the requirements of Item 9.01 of Form 8-K, this Amendment No. 1 on Form 8-K/A is being filed within 71 calendar days of the date that the Initial Form 8-K was required to be filed.
Item 9.01. Financial Statements and Exhibits.
(a) | Financial Statements of Businesses Acquired. |
The following audited and unaudited financial statements as required by Item 9.01(a) are attached hereto as Exhibits to this Current Report on Form 8-K/A and are incorporated herein by reference.
(i.) | Report of Independent Auditor |
(ii.) | Audited Financial Statements of Radion, Inc. and Affiliate for the year ended December 31, 2013 |
(iii.) | Unaudited Financial Statements of Radion, Inc. and Affiliate as of June 30, 2014 and for the six months ended June 30, 2014 and 2013 |
(b) | Pro Forma Financial Information. |
The following Unaudited Pro Forma financial statements include the Consolidated Balance Sheet as required by Item 9.01(b), giving operational assets and certain liabilities relating to the business and product lines of iCAD, Inc and subsidiaries as if the acquisition had been completed on June 30, 2014, and consolidated statement of operations for the year ended December 31, 2013 and the six months ended June 30, 2014, as if the acquisition had been completed on January 1, 2013 and are attached hereto as Exhibit 99.3 to this Current Report on Form 8-K/A and are incorporated herein by reference.
(i.) | Unaudited Consolidated Pro Forma Balance Sheet as of June 30, 2014 |
(ii.) | Unaudited Consolidated Pro Forma Statement of Operations for the year ended December 31, 2013 |
(iii.) | Unaudited Consolidated Pro Forma Statement of Operations for the six months ended June 30, 2014 |
(iv.) | Notes to unaudited consolidated Pro Forma financial statements |
(d) | Exhibits. |
2.1* | Asset Purchase Agreement by and between iCAD, Inc. and Radion, Inc., dated as of July 15, 2014. | |
2.2* | Asset Purchase Agreement by and among iCAD, Inc., Radion Capital Partners, LLC and DermEbx, a series of Radion Capital Partners, LLC, dated as of July 15, 2014. | |
23.1 | Consent of Independent Auditor | |
99.1 | Report of Independent Auditor | |
99.2 | Audited Consolidated Financial Statements of Radion, Inc. and Affiliate for the year ended December 31, 2013 | |
99.3 | Unaudited Consolidated Financial Statements of Radion, Inc. and Affiliate for the six months ended June 30, 2014 and 2013 | |
99.4 | Unaudited Pro Formas |
* | The Registrant has omitted certain schedules and exhibits in accordance with Item 601(b)(2) of regulation S-K and shall furnish the omitted schedules and exhibits to the Commission upon request. Filed with the initial Form 8-K on July 18, 2014. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
iCAD, Inc. | ||
(Registrant) | ||
By: | /s/ Kevin C. Burns | |
Kevin Burns | ||
Chief Financial Officer and | ||
Chief Operating Officer |
Date: September 29, 2014
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITOR
We consent to the incorporation by reference in the Registration Statement No. 333-187660, 33-72534, No. 333-99973, No. 333-119509, No. 333-139023, No. 333-144671 and No. 333-161959 on Form S-8 and No. 333-169716, 333-176777 and 333-178952 on Form S-3 of iCAD, Inc. of our report dated September 29, 2014, relating to our audit of the consolidated financial statements of Radion, Inc. and Affiliate as of and for the year ended December 31, 2013, included in this Current Report on Form 8-K.
/s/ McGladrey LLP
McGladrey LLP
Boston, MA
September 29, 2014
1
Exhibit 99.1
INDEPENDENT AUDITORS REPORT
To the Board of Directors
Radion, Inc. and Affiliate
Cupertino, CA
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Radion, Inc. and Affiliate which comprise the consolidated balance sheet of as of December 31, 2013, and the related consolidated statements of operations, stockholders deficit, and cash flows for the year then ended, and the related notes to the consolidated financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these 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 consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Radion, Inc. and Affiliate as of December 31, 2013, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ McGladrey, LLP
Boston, MA
September 29, 2014
1
Exhibit 99.2
Radion, Inc. and Affiliate
Consolidated Financial Statements
Year Ended December 31, 2013
Radion, Inc. and Affiliate
CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2013
CONTENTS
Page | ||||
Consolidated Financial Statements: |
||||
Balance Sheet |
2 | |||
Statements of Operations |
3 | |||
Statements of Stockholders Deficit |
4 | |||
Statements of Cash Flows |
5 | |||
Notes to Consolidated Financial Statements |
6-16 |
Radion, Inc and Affiliate
Consolidated Balance Sheet
December 31, 2013 |
||||
Assets | ||||
Current assets: |
||||
Cash and cash equivalents |
$ | 67,321 | ||
Trade accounts receivable, net |
1,635,658 | |||
Inventory, net |
1,078,365 | |||
Prepaid expenses and other current assets |
114,275 | |||
|
|
|||
Total current assets |
2,895,619 | |||
|
|
|||
Property and equipment: |
||||
Equipment |
9,767 | |||
Equipment under capital lease |
1,897,222 | |||
Furniture and fixtures |
1,309 | |||
|
|
|||
1,908,298 | ||||
Less accumulated depreciation and amortization |
(329,298 | ) | ||
|
|
|||
Net property and equipment |
1,579,000 | |||
|
|
|||
Other assets |
4,184 | |||
|
|
|||
Total assets |
$ | 4,478,803 | ||
|
|
|||
Liabilities and Stockholders Equity | ||||
Current liabilities: |
||||
Accounts payable |
$ | 855,650 | ||
Accrued and other expenses |
1,290,833 | |||
Accrued compensation |
862,834 | |||
Other liabilities |
447,571 | |||
Deferred revenue |
601,127 | |||
Due to related party |
103,310 | |||
Related party convertible notes payable - short term |
355,859 | |||
Capital lease obligation - short term |
581,931 | |||
|
|
|||
Total current liabilities |
5,099,115 | |||
|
|
|||
Related party convertible notes payable - long term portion |
75,000 | |||
Deferred revenue - long term portion |
128,337 | |||
Capital lease obligation - long-term portion |
1,017,145 | |||
Tax liability - uncertain tax positions |
167,774 | |||
|
|
|||
Total liabilities |
6,487,372 | |||
|
|
|||
Commitments and Contingencies (Note 5) |
||||
Stockholders deficit: |
||||
Preferred stock, $ 0.0001 par value: authorized 2,500,000 shares |
105 | |||
Common stock, $0.0001 par value: authorized 25,000,000 shares |
1,986 | |||
Additional paid-in capital |
1,195,132 | |||
Accumulated deficit |
(3,262,709 | ) | ||
|
|
|||
Total stockholders deficit |
(2,065,486 | ) | ||
|
|
|||
Non-controlling interest in DermEbx |
56,918 | |||
Total liabilities and stockholders deficit |
$ | 4,478,803 | ||
|
|
See accompanying notes to consolidated financial statements.
Page 2
Radion, Inc and Affiliate | ||||
Consolidated Statements of Operations |
||||
Year Ended December 31, 2013 |
||||
Revenue, net |
$ | 5,763,608 | ||
Cost of revenue: |
2,950,346 | |||
|
|
|||
Gross profit |
2,813,262 | |||
|
|
|||
Operating expenses: |
||||
Marketing and sales |
661,404 | |||
Engineering and product development |
170,917 | |||
General and administrative |
3,394,397 | |||
|
|
|||
Total operating expenses |
4,226,718 | |||
|
|
|||
Loss from operations |
(1,413,456 | ) | ||
Interest income |
4,274 | |||
Interest expense |
(134,194 | ) | ||
|
|
|||
Other income (expense), net |
(129,920 | ) | ||
Loss before income tax expense |
(1,543,376 | ) | ||
Provision for income taxes |
(167,774 | ) | ||
|
|
|||
Net loss |
$ | (1,711,150 | ) | |
|
|
See accompanying notes to consolidated financial statements.
Page 3
Radion, Inc and Affiliate
Consolidated Statements of Stockholders Deficit
Common Stock | Preferred Stock | Additional | Non-controlling | |||||||||||||||||||||||||||||
Number of | Number of | Paid-in | interest in | Accumulated | Stockholders | |||||||||||||||||||||||||||
Shares Issued | Par Value | Shares Issued | Par Value | Capital | DermEbx llc | Deficit | Deficit | |||||||||||||||||||||||||
Balance at December 31, 2012 |
19,837,500 | 1,984 | 1,052,189 | 105 | 984,677 | | (1,595,041 | ) | (608,275 | ) | ||||||||||||||||||||||
Contributed capital |
100,400 | 100,400 | ||||||||||||||||||||||||||||||
Issuance of common stock pursuant to stock option plans |
25,000 | 2 | 998 | | 1,000 | |||||||||||||||||||||||||||
Stock-based compensation |
| 209,457 | 209,457 | |||||||||||||||||||||||||||||
Net income (loss) |
(43,482 | ) | (1,667,668 | ) | (1,711,150 | ) | ||||||||||||||||||||||||||
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|
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|
|
|
|||||||||||||||||
Balance at December 31, 2013 |
19,862,500 | 1,986 | 1,052,189 | 105 | 1,195,132 | 56,918 | (3,262,709 | ) | (2,008,568 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
Page 4
Radion, Inc and Affiliate
Consolidated Statements of Cash Flows
For the twelve months ended December 31, 2013 |
||||
Cash flow from operating activities: |
||||
Net loss |
$ | (1,711,150 | ) | |
Adjustments to reconcile net loss to net cash used for operating activities: |
||||
Depreciation |
325,693 | |||
Provision for bad debt |
122,191 | |||
Stock based compensation |
209,457 | |||
Changes in operating assets and liabilities: |
||||
Accounts receivable |
(1,003,804 | ) | ||
Inventory |
(1,078,365 | ) | ||
Prepaid and other current assets |
(87,513 | ) | ||
Accounts payable |
103,245 | |||
Accrued expenses |
2,249,128 | |||
Deferred revenue |
729,464 | |||
|
|
|||
Total adjustments |
1,569,496 | |||
|
|
|||
Net cash used for operating activities |
(141,654 | ) | ||
|
|
|||
Cash flow from investing activities: |
||||
Additions to property and equipment |
(1,886,439 | ) | ||
|
|
|||
Net cash used for investing activities |
(1,886,439 | ) | ||
|
|
|||
Cash flow from financing activities: |
||||
Contributed capital in DermEbx, LLC |
100,400 | |||
Proceeds from debt financing |
1,599,076 | |||
Stock option exercise |
1,000 | |||
Other liabilities |
359,000 | |||
|
|
|||
Net cash provided by financing activities |
2,059,476 | |||
|
|
|||
Increase in cash and equivalents |
31,383 | |||
Cash and equivalents, beginning of period |
35,938 | |||
|
|
|||
Cash and equivalents, end of period |
$ | 67,321 | ||
|
|
See accompanying notes to consolidated financial statements.
Page 5
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Year Ended December 31, 2013
1. | NATURE OF BUSINESS |
Radion, Inc. (Radion) and its variable interest entity, DermEBX, a Series of Radion Capital Partners, LLC (DermEBX and Radion collectively the Company) specialize in the providing software as a solution (SAAS) based software, equipment, development, management and technical services to Dermatologists for the treatment of skin cancer.
The Company is subject to risks common to startup companies in similar stages of development including, but not limited to, the need for successful development of new technology, development of markets and distribution channels, raising sufficient capital to support operations, protection of proprietary technology, dependence on key personnel, fluctuations in operating results and risks associated with changes in information technology.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and include the consolidated accounts and transactions of Radion and its variable interest entity, DermEBX, collectively. All intercompany balances and transactions are eliminated in consolidation. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (FASB ASC).
A variable interest entity (VIE) is an entity with insufficient equity investment or in which the equity holders lack one or more of the characteristics of controlling interests. The characteristics of controlling interests are adequate decision making ability, the obligation to absorb the expected losses, and the right to receive the expected residual returns. Generally US GAAP requires VIE to be consolidated in an entitys financial statements if the entity is the primary beneficiary of the VIE. DermEBX is a VIE due to its insufficient equity. In determining whether Radion is the primary beneficiary of DermEBX, Radion considers, among other things, whether it has the power to direct the activities of the VIE that most significantly impact the entitys economic performance, including, but not limited to, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. Radion also considers whether it has the obligation to absorb losses of, or the right to receive benefits from, the VIE. Radion assesses its determination as the primary beneficiary on an ongoing basis.
Radion is considered the primary beneficiary of DermEBX primarily because the officers have the power to direct the activities of both entities and combined have a majority ownership in both entities. Additionally, there is a software original equipment manufacturer (OEM) license and service agreement between the entities.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities during the reporting period. Actual results could differ from these estimates. Significant estimates include revenue recognition, stock based compensation expense and the useful lives of property and equipment.
Page 6
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Year Ended December 31, 2013
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash equivalents and accounts receivable. The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of original purchase to be cash equivalents. The Company maintains its cash and cash equivalents in bank deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company sells its products primarily to small to mid-sized medical practices. Concentrations of credit risk with respect to trade receivables are limited due to the nature of the customers comprising the Companys customer base.
The Company monitors its accounts receivable credit risk as a matter of policy. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to exist in the Companys accounts receivable.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and managements evaluation of outstanding accounts receivable at the end of the year.
Bad debts are written off against the allowance when identified. At December 31, 2013 the allowance for doubtful accounts was $152,693.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. The following estimated useful lives used are:
Furniture and fixtures |
7 years | |||
Computer equipment |
4 years | |||
Equipment capital lease |
3 years |
Impairment of Long-Lived Assets
The Companys long-lived assets are reviewed by management for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based on its undiscounted future cash flows. At December 31, 2013 the Company has not identified any impairment of its long-lived assets.
Revenue Recognition
The Company recognizes revenue primarily from the sale of physics and management services, the lease of electronic brachytherapy equipment, supplies and the right to use the Companys RadionHub software. Revenue is recognized when delivery has occurred, persuasive evidence of an arrangement exists, fees are fixed or determinable and collectability of the related receivable is probable. The Company assesses whether collection is probable by considering a number of factors, including past transaction history with the customer and the creditworthiness of the customer, as obtained from third party credit references. For supplies revenue, delivery has occurred upon shipment provided title and risk of loss have passed to the customer. Services revenue and development fees are considered to be delivered as the services are performed or over the estimated life of the agreement. The Company typically bills items monthly over the life of the agreement except for development fees, which are generally billed in advance or over a 12
Page 7
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Year Ended December 31, 2013
month period and the fee for treatment supplies which is generally billed in advance. The Company has determined that each of these elements have standalone value and are separate units of accounting.
The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-25. For multiple element arrangements, revenue is allocated to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (BESP). VSOE generally exists only when the deliverable is sold separately and is the price actually charged for that deliverable. The process for determining BESP for deliverables without VSOE or TPE considers multiple factors including relative selling prices; competitive prices in the marketplace, and management judgment, however, these may vary depending upon the unique facts and circumstances related to each deliverable.
The Company has determined that sales related to the use of the RadionHub software generally follow the guidance of FASB ASC Topic 605 Revenue Recognition (ASC 605) as the software is hosted by the Company and the customer is not provided any license right. Accordingly, the software is considered SAAS.
The Company defers revenue from the sale of services related to future periods and recognizes revenue on a straight-line basis in accordance with ASC Topic 605-20, Services.
Deferred revenues represent amounts billed for development fees, which are generally billed monthly in advance.
Stock-Based Compensation
The Company accounts for its stock-based compensation awards in accordance with FASB ASC Topic 718, CompensationStock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees, including grants of employee stock options and restricted stock and modifications to existing stock options, to be recognized in the consolidated statements of operations based on their fair values. The Company uses the Black-Scholes option pricing model to determine the fair value of options granted.
Consistent with the guidance in FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees, the fair value of each non-employee stock option is estimated at the date of grant using the Black-Scholes option pricing model with assumptions generally consistent with those used for employee stock options, with the exception of expected term, which is over the contractual life.
Compensation expense related to awards to employees is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. Awards to non-employees are adjusted through stock-based compensation expense as the award vests to reflect the current fair value of such awards, and expensed using an accelerated attribution model.
The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected term, risk-free interest rate and expected dividends. The Company does not have a history of market prices of its common stock as it is not a public company, and as such volatility is estimated using historical volatilities of similar public entities. The expected life of the employee awards is estimated based on the simplified method. The risk free interest rate assumption is based on observed interest rates appropriate for the terms of the awards. The dividend yield assumption is based on the history and expectation of paying no dividends.
Page 8
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Year Ended December 31, 2013
There were no stock options granted during the year ended December 31, 2013.
The Company recorded stock-based compensation expense in connection with share-based awards of $209,457 for the year ended December 31, 2013, which is included in the accompanying statements of operations. As of December 31, 2013 there was $114,678 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted average period of 2.5 years. No tax benefit was recorded related to options grants during 2013.
Fair Value of Financial Instruments
The Company accounts for the fair value measurements in accordance with accounting guidance that defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 - | Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date. The Company does not have any instruments meeting the criteria of Level 1 inputs. | |
Level 2 - | Pricing inputs are quoted prices for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. The Company does not have any instruments meeting the criteria of Level 2 inputs. | |
Level 3 - | Pricing inputs include unobservable inputs that reflect the reporting entitys own assumptions about the assumptions market participants would use in pricing the asset or liability, which are developed based on the best information available. |
Assets and liabilities that are within the provisions of accounting guidance that defines fair value, such as the Companys warrant liabilities, are recorded at fair value using market valuation approaches. The Companys warrant liabilities are not exchange traded instruments and no observable inputs exist. The warrants are valued based on unobservable inputs that reflect the reporting entitys own assumptions in pricing the liabilities and accordingly classified as level 3 inputs.
Financial instruments measured and reported at fair value on a recurring basis as of December 31, 2013 are as follows:
Balance as of December 31, 2013 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Warrant liabilities |
$ | 88,571 | $ | | $ | | $ | 88,571 | ||||||||
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Page 9
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Year Ended December 31, 2013
Activity for liabilities classified as Level 3:
Level 3 | ||||
Beginning balance at December 31, 2012 |
$ | 88,450 | ||
Change in fair value |
121 | |||
|
|
|||
Ending balance at December 31, 2013 |
$ | 88,571 | ||
|
|
The valuation of these instruments is determined using widely accepted valuation techniques including the Black-Scholes Pricing Model. The fair value was determined using this model with assumptions for volatility, expected dividend yield; expected term and risk-free interest rate (see Note 7). The warrants are categorized as Level 3 of the fair value hierarchy.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the year ended December 31, 2013 totaled $360.
Income Taxes
The Company uses the liability method under FASB ASC Topic 740, Income Taxes, in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and for net operating loss carry forwards, measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company follows the provisions of applicable accounting standards relative to accounting for uncertain tax positions. Under these provisions, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax positions as well as the consideration of the available facts and circumstances.
3. | PROPERTY AND EQUIPMENT |
2013 | ||||
Property and equipment |
||||
Furniture and fixtures |
$ | 1,309 | ||
Equipment |
1,897,222 | |||
Office equipment |
9,767 | |||
|
|
|||
1,908,298 | ||||
Less - accumulated depreciation |
(329,298 | ) | ||
|
|
|||
$ | 1,579,000 | |||
|
|
Depreciation expense for the year ended December 31, 2013 was $325,693.
Page 10
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Year Ended December 31, 2013
4. | RELATED PARTY CONVERTIBLE NOTES PAYABLE |
At December 31, 2013 the Company had approximately $430,859 of Notes Payable outstanding with shareholders. The Notes are convertible to preferred stock in the event the Company consummates, prior to the maturity date of the note, an equity financing pursuant to which it sells shares of a series of Preferred Stock (the Preferred Stock), and with the principal purpose of raising capital (a Qualified Equity Financing), then the outstanding principal amount of and all accrued interest under this Note shall automatically convert into a number of shares of such Preferred Stock equal to the outstanding principal amount of and all accrued interest under this Note, divided by the price per share at which the Preferred Stock is sold in the Qualified Equity Financing. The conversion to Preferred Stock is subject to discounts of 10%, 20% or 30% based on the date the Qualified Equity Financing is completed. Conversion of the notes is contingent upon a subsequent financing event, if such event where to occur, a beneficial conversion would be measured and recorded in earnings in the period of the financing event.
The Convertible Notes bear interest at the rate of 5% per annum and all outstanding principal and interest is due at the maturity date if not converted into preferred stock issued at a Qualified Equity Financing before the maturity date. The notes mature at various dates through 2017.
5. | COMMITMENTS AND CONTINGENCIES |
Capital Leases
The Company entered into two separate Master Lease Agreements (Lease One and Lease Two) for the use of equipment. The Company subsequently rents this equipment to the customer for use in their dermatology practice.
The term of Lease One is 36 months. The Company has leased 6 machines pursuant to the Master Lease. A security deposit of approximately 5% of the aggregate equipment capitalized cost was paid at the execution of each lease schedule. The Company has the right to return all the equipment under each lease schedule at the end of the term.
The term of Lease Two is 36 months. The Company has leased 4 machines pursuant to the Master Lease. A security deposit of approximately $19,000 was paid at the execution of the lease schedule. The Company has the right to return all the equipment under each lease schedule at the end of the term.
The leased equipment has been included in the Companys balance sheet at December 31, 2013 and depreciated in the same manner as its other fixed assets. The leased equipment had a cost of $1,885,130 at December 31, 2013, and the related amortization of these leases totaled $320,686 for the year ending December 31, 2013.
Future minimum payments under capital leases for the fiscal years ending December 31 are approximately as follows:
2014 |
$ | 763,709 | ||
2015 |
763,710 | |||
2016 |
365,391 | |||
|
|
|||
Less-interest |
(293,734 | ) | ||
|
|
|||
Present value of minimum capital lease obligations |
1,599,076 | |||
Less-current portion of capital lease obligations |
(581,931 | ) | ||
|
|
|||
$ | 1,017,145 | |||
|
|
Page 11
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Year Ended December 31, 2013
Operating Leases
The Company leases approximately 1,000 square feet consisting of two separate office facilities under non-cancelable operating leases each expiring March 31, 2016. Rent expense under these agreements was $37,782 for the year ended December 31, 2013.
The Companys future minimum payments related to the leased facility are shown below.
Future minimum payments under non-cancelable operating leases for the fiscal years ending December 31 are as follows:
2014 |
$ | 38,456 | ||
2015 |
39,609 | |||
2016 |
9,975 | |||
|
|
|||
$88,040 | ||||
|
|
Other liabilities
The Company borrowed $359,000 from an individual with no formal agreement. The amount was settled in January 2014 for $275,000 and a gain of $84,000 was recorded.
6. | STOCKHOLDERS DEFICIT |
Common Stock
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Companys stockholders. The holders of common stock are entitled to receive dividends when and if declared by the Board of Directors. Upon liquidation, dissolution, or winding up, the stock holders are entitled to share pro rata in the net assets available after the payment of the liquidation preference of holders of any outstanding preferred stock.
The Company has 25,000,000 authorized shares of common stock, of which 5,037,500 are reserved for future issuance:
Series A preferred stock
The Company has 2,500,000 authorized shares of Series A preferred stock and 1,052,189 shares issued with 1,447,811 reserved for future issuance. These outstanding shares were cancelled in February 2014.
Conversion Rights
The Series A preferred stock is convertible into the Companys common stock, at any time, at the option of the holder. Each share of Series A and A-1 preferred stock is convertible into 1 share of common stock, subject to certain anti-dilution adjustments. All outstanding shares of Series A preferred stock shall automatically convert into common shares upon (i) the vote of at least 50% of the then outstanding shares of preferred stock or (ii) if the Company shall effect a firm commitment underwritten public offering for which the gross proceeds is not less than $20,000,000.
Voting
The holders of Series A preferred stock are entitled to the number of votes equal to the number of whole shares of common stock into which the shares of preferred stock could be converted as of the record date.
Dividends
The holders of Series A preferred stock are entitled to receive dividends when and if declared by the Board of Directors.
Page 12
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Year Ended December 31, 2013
Liquidation Preference
Upon liquidation of the Company, each holder of outstanding shares of preferred stock shall be entitled to be paid out the assets of the Company before any payment is made to the holders of Common Stock. Payments include any undeclared, unpaid dividends. If assets are insufficient to pay the aggregate preferred preference amounts, then the preferred stockholders shall share ratably in any distribution in connection with a liquidation event in proportion to the respective amounts to which they are entitled. If assets remain for distribution after satisfying the preferred preference amounts, the remaining assets and funds of the Company shall be distributed among the common stockholders pro rata based on the number of shares held by each holder.
Preferred Stock Warrants
The Company issued warrants to purchase 199,772 shares of Preferred Stock on various dates during 2009 through 2013. The warrants have an exercise price of $0.04 per share and expire in 2016 and 2020. The grant date fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions; risk free interest rate at 0.48%-3.32%, no dividend yield, volatility of 47%-63% and an estimated life of 7-10 years. The warrants are accounted for as liabilities in the accompanying balance sheet and adjustments to fair value are recorded at each reporting date as a component of other income (expense).
7. | STOCK OPTIONS |
The Company established the 2009 Incentive Stock Plan (the 2009 Plan) which provides for shares of common stock to be issued as incentive stock options (ISOs) or nonqualified stock options and as restricted stock. Exercise prices and vesting periods are determined on the date of grant by the board of directors. Options generally vest ratably over 4 years and expire ten years from the date of grant. As of December 31, 2013 the Company has reserved a total of 4,500,000 shares of its common stock for issuance pursuant to the 2009 Plan and there were 755,000 shares available for future grant.
Option activity under the 2009 Plan is as follows:
Number of Options |
Weighted-Average Exercise Price Per Share |
|||||||
Outstanding options at December 31, 2012 |
3,632,500 | 0.04 | ||||||
Granted |
| | ||||||
Exercised |
(25,000 | ) | 0.04 | |||||
Canceled |
(400,000 | ) | 0.04 | |||||
|
|
|
|
|||||
Outstanding at December 31, 2013 |
3,207,500 | $ | 0.04 | |||||
|
|
|
|
|||||
Options exercisable at December 31, 2013 |
1,903,750 | $ | 0.04 | |||||
|
|
|
|
Page 13
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Year Ended December 31, 2013
Information regarding stock options outstanding that are vested or expected to vest as of December 31, 2013, is as follows:
Vested and Expected to Vest | Options Exercisable | |||||||||||||||||||||||||
Exercise Prices |
Number of Options |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life (Years) |
Number of Options |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life (Years) |
||||||||||||||||||||
$ | 0.04 | 3,207,500 | $ | 0.04 | 7.43 | 1,903,750 | $ | 0.04 | 8.11 |
8. | INCOME TAXES |
The components of income tax expense for the years ended December 31, 2013 are as follows:
2013 | ||||
Current provision (benefit): |
||||
Federal |
$ | 145,000 | ||
State |
23,000 | |||
|
|
|||
$ | 168,000 | |||
|
|
A summary of the differences between the Companys effective income tax rate and the Federal statutory income tax rate for the years ended December 31, 2013 is as follows:
2013 | ||||
Federal statutory rate |
34.0 | % | ||
State income taxes, net of federal benefit |
7.9 | % | ||
Permanent differences |
(1.0 | %) | ||
Change in valuation allowance |
(51.0 | %) | ||
|
|
|||
Effective income tax |
(10.1 | %) | ||
|
|
Deferred tax assets and liabilities are recognized for the expected future tax consequences of net operating loss carryforwards, tax credit carryforwards and temporary differences between the financial statement carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on the available evidence, it is more likely than not that the deferred tax assets will not be realized.
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 net deferred tax assets, as it is more likely than not that the deferred tax assets will not be utilized. Deferred tax assets (liabilities) are comprised of the following at December 31:
2013 | ||||
Accruals and reserves |
$ | 569,000 | ||
Fixed assets and intangibles |
18,000 | |||
Stock compensation |
83,000 | |||
Net operating loss and credits |
103,000 | |||
Net deferred tax assets |
773,000 | |||
Valuation allowance |
(773,000 | ) | ||
|
|
|||
$ | | |||
|
|
The increase in net deferred tax asset and corresponding valuation allowance is primarily attributable to compensation accruals recorded for US GAAP, but not deducted for tax purposes.
As of December 31, 2013, the Company had federal net operating loss carryforwards of approximately $67,000 and California net operating losses of approximately $235,000 expiring beginning in 2031. As of December 31, 2013, the Company has provided a valuation allowance for its net operating loss carryforwards due to the uncertainty of the Companys ability to generate sufficient taxable income in future years to obtain the benefit from the utilization of the net operating loss carryforwards. In the event of a deemed change in control, an annual limitation imposed on the utilization of the net operating losses may result in the expiration of all or a portion of the net operating loss carryforwards.
Page 14
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Year Ended December 31, 2013
The Company has available tax credit to offset future income tax liabilities totaling approximately $50,000. The credits expire in various years through 2033.
ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
A reconciliation of the beginning and ending balances of the total amounts of uncertain tax positions is as follows:
Year Ended December 31, | ||||
2013 | ||||
Balance, beginning of year |
$ | 0 | ||
Additions for current year tax positions |
167,774 | |||
Reductions of prior year tax positions |
| |||
|
|
|||
Balance, end of year |
$ | 167,774 | ||
|
|
At December 31, 2013, the Company had approximately $167,000 of uncertain tax positions. The Companys practice is to recognize interest and penalty expenses related to uncertain tax positions in income tax expense. The Company files United States federal and various state income tax returns. Generally, the Companys three preceding tax years remain subject to examination by federal and state taxing authorities.
The Company does not anticipate that it is reasonably possible that unrecognized tax benefits as of December 31, 2013 will significantly change within the next 12 months.
9. | VARIABLE INTEREST ENTITY |
As indicated in Note 1, Radion has consolidated a VIE under the requirements of US GAAP. As of and for the year ended December 31, 2013, Radion consolidated DermEBX, the entitys assets, liabilities and results of operations are included in the Companys consolidated financial statements. The VIEs equity holders interests are reflected in net income attributable to the noncontrolling interests in the consolidated statement of operations and noncontrolling interests in the consolidated balance sheet.
Summarized carrying amounts of the assets and liabilities of the VIE as of December 31, 2013 are as follows:
Current assets |
$ | 2,816,456 | ||
Property held for lease, net |
1,564,444 | |||
|
|
|||
Total assets |
$ | 4,380,900 | ||
|
|
|||
Current liabilities |
3,139,063 | |||
Uncertain tax positions |
167,774 | |||
Capital lease obligation |
1,017,145 | |||
|
|
|||
Total liabilities |
4,323,982 | |||
|
|
|||
Members equity |
100,400 | |||
Net loss |
(43,482 | ) | ||
|
|
|||
Total liabilities and equity |
$ | 4,380,900 | ||
|
|
Page 15
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Year Ended December 31, 2013
Assets of DermEBX are not available to settle obligations of Radion, Inc. The VIEs creditors lack recourse against the general credit of Radion, Inc.
10. | RELATED PARTY TRANSACTIONS |
The Company transacts with a related party, Radion Capital Partners. Radion Capital Partners leases equipment to the Company and as of December 31, 2013, the Company owed approximately $1,227,810 related to Lease One as discussed in Note 5, and approximately $95,000 related to an outstanding payable.
11. | SUBSEQUENT EVENTS |
The Company has evaluated subsequent events through September 29, 2014, the date which the financial statements were available to be issued. The following events occurred
On July 15th, 2014, DermEbx, LLC and Radion, Inc agreed to be acquired by iCAD, Inc for approximately $12.4 million in consideration. In connection with the acquisition by iCAD, the outstanding related party convertible notes payable were paid in cash.
Page 16
Exhibit 99.3
Radion, Inc. and Affiliate
Consolidated Financial Statements (unaudited)
Six Months Ended June 30, 2014 and 2013
Radion, Inc. and Affiliate
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Six Months Ended June 30, 2014 and 2013
C O N T E N T S
Page | ||||
Consolidated Financial Statements (unaudited): |
||||
Balance Sheets |
2 | |||
Statements of Operations |
3 | |||
Statements of Cash Flows |
4 | |||
Notes to Consolidated Financial Statements |
5-14 |
Radion, Inc and Affiliate
Consolidated Balance Sheet
(Unaudited)
June 30, | December 31, | |||||||
Assets | 2014 | 2013 | ||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,407,359 | $ | 67,321 | ||||
Trade accounts receivable, net |
1,893,572 | 1,635,658 | ||||||
Inventory, net |
| 1,078,365 | ||||||
Prepaid expenses and other current assets |
268,801 | 114,275 | ||||||
|
|
|
|
|||||
Total current assets |
3,569,732 | 2,895,619 | ||||||
|
|
|
|
|||||
Property and equipment: |
||||||||
Equipment |
1,956,718 | 9,767 | ||||||
Equipment under capital lease |
2,980,832 | 1,897,222 | ||||||
Furniture and fixtures |
1,309 | 1,309 | ||||||
|
|
|
|
|||||
4,938,859 | 1,908,298 | |||||||
Less accumulated depreciation and amortization |
(783,028 | ) | (329,298 | ) | ||||
|
|
|
|
|||||
Net property and equipment |
4,155,831 | 1,579,000 | ||||||
|
|
|
|
|||||
Other assets |
13,214 | 4,184 | ||||||
|
|
|
|
|||||
Total assets |
$ | 7,738,777 | $ | 4,478,803 | ||||
|
|
|
|
|||||
Liabilities and Stockholders Equity | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,215,114 | $ | 855,650 | ||||
Accrued and other expenses |
71,237 | 1,290,834 | ||||||
Accrued compensation |
995,177 | 862,834 | ||||||
Other liabilities |
415,350 | 497,572 | ||||||
Deferred revenue |
800,636 | 601,127 | ||||||
Due to related party |
367,792 | 103,310 | ||||||
Related party convertible notes payable - short term |
335,859 | 355,859 | ||||||
Capital lease obligation - short term |
772,800 | 581,931 | ||||||
|
|
|
|
|||||
Total current liabilities |
5,973,965 | 5,099,116 | ||||||
|
|
|
|
|||||
Related party convertible notes payable - long term portion |
75,000 | 75,000 | ||||||
Deferred revenue - long term portion |
170,932 | 128,337 | ||||||
Capital lease obligation - long-term portion |
1,525,366 | 1,017,145 | ||||||
Tax liability - uncertain tax positions |
1,950,992 | 167,774 | ||||||
|
|
|
|
|||||
Total liabilities |
9,696,255 | 6,487,372 | ||||||
|
|
|
|
|||||
Commitments and Contingencies (Note 5) |
||||||||
Stockholders deficit: |
||||||||
Preferred stock, $ 0.0001 par value: authorized 2,500,000 shares |
| 105 | ||||||
Common stock, $ 0 .0001 par value: authorized 25,000,000 shares |
1,911 | 1,986 | ||||||
Additional paid-in capital |
1,245,411 | 1,195,132 | ||||||
Accumulated deficit |
(3,528,051 | ) | (3,262,709 | ) | ||||
|
|
|
|
|||||
Total stockholders deficit |
(2,057,878 | ) | (2,065,486 | ) | ||||
|
|
|
|
|||||
Non-controlling interest in DermEbx |
325,251 | 56,918 | ||||||
Total liabilities and stockholders deficit |
$ | 7,738,777 | $ | 4,478,800 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
Page 2
Radion, Inc and Affiliate
Consolidated Statements of Operations
(unaudited)
Six months ended June 30, | ||||||||
2014 | 2013 | |||||||
Revenue, net |
$ | 6,300,935 | $ | 2,453,734 | ||||
Cost of revenue: |
1,795,884 | 1,664,263 | ||||||
|
|
|
|
|||||
Gross profit |
4,505,051 | 789,471 | ||||||
|
|
|
|
|||||
Operating expenses: |
||||||||
Marketing and sales |
563,237 | 367,372 | ||||||
Engineering and product development |
82,100 | 115,157 | ||||||
General and administrative |
2,008,125 | 1,188,640 | ||||||
|
|
|
|
|||||
Total operating expenses |
2,653,462 | 1,671,169 | ||||||
|
|
|
|
|||||
Income (loss) from operations |
1,851,589 | (881,698 | ) | |||||
Other income |
75,918 | | ||||||
Interest income |
9,030 | 4,274 | ||||||
Interest expense |
(152,328 | ) | (48,190 | ) | ||||
|
|
|
|
|||||
Other expense, net |
(67,380 | ) | (43,916 | ) | ||||
Income (loss) before income tax expense |
1,784,209 | (925,614 | ) | |||||
Tax expense |
(1,783,218 | ) | | |||||
|
|
|
|
|||||
Net income (loss) and comprehensive income (loss) |
$ | 991 | $ | (925,614 | ) | |||
|
|
|
|
See accompanying notes to consolidated financial statements.
Page 3
Radion, Inc and Affiliate
Consolidated Statements of Cash Flows
(unaudited)
For the six months ended June 30, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Cash flow from operating activities: |
||||||||
Net Income (loss) |
$ | 991 | $ | (925,614 | ) | |||
Adjustments to reconcile net income (loss) to net cash provide by (used for) operating activities: |
||||||||
Depreciation |
453,729 | 115,843 | ||||||
Bad debt provision |
5,000 | 77,250 | ||||||
Stock compensation |
80,099 | 78,069 | ||||||
Gain on extinguishment of note payable |
84,000 | |||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(262,914 | ) | (113,585 | ) | ||||
Inventory |
1,078,365 | | ||||||
Prepaid and other current assets |
(163,555 | ) | (384,754 | ) | ||||
Accounts payable |
1,359,464 | 378,744 | ||||||
Accrued expenses |
1,287,266 | 456,513 | ||||||
Deferred revenue |
242,104 | 77,333 | ||||||
|
|
|
|
|||||
Total adjustments |
3,995,578 | 685,413 | ||||||
|
|
|
|
|||||
Net cash provided by (used for) operating activities |
3,996,509 | (240,201 | ) | |||||
|
|
|
|
|||||
Cash flow from investing activities: |
||||||||
Additions to property and equipment |
(3,030,561 | ) | (1,014,119 | ) | ||||
|
|
|
|
|||||
Net cash used for investing activities |
(3,030,561 | ) | (1,014,119 | ) | ||||
|
|
|
|
|||||
Cash flow from financing activities: |
||||||||
Contributed capital in DermEbx, LLC |
| 450 | ||||||
Proceeds of Debt financing |
699,090 | 910,121 | ||||||
(Repurchase) Issuance of common stock for cash, net |
(30,000 | ) | 1,000 | |||||
Other liabilities |
275,000 | |||||||
Notes payable |
(379,000 | ) | 379,950 | |||||
|
|
|
|
|||||
Net cash provided by (used for) financing activities |
374,090 | 1,291,521 | ||||||
|
|
|
|
|||||
Increase in cash and equivalents |
1,340,038 | 37,201 | ||||||
Cash and equivalents, beginning of period |
67,321 | 35,938 | ||||||
|
|
|
|
|||||
Cash and equivalents, end of period |
$ | 1,407,359 | $ | 73,139 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
Page 4
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013
1. | NATURE OF BUSINESS |
Radion, Inc. (Radion) and its variable interest entity, DermEBX, a Series of Radion Capital Partners, LLC (DermEBX and collectively the Company) specialize in the providing software as a service (SAAS) based software, equipment, development, management and technical services to Dermatologists for the treatment of skin cancer.
The Company is subject to risks common to startup companies in similar stages of development including, but not limited to, the need for successful development of new technology, development of markets and distribution channels, raising sufficient capital to support operations, protection of proprietary technology, dependence on key personnel, fluctuations in operating results and risks associated with changes in information technology.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and include the consolidated accounts and transactions of Radion, Inc. and its variable interest entity, DermEBX, collectively. All intercompany balances and transactions are eliminated in consolidation. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (FASB ASC).
A variable interest entity (VIE) is an entity with insufficient equity investment or in which the equity holders lack one or more of the characteristics of controlling interests, (which are adequate decision making ability, the obligation to absorb the expected losses, and the right to receive the expected residual returns). Generally accepted accounting principles require VIEs, to be consolidated in an entitys financial statements if the entity is the primary beneficiary of the VIE. DermEBX, is a VIE due to its insufficient equity. In determining whether it is the primary beneficiary Radion considers, among other things, whether it has the power to direct the activities of the VIE that most significantly impact the entitys economic performance, including, but not limited to, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. Radion also considers whether it has the obligation to absorb losses of or the right to receive benefits from the VIE. Radion assesses its determination as the primary beneficiary on an ongoing basis.
Radion is considered the primary beneficiary of DermEBX primarily because the officers who have the power to direct the activities of both entities and combined have a majority ownership in both entities. Additionally, there is a software original equipment manufacturer (OEM) licenses and service agreement between the entities.
Use of Estimates
The preparation of 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, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities during the reporting period. Actual results could differ from these estimates. Significant estimates include revenue recognition, stock based compensation expense and the useful lives of property and equipment.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash equivalents and accounts receivable. The Company considers all highly liquid investments
Page 5
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013
with an original maturity of 90 days or less at the time of original purchase to be cash equivalents. The Company maintains its cash and cash equivalents in bank deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company sells its products primarily to small to mid-sized medical practices. Concentrations of credit risk with respect to trade receivables are limited due to the nature of the customers comprising the Companys customer base.
The Company monitors its accounts receivable credit risk as a matter of policy. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to exist in the Companys accounts receivable.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and managements evaluation of outstanding accounts receivable at the end of the year.
Bad debts are written off against the allowance when identified. At June 30, 2014 and 2013, respectively the allowance for doubtful accounts was $184,193 and $107,752.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. The following estimated useful lives used are:
Furniture and fixtures |
7 years | |||
Computer equipment |
4 years | |||
Equipment Capital Lease |
3 years |
Impairment of Long-Lived Assets
The Companys long-lived assets are reviewed by management for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based on its undiscounted future cash flows. At June 30, 2014 the Company has not identified any impairment of its long-lived assets.
Revenue Recognition
The Company recognizes revenue primarily from the sale of physics and management services, the lease of electronic brachytherapy equipment, supplies and the right to use the Companys RadionHub software. Revenue is recognized when delivery has occurred, persuasive evidence of an arrangement exists, fees are fixed or determinable and collectability of the related receivable is probable. The Company assesses whether collection is probable by considering a number of factors, including past transaction history with the customer and the creditworthiness of the customer, as obtained from third party credit references. For supplies revenue, delivery has occurred upon shipment provided title and risk of loss have passed to the customer. Services revenue and development fees are considered to be delivered as the services are performed or over the estimated life of the agreement. The Company typically bills items monthly over the life of the agreement except for development fees, which are generally billed in advance or over a 12 month period and the fee for treatment supplies which is generally billed in advance. The Company has determined that each of these elements have standalone value and are separate units of accounting.
Page 6
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013
The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-25. For multiple element arrangements, revenue is allocated to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (BESP). VSOE generally exists only when the deliverable is sold separately and is the price actually charged for that deliverable. The process for determining BESP for deliverables without VSOE or TPE considers multiple factors including relative selling prices; competitive prices in the marketplace, and management judgment, however, these may vary depending upon the unique facts and circumstances related to each deliverable.
The Company has determined that sales related to the use of the RadionHub software generally follow the guidance of FASB ASC Topic 605 Revenue Recognition (ASC 605) as the software is hosted by the Company and the customer is not provided any license right. Accordingly, the software is considered SAAS.
The Company defers revenue from the sale of services related to future periods and recognizes revenue on a straight-line basis in accordance with ASC Topic 605-20, Services.
Deferred revenues represent amounts billed for development fees, which are generally billed monthly in advance.
Stock-Based Compensation
The Company accounts for its stock-based compensation awards in accordance with FASB ASC Topic 718, CompensationStock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees, including grants of employee stock options and restricted stock and modifications to existing stock options, to be recognized in the consolidated statements of operations based on their fair values. The Company uses the Black-Scholes option pricing model to determine the fair value of options granted.
Consistent with the guidance in FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees, the fair value of each non-employee stock option is estimated at the date of grant using the Black-Scholes option pricing model with assumptions generally consistent with those used for employee stock options, with the exception of expected term, which is over the contractual life.
Compensation expense related to awards to employees is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. Awards to non-employees are adjusted through stock-based compensation expense as the award vests to reflect the current fair value of such awards, and expensed using an accelerated attribution model.
The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected term, risk-free interest rate and expected dividends. The Company does not have a history of market prices of its common stock as it is not a public company, and as such volatility is estimated using historical volatilities of similar public entities. The expected life of the employee awards is estimated based on the simplified method. The risk free interest rate assumption is based on observed interest rates appropriate for the terms of the awards. The dividend yield assumption is based on the history and expectation of paying no dividends.
Page 7
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013
There were no stock options granted during the six months ended June 30, 2014 and 2013.
The Company recorded stock-based compensation expense in connection with share-based awards of $80,099 and $78,069 for the years ended June 30, 2014 and 2013, respectively which is included in the accompanying statements of operations. As of June 30, 2014 there was $26,145 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted average period of 2.0 years. No tax benefit was recorded related to options grants during 2014.
Fair Value of Financial Instruments
The Company accounts for the fair value measurements in accordance with accounting guidance that defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 - | Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date. The Company does not have any instruments meeting the criteria of Level 1 inputs. | |||
Level 2 - | Pricing inputs are quoted prices for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. The Company does not have any instruments meeting the criteria of Level 2 inputs. | |||
Level 3 - | Pricing inputs include unobservable inputs that reflect the reporting entitys own assumptions about the assumptions market participants would use in pricing the asset or liability, which are developed based on the best information available. |
Assets and liabilities that are within the provisions of accounting guidance that defines fair value, such as the Companys warrant liabilities, are recorded at fair value using market valuation approaches. The Companys warrant liabilities are not exchange traded instruments and no observable inputs exist. The warrants are valued based on unobservable inputs that reflect the reporting entitys own assumptions in pricing the liabilities and accordingly classified as level 3 inputs.
Financial instruments measured and reported at fair value on a recurring basis as of June 30, 2014 and 2013 are as follows:
Balance as of June 30, 2014 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Warrant liabilities |
$ | 88,571 | $ | | $ | | $ | 88,571 | ||||||||
|
|
|
|
|
|
|
|
Page 8
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013
Balance as of June 30, 2013 |
Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Warrant liabilities |
$ | 88,450 | $ | | $ | | $ | 88,450 | ||||||||
|
|
|
|
|
|
|
|
Activity for liabilities classified as Level 3:
Level 3 | ||||
Beginning balance at December 31, 2012 |
$ | 88,450 | ||
Change in fair value |
| |||
|
|
|||
Ending balance at June 30, 2013 |
$ | 88,450 | ||
|
|
|||
Level 3 | ||||
Beginning balance at December 31, 2013 |
$ | 88,571 | ||
Change in fair value |
| |||
|
|
|||
Ending balance at June 30, 2014 |
$ | 88,571 | ||
|
|
The valuation of these instruments is determined using widely accepted valuation techniques including the Black-Scholes Pricing Model. The fair value was determined using this model with assumptions for volatility, expected dividend yield; expected term and risk-free interest rate (see Note 7). The warrants are categorized as Level 3 of the fair value hierarchy.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the six mont period ended June 30, 2014 and 2013, respectively totaled $406 and $1,831.
Income Taxes
The Company uses the liability method under FASB ASC Topic 740, Income Taxes, in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and for net operating loss carry forwards, measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company follows the provisions of applicable accounting standards relative to accounting for uncertain tax positions. Under these provisions, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax positions as well as the consideration of the available facts and circumstances.
Page 9
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013
3. | PROPERTY AND EQUIPMENT |
The balance of property and equipment at June 30, 2014 and December 31, 2013 is as follows:
2014 | 2013 | |||||||
Property and equipment |
||||||||
Furniture and fixtures |
$ | 1,309 | 1,309 | |||||
Equipment under capital lease |
2,980,832 | 1,897,222 | ||||||
Equipment |
1,956,718 | 9,767 | ||||||
|
|
|
|
|||||
4,938,859 | 1,908,298 | |||||||
Less - accumulated depreciation |
(783,028 | ) | (329,298 | ) | ||||
|
|
|
|
|||||
$ | 4,155,831 | 1,579,000 | ||||||
|
|
|
|
Depreciation expense for the six months ended June 30, 2014 and 2013 respectively was $453,729 and 115,843.
4. | RELATED PARTY CONVERTIBLE NOTES PAYABLE |
At June 30, 2014 the Company had approximately $410,859 of Notes Payable outstanding with shareholders. The Notes are convertible to preferred stock in the event the Company consummates, prior to the maturity date of the note, an equity financing pursuant to which it sells shares of a series of Preferred Stock (the Preferred Stock), and with the principal purpose of raising capital (a Qualified Equity Financing), then the outstanding principal amount of and all accrued interest under this Note shall automatically convert into a number of shares of such Preferred Stock equal to the outstanding principal amount of and all accrued interest under this Note, divided by the price per share at which the Preferred Stock is sold in the Qualified Equity Financing. The conversion to Preferred Stock is subject to discounts of 10%, 20% or 30% based on the date the Qualified Equity Financing is completed. Conversion of the notes is contingent upon a subsequent financing event, if such event where to occur, a beneficial conversion would be measured and recorded in earnings in the period of the financing event.
The Convertible Notes bear interest at the rate of 5% per annum and all outstanding principal and interest is due at the maturity date if not converted into preferred stock issued at a Qualified Equity Financing before the maturity date. The notes mature at various dates through 2017.
5. | COMMITMENTS AND CONTINGENCIES |
Capital Leases
The Company entered into two separate Master Lease Agreements (Lease One and Lease Two) for the use of equipment. The Company subsequently rents this equipment to the customer for use in their dermatology practice.
The term of Lease One is 36 months. The Company has leased 6 machines pursuant to the Master Lease. A security deposit of approximately 5% of the aggregate equipment capitalized cost was paid at the execution of each lease schedule. The Company has the right to return all the equipment under each lease schedule at the end of the term.
The term of Lease Two is 36 months. The Company has leased 4 machines pursuant to the Master Lease. A security deposit of approximately $19,000 was paid at the execution of the lease schedule. The Company has the right to return all the equipment under each lease schedule at the end of the term.
Page 10
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013
The leased equipment has been included in the Companys balance sheet at June 30, 2014 and depreciated in the same manner as its other fixed assets. The leased equipment had a cost of $2,968,740 at June 30, 2014, and the related amortization of these leases totaled $748,028 as of June 30, 2013.
Future minimum payments under capital leases for the as of June 30, 2014 are approximately as follows:
2014 |
$ | 611,751 | ||
2015 |
1,223,502 | |||
2016 |
825,183 | |||
2017 |
86,211 | |||
|
|
|||
2,746,467 | ||||
Less-interest |
(448,481 | ) | ||
|
|
|||
Present value of minimum capital lease obligations |
2,298,166 | |||
Less-current portion of capital lease obligations |
(772,800 | ) | ||
|
|
|||
$ | 1,525,366 | |||
|
|
Operating Leases
The Company leases approximately 1,000 square feet consisting of two separate office facilities under non-cancelable operating leases each expiring March 31, 2016. Rent expense under these agreements was $20,493 and $13,513 for the six months ended June 30, 2014 and 2013 respectively.
The Companys future minimum payments related to the leased facility are shown below.
Future minimum payments under non-cancelable operating leases as of June 30, 2014 are as follows:
2014 |
$ | 19,369 | ||
2015 |
39,609 | |||
2016 |
9,975 | |||
|
|
|||
$ | 68,953 | |||
|
|
Other Liabilities
The Company borrowed $359,000 from an individual with no formal agreement. The amount was settled in January 2014 for $275,000 and a gain of $89,000 was recorded.
6. | STOCKHOLDERS DEFICIT |
Common Stock
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Companys stockholders. The holders of common stock are entitled to receive dividends when and if declared by the Board of Directors. Upon liquidation, dissolution, or winding up, the stock holders are entitled to share pro rata in the net assets available after the payment of the liquidation preference of holders of any outstanding preferred stock.
The Company has 25,000,000 authorized shares of common stock, of which 5,037,500 are reserved for future issuance:
Series A preferred stock
The Company has 2,500,000 authorized shares of Series A preferred stock and 1,052,189 shares issued with 1,447,811 reserved for future issuance. In February 2014, these outstanding shares were cancelled.
Page 11
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013
Conversion Rights
The Series A preferred stock is convertible into the Companys common stock, at any time, at the option of the holder. Each share of Series A and A-1 preferred stock is convertible into 1 share of common stock, subject to certain anti-dilution adjustments. All outstanding shares of Series A preferred stock shall automatically convert into common shares upon (i) the vote of at least 50% of the then outstanding shares of preferred stock or (ii) if the Company shall effect a firm commitment underwritten public offering for which the gross proceeds is not less than $20,000,000.
Voting
The holders of Series A preferred stock are entitled to the number of votes equal to the number of whole shares of common stock into which the shares of preferred stock could be converted as of the record date.
Dividends
The holders of Series A preferred stock are entitled to receive dividends when and if declared by the Board of Directors.
Liquidation Preference
Upon liquidation of the Company, each holder of outstanding shares of preferred stock shall be entitled to be paid out the assets of the Company before any payment is made to the holders of Common Stock. Payments include any undeclared, unpaid dividends. If assets are insufficient to pay the aggregate preferred preference amounts, then the preferred stockholders shall share ratably in any distribution in connection with a liquidation event in proportion to the respective amounts to which they are entitled. If assets remain for distribution after satisfying the preferred preference amounts, the remaining assets and funds of the Company shall be distributed among the common stockholders pro rata based on the number of shares held by each holder.
Preferred Stock Warrants
The Company issued warrants to purchase 199,772 shares of Preferred Stock on various dates during 2009 through 2013. The warrants have an exercise price of $0.04 per share and expire in 2016 and 2020. The grant date fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions; risk free interest rate at 0.36%-3.03%, no dividend yield, volatility of 43%-63% and an estimated life of 7-10 years. The warrants are accounted for as other liabilities in the accompanying balance sheet and adjustments to fair value are recorded at each reporting date as a component of other income (expense).
7. | STOCK OPTIONS |
The Company established the 2009 Incentive Stock Plan (the 2009 Plan) which provides for shares of common stock to be issued as incentive stock options (ISOs) or nonqualified stock options and as restricted stock. Exercise prices and vesting periods are determined on the date of grant by the board of directors. Options generally vest ratably over 4 years and expire ten years from the date of grant. As of June 30, 2014 the Company has reserved a total of 4,500,000 shares of its common stock for issuance pursuant to the 2009 Plan and there were 755,000 shares available for future grant.
Page 12
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013
Option activity under the 2009 Plan is as follows:
Number of Options |
Weighted- Average Exercise Price Per Share |
|||||||
Outstanding options at December 31, 2013 |
3,207,500 | $ | 0.04 | |||||
Granted |
| | ||||||
Exercised |
| | ||||||
Canceled |
| | ||||||
|
|
|
|
|||||
Outstanding at June 30, 2014 |
3,207,500 | $ | 0.04 | |||||
|
|
|
|
|||||
Options exercisable at June 30, 2014 |
1,903,750 | $ | 0.04 | |||||
|
|
|
|
Information regarding stock options outstanding that are vested or expected to vest as of June 30, 2014 is as follows:
Vested and Expected to Vest | Options Exercisable | |||||||||||||||||||||||||
Exercise |
Number of Options |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life (Years) |
Number of Options |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life (Years) |
||||||||||||||||||||
$ | 0.04 | 3,207,500 | $ | 0.04 | 6.93 | 1,903,750 | $ | 0.04 | 7.61 |
8. | INCOME TAXES |
The Company has recorded tax expense of $0 and $1,783,218 for the six months ending June 30, 2013 and June 30, 2014, respectively. The tax expense relates to uncertain income tax positions. The Company follows the provisions of applicable accounting standards relative to accounting for uncertain tax positions. Under these provisions, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax positions as well as the consideration of the available facts and circumstances.
As of June 30, 2013 and June 302, 2014, the Company had recorded $0 and $1,950,992, respectively, of unrecognized income tax benefits. The Company records interest and penalties related to unrecognized benefits through income tax expense.
The Companys federal and state income tax returns remain subject to examination for three or four years depending on the states statute of limitations.
The Company uses the liability method under FASB ASC Topic 740, Income Taxes, in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and for net operating loss carry forwards, measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Page 13
Radion, Inc. and Affiliate
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2014 and 2013
9. | VARIABLE INTEREST ENTITY |
As indicated in Note 1, Radion has consolidated a VIE under the requirements of US GAAP. As and for the period ended June 30, 2014, Radion consolidated DermEBX. The entitys assets, liabilities and results of operations are included in the Companys consolidated financial statements. The VIEs equity holders interests are reflected in net income attributable to the noncontrolling interests in the consolidated statement of operations and noncontrolling interests in the consolidated balance sheet.
Summarized carrying amounts of the assets and liabilities of the VIE as of June 30, 2014 are as follows:
2014 | ||||
Current assets |
$ | 3,492,319 | ||
Property, net |
4,142,931 | |||
|
|
|||
Total assets |
$ | 7,635,250 | ||
|
|
|||
Current liabilities |
$ | 3,835,642 | ||
Capital lease obligation |
1,525,366 | |||
Tax liabilityuncertain tax positions |
1,950,992 | |||
|
|
|||
Total liabilities |
7,312,000 | |||
|
|
|||
Members equity |
100,400 | |||
Accumulated income |
222,850 | |||
|
|
|||
Total liabilities and equity |
$ | 7,635,250 | ||
|
|
Assets of DermEBX are not available to settle obligations of Radion. The VIEs creditors lack recourse against the general credit of Radion.
10. | RELATED PARTY TRANSACTIONS |
The Company transacts with a related party, Radion Capital Partners. Radion Capital Partners leases equipment to the Company and as of June 30, 2014, the Company owed approximately $1,601,748 related to Lease One as discussed in Note 5, and approximately $349,000 related to an outstanding payable.
11. | SUBSEQUENT EVENTS |
The Company has evaluated subsequent events through September 29, 2014, the date which the financial statements were available to be issued. The following events occurred
On July 15th, 2014, DermEbx, LLC and Radion, Inc agreed to be acquired by iCAD, Inc for approximately $12.4 million in consideration. In connection with the acquisition by iCAD, the outstanding related party convertible notes payable were paid in cash.
Page 14
Exhibit 99.4
Introduction
On July 15, 2014 (the Closing Date), iCAD, Inc., a Delaware Corporation (Registrant), entered into an Asset Purchase Agreement (the Radion Purchase Agreement) by and between the Registrant and Radion, Inc., a Delaware corporation (Radion). Also on the Closing Date, Registrant entered into an Asset Purchase Agreement (the DermEbx Purchase Agreement and, together with the Radion Purchase Agreement, the Purchase Agreements) by and among the Registrant, Radion Capital Partners, LLC, a California limited liability company (RCP) and DermEbx, a series of RCP (DermEbx and, together with Radion, the Sellers).
Pursuant to the terms of the DermEbx Purchase Agreement, Registrant purchased substantially all of the assets of the DermEbx, including all of DermEbxs intellectual property and customer contracts. As consideration for DermEbxs assets, Registrant paid the following consideration: (i) $1,600,000 in cash (the DermEbx Cash Consideration) and (ii) the issuance to DermEbx of 600,000 restricted shares of the Registrants common stock, $0.01 par value per share (Common Stock) (the DermEbx Equity Consideration). Registrant held back $500,000 of the DermEbx Cash Consideration for the purposes of a purchase price adjustment based on the working capital of DermEbx, which adjustment will be made 120 days after the Closing Date. Additionally, Registrant delivered 90,000 shares of the Equity Consideration (the DermEbx Escrow Shares) to US Bank, N.A., as escrow agent, to be held in escrow for a period of eighteen (18) months pursuant to the terms of an escrow agreement. The DermEbx Escrow Shares will act as the source of payment for the indemnification of Registrant by DermEbx under the DermEbx Purchase Agreement.
Pursuant to the terms of the Radion Purchase Agreement, Registrant purchased substantially all of the assets of Radion, including all of Radions intellectual property and customer contracts. As consideration for Radions assets, Registrant paid the following consideration: (i) $2,200,000 in cash and (ii) the issuance to Radion of 600,000 restricted shares of the Registrants Common Stock (the Radion Equity Consideration and, together with the DermEbx Equity Consideration, the Equity Consideration). Registrant delivered 90,000 shares of the Radion Equity Consideration (the Radion Escrow Shares and, together with the DermEbx Escrow Shares, the Escrow Shares) to US Bank, N.A., as escrow agent, to be held in escrow for a period of eighteen (18) months pursuant to the terms of an escrow agreement. The Radion Escrow Shares will act as a source of payment for the indemnification of Registrant by Radion under the Radion Purchase Agreement.
The following unaudited condensed consolidated pro forma financial information gives effect to the acquisition by the Registrant of Radion and DermEbx using the purchase method of accounting, as required by Accounting Standards Codification (ASC) 805, Business Combinations. Under this method of accounting, the Registrant allocated the purchase price to the fair value of assets acquired, including identified intangible assets and goodwill. The purchase price allocation is subject to revision when the Registrant obtains additional information regarding its purchased asset valuation. The unaudited pro forma consolidated balance sheet assumes the acquisition took place on June 30, 2014. The unaudited condensed consolidated pro forma statement of operations for the year ended December 31, 2013 and six months ended June 30, 2014, assume that the acquisition took place as of January 1, 2013. The financial information presented in the unaudited condensed financial statements is based on amounts and adjustments that the Registrants management believes to be factually supportable. The Sellers have made no attempt to included forward looking assumptions in such information. Certain reclassifications have been made to Radion and DermEbxs historical presentation to conform to the Registrants presentation. These reclassifications do not materially impact the unaudited pro forma condensed consolidated pro forma statement of operations for the periods presented. The
unaudited pro forma adjustments, which are based upon available information and upon certain assumptions that the Sellers believes are reasonable, are described in the accompanying notes. The Registrant is providing the unaudited condensed consolidated pro forma financial information for informational purposes only. The Sellers and the Registrant may have performed differently had they been combined during the periods presented. You should not rely on the unaudited condensed consolidated pro forma financial information as being indicative of the historical results that would have been achieved had the Sellers and the Registrant actually been combined during the periods presented or the future results that the combined companies will experience. The unaudited condensed consolidated pro forma statements of operations do not give effect to any cost savings or operating synergies expected to result from the acquisitions or the costs to achieve such cost savings or operating synergies.
iCAD, INC. AND SUBSIDIARY
Unaudited Pro Forma Consolidated Balance Sheet
June 30, 2014
(In thousands, except for share data)
Historical | ||||||||||||||||
iCAD, Inc | Radion, Inc and affiliate | Pro Forma Adjustments |
Pro Forma Total | |||||||||||||
Assets | ||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 34,851 | 1,407 | (3,800 | )(a) | $ | 31,051 | |||||||||
(1,407 | )(b) | |||||||||||||||
Accounts receivable, net |
9,631 | 1,894 | (1,538 | )(c) | 9,987 | |||||||||||
Inventory, net |
1,868 | | | 1,868 | ||||||||||||
Prepaid expenses and other current assets |
444 | 269 | (269 | )(a) | 444 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
46,794 | 3,570 | (7,014 | ) | 43,350 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Property and equipment, net |
1,703 | 4,156 | | 5,859 | ||||||||||||
Other assets |
177 | 13 | (13 | )(b) | 177 | |||||||||||
Intangible assets, net |
12,971 | | 5,980 | (d) | 18,951 | |||||||||||
Goodwill |
21,109 | | 5,465 | (e) | 26,574 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 82,754 | 7,739 | 4,418 | $ | 94,911 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities and Stockholders Equity | ||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 2,031 | 2,215 | (1,538 | )(c) | $ | 2,708 | |||||||||
Accrued and other expenses |
4,248 | 1,481 | (1,481 | )(b) | 4,395 | |||||||||||
147 | (f) | |||||||||||||||
Interest payable |
216 | | | 216 | ||||||||||||
Notes and lease payable - current portion |
3,884 | 773 | | 4,657 | ||||||||||||
Due to affiliates and related parties |
| 704 | (704 | )(b) | | |||||||||||
Deferred revenue |
8,581 | 801 | (446 | )(g) | 8,936 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current liabilities |
18,960 | 6,142 | (4,190 | ) | 20,912 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Deferred revenue, long-term portion |
1,253 | 171 | (47 | )(g) | 1,377 | |||||||||||
Other long-term liabilities |
705 | 75 | (75 | )(b) | 705 | |||||||||||
Capital lease - long-term portion |
164 | 1,525 | | 1,689 | ||||||||||||
Notes payable - long-term portion |
8,747 | | | 8,747 | ||||||||||||
Tax liability - uncertain tax positions |
1,951 | (1,951 | )(g) | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
29,829 | 9,690 | (6,095 | ) | 33,430 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Commitments and Contingencies |
||||||||||||||||
Stockholders equity (deficit): |
52,925 | (1,957 | ) | 174 | (h) | 61,481 | ||||||||||
8,556 | (a) | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities and stockholders equity (deficit) |
$ | 82,754 | 7,739 | 4,418 | $ | 94,911 | ||||||||||
|
|
|
|
|
|
|
|
Unaudited Condensed Consolidated Pro Forma Statement of Operations
Year ended December 31, 2013
(In thousands, except for per share data)
Historical | ||||||||||||||||
Radion, Inc and | Pro Forma | Pro Forma Total | ||||||||||||||
iCAD, Inc | affiliate | Adjustments | (unaudited) | |||||||||||||
Revenue |
$ | 33,067 | 5,764 | (3,192 | )(i) | 35,639 | ||||||||||
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Total revenue |
33,067 | 5,764 | (3,192 | ) | 35,639 | |||||||||||
Cost of revenue |
9,982 | 2,951 | (965 | )(j) | 12,080 | |||||||||||
112 | (k) | |||||||||||||||
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Total cost of revenue |
9,982 | 2,951 | (853 | ) | 12,080 | |||||||||||
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Gross profit |
23,085 | 2,813 | (2,339 | ) | 23,559 | |||||||||||
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Operating expenses: |
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Engineering and product development |
7,694 | 661 | 8,355 | |||||||||||||
Marketing and sales |
10,427 | 171 | 10,598 | |||||||||||||
General and administrative |
6,740 | 3,394 | 872 | (k) | 10,118 | |||||||||||
(888 | )(l) | |||||||||||||||
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Total operating expenses |
24,861 | 4,226 | (16 | ) | 29,071 | |||||||||||
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Loss from operations |
(1,776 | ) | (1,413 | ) | (2,322 | ) | (5,511 | ) | ||||||||
Loss from change in fair value of warrant |
(2,448 | ) | | | (2,448 | ) | ||||||||||
Interest expense |
(3,277 | ) | (134 | ) | | (3,411 | ) | |||||||||
Other income |
19 | 4 | (4 | )(m) | 11 | |||||||||||
(8 | )(n) | |||||||||||||||
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Other income (expense), net |
(5,706 | ) | (130 | ) | (12 | ) | (5,848 | ) | ||||||||
Loss before income tax expense |
(7,482 | ) | (1,543 | ) | (2,334 | ) | (11,359 | ) | ||||||||
Income tax expense |
(126 | ) | (168 | ) | 168 | (126 | ) | |||||||||
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Net loss and comprehensive loss |
$ | (7,608 | ) | (1,711 | ) | (2,166 | ) | (11,485 | ) | |||||||
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Net loss per share: |
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Basic and diluted |
$ | (0.70 | ) | (0.95 | ) | |||||||||||
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Weighted average number of shares used in computing loss per share: |
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Basic and diluted |
10,842 | 1,200 | (o) | 12,042 | ||||||||||||
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Unaudited Condensed Consolidated Pro Forma Statement of Operations
for the six months ended June 30, 2014
(In thousands, except for per share data)
Historical | ||||||||||||||||
Radion, Inc and | Pro Forma | Pro Forma Total | ||||||||||||||
iCAD, Inc | affiliate | Adjustments | (unaudited) | |||||||||||||
Revenue |
$ | 18,187 | 6,301 | (2,080 | )(i) | 22,408 | ||||||||||
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Total revenue |
18,187 | 6,301 | 22,408 | |||||||||||||
Cost of revenue |
5,423 | 1,796 | (710 | )(j) | 6,565 | |||||||||||
56 | (k) | |||||||||||||||
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Total cost of revenue |
5,423 | 1,796 | (654 | ) | 6,565 | |||||||||||
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Gross profit |
12,764 | 4,505 | 654 | 15,843 | ||||||||||||
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Operating expenses: |
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Engineering and product development |
4,197 | 563 | 4,760 | |||||||||||||
Marketing and sales |
5,522 | 82 | 5,604 | |||||||||||||
General and administrative |
3,671 | 2,009 | 436 | (k) | 4,794 | |||||||||||
(1,118 | )(l) | |||||||||||||||
(204 | )(p) | |||||||||||||||
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Total operating expenses |
13,390 | 2,654 | (886 | ) | 15,158 | |||||||||||
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Gain (loss) from operations |
(626 | ) | 1,851 | 1,540 | 686 | |||||||||||
Loss from extinguishment of debt |
(903 | ) | | | (903 | ) | ||||||||||
Gain from change in fair value of warrant |
1,835 | | | 1,835 | ||||||||||||
Interest expense |
(1,431 | ) | (152 | ) | (1,583 | ) | ||||||||||
Other income |
16 | 85 | (85 | )(m) | 12 | |||||||||||
(4 | )(n) | |||||||||||||||
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Other expense, net |
(483 | ) | (67 | ) | (89 | ) | (639 | ) | ||||||||
Loss before income tax expense |
(1,109 | ) | 1,784 | 1,452 | 47 | |||||||||||
Income tax expense |
(78 | ) | (1,783 | ) | 1,783 | (q) | (78 | ) | ||||||||
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Net loss and comprehensive loss |
$ | (1,187 | ) | 1,785 | 1,452 | (31 | ) | |||||||||
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Net loss per share: |
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Basic and diluted |
$ | (0.09 | ) | (0.00 | ) | |||||||||||
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Weighted average number of shares used in computing loss per share: |
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Basic and diluted |
12,759 | 1,200 | (o) | 13,959 | ||||||||||||
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1. Basis of Pro Forma Presentation
The unaudited pro forma condensed consolidated financial information has been prepared based on the Registrants historical financial information and the historical financial information of Radion & Affiliate, giving effect to the acquisition and related adjustments described in these notes. Certain note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted as permitted by the SEC rules and regulations.
This unaudited pro forma condensed consolidated financial information is not necessarily indicative of the results of operations that would have been achieved had the acquisition actually taken place at the dates indicated and do not purport to be indicative of future position or operating results.
The unaudited pro forma condensed consolidated financial information has been prepared on the basis of assumptions relating to the allocation of consideration paid for the acquired assets and liabilities of Sellers based on Sellers managements best preliminary estimates. The actual allocation of the amount of the consideration may differ from that reflected in this unaudited pro forma condensed consolidated financial information after a third party valuation and other procedures have been completed.
Below are tables of the preliminary estimated purchase price allocation for Radion, Inc. and DermEbx (numbers in thousands):
Fair value of the Registrants common stock issued |
$ | 8,556 | ||
Cash consideration |
3,800 | |||
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Total purchase price |
$ | 12,350 | ||
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Estimated fair value of net tangible assets acquired |
$ | 2,163 | ||
Assumed financial liabilities |
(2,909 | ) | ||
Estimated fair value of identifiable intangible assets |
5,980 | |||
Goodwill |
7,122 | |||
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Total Acquisition Cost |
$ | 12,350 | ||
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2. Pro Forma Adjustments
a) | Adjustments reflect the components of the purchase consideration and related transaction costs which consist of cash consideration of $3.8 million and the Registrants common stock with a market value of $8.6 million. The value of the Registrants common stock was based upon a per share value of $7.13, the closing price of the Registrants common stock on the closing date. |
b) | Represents adjustments to eliminate assets and liabilities not acquired in the transaction. |
c) | Represents the adjustment to eliminate intercompany receivables acquired in connection with the transaction. Radion, Inc. and affiliate was a customer of the Registrant during the periods presented. |
d) | Represents adjustments to increase the carrying values of identifiable intangible assets. |
e) | To record the estimated residual value of goodwill acquired, estimated as the difference between the purchase price of and the estimated fair value of identifiable assets and liabilities. |
f) | To record liabilities for paid time off acquired in the transaction. |
g) | Represents the adjustment to eliminate intercompany deferred revenue in the historical financials of the Registrant in connection with the transaction. Radion and DermEbx were customers of the Registrant during the periods presented. |
h) | Reflects the elimination of existing stockholders deficit of Radion and affiliate. |
i) | Represents the adjustment to eliminate intercompany revenue in the historical financials of the Registrant in connection with the transaction. Radion, Inc. and DermEbx were customers of the Registrant during the periods presented. |
j) | Represents the adjustment to eliminate intercompany cost of revenue in the historical financials the Registrant in connection with the transaction. Radion, Inc. and DermEbx were customers of the Registrant during the periods presented. |
k) | Represents amortization of increase in value of acquired identifiable intangible assets of Radion and DermEbx based upon estimated weighted average life of six years. |
l) | Represents the elimination of management fees reported in Radions and DermEbx historical consolidated financial statements, which were not acquired. |
m) | Represents the elimination of income from non-operating activities of Radions and DermEbx historical financial statements, resulting from liabilities that were not assumed. |
n) | Represents the elimination of interest income reflecting the use of $3.8 million of cash used for the acquisition, presented as if the cash had been used at the beginning of the period. |
o) | Represents the increase in weighted average basic and diluted shares outstanding for the Registrants common stock issued in connection with the acquisition. Pro forma basic and diluted loss per share was calculated assuming that the 1.2 million shares of the Registrants common stock issued in connection with the acquisition were issued at the beginning of the period presented. |
p) | Reflects the elimination of legal and professional fees associated with the acquisition. |
q) | Represents the elimination of tax liabilities and expense for uncertain tax positions that were not acquired. |