Visualize. Act. Change.
2011 Annual Report
miniaturized x-ray to deliver a precise isotope-free
radiation dose directly to the cancerous areas with
minimal impact to healthy tissue. Conventional external
beam technology, in contrast, delivers treatment from
outside the body, potentially exposing healthy tissue to
radiation.
IORT market size and momentum
We have been extremely encouraged about the
growth prospects for eBx technology. Our platform is
affordable and portable, so it can be used in a wide
variety of clinical settings to give us a larger potential
served market. We are talking to new stakeholders in
hospitals, including radiation and surgical oncologists.
Rose Medical Center in Denver, Colorado, is one of five
leading hospitals in the U.S. that adopted the Xoft
system in 2011. Dr. Barbara Schwartzberg, Chair of
Cancer Services at Rose Medical Center, says, “The Xoft
Axxent eBx System gives us the ability to provide a full
course of radiation treatment at the time of surgery,
creating opportunities for our physicians to treat breast
cancer patients in a manner that is less disruptive
and less burdensome on the patient’s lifestyle. Most
importantly, this is a great improvement in patient care,
and it may also lower the cost of treatment.”
In early 2012, we announced that iCAD is sponsoring a
multi-center study that will follow up to 1,000 patients
at as many as 50 study sites across the U.S. and Europe
for 10 years after IORT treatment. We expect this study
will offer further validation that IORT is as safe and
effective as external beam radiation, adding to the
clinical literature that includes the landmark TARGIT-A
trial, published in The Lancet.
Board of Directors
Dr. Lawrence Howard
Chairman of the Board, General Partner, Hudson Ventures, LP
Ken Ferry
President and Chief Executive Officer, iCAD, Inc.
Rachel Brem, M.D.(2), (3)
Professor and Vice Chair, Department of Radiology,
The George Washington University, Washington DC
Associate Director of the GW Cancer Institute
Anthony F. Ecock(1), (3)
Senior Operating Executive,
Welsh, Carson, Anderson and Stowe
Michael Klein(2)
Chief Executive Officer US HIFU
Former President and CEO of Xoft, Inc.
Steven Rappaport(1)
Partner, RZ Capital, LLC
Somu Subramaniam(3)
Managing Partner and Co-founder of New Science Ventures
Elliot Sussman, M.D.(1), (2)
Professor of Medicine at the
University of South Florida College of Medicine
Executive Officers
Ken Ferry
President and Chief Executive Officer
Executive Vice President, Finance and Chief Financial Officer
Kevin Burns
Jonathan Go
Stacey Stevens
Senior Vice President of Research and Development
Senior Vice President of Marketing and Strategy
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating & Corporate Governance Committee Member
Dear Shareholder:
As healthcare institutions begin reinvesting to refresh
technology, iCAD is well positioned to capitalize on more
vigorous spending in the area of cancer detection and,
especially, cancer treatment alternatives.
Having proven our ability to build and sustain leadership
in one focused area — early cancer detection — our
long-term plan has been to expand into complementary
market segments. There is no question that
diversification is the launch pad for larger market
opportunities and for developing a broader oncology
strategy.
In 2010, we identified several complementary markets
that would enable us to expand our customer base and
build relationships with more clinical specialties. Our
acquisition of Xoft at the end of 2010 was an exceptional
fit. With the acquisition, we are immediately positioned
at the forefront of electronic brachytherapy (eBx®)
technology for the delivery of Intra-Operative Radiation
Therapy (IORT) for early stage breast cancer.
Which would you choose – eight minutes or six
weeks of treatment?
In the U.S., there are approximately 261,000 new breast
cancer cases per year. Approximately 110,000 of these
women have early stage breast cancer, and meet
the clinical criteria that would make them potential
candidates for IORT.
These are the facts: conventional radiation treatment
requires women to travel to radiation treatment centers
five days a week for as long as six weeks. These centers
can be miles or even hours away. Studies have shown
that compliance to radiation treatment can vary greatly
— some women actually opt for a mastectomy instead
of breast conservation surgery with radiation therapy, or
stop treatment because of the fatigue, loss of time, and
other burdens of such a long course of treatment.
IORT is delivered in the surgical suite, directly after
the lumpectomy, before the patient even wakes up
from surgery. The procedure can take as little as eight
minutes, compared to six weeks of conventional
radiation treatment.
The Xoft Axxent® eBx system uses a proprietary
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Investor Relations
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+1 408 419 2300 phone
+1 408 419 2301 fax
www.xoftinc.com
Stock Information
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ICAD
New York, NY
Anne Marie Fields
afields@lhai.com
+1 212 838 3777 ext. 6604
Public Relations
Schwartz MSL
Waltham, MA
Helen Shik
icad@schwartzmsl.com
+1 781 684 6587 phone
Sales
sales@icadmed.com
+1 866 280 2239 toll free
+1 937 431 1464 phone
Service and Support
support@icadmed.com
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+1 937 431 1464 phone
Transfer Agent
Continental Stock
Transfer & Trust Company
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Legal Counsel
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1
iCAD | 2012 Annual Report
Ken Ferry
President and Chief
Executive Officer
© 2012 iCAD, Inc. All rights reserved. iCAD, the iCAD logo, Never Stop Looking, TotalLook, SecondLook, VersaVue, MammoAdvantage,
SpectraLook, VividLook, VeraLook, Xoft, Axxent, and eBx are registered trademarks. Other company, product, and service names may be
trademarks or service marks of others.
We also continue to advocate for new screening
techniques for colon cancer. There was an encouraging
development in CT Colonography (CTC), also known as
virtual colonoscopy, when the National CT Colonography
Trial conducted by the American College of Radiology
Imaging Network (ACRIN) confirmed that CTC screening
is comparable to standard colonoscopy in its ability
to accurately detect colon cancer and precancerous
polyps in patients ages 65 and older. Like many vocal
proponents for virtual colonoscopies, we are hopeful
that Medicare will issue a payment value for CTC in the
coming year based on this new data. iCAD’s VeraLook®,
in conjunction with CTC, offers a less invasive screening
alternative to traditional colonoscopies.
We are grateful for the confidence of our stockholders,
the dedication of our employees, and the guidance of so
many great clinicians in the oncology field. We share a
common goal to make a difference in the lives of cancer
patients and their families. It is an honor to come to
work every day knowing that we have the chance to
change millions of lives.
Sincerely,
Ken Ferry
President and Chief Executive Officer
Xoft’s core technology — a miniature X-ray source—
lends itself to a number of additional cancers where
localized radiation delivery is indicated. The system is
already FDA-approved for skin and endometrial cancer.
We believe this platform has enormous long-term
potential for treating many types of cancer inside the
body, such as the abdomen, spine and brain, where iCAD
has active, ongoing clinical research.
In early 2012, we successfully raised additional capital
to help ensure that we can build our organization to
capitalize on the developing IORT market. We continue
to balance rigorous operating expense controls
with investments for a stronger future. Electronic
brachytherapy is not only good business — it is better
healthcare. We are committed to making this treatment
alternative more widely available to cancer patients.
Changing to a new software model for CAD should
increase revenue and predictability
We also began transitioning our traditional CAD
business to a software delivery model, which will provide
more sustained and predictable revenue from annual
subscriptions. Our customers will benefit from access
to continual software updates and support directly
from iCAD. This new model will also potentially capture
revenue from as many as 2,500 installed iCAD products
where we currently do not receive any recurring revenue.
Our expansion from mammography into MRI has also
proven to be a growth area for the company. Sales from
SpectraLook® and VividLook® for breast and prostate
DCE MRI grew by approximately 50 percent in 2011. As
our installed base from these new modalities expanded,
our service business has also continued to grow, with
service contract revenues growing in double digits for
the third year in a row.
Advocating for better screening techniques for
prostate and colon cancer
Prostate cancer is the second leading cause of cancer
death for men in the U.S., and we believe that the
superior accuracy of MRI with image analysis can save
lives. More education around the inadequacies of PSA
testing is still needed, and we continue to work with
colleagues and patients for the adoption of a better
screening and cancer staging protocol for prostate
cancer.
The Lancet, www.thelancet.com, published online June 5, 2010 DOI:10.1016/S0140-6736(10)60837-9).
iCAD | 2012 Annual Report
2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9341
iCAD, INC.
(Exact name of registrant as specified in its charter)
Delaware
02-0377419
(State or other jurisdiction (I.R.S. Employer
Identification No.)
of incorporation or organization)
98 Spit Brook Road, Suite 100,
Nashua, New Hampshire
03062
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (603) 882-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, $.01 par value
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes___ No X .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes___ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirement for the past 90 days. Yes X
No___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes X
No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ____ Accelerated filer ____
Non-accelerated filer ____
Smaller reporting company X
(do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes___ No X .
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price for the registrant’s
Common Stock on June 30, 2011 was $46,735,512. Shares of voting stock held by each officer and director and by each person who, as
of June 30, 2011, may be deemed to have beneficially owned more than 10% of the outstanding voting stock have been excluded. This
determination of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.
As of March 5, 2012, the registrant had 53,944,755 shares of Common Stock outstanding.
Documents Incorporated by Reference: Certain portions of the registrant’s definitive Proxy Statement for its 2012 Annual Meeting
of Stockholders are incorporated by reference into Items 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K.
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:
Certain information included in this annual report on Form 10-K that are not historical facts contain forward looking
statements that involve a number of known and unknown risks, uncertainties and other factors that could cause the actual
results, performance or achievements of the Company to be materially different from any future results, performance
or achievement expressed or implied by such forward looking statements. These risks and uncertainties include, but
are not limited to, the Company’s ability to defend itself in litigation matters, to achieve business and strategic
objectives, the risks of uncertainty of patent protection, the impact of supply and manufacturing constraints or
difficulties, uncertainty of future sales levels, protection of patents and other proprietary rights, the impact of supply
and manufacturing constraints or difficulties, product market acceptance, possible technological obsolescence of
products, increased competition, litigation and/or government regulation, changes in Medicare reimbursement policies,
risks relating to our existing and future debt obligations, competitive factors, the effects of a decline in the economy
or markets served by the Company and other risks detailed in this report and in the Company’s other filings with the
United States Securities and Exchange Commission (“SEC”). The words “believe”, “demonstrate”, “intend”, “expect”,
“estimate”, “anticipate”, “likely”, “seek” and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement
was made. Unless the context otherwise requires, the terms “iCAD”, “Company”, “we”, “our” “registrant”, and “us”
means iCAD, Inc. and any consolidated subsidiaries.
Item 1. Business.
General
PART I
iCAD was founded in 1984 as Howtek, Inc. (“Howtek”). In June 2002, the Company acquired Intelligent Systems
Software, Inc. (“ISSI”), a privately held company based in Florida and in December 2003, the Company acquired
Qualia Computing, Inc. (“Qualia”), a privately held company based in Ohio, and its subsidiaries, including CADx
Systems, Inc. (together “CADx”). ISSI and Qualia Computing offered Computer-Aided Detection (“CAD”) for breast
cancer detection. These acquisitions brought together two of the three companies with clearance by the United States
Food and Drug Administration (“FDA”) to market CAD solutions for breast cancer in the United States.
Since that time the Company has established itself as an industry-leading provider of CAD solutions for mammography.
iCAD offers a comprehensive range of high-performance upgradeable products for use with mammography, including
digital radiography, computed radiography and film-based mammography. These solutions enable radiologists to better
serve patients by identifying pathologies and pinpointing cancers. Early detection of cancer is a key to better prognosis,
less invasive treatment and lower treatment costs, and higher survival rates. Performed as an adjunct to a mammography
screening, CAD quickly became a standard of care in breast cancer detection, helping radiologists improve clinical
outcomes while enhancing workflow. Since iCAD received FDA clearance for its first breast cancer detection product
in January 2002, more than 4,000 iCAD systems have been placed in healthcare sites worldwide.
In July 2008, iCAD expanded its portfolio of products with the acquisition of substantially all of the assets of 3TP
LLC, dba CAD Sciences (“CAD Sciences”). The technology acquired is a pharmacokinetic based CAD technology that
aids in the interpretation of contrast enhanced Magnetic Resonance Imaging (“MRI”) images. This acquisition extended
iCAD’s position beyond mammography CAD and provided the Company with a portfolio of advanced image analysis
and workflow solutions for the early detection of some of the most prevalent cancers using digital mammography,
MRI and Computed Tomography (“CT”). iCAD believes that advances in MRI and CT are creating opportunities in
the medical imaging sector. There is also significant synergy regarding customer call points, providing the iCAD sales
team with additional products to sell.
iCAD is also applying its patented detection technology and algorithms to the development of CAD solutions for use
with virtual colonoscopy or CT Colonography (“CTC”) to improve the detection of colonic polyps. The Company’s
pattern recognition and image analysis expertise are readily applicable to colonic polyp detection and the Company has
developed a CTC CAD solution. The Company completed clinical testing of its CTC CAD product in the first quarter
of 2009 and in August 2010 became the first CAD technology product to receive FDA clearance for use with CTC.
On December 30, 2010, the Company acquired Xoft, Inc. (“Xoft”), a privately held company based in California. The
Company acquired 100% of the outstanding stock of Xoft in exchange for 8,348,501 shares of the Company’s common
stock and approximately $1,183,000 in cash, for total consideration at closing of approximately $12,879,000 based on
a per share value of $1.40, the average of the closing sale price of the Company’s common stock over the thirty trading
days immediately preceding the closing date and the closing price on the closing date. The Company’s Consolidated
1
Statement of Operations does not include the financial results of Xoft for the periods ended December 31, 2010 and
2009.
The acquisition of Xoft brought an isotope-free cancer treatment platform technology to the Company’s product line.
Xoft designs, develops, manufactures, markets and sells electronic brachytherapy (eBx™) products for the treatment
of breast, endometrial and skin cancer, and for the treatment of other cancers or conditions where radiation therapy is
indicated, and is used in a broad range of clinical settings. The portable Axxent System which delivers electronically
controlled radiation therapy directly to cancer sites with minimal radiation exposure to surrounding healthy tissue is
FDA-cleared. Electronic Brachytherapy is a type of brachytherapy that utilizes a miniaturized high dose rate X-ray
source to apply radiation directly to the cancerous site. The goal is to direct the radiation dose to the size and shape of
the cancerous area, sparing healthy tissue and organs. The Xoft technology delivers similar clinical dose rates to
traditional radioactive systems. Electronic Brachytherapy can be delivered during an operative procedure and may be
used for Accelerated Partial Breast Irradiation (APBI) which delivers the full course of radiation over a course of five
days. This technology enables radiation oncology departments in hospitals, clinics and physician offices to perform
traditional radiotherapy treatments and provide advanced treatments such as Intraoperative Radiation Therapy (IORT).
Current customers of the Xoft eBx system include university research and community hospitals, private and
governmental institutions, doctors’ offices, cancer care clinics, and veterinary facilities.
Today, the Company is an industry-leading provider of advanced image analysis and workflow solutions that enable
healthcare professionals to better serve patients by identifying pathologies and pinpointing the most prevalent cancers
earlier. iCAD offers a comprehensive range of high-performance, upgradeable Computer-Aided Detection (CAD)
systems and workflow solutions for mammography, Magnetic Resonance Imaging (MRI) and Computed Tomography
(CT). The Company believes that the acquisition of Xoft will transform the Company into a broader player in the
oncology market.
The iCAD website is www.icadmed.com. At this website the following documents are available at no charge: annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange
Act”), as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to,
the SEC. The information on the website listed above, is not and should not be considered part of this annual report on
Form 10-K and is not incorporated by reference in this document.
The Company is headquartered in Nashua, New Hampshire with research and development (“R&D”) centers located
in Fairborn, Ohio and Sunnyvale, California. The Sunnyvale, California facility is also the design, and manufacturing
facility for a portion of the Company’s Xoft products.
Strategy
The Company intends to continue the extension of its superior image analysis and clinical decision support solutions
for mammography, MRI and CT imaging. iCAD believes that advances in digital imaging techniques should bolster
its efforts to develop additional commercially viable CAD/advanced image analysis and workflow products.
The Company is currently applying its patented detection technology, pharmacokinetics, and algorithms to products
used to detect disease states where pattern recognition, image analysis, and clinical efficiency play a pivotal role. For
breast imaging, the Company is developing CAD solutions for tomosynthesis (3-D mammography) and a next-
generation of breast MR image analysis workstations to help radiologists find cancer earlier and more efficiently. The
Company believes that CAD for tomosynthesis has the potential to help radiologists better detect cancer and manage
the workflow issues created by large 3D tomosynthesis datasets. The pharmacokinetics or second generation kinetics
technology complements iCAD’s core competency in morphology (anatomy) based CAD solutions providing a platform
for iCAD to produce next-generation MRI products delivering both kinetics and morphology technology in a single
CAD solution. For colorectal cancer screening, iCAD has developed a CAD solution to help radiologists detect colonic
polyps during their review of CTC exams.
The Company believes that MR image analysis for prostate imaging is an emerging growth opportunity. Nearly one
in six men over age 40 is afflicted with prostate cancer in the U.S. and 10% of those cases are expected to be fatal.
Current standards for detecting prostate cancer are considered, by many medical professionals, to be antiquated and
subject to accuracy issues. The current Prostate Specific Antigen blood test has a false negative rate approaching 15%,
while only approximately 12% of men with abnormal tests actually have cancer. Biopsies miss at least 20% of all
malignancies and underestimate the disease aggressiveness in up to 30% of men. Scientific evidence is growing that
advanced imaging technologies will improve early detection, eliminate unnecessary procedures, and provide accurate
image guidance for biopsies.
2
The Company is also exploring the role of MR image analysis in treatment planning and the early monitoring of cancer
treatment. Radiosurgical planning and delivery systems can be used to create a customized radiation dose distribution
tailored to focus the highest regions of dose on the areas within the prostate where cancer is most heavily involved and
to deliver the dose pattern with sub-millimeter accuracy and precision. The Company’s technology delivers an imaging
method for mapping these tumor-bearing regions. As part of a collaborative research effort, the direct three-dimensional
computerized integration of these complementary technologies shows promise in delivering customized treatment
plans, to more exactly and safely treat the specific cancer involvement pattern of each individual prostate cancer. Today,
monitoring of therapy is solely based on tumor size and the response is assessed “after the fact”, often resulting in
patients and payers having to deal with ineffective treatment. The Company believes that an early-stage therapy
monitoring solution that is simple and widely available could result in more effective cancer treatment plans.
While the Company continues to pursue growth opportunities in its CAD markets, it also continues to assess strategic
opportunities for incremental growth beyond CAD. The Company is transforming itself from a business focused on
image analysis for the early detection of cancers to a broader player in the oncology market and embarked on this
strategy with the acquisition of Xoft at the end of 2010. The Company’s belief is that early detection in combination
with earlier targeted intervention will provide patients and care providers with the best tools available to achieve better
clinical outcomes resulting in a market demand that will drive top line growth.
Existing Markets and Market Opportunities
Mammography CAD systems use sophisticated algorithms to analyze image data and mark suspicious areas in the
image that may indicate cancer. The locations of the abnormalities are marked in a manner that allows the reader of
the image to reference the same areas in the original mammogram for further review. The use of CAD aids in the
detection of potential abnormalities for the radiologist to review. After initially reviewing the case films or digital
images, a radiologist reviews the CAD results and subsequently re-examines suspicious areas that warrant a second look
before making a final interpretation of the study. The radiologist determines if a clinically significant abnormality
exists and whether further diagnostic evaluation is warranted. As a medical imaging tool, CAD is most prevalent as
an adjunct to mammography given the documented success of CAD for detecting breast cancer.
Approximately 39 million mammograms were performed in the U.S. in 2010. Although mammography is the most
effective method for early detection of breast cancer; studies have shown that an estimated 20% or more of all breast
cancers go undetected in the screening stage. More than half of the cancers missed are due to observational errors.
CAD, when used in conjunction with mammography, has been proven to help reduce the risk of these observational
errors by as much as 20%. Earlier cancer detection typically leads to more effective, less invasive, and less costly
treatment options which ultimately should translate into improved patient survival rates. CAD as an adjunct to
mammography screening is reimbursable in the U.S. under federal and most third party insurance programs. This
reimbursement provides economic support for the acquisition of CAD products by women’s healthcare providers.
Market growth has also been driven in recent years by the introduction of full field digital mammography (“FFDM”)
systems.
In the U.S., approximately 8,620 facilities (with approximately 12,300 mammography systems) were certified to
provide mammography screening in 2010. Historically, these centers have used conventional film-based medical
imaging technologies to capture and analyze breast images. Of the 8,620 certified facilities, to date approximately 82%
have acquired FFDM systems. A FFDM system generates a digital image eliminating film used in conventional
mammography.
While a double reading protocol is currently advocated as a standard of care in most European countries this is not the
standard protocol in the United States. Double reading requires substantially more resources, which are often not
available due to the shortage of mammographers. In view of the frequency of missed cancers and of the lack of
resources for double reading as a standard of care, CAD in combination with review by a single radiologist is an
alternative to double reading of mammography and may further reduce breast cancer mortality.
Based on the report published by Frost and Sullivan entitled “2007 European Women’s Healthcare Imaging Markets”,
breast cancer is one of the most prevalent forms of cancer and it is also responsible for the most number of cancer-related
deaths among women in the European Union (“EU”). The number of expected cancer cases is expected to continue
to rise as the incidence of cancer increases steeply with age and life expectancy. According to the European
Parliamentary Group on Breast Cancer, they expect approximately 269,000 new breast cancer cases will be reported
and over 87,000 deaths per year. On average 1 out of every 10 women in the EU is expected to develop breast cancer
at some point in her life. As a result, most countries in Western Europe have or are planning to implement
mammography screening programs resulting in an expected increase in the number of mammograms performed in the
coming years.
3
Market Size and Share
GlobalData projects the full-field digital mammography sector will grow at a compound annual growth rate of 8% and
reach $1.3 billion in 2017.
Frost and Sullivan and IMV, a market research company, both reported historical increases and foresee continuing
growth in breast MRI exams as published in their 2008 reports. Frost and Sullivan predicts the use of MRI in the
management of breast cancer volumes will heighten to 3 million by 2014. More than 5,000 MRI systems could be used
for breast MRI procedures today. Merge Healthcare, Inc. (formerly Confirma, Inc. acquired in September 2009) and
Invivo Corporation have been and currently remain the market leaders in breast MR image analysis.
In addition, IMV estimated that 1.1 million patients were treated with radiation therapy in 2009. According to the same
study, the top indication treated was breast MRI procedures at 24% of all procedures. U.S. sales of brachytherapy
products were $240 million in 2008 and are expected to increase to $1,979 million by 2016 as estimated by the market
research firm Bio-tech Systems, Inc.
New Market Opportunities
Computed Tomography Applications and Colonic Polyp Detection
CT is a well-established and widely used imaging technology that has evolved rapidly over the last few years. CT
equipment is used to image cross-sectional “slices” of various parts of the human body. When combined, these “slices”
provide detailed volumetric representations of the imaged areas. The use of multi-detectors in CT equipment has
progressed in just a few years from 4 slices to 8, 16, 64 slices and beyond, resulting in vastly improved image quality.
The image quality improvements resulting from the increased number of slices per procedure and greatly increased
imaging speeds have expanded the use of CT imaging in both the number of procedures performed as well as the
applications for which it is utilized. It was estimated by Frost and Sullivan that over 72 million CT procedures would
be performed in 2011 in the U.S. alone with an installed base of approximately 6,000 machines. While the increased
number of cross sectional slices provides important and valuable diagnostic information, it adds to the challenge of
managing and interpreting the large volume of data generated. The Company believes that the challenges in CT imaging
presents it with opportunities to provide automated image analysis and clinical decision support solutions.
According to data from the American Cancer Society, it is estimated that over 51,000 Americans will die from colorectal
cancer and 143,000 people will be diagnosed with colon cancer in 2012. It is the second leading cause of cancer deaths
in spite of being highly preventable with early identification and removal of colorectal polyps. Several techniques
including optical colonoscopy, which involves visualizing the inside of the colon with a specialized scope, exist for the
early identification of polyps. More than 116 million Americans are age 50 and older, the recommended age for
colorectal cancer screening. However, this technique remains highly underutilized with less than half of this population
being tested. This reluctance can be directly linked to patients’ general discomfort with the invasive nature of this
screening procedure.
Abundant research has been performed and CT techniques have evolved over more than a decade, to the point where
CTC, as it is performed today, has demonstrated itself as a valid and highly effective screening tool for colorectal
cancer. ACRIN’s large multi-center National CT Colonography Trial of a screening population published in the
September 18th, 2008 issue of the New England Journal of Medicine demonstrated that CTC is highly accurate for the
detection of intermediate and large polyps and that the accuracy of CTC is similar to colonoscopy. In March of 2008,
new consensus guidelines for screening for colorectal cancer (”CRC”) were jointly issued by the American Cancer
Society (“ACS”), the American College of Radiology (ACR), and the U.S. Multi-Society Task Force on CRC. The
guidelines include recommendations for the use of CTC for CRC screening. Most surveys of patients that have had both
traditional colonoscopy and CTC have also shown greater patient preference for CTC with most patients preferring
continued CTC surveillance over traditional colonoscopic surveillance. The Company believes that the ACRIN Study
coupled with the 2008 consensus guidelines for screening for CRC are likely to increase the utilization of CTC.
CTC is a less invasive technique than traditional colonoscopy for imaging the colon. CTC is performed with standard
CT imaging of the abdomen while the colon is distended after subjecting the patient to a colon cleansing regimen.
Specialized software from third party display workstation and PACS vendors is then used to reconstruct and visualize
the internal surface of the colon and review the CT slices. The process of reading a CTC exam can be lengthy and
tedious as the interpreting physician is often required to traverse the entire length of the colon multiple times. CAD
technology can play an important role in improving the accuracy and efficiency of reading CTC cases by automatically
identifying potential polyps. CAD technology has been developed to aid radiologists in their review of CTC images
as a means of improving polyp detection. The Company anticipates that CAD will become an important adjunct to CTC.
Three insurance procedure codes for CTC were approved and became effective January 1, 2010. The codes include:
74263 Screening CTC without contrast, 74261 Diagnostic CTC without contrast, and 74262 Diagnostic CTC with
4
contrast. While screening CTC is not covered by Medicare, coverage continues to increase with approximately half of
the U.S. states providing coverage for CTC screening and some of the private payers currently covering CTC screening
include: CIGNA, Anthem BCBS (15 states), Kaiser Permanente, Carefirst BCBS, Healthlink, Horizon BCBS (NJ),
Oxford Health Plans, Independence BC (PA), Physicians Plus of WI, BCBS Delaware, WPS Health Insurance (WI),
BCBS AR, United Healthcare, UniCare, BCBS N.C., and BCBS Texas, BCBS Wellmark
Magnetic Resonance Imaging (MRI) Applications - Breast and Prostate Cancer Detection
In addition to mammography and CT imaging modalities, the interpretation of MRI exams also benefits from advanced
image analysis and clinical decision support tools. Radiologists turn to MRI to examine the soft tissues, blood vessels,
and organs in the head, neck, chest, abdomen, and pelvis to help them diagnose and monitor tumors, heart problems,
liver diseases and other organs, such as breast and prostate for possible links to cancer. MRI uses magnets and radio
waves instead of x-rays to produce very detailed, cross-sectional images of the body, and can be used to look specifically
at those areas.
MRI is an excellent tool to detect breast cancer as well as prostate cancer. While MRI is a more expensive option than
traditional mammography, it enables physicians to view tumors which may have been missed during routine screenings.
The first breast MRI product received FDA clearance in 1991 for use as an adjunct to mammography. The ACS
published new guidelines in the March/April 2007 CA: A Cancer Journal of Clinicians, recommending that women at
high risk for breast cancer augment their annual mammogram with an annual breast MRI. The guidelines recommended
MRI scans for women with a lifetime risk of breast cancer of 20%-25% or greater, including women with a strong
family history of breast or ovarian cancer and women who were treated for Hodgkin’s disease. The ACR and SBI
endorsed these recommendations in their recommendations published in the Journal of the American College of
Radiology 2010;7:18-27.
The Prostate Specific Antigen (PSA) in conjunction with digital rectal examination (DRE) and pathologic information
from biopsies are what urologists and radiation oncologists have traditionally used to determine the extent and expected
behavior of prostate cancer, which may affect 1 out of 6 men over the course of their lifetime. While commonly used,
and recommended by the American Urological Association, PSA tests can be unreliable and potentially misleading.
Accurate staging of the disease is one of the biggest challenges with prostate cancer. Of the 230,000 men who are
diagnosed with prostate cancer every year in the U.S., most have slow-growing tumors that likely will not lead to death
or require invasive treatment, though the diagnosis does cause patient anxiety and requires close monitoring.
Those men who are diagnosed with a non-aggressive cancer are typically periodically monitored through repeat PSA,
DRE and, at times, biopsies. This monitoring is referred to as watchful waiting or active surveillance. The goal of this
watchful waiting is to monitor the indolent cancer and catch it at an early stage before it progresses to a more aggressive
state. This will theoretically allow patients better treatment options, but because the current tests have their faults by
the time the disease has been identified, treatment options may be limited to a prostatectomy. This radical procedure
creates numerous morbidities such as impotence, incontinence as well as psychological issues. Advanced imaging
tools such as MRI, may play an important role in this population to allow earlier detection and allow more choices for
treatment options.
With advanced diagnostic imaging tools, physicians can more accurately stage the severity of the prostate cancer and
minimize a patient’s exposure to unnecessary and painful biopsies. Prostate biopsies are typically done following an
elevated PSA, suspicious DRE, or both. These biopsies are usually performed by an urologist under the assistance of
a portable ultrasound system. Anywhere from a dozen to 30 or more samples are taken from the prostate. More than
1.2 million men have transrectal ultrasound (TRUS) biopsies each year in the U.S. and less than 15 percent come back
positive for cancer. This translates into roughly $2 billion in cost to the healthcare system, not to mention the
psychological implications for patients worried they may have a deadly form of the disease.
Without an optimal visual picture of the prostate and surrounding area, biopsy exams are essentially conducted
“blindly.” This can result in cancerous lesions being missed and other sections of the prostate unnecessarily
oversampled. Oversampling causes the patient pain and can even lead to impotence or incontinence.
Historically, imaging the prostate has presented a challenge because of the vascularity of the organ coupled with its
location deep within the abdominal/pelvic cavity. Now other options are available that can provide more accurate
imaging of the prostate gland, including MRI with dynamic contrast enhancement (DCE). Similar to MRI for breast
cancer, prostate DCE MRI provides a more thorough diagnostic assessment, and improved staging of the disease. A
necessary component to this technology is CAD which uses advanced algorithms to assist radiologists in determining
malignant versus benign tumors and to pinpoint tumor location and size.
In the future, MRI imaging may have an expanded role in the management of prostate cancer patients, particularly for
management strategies involving active surveillance. As more men consider “watchful waiting” or delaying active
5
treatment of their cancer, advances in imaging will help make these decisions easier, based more on solid science than
on the assumption that a man’s prostate cancer is slow growing.
Radiation Therapy: Electronic Brachytherapy (eBx™) for Breast Cancer Treatment
The Company believes that radiation therapy is an important tool in the fight against cancer. When radiation interacts
with a cell it alters the cell’s DNA (or genetic make-up) and its ability to reproduce, which ultimately leads to cell
death. eBx is a form of radiation therapy that is delivered directly at the location of the tumor and targets and kills cancer
cells.
eBx is a type of brachytherapy that utilizes a miniaturized high dose rate yet low energy X-ray source to apply radiation
directly to the cancerous site. The goal is to direct the radiation dose to the size and shape of the cancerous area while
sparing healthy tissue and organs. The Xoft technology delivers clinical dose rates similar to traditional radio-active
systems. However, because of the electronic nature of the Xoft technology, the dose fall off is much faster thus lowering
the radiation exposure outside of the prescription area. Given this rapid dose fall off, there is no need for a leaded vault
as compared to traditional radiation therapy, enabling the eBx system to be transported to different locations within the
same facility or between multiple facilities.
Electronic Brachytherapy can be delivered during an operative procedure and may be used as a primary or secondary
modality over a course of days. This technology enables radiation oncology departments in hospitals, clinics and
physician offices to perform traditional radiotherapy treatments and offer advanced treatments such as Intraoperative
Radiation Therapy (IORT). Current customers of the Xoft eBx system include university research and community
hospitals, private and governmental institutions, doctors’ offices, cancer care clinics, and veterinary facilities.
Of the approximately 261,000 women who are diagnosed with breast cancer every year in the U.S., the majority or 60%
are diagnosed with early stage breast cancer. About 70% of early stage breast cancers qualify as candidates for treatment
with electronic brachytherapy. Currently about 80% of early stage breast cancer patients that are treated with radiation
therapy follow a 5-7 week daily protocol of traditional external beam radiation and 20% are treated with a 5-day
protocol using brachytherapy.
Breast cancer is a relatively common disease, and is often treatable by surgery, followed by radiotherapy with an
additional therapy such as chemotherapy and/or hormonal therapy. Early detection has led to earlier diagnosis with
small, early stage diseases that can be removed by local excision rather than a complete mastectomy. Microscopic
cancerous cells can be present and easily managed with the application of radiotherapy. The protocol in the recent past
for most women included a day procedure for a lumpectomy and 5-7 weeks daily for radiation. IORT allows the
physician to treat the remaining breast tissue in the operating room while the patient is still under anesthesia, eliminating
the need for 5-7 weeks of daily traditional radiation therapy.
In a scientific paper presented at the 2010 ASCO Meeting, Dr. Jayant Vaidya of the University College London, UK,
concluded that in the 2,200 patient multinational clinical trial (TARGIT-A trial) IORT, generated with 50 kV electronic
brachytherapy, is equivalent to conventional external beam radiotherapy.
Products and Product Development
The table below presents the revenue and percentage of revenue attributable to the Company’s products and services,
in 2011, 2010 and 2009 (in thousands):
Digital & MRI CAD revenue
Film based revenue
Electronic brachytherapy
Service & supply revenue
Total revenue
2011
2010
$
For the year ended December 31,
%
%3.64
%2.8
%6.41
%9.03
$
13,256
2,361
4,170
8,865
28,652
293,51
533,3
-
848,5
575,42
$
$
%
%6.26
%6.31
%0.0
%8.32
2009
$
092,81
597,5
-
420,4
901,82
$
%
%1.56
%6.02
%0.0
%3.41
The revenues above exclude the results of Xoft for the years ended December 31, 2010 and 2009.
6
Digital and MRI CAD products:
Advanced Image Analysis and Workflow Solutions in Breast Imaging (Mammography)
iCAD develops and markets a comprehensive range of high-performance CAD solutions for digital and film-based
mammography systems. iCAD’s SecondLook™ systems are based on sophisticated patented algorithms that analyze
the data; automatically identifying and marking suspicious regions in the images. The system provides the radiologist
with a “second look” which helps the radiologist detect actionable missed cancers earlier than screening mammography
alone. SecondLook detects and identifies suspicious masses and micro-calcifications utilizing image processing, pattern
recognition and artificial intelligence techniques. Knowledge from thousands of mammography images are incorporated
in these algorithms enabling the product to distinguish between characteristics of cancerous and normal tissue. The result
is earlier detection of hard-to-find cancers, improved workflow for radiologists, and higher quality patient care.
The Company launched and began shipments of its next generation SecondLook Digital CAD, SecondLook® Premier*
to Europe in December of 2010. SecondLook Premier was developed to provide breast imagers with the most advanced
and customizable digital mammography CAD system providing improved cancer detection through increased
sensitivity, reduced false positives and robust clinical decision support tools. Built on an all-digital dataset, the
technology expands on the SecondLook® platform and provides, what the Company believes to be, the richest set of
clinical decision support tools. Its CAD metrics provide automated measurements of mammographic characteristics for
every case and each CAD detection and CAD iNSIGHT provides the rationale for each CAD detection. The Company
initiated a reader study in 2011 to obtain the clinical data that will be used to prepare their regulatory submission for
SecondLook Premier to the FDA. iCAD continues to develop CAD products for additional digital imaging (FFDM and
computed radiography) providers. Developmental work continues with PACS companies and iCAD is focused on
developing new, more efficient ways of integrating CAD into PACS review workstations to create a streamlined
workflow for mammography and potentially other specialties.
SecondLook Digital
SecondLook Digital (SLD) is designed to function with leading digital mammography systems (FFDM and computed
radiography) – including systems sold by GE Healthcare, Siemens Medical Systems, Fuji Medical Systems, Hologic,
Inc., Sectra Medical Systems, Philips, IMS Giotto, Agfa Corporation, and Planmed. iCAD believes it has strong
development partnerships with imaging providers. The algorithms in SecondLook Digital products have been optimized
for each digital imaging provider based upon characteristics of their unique detectors. The Company’s SecondLook
Premier CAD solution was tailored for GE Healthcare and Siemens Medical Systems upon initial release of their
systems for Europe.
SecondLook Digital is a computer server residing on a customer’s network that receives patient studies from the
imaging modality, performs CAD analysis and sends the CAD results to PACS and/or review workstations. Workflow
and efficiency are critical in digital imaging environments therefore iCAD has developed flexible, powerful DICOM
integration capabilities that enable SecondLook Digital to integrate seamlessly with leading PACS archives and review
workstations from multiple providers. iCAD has worked with its OEM partners to ensure CAD results are integrated
and easily viewed using each review workstation’s graphical user interface. To further improve efficiency and clinical
efficacy, the most urgent or important patient studies can be prioritized and analyzed with CAD first.
During 2010, the Company also introduced and expanded shipments of its SecondLook Digital Multivendor Solution
(MVS) to address U.S. customers as well as the European and Canadian markets. The MVS solution enables hospitals
and imaging facilities to process cases from multiple digital mammography vendors using a single server and
incremental software licenses. This reduces the hardware required resulting in a lower overall cost to the facility,
including the consolidation of support to a single unit and service contract. In 2011, the Company entered into a
distribution agreement with Carestream Health, Inc. to distribute its MVS globally.
Advanced Image Analysis and Workflow Solutions in MRI Imaging – Breast and Prostate
SpectraLook, VividLook, OmniLook
iCAD offers a suite of FDA cleared dynamic contrast enhanced (DCE) MRI analysis solutions for breast, prostate, and
other organs.
Each of three modules, SpectraLook for breast, VividLook for prostate, and OmniLook for other organs, deliver
objective, consistent quantitative analysis of DCE MR images. The software automates the process of drawing regions
of interest, minimizing potential errors inherent in manual processes. Once a region of interest has been identified, a
sophisticated algorithm analyzes changes in the MR signal in the tissue to help clinicians discern biological processes
taking place in malignant versus benign tumors.
iCAD’s algorithm uniquely uses all data available from an MR study, resulting in more consistent analysis across
magnets and contrast agents.
7
VersaVue Enterprise
VersaVue Enterprise is a review and reporting solution built on read-anywhere thin client architecture. Used in
conjunction with SpectraLook, VividLook, or OmniLook modules, it provides visual and quantitative depictions of the
movement of contrast agent through a lesion. Colorized overlays draw the attention of the reading radiologist to
suspicious areas within the organ being imaged, aiding in the analysis of large MRI datasets. The combination of
quantitative and qualitative information reveals characteristics of tumor physiology, and can aid in detecting and
localizing cancer as well as supporting treatment planning and monitoring of the lesion over time.
PrecisionPoint®, iCAD’s interventional planning solution, provides radiologists with an automatic calculation of the
location and depth of a targeted region of interest making breast biopsies easier, faster, and more reliable.
In 2011, the Company entered into a distribution agreement with Hitachi Medical Systems to distribute its SpectraLook
and PrecisionPoint software. The Company also entered into a distribution agreement with Carestream Health, Inc. to
globally distribute its entire suite of MR image analysis workstation software, including SpectraLook, VividLook,
OmniLook, VersaVue, and PrecisionPoint.
Advanced Image Analysis and Workflow Solutions in CT Colonography
VeraLook™
iCAD introduced a CAD solution, VeraLook, in August 2010 following FDA clearance of the product. This solution
is designed to support detection of colonic polyps in conjunction with CTC. iCAD believes that CAD for CTC is a
natural extension of iCAD’s core competencies in image analysis and image processing. The system works in
conjunction with third party display workstations and PACS vendors. Field testing of the product was initiated in 2008
and iCAD conducted a multi-reader clinical study of iCAD’s CT Colon CAD product, for use with CTC. Results of
the Company’s clinical study, “Impact of Computer-Aided Detection for CT Colonography in a Multireader, Multicase
Trial” demonstrated that reader sensitivity improved 5.5% for patients with both small and large polyps with use of
CAD. Use of CAD reduced specificity of readers by 2.5%. The clinical relevance of this CAD program was improved
reader performance while maintaining high reader specificity. In 2011, the Company entered into a distribution
agreement with Vital Images, a Toshiba Medical System Group Company, to globally distribute its VeraLook product.
Film based products
Products for Converting Mammography Films to Digital Images
TotalLook MammoAdvantage™
The TotalLook MammoAdvantage (“TLMA”) system is iCAD’s second generation mammography specific digitizer.
TLMA provides a comprehensive film-to-digital solution making it easier for facilities to transition from film to digital
mammography. The product converts prior mammography films to digital images delivering high resolution digitized
images to meet the critical specifications required for conversion of prior films. The TLMA’s unique configurable
image resolution settings enable the digitized and newly acquired digital images to be displayed at the same time. In
moving to one review workstation for comparative review, users experience improvements in workflow, productivity
and reduced discomfort associated with switching between a light box and a computer screen to view images. Results
from a study (Full Field Digital Mammography Interpretation with Prior Analog versus Prior Digitized Analog
Mammograms: Time for Interpretation) presented at the 2009 RSNA meeting demonstrated a 30% reduction in time
for image interpretation with digitized analog mammograms.
The TLMA provides flexible DICOM connectivity for seamless integration with leading review workstations, PACS
and RIS systems. Specialized image compression techniques reduce file sizes up to 80%, minimizing long-term storage
requirements.
Electronic Brachytherapy products:
Electronic Brachytherapy (eBx™) Treatment for Breast Cancer
Axxent® eBx™
The acquisition of Xoft brings the Axxent eBx system to the Company’s product offerings. The portable Axxent system
uses isotope-free miniaturized X-ray tube technology to deliver therapy directly to cancer sites with minimal radiation
exposure to surrounding healthy tissue. Axxent is FDA-cleared for the treatment of early stage breast cancer,
endometrial cancer and skin cancer, as well as for the treatment of other cancers or conditions where radiation therapy
is indicated, including Intraoperative Radiation Therapy (IORT). The Company offers FDA-cleared applicators for the
utilization of the Axxent eBx system including breast applicators for IORT and APBI in the treatment of breast cancer,
vaginal applicators for the treatment of endometrial cancer, and skin applicators for the treatment of non-melanoma skin
cancers. The applicators are offered in a variety of sizes based on clinical need. The Company also provides the 50kV
isotope-free energy source, a comprehensive service warranty program, and various accessories such as the Axxent eBx
Rigid Shield for internal IORT shielding. Current customers of the Xoft eBx system include university research and
8
community hospitals, private and governmental institutions, doctors’ offices, cancer care clinics, and veterinary
facilities.
Sales and Marketing
iCAD’s products are sold through its direct regional sales organization in the U.S. as well as through its OEM partners,
including GE Healthcare, Fuji Medical Systems, Siemens Medical, Philips Healthcare, Agfa Corporation, Sectra
Medical Systems, Planmed, Fuji Medical Systems, IMS Giotto, and Carestream.
The Company’s products are marketed on the basis of their clinical superiority and their ability to help radiologists
detect more cancers earlier, while seamlessly integrating into the clinical workflow of the radiologist. In 2011, the
Company continued to build upon its positioning of advance image analysis and clinical decision support solutions for
mammography, MRI and CTC. As part of its sales and marketing efforts, iCAD has developed and executed a variety
of public relations and local outreach programs with numerous iCAD customers. Additional investments are being
made in cultivating relationships with the leaders in breast, colon, and prostate CAD at national trade shows, including
at the RSNA meeting in December 2011, where industry leaders discussed the future of CAD in these modalities.
In 2011, iCAD continued to invest in a series of educational initiatives and advocacy efforts to advance the use of MRI
technologies in the diagnosis and management of prostate and other cancers. “Decisions in Medical Imaging” was a
series of live webinars focused on how MRI combined with an advanced quantitative image analysis solution can
support improved cancer management. The seminars, which have been archived as part of an eLearning library, provide
clinicians with an understanding of how DCE MRI supports improved patient care throughout the cancer care cycle.
iCAD, through its Xoft subsidiary, markets the Axxent eBx system in the United States and select countries worldwide,
primarily in Europe. Xoft’s direct sales force sells the system on the basis of its clinical effectiveness as a platform
high dose rate, low energy radiation therapy solution for hospitals, ambulatory care centers and free standing radiation
oncology facilities. Breast IORT is a strategic focus of the Company due to the significant clinical /lifestyle benefits
to the patient and economic advantages to the facility. The Axxent eBx system offers a distinct competitive advantage
given its overall flexibility in terms of portability, minimal shielding requirement, and ability to treat various types of
cancers.
Core to the Company’s eBx market development strategy is a comprehensive medical education program. Xoft actively
participates in several key industry scientific conferences in the United States and Europe including but not limited to
ACRO, Miami Breast, ASBS, AAPM, ESTRO and ASTRO on an annual basis. At select industry conferences and at
independent venues the Company provides specific additional eBx professional education programs and product
demonstrations in the form of symposia.
Competition
The Company currently faces direct competition in its CAD business from Hologic, Inc. and imaging equipment
manufacturers such as GE Healthcare, Siemens Medical, and Philips Medical Systems. Other medical imaging
equipment manufacturers have explored the possibility of introducing their own versions of CAD and comparative
reading products into the market, but thus far have not had a significant impact in the market. The Company believes
that current regulatory requirements present a significant barrier to entry into this market.
Merge Healthcare, Inc. (which acquired Confirma, Inc. in September 2009) and InVivo Corporation (Philips) are the
market leaders in breast MR image analysis. Both companies also offer prostate MR image analysis solutions following
iCAD’s lead in entering this market in the U.S. The Company believes that its market leadership in mammography CAD
and prostate education provides it with a competitive advantage with the breast and prostate imaging communities.
The Company’s CT Colon solution faces competition from the traditional imaging CT equipment manufacturers, 3D
Rendering and Analysis firms, as well as from emerging CAD companies. Siemens Medical, GE Healthcare, and
Philips Medical Systems currently offer or are in the process of developing polyp detection products. The Company
expects that these companies will offer a colonic polyp detection solution as an advanced feature of their image
management and display products typically sold with their CT equipment. Medicsight has a commercial product
available in the United States, Europe, and Asia. The Company believes that current regulatory requirements present
a significant barrier to entry into this market and that its market leadership in mammography CAD provides it with a
competitive advantage within the CT Colonography community.
The Company’s eBx products face competition primarily from one company, Carl Zeiss, Inc., a multinational company,
where eBx products are only one of that company’s many products. Carl Zeiss Inc. manufactures and sells eBx products
for the use of intraoperative radiation therapy. The Company believes the main focus of the Carl Zeiss company is
Breast IORT and they have to-date not positioned their product as a traditional Brachytherapy system for use in multi-
9
fraction accelerated partial breast irradiation, skin or endometrial applications. IntraOp/Mobetron is an additional
competitor in the HDR (high dose rate) brachytherapy market. IntraOp/Mobetron provides a brachytherapy solution
for IORT but due to this company’s isotope-based technology their system requires a vaulted facility.
iCAD operates in highly competitive and rapidly changing markets with competitive products available from nationally
and internationally recognized companies. Many of these competitors have significantly greater financial, technical
and human resources than iCAD and they are well established in the healthcare market. In addition, some companies
have developed or may develop technologies or products that could compete with the products we manufacture and
distribute or that would render our products obsolete or noncompetitive. Moreover, competitors may achieve patent
protection, regulatory approval, or product commercialization before we do, which would limit our ability to compete
with them. These and other competitive pressures could have a material adverse effect on the Company’s business.
Manufacturing and Professional Services
The Company’s CAD products are manufactured and assembled for it by a contract manufacturer of medical devices.
The Company’s manufacturing efforts are generally limited to purchasing and supply chain management,
planning/scheduling, manufacturing engineering, service repairs, quality assurance, inventory management, and
warehousing. Once the product has shipped, it is usually installed by one of the Company’s OEM partners at the
customer site. When a product sale is taken direct from the end customer by iCAD, the product is installed by iCAD
personnel at the customer site.
iCAD’s Professional Services staff is comprised of a team of trained and specialized individuals providing
comprehensive product support on a pre-sales and post-sales basis. This includes pre-sale product demonstrations,
product installations, applications training, and call center management (or technical support). The support center is the
single point of contact for the customer, providing remote diagnostics, troubleshooting, training, and service dispatch.
Service repair efforts are generally performed at the customer site by third party service organizations or in the
Company’s repair depot by the Company’s repair technicians.
Xoft’s portable Axxent® Controller is manufactured and assembled for it by a contract manufacturer. Its electronic
brachytherapy miniaturized X-ray source, which is used to deliver radiation directly to the cancerous site, is
manufactured in the Company’s Sunnyvale, CA facility. Xoft operations consist of manufacturing, engineering,
administration, purchasing, planning and scheduling, service repairs, quality assurance, inventory management, and
warehousing. Once the product has shipped, it is installed by Xoft personnel at the customer site.
Xoft’s Field Service and Customer Service staff is comprised of a team of trained and specialized individuals providing
comprehensive product support on a pre-sales and post-sales basis. The Field Service staff provides product
installations, maintenance, training and service repair efforts generally performed at the customer site. The Customer
Service staff provides pre-sale product demonstrations, customer support, troubleshooting, service dispatch and call
center management.
Government Regulation
The Company’s systems are medical devices subject to extensive regulation by the FDA under the Federal Food, Drug,
and Cosmetic Act with potentially significant costs for compliance. The FDA’s regulations govern, among other things,
product development, product testing, product labeling, product storage, pre-market clearance or approval, advertising
and promotion, and sales and distribution. The Company’s devices are also subject to FDA clearance or approval before
they can be marketed in the U.S. and may be subject to additional regulatory approvals before they can be marketed
outside the U.S. There is no guarantee that future products or product modifications will receive the necessary approvals.
The FDA’s Quality System Regulations require that the Company’s operations follow extensive design, testing, control,
documentation and other quality assurance procedures during the manufacturing process. The Company is subject to
FDA regulations covering labeling regulations and adverse event reporting including the FDA’s general prohibition of
promoting products for unapproved or off-label uses.
The Company’s manufacturing facilities are subject to periodic inspections by the FDA and corresponding state
agencies. Compliance with extensive international regulatory requirements is also required. Failure to fully comply
with applicable regulations could result in the Company receiving warning letters, non-approvals, suspensions of
existing approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions, injunctions,
and criminal prosecution.
Additionally, in order to market and sell its products in certain countries outside of the U.S., the Company must obtain
and maintain regulatory approvals and comply with the regulations of each specific country. These regulations,
including the requirements for approvals, and the time required for regulatory review vary by country.
10
On February 3, 2011, the Company in cooperation with the FDA, voluntarily recalled its Axxent Flexishield Mini
which was acquired as part of its acquisition of Xoft in December 2010. The voluntary recall was prompted after the
Company was notified in January 2011 of the presence of microscopic particles found in certain patients’ breasts during
post-surgery follow up imaging exams, which were later determined to be tungsten and alleged to be originating from
the Axxent Flexishield Mini, an optional accessory device to the Company’s Axxent Electronic Brachytherapy system.
The Company has developed the Flexishield Rigid, which is a replacement for the Flexishield Mini and the new product
has received FDA clearance. On June 9, 2011, the Company received notification from the FDA that the recall was
complete and that the FDA considered the recall terminated at that time.
Intellectual Property
The Company primarily relies on a combination of patents, trade secrets and copyright law, third-party and employee
confidentiality agreements, and other protective measures to protect its intellectual property rights pertaining to our
products and technologies.
Currently, the Company has 57 U.S. and 4 foreign issued patents covering its CAD and eBx technologies expiring
between 2018 and 2028. These patents help the Company maintain a proprietary position in its markets. Additionally,
the Company has 28 patent applications pending domestically, some of which have been also filed internationally, and
it plans to file additional domestic and foreign patent applications when it believes such protection will benefit the
Company. These patents and patent applications relate to current and future uses of iCAD’s CAD and digitizer
technologies and products, including CAD for CT colonography and lung and CAD for MRI breast and prostate, as well
as Xoft’s current and future eBx technologies and products. In June 2006, the Company secured a non-exclusive patent
license from the National Institute of Health which relates broadly to CAD in colonography. In August 2007, Xoft
secured a non-exclusive patent license from Cytyc/Hologic which relates to balloon applicators for breast brachytherapy.
The Company believes it has all the necessary licenses from third parties for software and other technologies in its
products.
Sources and Availability of Materials
The Company depends upon a limited number of suppliers and manufacturers for its products, and certain components
in its products may be available from a sole or limited number of suppliers. The Company’s products are generally
either manufactured and assembled for it by a sole manufacturer, by a limited number of manufacturers or assembled
by it from supplies it obtains from a limited number of suppliers. Critical components required to manufacture these
products, whether by outside manufacturers or directly, may be available from a sole or limited number of component
suppliers. The Company generally does not have long-term arrangements with any of its manufacturers or suppliers.
The loss of a sole or key manufacturer or supplier would impair its ability to deliver products to customers in a timely
manner and would adversely affect its sales and operating results. The Company’s business would be harmed if any
of its manufacturers or suppliers could not meet its quality and performance specifications and quantity and delivery
requirements.
Major Customers
The Company’s two major customers over the past three years were GE Healthcare and Fuji Medical Systems. GE
Healthcare accounted for $6.8 million in 2011, $9.3 million in 2010 and $8.8 million in 2009 or 24%, 38%, and 31%
of the Company’s revenues, respectively. Fuji Medical Systems accounted for $3.2 million in 2011, $3.1 million in
2010 and $4.8 million in 2009 or 11%, 13% and 17% of the Company’s revenues, respectively.
Engineering and Product Development
The Company spent $10.8 million, $6.6 million, and $7.2 million on research and development activities during the
years ended December 2011, 2010 and 2009, respectively. The research and development expenses for 2011 are
primarily attributed to personnel, consulting, subcontract, licensing and data collection expenses relating to the
Company’s new product development and clinical testing.
Employees
As of February, 2012, the Company had 110 employees, all of which are full time employees, with 35 involved in
sales and marketing, 36 in research and development, 25 in service, manufacturing, technical support and operations
functions, and 13 in administrative functions. None of the Company’s employees are represented by labor
organizations. The Company considers its relations with employees to be good.
11
Environmental Protection
Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect
upon the capital expenditures, earnings (losses) and competitive position of the Company.
Financial Geographic Information
The Company markets its products for digital mammography in the U.S. through its direct regional sales organization
as well as through its OEM partners, including GE Healthcare, Fuji Medical Systems and Siemens Medical. Outside
the U.S. the Company markets its products for digital mammography generally through its OEM partners, GE
Healthcare, Siemens Medical, Agfa Corporation, Sectra Medical Systems, Planmed Oy, Fuji Medical Systems and
IMS Giotto. Total export sales decreased to approximately $1.8 million or 6% of sales in 2011 as compared to $4.0
million or 16% of total sales in 2010 and $3.7 million or 13% of total sales in 2009.
The Company’s principal concentration of export sales is in Europe, which accounted for 67% of the Company’s export
sales in 2011, 77% of export sales in 2010, and 64% of export sales in 2009. Of these sales 16% in 2011, 55% in 2010
and 36% in 2009 were in France, and in 2011, an additional 21% were in Germany. The balance of the export sales in
2011 were primarily into Canada and Asia.
Foreign Regulations
International sales of the Company’s products are subject to foreign government regulation, the requirements of which
vary substantially from country to country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval, and the requirements may differ. Obtaining and maintaining foreign
regulatory approvals is an expensive and time consuming process. The Company cannot be certain that it will be able
to obtain the necessary regulatory approvals timely or at all in any foreign country in which it plans to market its CAD
products and the Axxent eBx system, and if it fails to receive and maintain such approvals, its ability to generate
revenue may be significantly diminished.
Product Liability Insurance
The Company believes that it maintains appropriate product liability insurance with respect to its products. The
Company cannot be certain that with respect to its current or future products, such insurance coverage will continue
to be available on terms acceptable to the Company or that such coverage will be adequate for liabilities that may
actually be incurred.
Item 1A.
Risk Factors.
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could
materially adversely affect our operations. The following highlights some of the factors that have affected, and/or in
the future could affect, our operations.
We have incurred significant losses from inception through 2011 and there can be no assurance that we will be
able to achieve and sustain future profitability.
We have incurred significant losses since our inception. We incurred a net loss of $37.6 million during the fiscal year
ended December 31, 2011. We may not be able to achieve profitability.
A limited number of customers account for a significant portion of our total revenues. The loss of a principal
customer could seriously hurt our business.
Our principal sales distribution channel for our digital products is through our OEM partners. Our digital product
revenue accounted for 41% and 55% of our total revenue for the years ended December 31, 2011 and 2010, respectively.
In 2011 we had two major customers, GE Healthcare and Fuji Medical Systems, with 24% and 11% of our revenues,
respectively. A limited number of major customers have in the past and may continue in the future to account for a
significant portion of our revenues. The loss of our relationships with principal customers or a decline in sales to
principal customers could materially adversely affect our business and operating results.
12
Our business is dependent upon future market growth of full field digital mammography systems and digital
computer aided detection products as well as advanced image analysis and workflow solutions for use with MRI
and CT and to the market growth of electronic brachytherapy: this growth may not occur or may occur too
slowly to benefit us.
Our future business is substantially dependent on the continued growth in the market for full field digital mammography
systems and digital computer aided detection products as well as advanced image analysis and workflow solutions for
use with MRI and CT and to the market growth of electronic brachytherapy The market for these products may not
continue to develop or may develop at a slower rate than we anticipate due to a variety of factors, including, general
economic conditions, delays in hospital spending for capital equipment, the significant cost associated with the
procurement of full field digital mammography systems and CAD products and MRI and CT systems and the reliance
on third party insurance reimbursement. In addition we may not be able to successfully develop or obtain FDA
clearance for our proposed products.
If goodwill and/or other intangible assets that we have recorded in connection with our acquisitions become
impaired, we could have to take significant charges against earnings.
In connection with the accounting for our acquisitions, we have recorded a significant amount of goodwill and other
intangible assets. In September 2011, we recorded a significant impairment on our goodwill. Under current accounting
guidelines, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other
intangible assets has been impaired. Any reduction or impairment of the value of goodwill or other intangible assets
will result in a charge against earnings which could materially adversely affect our reported results of operations in
future periods.
We may not be able to obtain regulatory approval for any of the other products that we may consider developing.
We have received FDA approvals only for our currently offered CAD products. Before we are able to commercialize
any other product, we must obtain regulatory approvals for each indicated use for that product. The process for
satisfying these regulatory requirements is lengthy and costly and will require us to comply with complex standards
for research and development, clinical trials, testing, manufacturing, quality control, labeling, and promotion of
products.
Our products and manufacturing facilities are subject to extensive regulation with potentially significant costs
for compliance.
Our CAD systems for the computer aided detection of cancer and Axxent eBx systems are medical devices subject to
extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act. In addition, our manufacturing
operations are subject to FDA regulation and we are also subject to FDA regulations covering labeling, adverse event
reporting, and the FDA’s general prohibition against promoting products for unapproved or off-label uses.
Our failure to fully comply with applicable regulations could result in the issuance of warning letters, non-approvals,
suspensions of existing approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions,
injunctions, and criminal prosecution. Moreover, unanticipated changes in existing regulatory requirements or adoption
of new requirements could increase our application, operating and compliance burdens and adversely affect our
business, financial condition and results of operations.
Sales of our CAD products in certain countries outside of the U.S. are also subject to extensive regulatory approvals.
Obtaining and maintaining foreign regulatory approvals is an expensive and time consuming process. We cannot be
certain that we will be able to obtain the necessary regulatory approvals timely or at all in any foreign country in which
we plan to market our CAD products and Axxent eBx systems, and if we fail to receive such approvals, our ability to
generate revenue may be significantly diminished.
During 2011, we recalled the Axxent Flexishield Mini and our other products may be recalled even after we
have received FDA or other governmental approval or clearance.
On February 3, 2011, the Company in cooperation with the FDA, voluntarily recalled its Axxent Flexishield Mini.
The voluntary recall was prompted after the Company was notified in January 2011 of the presence of microscopic
particles found in certain patients’ breasts during post-surgery follow up imaging exams, which were later determined
to be tungsten and alleged to be originating from the Axxent Flexishield Mini, an optional accessory device to the
Company’s Axxent Electronic Brachytherapy system. On June 9, 2011, the Company received notification from the
FDA that the recall was complete and that the FDA considered the recall terminated at that time. We cannot assure you
that the recall will not adversely affect our ability to market our Axxent eBx system due to, market perception or
otherwise.
13
If the safety or efficacy of any of our products is called into question, the FDA and similar governmental authorities in
other countries may require us to recall our products, even if our product received approval or clearance by the FDA or a
similar governmental body. Such a recall would divert the focus of our management and our financial resources and
could materially and adversely affect our reputation with customers and our financial condition and results of operations.
Our quarterly and annual operating and financial results and our gross margins are likely to fluctuate
significantly in future periods.
Our quarterly and annual operating and financial results are difficult to predict and may fluctuate significantly from
period to period. Our revenues and results of operations may fluctuate as a result of a variety of factors that are outside
of our control including, but not limited to, general economic conditions, the timing of orders from our OEM partners,
our OEM partners ability to manufacture and ship their digital mammography systems, our timely receipt by the FDA
for the clearance to market our products, our ability to timely engage other OEM partners for the sale of our products,
the timing of product enhancements and new product introductions by us or our competitors, the pricing of our products,
changes in customers’ budgets, competitive conditions and the possible deferral of revenue under our revenue
recognition policies.
Our existing and future debt obligations could impair our liquidity and financial condition, and in the event we
are unable to meet our debt obligations the lenders could foreclose on our assets.
In connection with a Facility Agreement entered into on December 29, 2011, we incurred $15,000,000 principal amount
of long-term debt. Our debt obligations:
• could impair our liquidity;
• could make it more difficult for us to satisfy our other obligations;
•
•
•
•
require us to dedicate a substantial portion of our cash flow to payments on our debt obligations, which
reduces the availability of our cash flow to fund working capital, capital expenditures and other corporate
requirements;
impose restrictions on our ability to incur indebtedness, other than permitted indebtedness, and could
impede us from obtaining additional financing in the future for working capital, capital expenditures,
acquisitions and general corporate purposes;
impose restrictions on us with respect to the use of our available cash, including in connection with future
acquisitions;
require us to maintain at least $5,000,000 of cash and cash equivalents as of the last day of each calendar
quarter;
• make us more vulnerable in the event of a downturn in our business prospects and could limit our flexibility
to plan for, or react to, changes in our licensing markets; and
• could place us at a competitive disadvantage when compared to our competitors who have less debt.
We have pledged substantially all of our assets to secure our obligations under the Facility Agreement. In the event
that we were to fail in the future to make any required payment under agreements governing our indebtedness or fail
to comply with the financial and operating covenants contained in those agreements, we would be in default regarding
that indebtedness. A debt default would enable the lenders to foreclose on the assets securing such debt and could
significantly diminish the market value and marketability of our common stock and could result in the acceleration of
the payment obligations under all or a portion of our consolidated indebtedness.
Changes in or non-reimbursement of procedures by Medicare or other third-party payers may adversely affect
our business.
In the U.S., Medicare and a number of commercial third-party payers provide reimbursements for the use of CAD in
connection with mammography screening and diagnostics. In the future, however, these reimbursements may be
unavailable, reduced or inadequate due to changes in applicable legislation or regulations, changes in attitudes toward
the use of mammograms for broad screening to detect breast cancer or due to changes in the reimbursement policies
of third-party payers. As a result, healthcare providers may be unwilling to purchase our CAD products or any of our
future products, which could significantly harm our business, financial condition and operating results.
14
There is no guaranty that any of the products which we are developing or are contemplating developing will become
eligible for reimbursements or health insurance coverage at favorable rates or even at all or maintain eligibility.
The United States and several foreign jurisdictions are considering, or have already enacted, a number of legislative
and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products
profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in
promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or
expanding access to healthcare. In the United States, the medical device industry has been a particular focus of these
efforts and has been significantly affected by major legislative initiatives. We expect to experience pricing pressures
in connection with the sale of our products due to the trend toward managed healthcare, the increasing influence of
health maintenance organizations and additional legislative proposals.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Affordability Reconciliation Act, or collectively, ACA, became law in the U.S. The goal of ACA is to reduce the cost
of health care and substantially change the way health care is financed by both governmental and private insurers.
While we cannot predict what impact on federal reimbursement policies this legislation will have in general or on our
business specifically, the ACA may result in downward pressure on reimbursement, which could negatively affect
market acceptance of our products. Members of the U.S. Congress and some state legislatures are seeking to overturn
at least portions of the legislation and we expect they will continue to review and assess this legislation and possibly
alternative health care reform proposals. We cannot predict whether new proposals will be made or adopted, when
they may be adopted or what impact they may have on us if they are adopted.
We cannot be certain of the future effectiveness of our internal controls over financial reporting or the impact
of the same on our operations or the market price for our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our Annual Report on Form
10-K our assessment of the effectiveness of our internal controls over financial reporting. We have dedicated a
significant amount of time and resources to ensure compliance with this legislation for the year ended December 31,
2011 and will continue to do so for future fiscal periods. Although we believe that we currently have adequate internal
control procedures in place, we cannot be certain that future material changes to our internal controls over financial
reporting will be effective. If we cannot adequately maintain the effectiveness of our internal controls over financial
reporting, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action
could adversely affect our financial results and the market price of our common stock.
Our business is subject to The Health Insurance Portability and Accountability Act of 1996, or HIPAA, and
changes to or violations of these regulations could negatively impact our revenues.
HIPAA mandates, among other things, the adoption of standards to enhance the efficiency and simplify the
administration of the nation’s healthcare system. HIPAA requires the U.S. Department of Health and Human Services
to adopt standards for electronic transactions and code sets for basic healthcare transactions such as payment, eligibility
and remittance advices, or “transaction standards,” privacy of individually identifiable health information, or “privacy
standards,” security of individually identifiable health information, or “security standards,” electronic signatures, as well
as unique identifiers for providers, employers, health plans and individuals and enforcement. Final regulations have been
issued by DHHS for the privacy standards, certain of the transaction standards and security standards.
As a covered entity, we are required to comply in our operations with these standards and are subject to significant civil
and criminal penalties for failure to do so. In addition, in connection with providing services to customers that also are
healthcare providers, we are required to provide satisfactory written assurances to those customers that we will provide
those services in accordance with the privacy standards and security standards. HIPAA has and will require significant
and costly changes for us and others in the healthcare industry. Compliance with the privacy standards became
mandatory in April 2003 and compliance with the security standards became mandatory in April 2005.
Like other businesses subject to HIPAA regulations, we cannot fully predict the total financial or other impact of these
regulations on us. The costs associated with our ongoing compliance could be substantial, which could negatively
impact our profitability.
The markets for many of our products are subject to changing technology.
The markets for many products we sell are subject to changing technology, new product introductions and product
enhancements, and evolving industry standards. The introduction or enhancement of products embodying new
technology or the emergence of new industry standards could render our existing products obsolete or result in short
product life cycles or our inability to sell our products without offering a significant discount. Accordingly, our ability
to compete is in part dependent on our ability to continually offer enhanced and improved products.
15
We depend upon a limited number of suppliers and manufacturers for our products, and certain components
in our products may be available from a sole or limited number of suppliers.
Our products are generally either manufactured and assembled for us by a sole manufacturer, by a limited number of
manufacturers or assembled by us from supplies we obtain from a limited number of suppliers. Critical components
required to manufacture our products, whether by outside manufacturers or directly by us, may be available from a sole
or limited number of component suppliers. We generally do not have long-term arrangements with any of our
manufacturers or suppliers. The loss of a sole or key manufacturer or supplier would impair our ability to deliver
products to our customers in a timely manner and would adversely affect our sales and operating results. Our business
would be harmed if any of our manufacturers or suppliers could not meet our quality and performance specifications
and quantity and delivery requirements.
We rely on intellectual property and proprietary rights to maintain our competitive position and may not be able
to protect these rights.
We rely heavily on proprietary technology that we protect primarily through licensing arrangements, patents, trade
secrets, proprietary know-how and non-disclosure agreements. There can be no assurance that any pending or future
patent applications will be granted or that any current or future patents, regardless of whether we are an owner or a
licensee of the patent, will not be challenged, rendered unenforceable, invalidated, or circumvented or that the rights
will provide a competitive advantage to us. There can also be no assurance that our trade secrets or non-disclosure
agreements will provide meaningful protection of our proprietary information. Further, we cannot assure you that
others will not independently develop similar technologies or duplicate any technology developed by us or that our
technology will not infringe upon patents or other rights owned by others.
In addition, in the future, we may be required to assert infringement claims against third parties, and there can be no
assurance that one or more parties will not assert infringement claims against us. Any resulting litigation or proceeding
could result in significant expense to us and divert the efforts of our management personnel, whether or not such
litigation or proceeding is determined in our favor. In addition, to the extent that any of our intellectual property and
proprietary rights were ever deemed to violate the proprietary rights of others in any litigation or proceeding or as a
result of any claim, we may be prevented from using them, which could cause a termination of our ability to sell our
products. Litigation could also result in a judgment or monetary damages being levied against us.
We have been named as a defendant in an action alleging personal injury resulting from gross negligence and
product liability by patients that were treated with the Axxent eBx system that incorporated the Axxent
Flexishield Mini, and we may be exposed to additional significant product liability for which we may not have
sufficient insurance coverage or be able to procure sufficient insurance coverage.
The Company is a defendant in multiple suits brought in Orange County Superior Court by plaintiffs who allege personal
injury resulting from gross negligence and product liability relating to their treatment with the Axxent Electronic
Brachytherapy System that incorporated the Axxent Flexishield Mini. These suits are discussed in more detail in Item 3
of this Form 10-K and in Note 8(e) to the Consolidated Financial Statements filed with this Form 10-K.
Because of the preliminary nature of these complaints we are unable to evaluate the merits of the claims, however
based upon its preliminary analysis, we plan to vigorously defend the law suit.
There can be no assurances that we will be able to defend or settle these claims on favorable terms or that additional
claims will not be made by other patients treated with the Axxent Flexishield Mini.
Our product liability and general liability insurance coverage may not be adequate for us to avoid or limit our liability
exposure in the pending action or in future claims and adequate insurance coverage may not be available in sufficient
amounts or at a reasonable cost in the future. If available at all, product liability insurance for the medical device
industry generally is expensive. In any event, the pending and any future product liability claims could be costly to
defend and/or costly to resolve and could harm our reputation and business.
Our future prospects depend on our ability to retain current key employees and attract additional qualified
personnel.
Our success depends in large part on the continued service of our executive officers and other key employees. We may
not be able to retain the services of our executive officers and other key employees. The loss of executive officers or
other key personnel could have a material adverse effect on us.
In addition, in order to support our continued growth, we will be required to effectively recruit, develop and retain
additional qualified personnel. If we are unable to attract and retain additional necessary personnel, it could delay or
hinder our plans for growth. Competition for such personnel is intense, and there can be no assurance that we will be
able to successfully attract, assimilate or retain sufficiently qualified personnel. The failure to retain and attract
necessary personnel could have a material adverse effect on our business, financial condition and results of operations.
16
We distribute our products in highly competitive markets and our sales may suffer as a result.
We operate in highly competitive and rapidly changing markets that contain competitive products available from
nationally and internationally recognized companies. Many of these competitors have significantly greater financial,
technical and human resources than us and are well established. In addition, some companies have developed or may
develop technologies or products that could compete with the products we manufacture and distribute or that would
render our products obsolete or noncompetitive. In addition, our competitors may achieve patent protection, regulatory
approval, or product commercialization that would limit our ability to compete with them. These and other competitive
pressures could have a material adverse effect on our business.
Our international operations expose us to various risks, any number of which could harm our business.
We derive some of our revenues from sales outside of the United States. We are subject to the risks inherent in
conducting business across national boundaries, any one of which could adversely impact our business. In addition to
currency fluctuations, these risks include, among other things: economic downturns; changes in or interpretations of
local law, governmental policy or regulation; restrictions on the transfer of funds into or out of the country; varying tax
systems; and government protectionism. One or more of the foregoing factors could impair our current or future
operations and, as a result, harm our overall business.
We do not anticipate paying cash dividends on our common stock.
We have not paid cash dividends on our common stock in the past, and we do not intend to do so in the foreseeable
future. Any payment of dividends will be in the sole discretion of our Board of Directors.
The market price of our common stock has been, and may continue to be, volatile which could reduce the market
price of our common stock.
The publicly traded shares of our common stock have experienced, and may experience in the future, significant price
and volume fluctuations. This market volatility could reduce the market price of our common stock without regard to
our operating performance. In addition, the trading price of our common stock could change significantly in response
to actual or anticipated variations in our quarterly operating results, announcements by us or our competitors, factors
affecting the medical imaging industry generally, changes in national or regional economic conditions, changes in
securities analysts’ estimates for us or our competitors’ or industry’s future performance or general market conditions,
making it more difficult for shares of our common stock to be sold at a favorable price or at all. The market price of
our common stock could also be reduced by general market price declines or market volatility in the future or future
declines or volatility in the prices of stocks for companies in our industry.
Future sales of shares of our common stock may cause the prevailing market price of our shares to decrease and
could harm our ability to raise additional capital.
We have previously issued a substantial number of shares of common stock, which are eligible for resale under Rule
144 of the Securities Act of 1933, as amended, and may become freely tradable. In addition, shares of our common stock
issued upon conversion of our convertible debt are also eligible for sale under Rule 144. We have also registered
shares that are issuable upon the exercise of options. If holders of options choose to exercise their options and sell shares
of common stock in the public market, or if holders of currently restricted common stock or common stock issued
upon conversion of convertible debt choose to sell such shares of common stock in the public market under Rule 144
or otherwise, or attempt to publicly sell such shares all at once or in a short time period, the prevailing market price
for our common stock may decline. The sale of shares of common stock issued upon the exercise of our securities
could also dilute the holdings of our existing stockholders.
We face the potential delisting of our common stock from the Nasdaq Global Market as a result of failure to
comply with the minimum bid price requirement. If we are unable to meet this requirement or to transfer our
listing to the Nasdaq Capital Market, we could be required to list our common stock in the over-the-counter
market, which could make obtaining future financing more difficult.
Companies listed on The NASDAQ Stock Market (“NASDAQ”) are subject to delisting for, among other things, failure
to maintain a minimum closing bid price per share of $1.00 for 30 consecutive business days. On September 9, 2011,
we received a letter from NASDAQ indicating that for the last 30 consecutive business days, the bid price of our
common shares closed below the minimum $1.00 per share requirement pursuant to NASDAQ Listing Rule 5450(a)(1)
for continued inclusion on The NASDAQ Global Market. In accordance with NASDAQ Listing Rule 5810(c)(3)(A),
we had an initial grace period of 180 calendar days, or until March 7, 2012, to regain compliance with the minimum
bid price requirement. NASDAQ has granted us an extension until September 4, 2012 to regain compliance. We
cannot be sure that our share price will comply with the requirements for continued listing of our common shares on
17
The NASDAQ Global Market in the future. If our common shares lose their status on The NASDAQ Global Market
and we are not successful in obtaining a listing on The NASDAQ Capital Market, our common shares would likely trade
in the over-the-counter market.
If our shares were to trade in the over-the-counter market, selling our common shares could be more difficult because
smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’
coverage of us may be reduced. In addition, in the event our common shares are delisted, broker-dealers have certain
regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our
common shares, further limiting the liquidity of our common shares. These factors could result in lower prices and larger
spreads in the bid and ask prices for common shares.
Such delisting from The NASDAQ Global Market and continued or further declines in our share price and market
value could also greatly impair our ability to raise additional necessary capital through equity or debt financing, and
could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other
transactions.
Provisions in our corporate charter and in Delaware law could make it more difficult for a third party to acquire
us, discourage a takeover and adversely affect existing stockholders.
Our certificate of incorporation authorizes the Board of Directors to issue up to 1,000,000 shares of preferred stock.
The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance
by our Board of Directors, without further action by stockholders, and may include, among other things, voting rights
(including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion
and redemption rights, and sinking fund provisions. Although there are currently no shares of preferred stock
outstanding, future holders of preferred stock may have rights superior to our common stock and such rights could also
be used to restrict our ability to merge with, or sell our assets to a third party.
We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which could prevent
us from engaging in a “business combination” with a 15% or greater stockholder” for a period of three years from the
date such person acquired that status unless appropriate board or stockholder approvals are obtained.
These provisions could deter unsolicited takeovers or delay or prevent changes in our control or management, including
transactions in which stockholders might otherwise receive a premium for their shares over the then current market
price. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in
their best interests.
We could be exposed to unknown pre-existing liabilities of Xoft, which could cause us to incur substantial
financial obligations and harm our business.
In connection with the acquisition, we may have assumed liabilities of Xoft of which we are not aware and may have
little or no recourse against Xoft with respect thereto. To date, we have voluntarily recalled Xoft’s Axxent Flexishield
Mini and have been named in an action alleging personal injury resulting from general negligence and product liability
seeking unlimited damages by two plaintiffs, one of whom was a patient at a hospital who was treated with the Axxent
eBx system that incorporated the Axxent Flexshield Mini. If we were to discover that there were intentional
misrepresentations made to us by Xoft, or its representatives as to these or other matters, we would explore all possible
legal remedies to compensate us for any loss, including our rights to indemnification under the merger agreement that
we entered into with Xoft upon the closing of the Xoft acquisition. However, there is no assurance that in such case
legal remedies would be available or collectible. If such unknown liabilities exist and we are not fully indemnified for
any loss that we incur as a result thereof, we could incur substantial financial obligations, which could negatively
impact our financial condition and harm our business.
Acquisition-related accounting impairment and amortization charges may delay and reduce our post-acquisition
profitability.
Our acquisition of Xoft has been accounted for under the purchase method of accounting. Accordingly, under generally
accepted accounting principles, the acquired assets and assumed liabilities of Xoft have been recorded on our books
post-acquisition at their fair values at the date the acquisition was completed. Any excess of the value of the
consideration paid by us at the date the acquisition was completed over the fair value of the identifiable tangible and
finite-lived intangible assets of Xoft is treated as excess of purchase price over the fair value of net assets acquired
(commonly known as goodwill). Under current accounting standards, finite-lived intangible assets will be amortized
to expense over their estimated useful lives, which will reduce our post-acquisition profitability over several years. In
addition, goodwill will be tested on an annual basis for impairment, which may result in non-cash accounting
impairment charges.
18
Item 1B.
Unresolved Staff Comments.
Not applicable
Item 2.
Properties.
The Company’s executive offices are leased pursuant to a five-year lease (the “Lease”) that commenced on December
15, 2006, and renewed on January 1, 2012, consisting of approximately 11,000 square feet of office space located at
98 Spit Brook Road, Suite 100 in Nashua, New Hampshire (the “Premises”). The Lease renewal provided for an annual
base rent of $181,764 for the first year; $187,272 for the second year; $192,780 for the third year; $198,288 for the
fourth year and $203,796 for the fifth year. Additionally, the Company is required to pay its proportionate share of the
building and real estate tax expenses and obtain insurance for the Premises. The Company also has the right to extend
the term of the Lease for an additional five year period at the then current market rent rate (but not less than the last
annual rent paid by the Company).
The Company leases approximately 3,492 square feet of office space located at the 675/Fairborn Commerce Center,
1160 Dayton Yellow Springs Road, Suite 21, in Fairborn Ohio. The Ohio Lease provides for a three (3) year and three
(3) month term, which commenced on January 1, 2011 for approximately $43,650 per year, with all amounts payable
in equal monthly installments. The Ohio Lease provides the Company with the option to renew the lease for an
additional three (3) year period. The monthly payments for the renewal term, if any, will be substantially similar to the
payments referred to above.
As a result of its acquisition of Xoft on December 30, 2010, the Company leases a facility and certain office equipment
under a noncancelable operating lease which expires in January and February 2013, respectively. The facility consists
of approximately 41,000 square feet of office, manufacturing and warehousing space located at 345 Potrero Avenue,
Sunnyvale, CA. The operating lease provides for annual minimum lease payment of $885,000 in 2012 and $76,000 in
2013 with all amounts payable in equal monthly installments. Additionally, the Company is required to pay its
proportionate share of the building and real estate tax expenses and obtain insurance for the facility. Given local market
conditions the Sunnyvale lease is at a rate above market rate. The Company has a liability recorded of approximately
$402,000 at December 31, 2011 to reflect the off-market value of the rent.
In addition to the foregoing leases relating to its principal properties, the Company also has a lease for an additional
facility in Nashua, New Hampshire used for product repairs, manufacturing and warehousing.
If the Company is required to seek additional or replacement facilities, it believes there are adequate facilities available
at commercially reasonable rates.
Item 3.
Legal Proceedings.
On February 18, 2011, in the Orange County Superior Court (Docket No. 30-2011-00451816-CU-PL-CXC), named
plaintiffs Jane Doe and John Doe filed a complaint against Xoft, the Company, and Hoag Memorial Hospital
Presbyterian asserting causes of action for general negligence, breach of warranty, and strict liability and seeking
unlimited damages in excess of $25,000. On March 2, 2011, the Company received a Statement of Damages –
specifying that the damages being sought aggregated an amount of at least approximately $14.5 million. On April 6,
2011, plaintiffs Jane Doe and John Doe amended their complaint alleging only medical malpractice against Hoag
Memorial Hospital Presbyterian. On April 8, 2011, another complaint was filed in the Orange County Superior Court
(Docket No. 30-2011-00465448-CU-MM-CXC) on behalf of four additional Jane Doe plaintiffs and two John Doe
spouses with identical allegations against the same defendants. One John Doe spouse from this group of plaintiffs was
later dismissed on August 18, 2011. On April 19, 2011, a sixth Jane Doe plaintiff filed an identical complaint in the
Orange County Superior Court (Docket No. 30-2011-00468687-CU-MM-CXC), and on May 4, 2011, a seventh Jane
Doe plaintiff and John Doe spouse filed another complaint in the Orange County Superior Court (Docket No. 30-2011-
00473120-CU-PO-CXC), again with identical allegations against the same defendants. On July 12, 2011, an eighth
Jane Doe plaintiff and John Doe spouse filed a complaint in the Orange County Superior Court (Docket No. 30-2011-
00491068-CU-PL-CXC), and on July 14, 2011, a ninth Jane Doe plaintiff and John Doe spouse filed another complaint
in the Orange County Superior Court (Docket No. 30-2011-00491497-CU-PL-CXC), each with identical allegations
as the previously filed complaints. On August 18, 2011, these two groups of Jane Doe plaintiffs and John Doe spouses
amended their complaints to correct certain deficiencies. Additionally on August 18, 2011, a tenth Jane Doe plaintiff
and two additional John Doe spouses filed a complaint in the Orange County Superior Court (Docket No. 30-2011-
501448-CU-PL-CXC), again with identical allegations against the same defendants. On January 18, 2012, three
additional Jane Doe plaintiffs and one additional John Doe spouse filed a complaint in the Orange County Superior
Court (Docket No. 30-2012-00538423-CU-PL-CXC) with identical allegations against the same defendants.
19
It is alleged that each plaintiff Jane Doe was a patient who was treated with the Axxent Electronic Brachytherapy
System that incorporated the Axxent Flexishield Mini. The Company believes that all of the Jane Doe plaintiffs were
part of the group of 29 patients treated using the Axxent Flexishield Mini as part of a clinical trial. The Axxent
Flexishield Mini is the subject of a voluntary recall. Because of the preliminary nature of the complaints, the Company
is unable to evaluate the merits of the claims; however, based upon its preliminary analysis, it plans to vigorously
defend the lawsuits. Accordingly, since the amount of the potential damages in the event of an adverse result is not
reasonably estimable, no expense or purchase price adjustment has been recorded with respect to the contingent liability
associated with this matter.
Item 4.
Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
The Company’s common stock is traded on the NASDAQ Global Market under the symbol “ICAD”. The following
table sets forth the range of high and low sale prices for each quarterly period during 2011 and 2010.
Fiscal year ended
December 31, 2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal year ended
December 31, 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$
1.51
1.38
1.15
0.80
$
40.1
89.0
04.0
24.0
$
1.95
2.23
2.44
1.76
$
53.1
82.1
64.1
62.1
As of February 28, 2012 there were 381 holders of record of the Company’s common stock. In addition, the Company
believes that there are in excess of 5,250 holders of its common stock whose shares are held in “street name”.
The Company has not paid any cash dividends on its common stock to date, and the Company does not expect to pay
cash dividends in the foreseeable future. Future dividend policy will depend on the Company’s earnings, capital
requirements, financial condition, and other factors considered relevant by the Company’s Board of Directors. There
are no non-statutory restrictions on the Company’s present ability to pay dividends.
See Item 12 of this Form 10-K for certain information with respect to the Company’s equity compensation plans in effect
at December 31, 2011.
Item 6.
Selected Financial Data.
Not applicable.
20
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Overview
iCAD is an industry-leading provider of advanced image analysis and workflow solutions that enable radiologists and
other healthcare professionals to better serve patients by identifying pathologies and pinpointing cancer earlier. iCAD
offers a comprehensive range of high-performance, expandable Computer-Aided Detection (CAD) systems and
workflow solutions for mammography (film-based, digital radiography (DR) and computed radiography (CR),
Magnetic Resonance Imaging (MRI), and Computed Tomography (CT)). iCAD’s solutions aid in the early detection
of the most prevalent cancers including breast, prostate and colon cancer. Early detection of cancer is the key to better
prognosis, less invasive and lower treatment costs, and higher survival rates. Performed as an adjunct to mammography
screening, CAD has quickly become the standard of care in breast cancer detection, helping radiologists improve
clinical outcomes while enhancing workflow. Computer-enhanced breast and prostate MRI analysis streamlines case
interpretation workflow and generates more robust information for more effective patient treatment. CAD for
mammography screening is also reimbursable in the U.S. under federal and most third-party insurance programs. Since
receiving approval from the FDA for the Company’s first breast cancer detection product in January 2002, over 4,000
of iCAD’s CAD systems have been placed in mammography practices worldwide. iCAD is the only independent
company offering CAD solutions for the early detection of breast cancer.
The Company’s CAD systems include proprietary algorithm and other technology together with standard computer and
display equipment. CAD systems for the film-based analog mammography market also include a radiographic film
digitizer, either manufactured by the Company or others for the digitization of film-based medical images.
The Company is applying its core competencies in pattern recognition and algorithm development in disease detection
to its future product development efforts. Its focus is on the development and marketing of cancer detection products
for disease states where there are established or emerging protocols for screening as a standard of care. iCAD continues
to pursue development or acquisition of products for select disease states that demonstrate one or more of the following:
it is clinically proven that screening has a significant positive impact on patient outcomes, where there is an opportunity
to lower health care costs, where screening is non-invasive or minimally invasive and where public awareness is high.
The Company also intends to pursue opportunities beyond CAD through possible strategic acquisitions as part of its
growth strategy, and as such the Company continues to actively evaluate strategic opportunities in the oncology market
that could leverage its opportunities for growth beyond its historic core markets.
iCAD has applied its patented detection technology and algorithms to the development of CAD solutions for use with
virtual colonoscopy or CT Colonography (CTC) to improve the detection of colonic polyps. The Company’s pattern
recognition and image analysis expertise are readily applicable to colonic polyp detection and the Company has
developed a CTC CAD solution. CTC is a technology that has evolved rapidly in recent years. Based on the results of
the National CT Colonography trial, the Company expects that the market for virtual colonoscopy will grow along
with the procedures for early detection of colon cancer. This trial demonstrated that CTC is highly accurate for the
detection of intermediate and large polyps and that the accuracy of CTC is similar to a colonoscopy. CTC is emerging
as an alternative imaging procedure for evaluation of the colon. The Company has developed and commenced marketing
VeralookÔ, a product for computer aided detection of polyps in the colon using CTC and completed the clinical testing
of its CTC CAD product in the first quarter of 2009. The Company filed a 510(k) application with the FDA in May
2009 seeking FDA clearance to market Veralook in the U.S and received FDA clearance in August, 2010. Colorectal
cancer has been shown to be highly preventable with early detection and removal of polyps.
In July 2008, the Company acquired pharmaco-kinetic based CAD products that aid in the interpretation of contrast
enhanced MRI images of the breast and prostate and began marketing these products in the fourth quarter of 2008. The
interpretation of MRI exams also benefits from advanced image analysis and clinical decision support tools. MRI is
an excellent tool to detect breast cancer as well as prostate cancer. While MRI is a more expensive option than traditional
mammography, it enables physicians to view tumors which may have been missed during routine screenings. MRI
uses magnets and radio waves instead of x-rays to produce very detailed, cross-sectional images of the body, and can
be used to look specifically at those areas.
The acquisition of Xoft, on December 30, 2010, brought an isotope-free cancer treatment platform technology to the
Company’s product line. Xoft designs, develops, manufactures, markets and sells electronic brachytherapy (eBx)
products for the treatment of breast and other cancers, used in a broad range of clinical settings. The portable Axxent
System which delivers electronically controlled radiation therapy directly to cancer sites with minimal radiation
exposure to surrounding healthy tissue is FDA-cleared. Electronic Brachytherapy (eBx™) is a type of brachytherapy
that utilizes a miniaturized high dose rate X-ray source to apply radiation directly to the cancerous site. The goal is to
21
direct the radiation dose to the size and shape of the cancerous area, sparing healthy tissue and organs. The Xoft
technology delivers similar clinical dose rates to traditional radio-active systems. Electronic Brachytherapy can be
delivered during an operative procedure and may be used as a primary or secondary modality over a course of days.
This technology enables radiation oncology departments in hospitals, clinics and physician offices to perform traditional
radiotherapy treatments and provide advanced treatments such as Intra-Operative Radiation Therapy (IORT). Current
customers for the Xoft eBx system include university research and community hospitals, private and governmental
institutions, doctors’ offices, cancer care clinics and veterinary facilities.
Critical Accounting Policies
The Company’s discussion and analysis of its financial condition, results of operations, and cash flows are based on
its consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates these estimates, including those related
to accounts receivable allowance, inventory valuation and obsolescence, intangible assets, income taxes, warranty
obligations, contingencies and litigation. Additionally, the Company uses assumptions and estimates in calculations to
determine stock-based compensation. The Company bases its estimates on historical experience and on various other
assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions.
The Company’s critical accounting policies include:
Inventory;
- Revenue recognition;
- Allowance for doubtful accounts;
-
- Valuation of long-lived and intangible assets;
- Goodwill;
-
-
Stock based compensation;
Income taxes.
Revenue Recognition
The Company recognizes revenue primarily from the sale of products and from the sale of services and supplies.
Revenue is recognized when delivery has occurred, persuasive evidence of an arrangement exists, fees are fixed or
determinable and collectability is probable. For product revenue delivery has occurred upon shipment, provided title
and risk of loss has passed to the customer. Services and supplies revenue are considered to be delivered as the services
are performed or over the estimate life of the supply agreement.
The Company recognizes revenue from the sale of certain of its MRI CAD products and services in accordance with
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 985-605, (“Software,
Revenue Recognition”) (“ASC 985-605”).
The Company recognizes revenue from the sale of its digital, film-based CAD and electronic brachytherapy products
and services in accordance with ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”).
In accordance with the guidance of ASU 2009-13, fair value as the measurement criteria is replaced with the term
selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU 2009-13 also eliminates
the use of the residual value method for determining the allocation of arrangement consideration. For multi-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 a 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.
Sales of the Company’s electronic brachytherapy product typically include several devices, accessories, service and
supply. The Company generally allocates revenue to the deliverables in the arrangement based on the BESP. Revenue
is recognized when the product has been delivered, and service and supply revenue is recognized over the life of the
service and supply agreement.
For most of iCAD’s Digital, MRI and film based sales, the responsibility for the installation process lies with its Original
Equipment Manufacturer (“OEM”) partners, GE Healthcare, Siemens Medical and others. On occasion, when iCAD
is responsible for product installation, the installation element is considered a separate unit of accounting because the
22
delivered product has stand alone value to the customer. In these instances, the Company allocates the deliverables
based on the framework established within ASU 2009-13. Therefore, the installation and training revenue is recognized
as the services are performed according to the VSOE of the element. Revenue from the Digital, MRI and film based
equipment when there is installation is recognized based on the relative selling price allocation of the BESP. In prior
years (prior to ASU 2009-13), the Company recognized the element on the residual method. The adoption of ASU 2009-
13 did not have a material effect on the financial condition or results of operations of the Company.
The Company uses customer purchase orders that include all terms of the arrangement and in the case of OEM
customers are also supported by distribution agreements. In accordance with the distribution agreement, the OEM
customers do not have a right of return, and title and risk of loss passes to the OEM customer upon shipment. The
Company generally ships Free On Board shipping point and uses shipping documents and third-party proof of delivery
to verify delivery and transfer of title. In addition, the Company assesses whether collection is reasonably assured 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.
If the terms of the sale include customer acceptance provisions and compliance with those provisions cannot be
demonstrated, all revenues are deferred and not recognized until such acceptance occurs. The Company considers all
relevant facts and circumstances in determining when to recognize revenue, including contractual obligations to the
customer, the customer’s post-delivery acceptance provisions, if any, and the installation process.
The Company defers revenue from the sale of extended service contracts related to future periods and recognizes
revenue on a straight-line basis in accordance with FASB ASC Topic 605-20, “Services”. The Company provides for
estimated warranty costs on original product warranties at the time of sale.
The Company also adopted ASC Update No. 2009-14, Certain Arrangements That Contain Software Elements (Update
No. 2009-14). This Update amended the scope of ASC Subtopic No. 985-605, “Revenue Recognition”, to exclude
tangible products that include software and non-software components that function together to deliver the product’s
essential functionality. The adoption of this standard did not have a material effect on the Company’s financial condition
or results of operations.
Allowance for Doubtful Accounts
The Company’s policy is to maintain allowances for estimated losses from the inability of its customers to make
required payments. Credit limits are established through a process of reviewing the financial results, stability and
payment history of each customer. Where appropriate, the Company obtains credit rating reports and financial
statements of customers when determining or modifying credit limits. The Company’s senior management reviews
accounts receivable on a periodic basis to determine if any receivables may potentially be uncollectible. The Company
includes any accounts receivable balances that it determines may likely be uncollectible, along with a general reserve
for estimated probable losses based on historical experience, in its overall allowance for doubtful accounts. An amount
would be written off against the allowance after all attempts to collect the receivable had failed. Based on the
information available to the Company, it believes the allowance for doubtful accounts as of December 31, 2011 is adequate.
Inventory
Inventory is valued at the lower of cost or market value, with cost determined by the first-in, first-out method. The
Company regularly reviews inventory quantities on hand and records a provision for excess and/or obsolete inventory
primarily based upon estimated usage of its inventory as well as other factors.
Long Lived Assets
Long-lived assets, other than goodwill, are evaluated for impairment when events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows
from the use of these assets. When any such impairment exists, the related assets are written down to fair value.
Intangible assets subject to amortization consist primarily of patents, technology intangibles, trade names, customer
relationships and distribution agreements purchased in the Company’s previous acquisitions. These assets, which
include assets acquired from Xoft, Inc., are amortized on a straight-line basis or the pattern of economic benefit over
their estimated useful lives of 5 to 10 years.
Goodwill
In accordance with FASB ASC Topic 350-20, “Intangibles - Goodwill and Other”, (“ASC 350-20”), the Company tests
goodwill for impairment on an annual basis and between annual tests if events and circumstances indicate it is more
likely than not that the fair value of the Company is less than the carrying value of the Company.
23
The Company’s goodwill arose in connection with its acquisitions in June 2002, December 2003 and December 2010.
The Company operates in one segment and one reporting unit since operations are supported by one central staff and
the results of operations are evaluated as one business unit. In general the Company’s medical device products are
similar in nature based on production, distribution, services provided and regulatory requirements. The Company uses
market capitalization as the best evidence of fair value (market capitalization is calculated using the quoted closing share
price of the Company’s common stock at its annual impairment testing date of October 1, multiplied by the number of
common shares outstanding) of the Company. The Company tests goodwill for impairment by comparing its market
capitalization (fair value) to its carrying value. The fair value of the Company is compared to the carrying amount at
the same date as the basis to determine if a potential impairment exists.
The Company assesses the potential impairment of goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable and at least annually. Factors the Company considers important, which could
trigger an impairment of such asset, include the following:
significant underperformance relative to historical or projected future operating results;
significant changes in the manner or use of the assets or the strategy for the Company’s overall business;
significant negative industry or economic trends;
significant decline in the Company’s stock price for a sustained period; and
•
•
•
•
• a decline in the Company’s market capitalization below net book value.
During the quarter ended September 30, 2011, as a result of the sustained decline in the market capitalization of the
Company, an interim Step 1 analysis was completed. The interim Step 1 test resulted in the determination that the
carrying value of equity exceeded the fair value of equity, thus requiring the Company to measure the amount of any
goodwill impairment by performing the second step of the impairment test. The Company corroborated the Step 1
analysis using an income approach.
The second step (defined as “Step 2”) of the goodwill impairment test, used to measure the amount of impairment
loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The guidance
in FASB ASC 350 — Intangibles — Goodwill and Other was used to estimate the implied fair value of goodwill. The
guidance provides that “If the carrying amount of the Company’s goodwill exceeds the implied fair value of that
goodwill, an impairment loss shall be recognized in an amount equal to that excess. The loss recognized cannot exceed
the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of
goodwill shall be its new accounting basis.”
The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in a
business combination is determined. The excess of the fair value of the single reporting unit over the amounts assigned
to its assets and liabilities is the implied amount of goodwill. The Company identified several intangible assets that were
valued during this process, including technology, customer relationships, trade names, non-compete agreements, and
the Company’s workforce. The allocation process was performed only for purposes of testing goodwill for impairment.
The Company determined the value of the select assets utilizing the income approach. This approach was selected as
it measures the income producing assets, primarily technology and customer relationships. This method estimates the
fair value based upon the ability to generate future cash flows, which is particularly applicable when future profit
margins and growth are expected to vary significantly from historical operating results.
Other significant assumptions include terminal value margin rates, future capital expenditures, and changes in future
working capital requirements. The Company also compared and reconciled the overall fair value to the Company’s
market capitalization. While there are inherent uncertainties related to the assumptions used and to the application of
these assumptions to this analysis, the income approach provides a reasonable estimate of the fair value of the
Company’s single reporting unit.
On December 22, 2011, the Company agreed to a settlement related to the litigation with Carl Zeiss Meditec Inc. and
Carl Zeiss Surgical GmbH (see Note 2). The Company determined that this settlement should be recorded as a
measurement period adjustment and accordingly recorded the present value of the litigation, retrospectively to the
opening balance sheet of Xoft. As a result, goodwill increased from approximately $45.7 million as of December 31,
2010 to $46.0 million as of December 31, 2010.
During the quarter ended, September 30, 2011, the Company recorded an impairment loss of approximately $26.8
million. However, as a result of recording a measurement period adjustment, the fair value of goodwill was reevaluated.
The Step 2 test resulted in determining the fair value of goodwill of $21.1 million which resulted in an additional
impairment loss of $78,000.
24
Additional, purchase accounting adjustments, considered to be measurement period adjustments, were recorded in the
six months subsequent to the acquisition of Xoft and consisted primarily of a $1.5 million decrease of the acquired
patent asset, a decrease of $500,000 in the acquired technology asset, a decrease in the fair value estimate of the royalty
obligation of $200,000 and a decrease of $100,000 related to contingent consideration and an increase of approximately
$300,000 related to unrecorded liabilities. These measurement period adjustments had no effect on the Company’s
operations and results and had an immaterial effect on the December 31, 2010 balance sheet. Accordingly, the
adjustments were recorded during 2011, and considered in the impairment analysis during the third quarter of 2011.
The changes in the carrying amount of goodwill for the year ended December 31, 2011, are as follows:
Twelve months ended December 31, 2011
Balance as of December 31, 2010
Purchase accounting adjustments
Impairment
Balance as of December 31, 2011 $21,109
$45,969
1,968
(26,828)
No goodwill impairment loss was recorded in 2010. For 2011 and 2010 the Company performed the annual step one
fair value comparison as of October 1, 2011 and October 1, 2010. At October 1, 2010, the Company’s market
capitalization (or market capitalization with a reasonable control premium) exceeded its carrying value. At October 1,
2011, the Company’s market capitalization with a reasonable control premium was less than the carrying value of
goodwill. However, the Company completed a goodwill impairment analysis as of September 30, 2011, and concluded
that the October 1, 2011 step one fair value comparison was consistent with the results on September 30, 2011. At
December 31, 2011 and 2010 the Company’s market capitalization (or market capitalization with a reasonable control
premium) exceeded its carrying value.
Stock-Based Compensation
The Company maintains stock-based incentive plans, under which it provides stock incentives to employees, directors
and contractors. The Company grants to employees, directors and contractors, restricted stock and/or options to
purchase common stock at an option price equal to the market value of the stock at the date of grant. The Company
follows FASB ASC Topic 718, “Compensation – Stock Compensation”, (“ASC 718”), for all stock-based compensation.
The Company uses the Black-Scholes option pricing model which requires extensive use of accounting judgment and
financial estimates, including estimates of the expected term participants will retain their vested stock options before
exercising them, the estimated volatility of its common stock price over the expected term, and the number of options
that will be forfeited prior to the completion of their vesting requirements. Application of alternative assumptions could
produce significantly different estimates of the fair value of stock-based compensation and consequently, the related
amounts recognized in the Consolidated Statements of Operations.
Income Taxes
The Company follows the liability method under FASB ASC Topic 740, “Income Taxes” (“ASC 740”). The primary
objectives of accounting for taxes under ASC 740 are to (a) recognize the amount of tax payable for the current year
and (b) recognize the amount of deferred tax liability or asset for the future tax consequences of events that have been
reflected in the Company’s financial statements or tax returns. The Company has provided a full valuation allowance
against its deferred tax assets at December 31, 2011 and 2010 as it is more likely than not that the deferred tax asset
will not be realized.
ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and 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. ASC 740-10 also provides guidance on de-
recognition, classification, interest and penalties, disclosure and transition.
In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business
combination are initially estimated as of the acquisition date and the Company revaluates these items quarterly, with
any adjustments to preliminary estimates being recorded to goodwill, provided that the Company is within the
measurement period (which may be up to one year from the acquisition date) and continues to collect information in
order to determine their estimated values. Subsequent to the measurement period or final determination of the tax
allowance’s or contingency’s estimated value, changes to these uncertain tax positions and tax related valuation
allowances may affect the provision for income taxes presented in the Company’s statement of operations.
25
Year Ended December 31, 2011 compared to Year Ended December 31, 2010
The Consolidated Statement of Operations does not include the financial results of Xoft for the period ended December
31, 2010.
Revenue. Revenue for the year ended December 31, 2011 was $28.7 million compared with revenue of $24.6 million
for the year ended December 31, 2010, an increase of $4.1 million or 16.6%. The increase in revenue was due primarily
to the increase in Electronic Brachytherapy revenues resulting from the acquisition of Xoft of $4.2 million and a $3.0
million increase in service and supply revenue offset by a decrease in digital and MRI CAD and film-based revenue.
The table below presents the components of revenue for 2011 and 2010:
Digital & MRI CAD revenue
Film based revenue
Electronic brachytherapy
Service & supply revenue
Total revenue
2011
$
For the year ended December 31,
2010
Change
$
$
13,256
2,361
4,170
8,865
28,652
15,392
3,335
-
5,848
24,575
$
$
$
% Change
(13.9%)
(29.2%)
-
51.6%
16.6%
(2,136)
(974)
4,170
3,017
4,077
The Company’s digital and MRI CAD revenue for the year ended December 31, 2011 decreased $2.1 million or 13.9%,
to $13.3 million compared to revenue of $15.4 million for the year ended December 31, 2010. The decrease in digital
and MRI CAD revenue was due primarily to a decrease in digital revenues of $2.7 million which was driven by decreases
in the international demand for the digital CAD systems, offset by an increase of approximately $0.6 million in MRI CAD
revenues. The increase of MRI CAD revenues is due largely to growing market adoption of this product.
Revenue from iCAD’s film based products for the year ended December 31, 2011 decreased 29.2% to $2.4 million
compared to $3.3 million in 2010. The TotalLook MammoAdvantage product is used for digitizing film based prior
mammography exams for comparative reading and is sold to further optimize workflow in a digital mammography
environment. The TotalLook MammoAdvantage product is typically sold as customers are preparing transition to
digital mammography. Revenues from film-based products and accessories continues to decline as the marketplace
continues to transition to digital technologies.
Service and supply revenue for the year ended December 31, 2011 increased 51.6% to $8.9 million compared to $5.8
million in 2010. The increase in the Company’s service and supply revenue is due primarily to approximately $1.7
million of service revenue related to the acquisition of Xoft and $1.3 million due to increased service contract revenue
on the Company’s growing installed base of CAD products as customers migrate from warranty to service contracts,
and to renewed service contract agreements.
Gross Margin. Gross margin decreased to 69.9% for the year ended December 31, 2011 compared to 80.1% for the year
ended December 31, 2010. The decline in gross margin is attributable to the increase of amortization related to acquired
technology, the mix of products, specifically for the electronic brachytherapy product, which has lower margins than
the CAD products, and increased costs related to the fixed cost of our Xoft manufacturing operation. The Company
has reclassified on the statement of operations for the twelve months ended December 31, 2010, the cost of product
installation, training, customer support and certain warranty repair costs of approximately $1.74 million that were
previously included in sales and marketing expenses to cost of revenue to conform to current period classifications. Cost
of revenue and gross margin for 2011 and 2010 are as follows (in thousands):
Products
Service and supplies
Amortization
Total cost of revenue
Gross margin
Gross margin %
For the year ended December 31,
2011
2010
$
887,4
609,2
931
8,625
$
693,2
684,2
-
288,4
Change % Change
99.8%
$
%9.61
-
%7.67
293,2
024
139
347,3
$
20,027
$
396,91
$
433
%7.1
69.9%
80.1%
26
45
117.9%
2
6
99.8%
Operating Expenses:
Operating expenses for 2011and 2010 are as follows (in thousands):
Operating expenses:
Engineering and product development
Marketing and sales
General and administrative
Contingent consideration
Goodwill impairment
Loss on indemnification asset
Total operating expenses
For the year ended December 31,
2011
2010
Change % Change
$
$
$
197,01
13,684
10,075
(4,900)
26,828
741
57,219
6,596
057,9
919,9
-
-
-
562,62
591,4
439,3
156
)009,4(
828,62
147
459,03
%6.36
%3.04
1.6%
-
-
-
117.9%
$
$
$
Engineering and Product Development. Engineering and product development costs for the year ended December 31,
2011 increased by $4.2 million or 63.6%, from $6.6 million in 2010 to $10.8 million in 2011. The increase in
engineering and product development costs was primarily due to an approximate $3.6 million increase as a result of
the acquisition of Xoft, and an increase of approximately $0.6 million due primarily to costs of clinical trials of
approximately $0.7 million, offset by various expense reductions.
Marketing and Sales. Marketing and sales expense for the year ended December 31, 2011 increased by $3.9 million
or 40.3%, from $9.8 million in 2010 to $13.7 million in 2011. The increase in marketing and sales expense was
primarily due to the increase of approximately $5.1 million related to the acquisition of Xoft, offset by a decrease in
expenses of approximately $1.2 million. The decrease in expenses is due primarily to a reduction in headcount which
reduced salary, fringe benefits and commissions approximately $0.5 million, a decrease in subcontract services of
approximately $0.4 million, a reduction in stock compensation of approximately $0.2 million and the remainder of $0.1
million in miscellaneous expenses.
General and Administrative. General and administrative expenses for the year ended December 31, 2011 increased by
$0.2 million or 1.6%, from $9.9 million in 2010 to $10.1 million in 2011. The increase in general and administrative
expense during 2011 was due primarily to an increase of $2.8 million of general and administrative expenses that were
not included in the 2010 results related to Xoft offset by a decrease of $2.6 million. The decrease of $2.6 million is
due primarily to a $3.2 million decrease related to transactions costs associated with a potential acquisition and the
acquisition of Xoft, incurred in 2010, offset by an increase in severance costs of approximately $0.5 million and the
remainder of $0.1 million increase in other expenses.
Contingent Consideration: The Company recorded a gain of $4.9 million during the year ended December 31, 2011. The
Contingent consideration resulted from the acquisition of Xoft, and the Company is required to determine the fair value
of the consideration at each reporting period. The Company determined that the revenue thresholds to achieve the
consideration were unlikely to be met, and therefore, reduced the fair value of contingent consideration to $0.0 million.
Goodwill Impairment: During the quarter ended September 30, 2011, the Company recorded an impairment of goodwill
of approximately $26.8 million. The Company determined that a triggering event had occurred and as a result
performed a Step 2 impairment analysis. In December 2011, the Company agreed to settle outstanding litigation with
Carl Zeiss Meditec. The litigation settlement was recorded retrospectively as a measurement period adjustment and
an additional amount was recorded to goodwill. The Company evaluated the additional goodwill in the impairment
analysis, and as a result recorded an additional $78,000 impairment as of the third quarter of 2011, for a total impairment
of $26.8 million.
Loss on indemnification asset:. In connection with the settlement of the litigation with Carl Zeiss Meditec, the Company
recorded, retrospectively, an indemnification asset as a purchase price adjustment as of December 31, 2010. The fair
value of the indemnification asset was determined to be the value of the underlying shares in escrow at the date of
acquisition. Subsequent changes in the value of the shares were recorded as an approximate $0.7 million loss on the
indemnification asset during the year ended December 31, 2011. The respective quarterly amounts were recorded
retrospectively during the year ended December 31, 2011.
Interest Income/Expense. Interest income for the year ended December 31, 2011 decreased by $49,000, from $73,000
in 2010 to $24,000 in 2011. The decrease in interest income is due primarily to lower cash balances which reduced
the interest earned from the Company’s money market accounts. Interest expense in 2011 of $419,000 represents
approximately $153,000 related to the accretion of the Hologic settlement liability and approximately $266,000 related
to the accretion of the Zeiss settlement liability.
27
Year Ended December 31, 2010 compared to Year Ended December 31, 2009
The Consolidated Statement of Operations does not include the financial results of Xoft for the fiscal years ended
December 31, 2010 and December 31, 2009.
Revenue. Revenue for the year ended December 31, 2010 was $24.6 million compared with revenue of $28.1 million
for the year ended December 31, 2009, for a decrease of $3.5 million or 12.6%. The decrease in revenue was due
primarily to the decrease in digital and MRI CAD and film-based revenue partially offset by an increase in service and
supply revenue.
The table below presents the revenue attributable to different products and services, in 2010 and 2009 (in thousands):
Digital & MRI CAD revenue
Film based revenue
Service & supply revenue
Total revenue
2010
$
For the year ended December 31,
2009
Change
$
$
15,392
3,335
5,848
24,575
18,289
5,796
4,024
28,109
$
$
$
% Change
(15.8%)
(42.5%)
45.3%
(12.6%)
(2,897)
(2,461)
1,824
(3,534)
The Company’s digital and MRI CAD revenue for the year ended December 31, 2010 decreased $2.9 million or 15.8%,
to $15.4 million compared to revenue of $18.3 million for the year ended December 31, 2009. The decrease in digital
and MRI CAD revenue was largely the result of a combination of having a key OEM customer out of the market
awaiting FDA approval of their new digital mammography system, and to the weakened economy as well as to
continued budget constraints in healthcare capital spending.
Revenue from iCAD’s film based products for the year ended December 31, 2010 decreased 42.5% to $3.3 million
compared to $5.8 million in 2009. This decrease can be attributed to the softer demand for full field digital
mammography systems which affected sales of TotalLook MammoAdvantage, current economic conditions and
constraints in healthcare capital spending. The majority of film-based revenue is derived from sales of the Company’s
TotalLook MammoAdvantage. The TotalLook MammoAdvantage product is used for digitizing film based prior
mammography exams for comparative reading and is sold to further optimize workflow in a digital mammography
environment. The TotalLook MammoAdvantage product is typically sold as customers are preparing to transition to
digital mammography. In addition, as expected the demand for film-based products and accessories continues to
decline as the marketplace continued to transition to digital technologies.
Service and supply revenue for the year ended December 31, 2010 increased 45.3% to $5.8 million compared to $4.0
million in 2009. The increase in the Company’s service and supply revenue is due primarily to increased service
contract revenue on the Company’s growing installed base of products as customers migrate from warranty to service
contracts, and to renewed service contract agreements. Service contract revenue represented 93% and 91% of the
Company’s total service and supply revenue for 2010 and 2009, respectively.
Gross Margin. Gross margin increased to 80.1% for the year ended December 31, 2010 compared to 77.6% for the year
ended December 31, 2009. The increase in gross margin is primarily attributable to component cost reductions, the
realization of some average selling price increases, and lower repair costs related to service contracts on a growing
installed base of products. The Company has reclassified $1.74 million and $1.68 million on the statement of operations
for the twelve months ended December 31, 2010 and 2009, respectively, the cost of product installation, training,
customer support and certain warranty repair costs that were previously included in sales and marketing expenses to
cost of revenue to conform to current period classifications. Cost of revenue and gross margin for 2010 and 2009 are
as follows (in thousands):
stcudorP
Service and supplies
Total cost of revenue
Gross profit
Gross profit %
For the year ended December 31,
2010
2009
$
693,2
2,486
4,882
$
3,905
593,2
003,6
Change % Change
(38.6%)
$
%8.3
)%5.22(
(1,509)
19
)814,1(
$
19,693
$
21,809
$
)611,2(
)%7.9(
80.1%
77.6%
28
$
23,931
9.8%
S
2
$
3,905
$
(1,509)
(38.6%)
Operating Expenses:
Operating expenses for 2010 and 2009 are as follows (in thousands):
Operating expenses:
Engineering and product development
Marketing and sales
General and administrative
Total operating expenses
For the year ended December 31,
2010
2009
Change % Change
$
$
$
6,596
9,750
9,919
26,265
712,7
063,9
453,7
23,931
$
$
$
)126(
093
565,2
2,334
)%6.8(
%2.4
%9.43
9.8%
Engineering and Product Development. Engineering and product development costs for the year ended December 31,
2010 decreased by $0.6 million or 8.6%, from $7.2 million in 2009 to $6.6 million in 2010. The decrease in engineering
and product development costs was primarily due to decreases of $0.5 million in stock-based and other compensation
related expenses resulting primarily from staff reductions, and in subcontracting services of $0.4 million, principally
relating to the licensing and clinical trial costs for the Company’s CT Colon product which was completed in the first
quarter of 2009. In addition, during 2010, the Company recorded decreases in legal costs of $0.1 million, in rent
expense of $62,000 and in depreciation and various other expenses totaling $92,000. These decreases were partially
offset by increases in consulting expenses of $0.2 million, subcontracting services of $0.4 million and licensing and
data collection expenses of $11,000, principally relating to new product development.
Marketing and Sales. Marketing and sales expense for the year ended December 31, 2010 increased by $0.4 million
or 4.2%, from $9.4 million in 2009 to $9.8 million in 2010. The increase in marketing and sales expense was primarily
due to the increase in consulting and subcontracting expenses of $0.4 million, principally relating to a strategy
consulting project initiated by the Company. In addition, during 2010, the Company recorded an increase in
compensation related expenses for existing employees of $0.2 million. These increases were partially offset by
decreases in depreciation and freight totaling $0.2 million.
General and Administrative. General and administrative expenses for the year ended December 31, 2010 increased by
$2.5 million or 34.9%, from $7.4 million in 2009 to $9.9 million in 2010.The increase in general and administrative
expense during 2010 was due primarily to an increase in legal and professional fees of $3.0 million associated with the
acquisition of Xoft and a potential acquisition that was not consummated, as well as increases in compensation related
expenses of $0.2 million, and in various administrative expenses totaling $0.1 million. These increases were partially
offset by a decrease in stock based compensation expense of $0.4 million, principally due to the completion of the
three year vesting period on the awards of restricted stock and stock options that were granted to the executive officers
of the Company in July 2007. In addition, during 2010 the Company recorded decreases in general legal costs,
consulting and subcontracting services, depreciation, taxes and insurance cost totaling $0.3 million.
Other Income: During the second quarter of 2010 the Company received a one-time payment of $0.3 million related
to the sale of a non-core patent that was acquired as part of the Qualia Computing, Inc. acquisition in 2003. The patent
is for technology that is outside of the medical device industry and unrelated to the Company’s core business.
Interest Income/Expense. Net interest income for the year ended December 31, 2010 decreased by $37,000, from
$110,000 in 2009 to $73,000 in 2010. The decrease in interest income is due primarily to the reduction of the interest
rate earned from the Company’s money market accounts.
Liquidity and Capital Resources
The Company believes that the proceeds of its debt financing signed on December 29, 2011 and funded on January 9,
2012, its current liquidity and capital resources are sufficient to sustain operations through at least the next 12 months,
primarily due to cash on hand and projected cash balances from operations. The Company’s ability to generate cash
adequate to meet its future capital requirements will depend primarily on operating cash flow. If sales or cash collections
are reduced from current expectations, or if expenses and cash requirements are increased, the Company may require
additional financing, although there are no guarantees that the Company will be able to obtain the financing if necessary.
The Company will continue to closely monitor its liquidity and the capital and credit markets.
On December 30, 2010, the Company completed the acquisition of Xoft, acquiring 100% of the outstanding stock of
Xoft in exchange for 8,348,501 shares of the Company’s common stock and approximately $1.2 million in cash, for a
total consideration at closing of approximately $12.9 million based on a per share value of $1.40, the closing price of
the Company’s common stock on the closing date. The Company also paid certain transaction expenses of Xoft totaling
approximately $1.0 million which is included in the Company’s statement of operations.
29
The Company had a working capital deficit of $1.4 million as current liabilities exceeded current assets at December
31, 2011. The ratio of current assets to current liabilities at December 31, 2011 and 2010 was 0.9 and 1.8, respectively.
The decrease in working capital is due to the cash used for the Company’s acquisition of Xoft and the increase in
operating expenses as a result of the acquisition. On December 29, 2011, the Company entered into a debt financing
arrangement in the amount of $15.0 million, which was funded on January 9, 2012.
Net cash used for operating activities for the year ended December 31, 2011 was $10.1 million compared to net cash
provided by operations of $0.2 million for 2010. The cash used for operating activities during the year ended December
31, 2011 was due primarily to operating losses of $37.6 million, offset by $27.2 million of non-cash expenses included
in net loss. The cash provided by operating activities for the year ended December 31, 2010 resulted from decreases
in accounts receivable of $1.9 million, inventory of $0.2 million, prepaid and other current assets of $78,000, accounts
payable and accrued expenses of $0.5 million and deferred revenue of $0.7 million, plus non-cash items including
depreciation and amortization totaling $1.6 million and stock-based compensation of $1.5 million, which were partially
offset by the net loss of $6.2 million, and the gain on the sale of a patent of $0.3 million.
The net cash used for investing activities for the year ended December 31, 2011 was $1.5 million. The cash used for
investing activities in 2011 was primarily due to cash paid related to the acquisition of Xoft of approximately $1.3
million and purchases of fixed assets of $0.2 million. Cash used for investing activities for the year ended December
31, 2010 was $99,000 which consisted of proceeds from the sale of a patent of $0.3 million offset by additions to
patents, technology and other assets of $28,000 and additions to property and equipment of $0.3 million and $24,000
related to the acquisition of Xoft.
Net cash used for financing activities for the year ended December 31, 2011 was $7,000, which consisted of taxes paid
related to the issuance of restricted stock. Cash used for financing activities for the year ended December 31, 2010 was
$87,000 relating to taxes paid with respect to the issuance of restricted stock.
The following table summarizes as of December 31, 2011, for the periods presented, the Company’s future estimated
cash payments under existing contractual obligations, and the financing obligations funded during 2012 as noted below
(in thousands).
Contractual Obligations
Payments due by period
Total
Less than 1
year
1-3 years
3-5 years
5+ years
Lease Obligations
$ 2,065
$ 1,143 $ 718 $ 204 $ -
Royalty Obligations
3,750
$ 1,250 $ 1,750 $ 750 -
Notes Payable
21,381
$ 1,022 $ 11,426 $ 8,933 -
Other Commitments 879
Total Contractual Obligations $ 28,075
879 - - -
$ -
$ 13,894 $ 9,887
$ 4,294
See Note 8 to our financial statements for a description of our obligations.
In addition to the contractual obligations related to the interest payments from Notes Payable, the Company is obligated
under the revenue purchase agreement discussed in Note 3 of the accompanying financial statements, to pay 4.25% of
revenues up to $25 million, 2.75% of annual revenues from $25 million to $50 million and 1.0% of annual revenues in excess
of $50 million. Included in the above amounts are the minimum annual payments under the revenue purchase agreement
of $125,000 per quarter payable in arrears. The Company is unable to estimate the variable contractual payments related
to the revenue purchase agreement, and accordingly only the minimum annual payments have been included.
Effect of New Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards”
(Topic 820)—Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair value and ensure that
the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial
Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure
requirements particularly for level 3 fair value measurements. ASU 2011-04 is effective for fiscal years and interim
periods within those years, beginning after December 15, 2011. The Company does not expect the adoption to have a
material impact on its financial statements.
30
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive
Income (“ASU 2011-05”). ASU 2011-05 increases the prominence of other comprehensive income in financial
statements. Under ASU 2011-05, companies will have the option to present the components of net income and
comprehensive income in either one or two consecutive financial statements. ASU 2011-05 eliminates the option to
present other comprehensive income in the statement of changes in equity and is applied retrospectively. For public
companies, ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December
15, 2011. The Company does not expect the adoption to have a material impact on its financial statements.
In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other
(Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test
goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether
it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this
is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-
step goodwill impairment test is not required. ASU 2011-08 is effective for fiscal years beginning after December 15,
2011, however early adoption is permitted. The Company does not expect this to have a material impact on its financial
statements.
In December 2011, the FASB issued Accounting Standards Update No. 2011-12: Comprehensive Income (Topic 220):
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated
Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”). The Update defers the
specific requirement to present items that are reclassified from accumulated other comprehensive income to net income
separately with their respective components of net income and other comprehensive income. As part of this update, the
FASB did not defer the requirement to report comprehensive income either in a single continuous statement or in two
separate but consecutive financial statements. ASU 2011-12 is effective for annual periods beginning after December
15, 2011.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
We believe we are not subject to material foreign currency exchange rate fluctuations, as most of our sales and
expenses are domestic and therefore are denominated in the U.S. dollar. We do not hold derivative securities and have
not entered into contracts embedded with derivative instruments, such as foreign currency and interest rate swaps,
options, forwards, futures, collars, and warrants, either to hedge existing risks or for speculative purposes.
Item 8.
Financial Statements and Supplementary Data.
See Financial Statements and Schedule attached hereto.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable
Item 9A.
Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
The Company, under the supervision and with the participation of its management, including its principal executive
officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls
and procedures as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, the
principal executive officer and principal financial officer concluded that the Company’s disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Exchange Act) were effective as of December 31, 2011.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic
evaluations to enhance, where necessary its procedures and controls.
(b) Management’s Annual Report on Internal Control Over Financial Reporting.
The Company, under the supervision and with the participation of its management, including its principal executive officer
and principal financial officer, is responsible for the preparation and integrity of the Company’s Consolidated Financial
Statements, establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)) for the Company and all related information appearing in this Annual Report on Form 10-K.
31
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
The Company employed the Internal Control-Integrated Framework founded by the Committee of Sponsoring
Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over
financial reporting. Management of the Company has assessed the Company’s internal control over financial reporting
to be effective as of December 31, 2011 based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to SEC rules that permit the Company to provide only
management’s report in this Annual Report on Form 10-K.
(c) Changes in Internal Control Over Financial Reporting.
The Company’s principal executive officer and principal financial officer conducted an evaluation of the Company’s
internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) to determine whether any changes
in internal control over financial reporting occurred during the quarter ended December 31, 2011, that have materially
affected or which are reasonably likely to materially affect internal control over financial reporting. Based on that
evaluation there has been no such change during such period.
Item 9B.
Other Information.
Not applicable.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
The following information includes information each director and executive officer has given us about his or her age,
all positions he or she holds, his or her principal occupation and business experience for the past five years, and the
names of other publicly-held companies of which he or she currently serves as a director or has served as a director
during the past five years. In addition to the information presented below regarding each director’s specific experience,
qualifications, attributes and skills that led our Board to the conclusion that he or she should serve as a director, we also
believe that all of our directors have a reputation for integrity, honesty and adherence to high ethical standards. They
each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service
to iCAD and our Board.
There are no family relationships among any of the directors and executive officers of iCAD.
Name
Age
Position with iCAD
Director/Officer
Since
Dr. Lawrence Howard
Kenneth Ferry
Kevin Burns
Jonathan Go
Rachel Brem, MD
Anthony Ecock
Steven Rappaport
Elliot Sussman, MD
Michael Klein
Somu Subramaniam
59
58
41
49
53
50
63
60
58
57
Chairman of the Board, and Director
President, Chief Executive Officer,
and Director
Executive Vice President of Finance,
Chief Financial Officer and Treasurer
and Secretary
Senior Vice President of
Research and Development
Director
Director
Director
Director
Director
Director
32
2006
2006
2011
2006
2004
2008
2006
2002
2010
2010
The Company’s Certificate of Incorporation provides for the annual election of all of its directors. The Board elects
officers on an annual basis and our officers generally serve until their successors are duly elected and qualified.
Upon the recommendation of the Company’s Nominating and Corporate Governance Committee, the Board of Directors
fixed the size of the Company’s Board at eight directors.
Dr. Lawrence Howard was appointed Chairman of the Board in 2007 and has been a director of the Company
since November 2006. Dr. Howard has been, since March 1997, a general partner of Hudson Ventures, L.P. (formerly
known as Hudson Partners, L.P.), a limited partnership that is the general partner of Hudson Venture Partners, L.P.
(“HVP”), a limited partnership that is qualified as a small business investment company. Since March 1997, Dr. Howard
has also been a managing member of Hudson Management Associates LLC, a limited liability company that provides
management services to HVP. Since November 2000, Dr. Howard has been a General Partner of Hudson Venture
Partners II, and a limited partner of Hudson Venture II, L.P. He was a founder and has been since November 1987, and
continues to be, a director of Presstek, Inc. (“Presstek”), a public company which has developed proprietary imaging
and consumables technologies for the printing and graphic arts industries, and served in various officer positions at
Presstek from October 1987 to June 1993, lastly as its Chief Executive Officer. We believe Dr. Howard’s qualifications
to serve on our Board of Directors include his financial expertise and his understanding of our products and market.
Kenneth Ferry has served as the Company’s President and Chief Executive Officer since May 2006. He has
over 25 years of experience in the healthcare technology field, with more than 10 years’ experience in senior
management positions. Prior to joining the Company, from October 2003 to May 2006, Mr. Ferry was Senior Vice
President and General Manager for the Global Patient Monitoring business for Philips Medical Systems, a leader in the
medical imaging and patient monitoring systems business. In this role he was responsible for Research & Development,
Marketing, Business Development, Supply Chain and Manufacturing, Quality and Regulatory, Finance and Human
Resources. From September 2001 to October 2003, Mr. Ferry served as a Senior Vice President in the North America
Field Organization of Philips Medical Systems. From 1983 to 2001, Mr. Ferry served in a number of management
positions with Hewlett Packard Company, a global provider of products, technologies, software solutions and services
to individual consumers and businesses and Agilent Technologies, Inc., a provider of core bio-analytical and electronic
measurement solutions to the communications, electronics, life sciences and chemical analysis industries. We believe
Mr. Ferry’s qualifications to serve on our Board of Directors include his global executive leadership skills and significant
experience as an executive in the healthcare industry.
Kevin C. Burns has served as the Company’s Executive Vice President of Finance and Chief Financial Officer
and Treasurer since April 2011. Mr. Burns has approximately twenty years of professional experience in finance
primarily in the technology industry. Most recently, Mr. Burns served as senior vice president and chief financial officer
at AMICAS, Inc., a publicly traded image and information management solutions company. During his tenure at
AMICAS, from November 2004 to May 2010, Mr. Burns led significant revenue and profit growth and effected a
successful sale of the company. Prior to joining AMICAS, Mr. Burns was responsible for corporate planning at NMS
Communications, a public telecom equipment company in the wireless applications and infrastructure market, from
November 2003 to November 2004. Previously, Mr. Burns was the director of corporate development at Demantra, Inc.
and has also held senior management positions in finance, accounting and corporate development at MAPICS, Inc. and
Marcam Corporation, both public software companies. Mr. Burns earned both a Bachelor of Science degree in Finance
and an MBA degree from Babson College.
Jonathan Go has served as the Company’s Senior Vice President of Research and Development since October
2006. Mr. Go brings more than twenty years of software development experience in the medical industry to his position
with the Company. From February 1998 to May 2006, Mr. Go served as Vice President of Engineering at Merge eMed
Inc., a provider of Radiology Information System and Picture Archiving and Communication Systems solutions for
imaging centers, specialty practices and hospitals. At Merge eMed, Mr. Go was responsible for software development,
product management, testing, system integration and technical support for all of eMed’s products. From July 1986 to
January 1998, Mr. Go held various development roles at Cedara Software Corp. in Toronto culminating as Director of
Engineering. Cedara Software is focused on the development of custom engineered software applications and
development tools for medical imaging manufacturers. At Cedara Mr. Go built the workstation program, developing
multiple specialty workstations that have been adopted by a large number of partners. Mr. Go earned a Bachelor of
Science in Electrical Engineering from the University of Michigan and a Master’s of Science in Electrical Engineering
and Biomedical Engineering from the University of Michigan.
Dr. Rachel Brem is currently the Professor and Vice Chairman in the Department of Radiology at The George
Washington University Medical Center and Associate Director of the George Washington Cancer Institute. Dr. Brem
has been at the George Washington University since 2000. From 1991 to 1999 Dr. Brem was at the John Hopkins
Medical Institution where she introduced image guided minimally invasive surgery and previously was the Director
of Breast Imaging. Dr. Brem is a nationally and internationally recognized expert in new technologies for the improved
diagnosis of breast cancer and has published over 80 manuscripts. We believe Dr. Brem’s qualifications to serve on our
33
Board of Directors include her expertise in the medical field specifically the diagnosis of breast cancer as well as her
understanding of our products and market.
Anthony Ecock has been Senior Operating Executive with the private equity investment firm, Welsh, Carson,
Anderson & Stowe (“WCAS”), since 2007. Mr. Ecock has over 9 years of experience in the healthcare technology field
and with more than 15 years in senior management positions. At WCAS, Mr. Ecock is responsible for helping portfolio
companies identify and implement growth, as well as earnings improvement opportunities. Before joining WCAS, he
served as Vice President and General Manager of GE Healthcare’s Enterprise Sales organization, a unit of the General
Electric Company, from 2003 to 2007. From 1999 to 2003 he served as Senior Vice President and Global General
Manager of the Hewlett Packard Company. Mr. Ecock spent most of his career at the consulting firm of Bain &
Company, where he was a Partner, Practice Leader for Information Technology and Global Program Director for
Consultant Training. We believe Mr. Ecock’s qualifications to serve on our Board of Directors include his financial
expertise and his years of experience in the healthcare market.
Steven Rappaport has been a partner of RZ Capital, LLC a private investment firm that also provides
administrative services for a limited number of clients since July 2002. From March 1995 to July 2002, Mr. Rappaport
was Director, President and Principal of Loanet, Inc., an online real-time accounting service used by brokers and
institutions to support domestic and international securities borrowing and lending activities. Loanet, Inc. was acquired
by SunGard Data Systems in May 2001. From March 1992 to December 1994, Mr. Rappaport was Executive Vice
President of Metallurg, Inc. (“Metallurg”), a producer and seller of high quality specialty metals and alloys, and
President of Metallurg’s subsidiary, Shieldalloy Corporation. He served as Director of Metallurg from 1985 to 1998.
From March 1987 to March 1992, Mr. Rappaport was Director, Executive Vice President and Secretary of Telerate, Inc.
(“Telerate”), an electronic distributor of financial information. Telerate was acquired by Dow Jones over a number of
years commencing in 1985 and culminating in January 1990, when it became a wholly-owned subsidiary. Mr. Rappaport
practiced corporate and tax law at the New York law firm of Hartman & Craven from August 1974 to March 1987. He
became a partner in the firm in 1979. Mr. Rappaport is currently serving as an independent director of Presstek and a
number of open and closed end American Stock Exchange funds of which Credit Suisse serves as the investment
adviser and a number of closed end mutual funds of which Aberdeen Investment Trust serves as the adviser. In addition,
Mr. Rappaport serves as a director of several privately owned businesses and a few not for profit organizations. We
believe Mr. Rappaport’s qualifications to serve on our Board of Directors include his extensive financial and legal
expertise combined with his experience as an executive officer, partner and director.
Dr. Elliot Sussman is currently a Professor of Medicine at the University of South Florida College of Medicine.
From 1993 to 2010, Dr. Sussman served as President and Chief Executive Officer of Lehigh Valley Health Network.
Dr. Sussman served as a Fellow in General Medicine and a Robert Wood Johnson Clinical Scholar at the University
of Pennsylvania, and trained as a resident at the Hospital of the University of Pennsylvania. Dr. Sussman is a director
and the Chairperson of the compensation committee of the Board of Directors of Universal Health Realty Income
Trust, a public company involved in real estate investment trust primarily engaged in investing in healthcare and human
service-related facilities. We believe Dr. Sussman’s qualifications to serve on our Board include his experience as a
Chief Executive Officer of a leading healthcare network, combined with his medical background and his understanding
of our products and market.
Michael Klein was President and CEO of Xoft, Inc, a position he held since 2005 until the sale of Xoft to
iCAD, Inc. in December 2010. Mr. Klein led the development, approval and commercialization of Xoft’s non-
radioactive x-ray technology for radiation therapy. The Xoft platform offering is used to treat breast, vaginal and skin
cancers. Prior to joining Xoft, from 2000 to 2004, Mr. Klein served as Chairman, President and CEO of R2 Technology,
Inc., a breast and lung cancer computer aided detection company. From 1997 to 2000 he served as General Manager
of Varian Medical Systems’ Oncology Group where he managed businesses ranging from $25 million to $250 million.
Mr. Klein has also served on the Board of Sanarus Medical, a breast biopsy and cryo-ablation company focused on the
treatment of fibro adenomas. He received his MBA degree from the New York Institute of Technology and completed
his post-graduate Executive Education Studies at Harvard University and Babson College. In 2008, Mr. Klein received
the R&D Magazine Top 100 Award on behalf of Xoft, where honors were awarded for the 100 most technologically
significant new products of 2008. A similar award was received in 2008 from Frost & Sullivan. We believe Mr. Klein’s
qualifications to serve on our Board include his experience as the former Chief Executive Officer of Xoft, as well as
his industry and product knowledge.
34
Somu Subramaniam, is currently a Managing Partner and co-founder of New Science Ventures, a New York-
based venture capital firm that invests in both early and late stage companies, using novel scientific approaches to
address significant unmet needs and create order of magnitude improvements in performance. Mr. Subramaniam serves
on several Boards of companies managed in New Science Venture’s portfolio, including Achronix Semiconductor
Corporation, RF Arrays, Inc., Lightwire, Inc., Silicon Storage Technology, Inc., MagSil Corporation, Trellis BioScience,
Inc., and BioScale, Inc. Prior to starting New Science Ventures in 2004, Mr. Subramaniam was a Director at McKinsey
& Co. and at various times led their Strategy Practice, Technology Practice and Healthcare Practice. While at McKinsey,
he advised leading multinational companies in the pharmaceuticals, medical devices, biotechnology, photonics, software
and semiconductor industries. He was also a member of McKinsey’s Investment Committee. Mr. Subramaniam
received his undergraduate degree (B.Tech) from the Indian Institute of Technology and his M.B.A. from Harvard
Business School. We believe Mr. Subramaniam’s qualifications to serve on our Board include his experience in
healthcare and medical devices, his financial expertise, as well as his market and product knowledge.
Audit Committee and Audit Committee Financial Expert
Our Board of Directors maintains an Audit Committee which is comprised of Mr. Rappaport (Chair), Mr.
Ecock and Dr. Sussman. Our Board has determined that each member of the Audit Committee meets the definition of
an “Independent Director” under applicable NASDAQ Marketplace Rules. In addition, the Board has determined that
each member of the Audit Committee meets the independence requirements of applicable SEC rules and that Mr.
Rappaport qualifies as an “audit committee financial expert” under applicable SEC rules.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires certain of our officers and our directors, and persons who own more
than 10 percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with
the SEC. Officers, directors, and greater than 10 percent stockholders are required by SEC regulation to furnish us
with copies of all Section 16(a) forms they file.
Based solely on our review of copies of such forms received by us, we believe that during the year ended December
31, 2011, all filing requirements applicable to all of our officers, directors, and greater than 10% beneficial stockholders
were timely complied with.
Code of Ethics
We have developed and adopted a comprehensive Code of Business Conduct and Ethics to cover all of our
employees. Copies of the Code of Business Conduct and Ethics can be obtained, without charge, upon written request,
addressed to:
iCAD, Inc.
98 Spit Brook Road, Suite 100
Nashua, NH 03062
Attention: Corporate Secretary
Item 11.
Executive Compensation.
The Company will furnish to the Securities and Exchange Commission a definitive proxy statement not later
than 120 days after the end of the fiscal year ended December 31, 2011. The response to this item will be contained
in our proxy statement for our 2012 annual meeting of stockholders under the captions “Executive Compensation,”
“Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report,” and is
incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The response to this item will be contained in our proxy statement for our 2012 annual meeting of stockholders in part
under the caption “Stock Ownership of Certain Beneficial Owners and Management” and in part below.
35
Equity Compensation Plans
The following table provides certain information with respect to all of our equity compensation plans in effect
as of December 31, 2011.
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
issuance under equity
compensation plans (excluding
securities reflected in column
(a))
4,230,796
1,172,815
5,403,611
$1.81
$2.46
$1.95
862,574
-0-
862,574
Plan Category:
Equity compensation plans
approved by security holders:
Equity compensation plans
not approved by security
holders (1):
Total
(1) Represents the aggregate number of shares of common stock issuable upon exercise of individual arrangements with
non-plan option holders. See Note 5 of Notes to our consolidated financial statements for a description of our Stock
Option and Stock Incentive Plans and certain information regarding the terms of the non-plan options.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The response to this item is contained in our proxy statement for our 2012 annual meeting of stockholders under the
captions “Certain Relationships and Related Transactions,” “Corporate Governance Matters — Director Independence”
and “Compensation Committee Report, and is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services.
The response to this item is contained in our proxy statement for our 2012 annual meeting of stockholders
under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm,” and is incorporated
herein by reference.
PART IV
Item 15.
Exhibits, Financial Statement Schedules.
a) The following documents are filed as part of this Annual Report on Form 10-K:
i.
ii.
iii.
2(a)
2(b)
Financial Statements - See Index on page xx.
Financial Statement Schedule - See Index on page xx. All other schedules for
which provision is made in the applicable accounting regulations of the Securities
and Exchange Commission are not required under the related instructions or are not
applicable and, therefore, have been omitted.
Exhibits - the following documents are filed as exhibits to this Annual Report on
Form 10-K:
Plan and Agreement of Merger dated February 15, 2002, by and among the
Registrant, ISSI Acquisition Corp. and Intelligent Systems Software, Inc., Maha
Sallam, Kevin Woods and W. Kip Speyer. [incorporated by reference to Annex A
of the Company’s proxy statement/prospectus dated May 24, 2002 contained in
the Registrant’s Registration Statement on Form S-4, File No. 333-86454].
Amended and Restated Plan and Agreement of Merger dated as of December 15,
2003 among the Registrant, Qualia Computing, Inc., Qualia Acquisition Corp.,
Steven K. Rogers, Thomas E. Shoup and James Corbett [incorporated by reference
to Exhibit 2(a) to the Registrant’s Current Report on Form 8-K for the event dated
December 31, 2003].
36
2(c)
2(d)
3 (a)
3(b)
Asset Purchase Agreement as of dated June 20, 2008 between the Registrant and
3TP LLC dba CAD Sciences [incorporated by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K for the event dated July 18, 2008]. **
Agreement and Plan of Merger dated December 15, 2010 by and among the
Registrant, XAC, Inc., Xoft, Inc. and Jeffrey Bird as representative of the Xoft,
Inc.’s stockholders [incorporated by reference to Exhibit 2.1 to the Registrant’s
Current Report on Form 8-K for the event dated December 30, 2010]. **
Certificate of Incorporation of the Registrant as amended through July 18, 2007
[incorporated by reference to Exhibit 3(i) to the Registrant’s Quarterly report on
Form 10-Q for the quarter ended June 30, 2007].
Amended and Restated By-laws of the Registrant [incorporated by reference to
Exhibit 3 (b) to the Registrant’s Report on Form 10-K for the year ended December
31, 2007].
4.1(a)
Form of Warrant issued on January 9, 2012 [incorporated by reference to Exhibit
4.1 of the Registrant’s report on Form 8-K filed with the SEC on January 3, 2012].
4.2(b)
Form of B Warrant issued on January 9, 2012 [incorporated by reference to Exhibit
4.2 of the Registrant’s report on Form 8-K filed with the SEC on January 3, 2012].
4.3(c) Registration Rights Agreement, dated as of December 29, 2011 [incorporated by
reference to Exhibit 4.3 of the Registrant’s report on Form 8-K filed with the SEC
on January 3, 2012].
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
2002 Stock Option Plan [incorporated by reference to Annex F to the Registrant’s
Registration Statement on Form S-4 (File No. 333-86454)].*
2004 Stock Incentive Plan [incorporated by reference to Exhibit B to the
Registrant’s definitive proxy statement on Schedule 14A filed with the SEC on
May 28, 2004].*
Form of Option Agreement under the Registrant’s 2002 Stock Option Plan
[incorporated by reference to Exhibit 10.2 to the Registrant’s quarterly report on
Form 10-Q for the quarter ended September 30, 2004].*
Form of Option Agreement under the Registrant’s 2004 Stock Incentive Plan
[incorporated by reference to Exhibit 10.3 to the Registrant’s quarterly report on
Form 10-Q for the quarter ended September 30, 2004].*
2005 Stock Incentive Plan [incorporated by reference to Exhibit 10.1 to the
Registrant’s report on Form 8-K filed with the SEC on June 28, 2005].*
Form of Option Agreement under the Registrant’s 2005 Stock Incentive Plan
[incorporated by reference to Exhibit 10.2 to the Registrant’s report on Form 8-K
filed with the SEC on June 28, 2005].*
Form of Indemnification Agreement with each of the Registrant’s directors and
officers [incorporated by reference to Exhibit 10.6 of Registrant’s Quarterly report
on Form 10-Q for the quarter ended June 30, 2006].
10(h) Option Agreement dated April 19, 2006 between the Registrant and Kenneth Ferry
[incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly report on
Form 10-Q for the quarter ended September 30, 2006].*
10(i)
Option Agreement dated April 19, 2006 between the Registrant and Stacey Stevens
[incorporated by reference to Exhibit 10.7 of the Registrant’s Quarterly report on
Form 10-Q for the quarter ended September 30, 2006].*
37
10(j)
Lease Agreement dated December 6, 2006 between the Registrant and Gregory D.
Stoyle and John J. Flatley, Trustees of the 1993 Flatley Family Trust, of Nashua,
NH [incorporated by reference to Exhibit 10(mm) to the Registrant’s Report on
Form 10-K for the year ended December 31, 2006].
10(k) Option Agreement dated November 3, 2006 between the Registrant and Jonathan
Go [incorporated by reference to Exhibit 10(oo) to the Registrant’s Report on Form
10-K for the year ended December 31, 2006].*
10(l)
10(m)
10(n)
10(o)
10(p)
10(q)
10(r)
10(s)
10(t)
10(u)
10(v)
10(w)
2007 Stock Incentive Plan, as amended [incorporated by reference to Appendix A
to the Company’s definitive proxy statement on Schedule 14A filed with the SEC
on June 16, 2009]. *
Form of Option Agreement under the Registrant’s 2007 Stock Incentive Plan.
[incorporated by reference to Exhibit 10(vv) to the Registrant’s Report on Form 10-
K for the year ended December 31, 2009]*
Form of Restricted Stock Agreement under the Registrant’s 2007 Stock Incentive
Plan. [incorporated by reference to Exhibit 10(vv) to the Registrant’s Report on
Form 10-K for the year ended December 31, 2009].*
Employment Agreement entered into as of June 1, 2008 between the Registrant and
Kenneth Ferry [incorporated by reference to Exhibit 10.5 of the Registrant’s report
on Form 10-Q filed with the SEC on August 8, 2008] *
Employment Agreement entered into as of June 1, 2008 between the Registrant and
Stacey Stevens [incorporated by reference to Exhibit 10.8 of the Registrant’s report
on Form 10-Q filed with the SEC on August 8, 2008]. *
Employment Agreement dated as of June 1, 2008 between the Registrant and
Jonathan Go [incorporated by reference to Exhibit 10.9 of the Registrant’s report
on Form 10-Q filed with the SEC on August 8, 2008]. *
Separation Agreement dated April 27, 2011 between the Registrant and Darlene M.
Deptula- Hicks [incorporated by reference to Exhibit 10.1 of the Registrant’s report
on Form 8-K filed with the SEC on April 27, 2011].
Employment Agreement dated April 26, 2011 between the Registrant and Kevin
C. Burns [incorporated by reference to Exhibit 10.2 of the Registrant’s report on
Form 8-K filed with the SEC on April 27, 2011].
Option Agreement dated April 26, 2011 between the Registrant and Kevin C. Burns
[incorporated by reference to Exhibit 10.3 of the Registrant’s report on Form 8-K
filed with the SEC on April 27, 2011].*
Facility Agreement including form of Promissory note, dated as of December 29,
2011, by and among the Company, Deerfield Private Design Fund II, L.P.,
Deerfield Private Design International II, L.P., Deerfield Special Situations Fund,
L.P., and Deerfield Special Situations Fund International Limited [incorporated by
reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed with the SEC
on January 3, 2012].
Form of Security Agreement by and among the Company, Deerfield Private Design
Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special
Situations Fund, L.P., and Deerfield Special Situations Fund International Limited
[incorporated by reference to Exhibit 10.2 of the Registrant’s report on Form 8-K
filed with the SEC on January 3, 2012].
Form of Security Agreement by and among Xoft, Inc., Deerfield Private Design
Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special
Situations Fund, L.P., and Deerfield Special Situations Fund International Limited
[incorporated by reference to Exhibit 10.3 of the Registrant’s report on Form 8-K
filed with the SEC on January 3, 2012].
38
10(x)
10(y)
Revenue Purchase Agreement, dated as of December 29, 2011, by and among the
Company, Deerfield Private Design Fund II, L.P., Deerfield Special Situations
Fund, L.P. and Horizon Sante TTNP SARL [incorporated by reference to Exhibit
10.4 of the Registrant’s report on Form 8-K filed with the SEC on January 3, 2012].
Settlement Agreement, dated as of December 22, 2011, by and among the
Company, Carl Zeiss Meditec, AG and Carl Zeiss Meditec,Inc.
21
Subsidiary
23.1
Consent of BDO USA, LLP, Independent Registered Public Accounting Firm.
31.1
31.2
32.1
32.2
101
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
The following materials formatted in XBRL (eXtensible Business Reporting
Language); (i) Consolidated Balance Sheets as of December 31, 2011 and
December 31, 2010, (ii) Consolidated Statements of Operations for the twelve
months ended December 31, 2011 and 2010 and 2009, (iii) Consolidated
Statements of Cash Flows for the twelve months ended December 31, 2011 and
2010 and 2009, and (iv) Notes to Consolidated Financial Statements***.
.
* Denotes a management compensation plan or arrangement.
** The Registrant has omitted certain schedules and exhibits pursuant to Item 601(b)(2) of Regulation S-K
and shall furnish supplementally to the SEC copies any of the omitted schedules and exhibits upon request
by the SEC.
(b) Exhibits - See (a) iii above.
(c) Financial Statement Schedule - See (a) ii above.
*** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not
filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities
Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, and otherwise are not subject to liability under those sections.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
iCAD, INC.
Date: March 8, 2012
By: /s/ Kenneth Ferry
Kenneth Ferry
President, Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Lawrence Howard
Dr. Lawrence Howard
Chairman of the Board,
Director
/s/ Kenneth Ferry
Kenneth Ferry
/s/ Kevin C. Burns
Kevin C. Burns
/s/ Rachel Brem
Rachel Brem, M.D.
/s/ Anthony Ecock
Anthony Ecock
/s/ Michael Klein
Michael Klein
/s/ Steven Rappaport
Steven Rappaport
/s/ Somu Subramaniam
Somu Subramaniam
/s/ Elliot Sussman
Elliot Sussman, M.D.
President, Chief Executive
Officer, Director (Principal
Executive Officer)
Executive Vice President of Finance,
Chief Financial Officer, Treasurer
(Principal Financial and Accounting
Officer)
Director
March 8, 2012
March 8, 2012
March 8, 2012
March 8, 2012
Director
March 8, 2012
March 8, 2012
March 8, 2012
March 8, 2012
March 8, 2012
Director
Director
Director
Director
40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
As of December 31, 2011 and 2010
Consolidated Statements of Operations
For the years ended December 31, 2011,
2010 and 2009
Consolidated Statements of Stockholders’ Equity
For the years ended December 31, 2011,
2010 and 2009
Consolidated Statements of Cash Flows
For the years ended December 31, 2011,
2010 and 2009
Page
F2
F3
F4
F5
F6
Notes to Consolidated Financial Statements
F7-F31
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of iCAD, Inc.,
Nashua, New Hampshire
We have audited the accompanying consolidated balance sheets of iCAD, Inc. and subsidiary (the “Company”) as of
December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal controls over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of iCAD, Inc. and subsidiary as of December 31, 2011 and 2010, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Boston, Massachusetts
March 8, 2012
F-2
iCAD, INC. AND SUBSIDIARY
Consolidated Balance Sheets
i
Assets
Current assets:
stnelaviuqe hsac dna hsaC
Trade accounts receivable, net of allowance for doubtful
0102 ni 05$ dna 1102 ni 45$ fo stnuocca
ten ,yrotnevnI
stessa tnerruc rehto dna sesnepxe diaperP
tessa noitacifinmednI
stessa tnerruc latoT
Property and equipment:
tnempiuqE
stnemevorpmi dlohesaeL
serutxif dna erutinruF
stessa gnitekraM
noitazitroma dna noitaicerped detalumucca sseL
tnempiuqe dna ytreporp teN
Other assets:
Deposits
Intangible assets, net of accumulated amortization
0102 ni 647,6$ dna 1102 ni 048,8$ fo
lliwdooG
stessa rehto latoT
stessa latoT
Liabilities and Stockholders' Equity
Current liabilities:
elbayap stnuoccA
sesnepxe deurccA
tner derrefeD
eunever derrefeD
seitilibail tnerruc latoT
esnepxe ytnarraw mret-gnoL
tner derrefed mret-gnoL
tsoc llacer mret-gnoL
eunever derrefed mret-gnoL
stsoc tnemelttes mret-gnoL
ytilibail noitaredisnoc tnegnitnoC
seitilibail latoT
Commitments and contingencies (Notes 3 and 8)
Stockholders' equity:
Preferred stock, $ .01 par value: authorized 1,000,000 shares;
.deussi enon
Common stock, $ .01 par value: authorized 85,000,000
shares; issued 54,754,510 in 2011 and 54,383,747 in 2010;
0102 ni 178,513,45 dna 1102 ni 553,528,35 gnidnatstuo
latipac ni-diap lanoitiddA
ticifed detalumuccA
0102 ni 678,76 dna 1102 ni 551,929 tsoc ta kcots yrusaerT
ytiuqe 'sredlohkcots latoT
December 31,
2011
December 31,
2010
(in thousands except share and per share data)
$
675,4
$
962,61
300,4
040,2
094
-
901,11
859,3
725
682
792
5,068
481,3
488,1
595
460,71
901,12
867,83
167,15
891,1
051,5
173
567,5
484,21
31
75
17
644,1
536,1
-
607,51
$
$
983,3
984,3
185
1,283
110,52
634,4
935
553
792
5,626
258,2
477,2
576
561,12
969,54
908,76
495,59
2,500
125,5
183
609,4
803,31
51
204
-
169
896,2
5,000
483,22
-
-
$
$
745
599,361
)270,721(
)514,1(
550,63
445
101,361
)584,98(
)059(
012,37
495,59
ytiuqe 'sredlohkcots dna seitilibail latoT
$
167,15
$
See accompanying notes to consolidated financial statements.
F-3
iCAD, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Revenue:
stcudorP
seilppus dna ecivreS
eunever latoT
Cost of Revenue:
stcudorP
seilppus dna ecivreS
noitazitromA
eunever fo tsoc latoT
tiforp ssorG
Operating expenses:
tnempoleved tcudorp dna gnireenignE
selas dna gnitekraM
evitartsinimda dna lareneG
noitaredisnoc tnegnitnoC
tnemriapmi lliwdooG
tessa noitacifinmedni no ssoL
sesnepxe gnitarepo latoT
2011
For the Years Ended December 31,
2009
2010
(in thousands except per share data)
$
$
787,91
568,8
256,82
$
18,727
5,848
24,575
887,4
609,2
139
526,8
720,02
197,01
486,31
570,01
)009,4(
828,62
147
912,75
2,396
2,486
-
4,882
19,693
6,596
9,750
9,919
-
-
-
26,265
24,085
4,024
28,109
3,905
2,395
-
6,300
21,809
7,217
9,360
7,354
-
-
-
23,931
snoitarepo morf ssoL
)291,73(
(6,572)
(2,122)
Other income (expense):
emocni rehtO
emocni tseretnI
esnepxe tseretnI
ten ,)esnepxe( emocni rehtO
-
42
)914(
)593(
275
73
-
348
-
119
(9)
110
tifeneb xat emocni erofeb ssoL
)785,73(
(6,224)
(2,012)
tifeneb xat emocnI
ssol teN
Net loss per share:
cisaB
detuliD
Weighted average number of shares used in
computing loss per share:
cisaB
detuliD
See accompanying notes to consolidated financial statements.
-
-
(44)
)785,73(
$
(6,224)
$
(1,968)
$)96.0(
$)96.0(
$)41.0(
$)41.0(
)40.0(
)40.0(
$
$
$
845,45
845,45
828,54
828,54
215,54
215,54
F-4
iCAD, INC. AND SUBSIDIARY
C
Consolidated Statements of Stockholders Equity
(in thousands except shares)
Balance at December 31, 2008
45,411,384 $
454 $
148,082 $
(81,293) $
(950) $
66,293
Common Stock
Number of
S hares Issued
Par Value
Additional
Paid-in
Capital
Accumulated
Deficit
Treasury
S tock
S tockholders'
Equity
23
(25)
(11)
1,994
-
150,063
(91)
11,613
1,516
-
163,101
(70)
60
-
904
-
163,995 $
-
-
-
-
-
-
-
-
(1,968)
(83,261)
-
(950)
-
-
-
-
-
-
-
(6,224)
(89,485)
-
(950)
-
-
-
-
-
-
(465)
-
23
(22)
(11)
1,994
(1,968)
66,309
(88)
11,697
1,516
(6,224)
73,210
(67)
60
(465)
904
(37,587)
(127,072) $
-
(1,415) $
(37,587)
36,055
Issuance of common stock pursuant
to stock option plans
47,161
Issuance of common stock relative to
vesting of restricted stock, net of 18,619
shares forfeited for tax obligations
Return of common stock relative to
the asset acquisition
Stock-based compensation
Net loss
Balance at December 31, 2009
Issuance of common stock relative to
vesting of restricted stock, net of 53,072
shares forfeited for tax obligations
M erger consideration (Note 2)
Stock-based compensation
Net loss
Balance at December 31, 2010
Issuance of common stock relative to
vesting of restricted stock, net of 57,340
shares forfeited for tax obligations
Issuance of common stock pursuant
to stock option plans
Shares added to treasury pursuant to litigation
settlement
Stock-based compensation
Net loss
Balance at December 31, 2011
292,147
(3,956)
-
-
45,746,736
288,510
8,348,501
-
-
54,383,747
295,763
75,000
-
-
-
54,754,510 $
See accompanying notes to consolidated financial statements.
-
3
-
-
-
457
3
84
-
-
544
3
-
-
-
-
547 $
F-5
iCAD, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31,
2009
2010
2011
(in thousands)
$
(37,587)
$
(6,224)
$
(1,968)
Cash flow from operating activities:
Net loss
Adjustments to reconcile net loss to net cash (used for) provided
by operating activities:
Depreciation
Amortization
Gain on sale of patent
Goodwill impairment
Loss on disposal of assets
Loss on indemnification asset
Stock-based compensation expense
Interest on royalty obligation
Fair value of contingent consideration
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable
Inventory
Prepaid and other current assets
Accounts payable
Accrued expenses
Deferred revenue
Total adjustments
Net cash (used for) provided by operating activities
Cash flow from investing activities:
Additions to patents, technology and other
Additions to property and equipment
Proceeds from sale of patent
Acquisition of Xoft, net of cash acquired
Net cash used for investing activities
Cash flow from financing activities:
Issuance of common stock for cash
Payment for Xoft
Taxes paid related to restricted stock issuance
Net cash (used for) provided by financing activities
Increase (decrease) in cash and equivalents
Cash and equivalents, beginning of year
Cash and equivalents, end of year
Supplemental disclosure of cash flow information:
Interest paid
Taxes paid
Non-cash items from investing and financing activities:
Fair market value of iCAD common stock issued to acquire
Xoft, Inc. and accrued cash consideration
Return of common stock from escrow related to acquisition
of Xoft in 2011 and CAD Sciences in 2008.
See accompanying notes to consolidated financial statements.
$
$
$
$
$
F-6
1,077
2,094
-
26,828
21
741
904
422
(4,900)
(614)
1,449
248
(1,375)
(713)
1,263
27,445
(10,142)
(13)
(263)
-
-
(276)
60
(1,268)
(67)
(1,275)
(11,693)
16,269
4,576
-
40
476
1,167
(275)
-
-
-
1,516
-
-
1,914
278
78
125
446
706
6,431
207
(28)
(322)
275
(24)
(99)
-
-
(87)
(87)
21
16,248
16,269
2
89
$
$
$
$
$
$
751
1,170
-
-
-
-
1,994
-
-
878
354
58
(824)
(530)
1,559
5,410
3,442
(138)
(173)
-
-
(311)
23
-
(22)
1
3,132
13,116
16,248
9
95
-
$
12,668
$
-
465
$
- $
11
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1)
Summary of Significant Accounting Policies
(a) Nature of Operations and Use of Estimates
iCAD, Inc. and subsidiary (the “Company” or “iCAD”) is a provider of Computer Aided Detection (“CAD”)
solutions that enable radiologists and other healthcare professionals to better serve patients by identifying
pathologies and pinpointing cancer earlier. CAD is performed as an adjunct to certain medical screening
procedures. CAD is reimbursable in the U.S. under federal and most third-party insurance programs. In July
2008, through the asset acquisition of 3TP LLC dba CAD Sciences (“CAD Sciences”), the Company acquired
pharmaco-kinetic based CAD products that aid in the interpretation of contrast enhanced MRI images of the
breast and prostate. iCAD has also developed CAD solutions for use with virtual colonoscopy to improve the
detection of colonic polyps while delivering improved workflow for the radiologists, and higher quality patient
care.
In addition, the acquisition of Xoft, Inc. (“Xoft”) on December 30, 2010, brought an isotope-free cancer
treatment platform technology to the Company’s product line. In this acquisition, the Company acquired
electronic brachytherapy (eBx) products for the treatment of breast, endometrial, skin and other cancers, used
in a broad range of clinical settings. The portable Axxent System which delivers electronically controlled
radiation therapy directly to cancer sites with minimal radiation exposure to surrounding healthy tissue is
FDA-cleared. This technology enables radiation oncology departments in hospitals, clinics and physician
offices to perform traditional radiotherapy treatments and offer advanced treatments such as Intra-Operative
Radiation Therapy (IORT). Customers include university research and community hospitals, private and
governmental institutions, doctors’ offices,, cancer care clinics and veterinary facilities. iCAD, Inc and Xoft,
Inc are collectively referred to herein as the Company or iCAD.
The Company considers itself a single reportable business segment. The Company sells its products throughout
the world through its direct sales organization as well as through various OEM partners, distributors and
resellers. See Note 7 for geographical and major customer information.
The preparation of financial statements in conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. It is reasonably possible that changes may occur in the near term that would
affect management’s estimates with respect to assets and liabilities.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary,
Xoft, Inc,. Any material inter-company transactions and balances have been eliminated in consolidation.
(c) Cash and cash equivalents
For purposes of reporting cash flows, the Company defines cash and cash equivalents as all bank transaction
accounts, money market funds, deposits and other money market instruments with original maturities of 90
days or less, which are unrestricted as to withdrawal. Cash and cash equivalents are maintained at financial
institutions and, at times, balances may exceed federally insured limits. The Company has never experienced
any losses related to these balances. All of the Company’s non-interest bearing cash balances were fully
insured at December 31, 2011 due to a temporary federal program in effect from December 31, 2010 through
December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts.
Beginning in 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and
the Company’s non-interest bearing cash balances may again exceed federally insured limits. Interest-bearing
amounts on deposit in excess of federally insured limits at December 31, 2011 approximated $4.2 million.
(d) Financial instruments
The carrying amounts of financial instruments, including cash and equivalents, accounts receivable and
accounts payable, approximated fair value as of December 31, 2011 and 2010 due to their short-term nature.
F-7
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(e) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are customer obligations due under normal trade terms. Credit limits are established
through a process of reviewing the financial history and stability of each customer. The Company performs
continuing credit evaluations of its customers’ financial condition and generally does not require collateral.
The Company’s policy is to maintain allowances for estimated losses from the inability of its customers to
make required payments. Credit limits are established through a process of reviewing the financial history
and stability of each customer. Where appropriate, the Company obtains credit rating reports and financial
statements of customers when determining or modifying credit limits. The Company’s senior management
reviews accounts receivable on a periodic basis to determine if any receivables may potentially be
uncollectible. The Company includes any accounts receivable balances that it determines may likely be
uncollectible, along with a general reserve for estimated probable losses based on historical experience, in its
overall allowance for doubtful accounts. An amount would be written off against the allowance after all
attempts to collect the receivable had failed. Based on the information available, the Company believes the
allowance for doubtful accounts as of December 31, 2011 and 2010 is adequate.
(f) Inventory
Inventory is valued at the lower of cost or market value, with cost determined by the first-in, first-out method.
The Company regularly reviews inventory quantities on hand and records an allowance for excess and/or
obsolete inventory primarily based upon the estimated usage of its inventory as well as other factors. At
December 31, 2011 and 2010 respectively inventories consisted of the following (in thousands):
As of December 31,
2011
2010
$
$
Raw materials 643
Work in process 23
Finished Goods 1,374
Inventory 2,040
$
810,2
-
174,1
984,3
$
(g) Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated
useful lives of the various classes of assets (ranging from 3 to 5 years) or the remaining lease term, whichever
is shorter for leasehold improvements.
(h) Long Lived Assets
Long-lived assets, other than goodwill, are evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted
future cash flows from the use of these assets. When any such impairment exists, the related assets are written
down to fair value. The Company did not record any impairment losses in the years ended December 31, 2011,
2010 or 2009. Intangible assets subject to amortization consist primarily of patents, technology, trade name,
customer relationships and distribution agreements purchased in the Company’s previous acquisitions. These
assets, which include assets acquired from Xoft, Inc., are amortized on a straight-line basis or the pattern of
economic benefit over their estimated useful lives of 5 to 10 years. A summary of intangible assets for 2011
and 2010 are as follows (in thousands):
F-8
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
i
i
(h) Long Lived Assets (continued)
Weighted
average
useful life
5 years
5 years
10 years
10 years
10 years
10 years
For the years ended December 31,
Gross Carrying Amount
sesnecil dna stnetaP
ygolonhceT
emanedarT
T
Total amortizable intangible assets
Accumulated Amortization
Patents and licenses
T
Technology
emanedarT
Total accumulated amortization
2011
2010
$
326
3
330,52
8
842
25,904
$ 2,129
$ 2,129
25,533
25,533
248
248
27,910
27,910
409 $ 391
$ 409 $ 391
6,181
8,233 6,181
371 891
6,745
6,745
8,840
T
Total amortizable intangible assets, net
$
17,064
$
21,165
Amortization expense related to intangible assets was approximately $2,094, $1,167 and $1,170 for the years
ended December 31, 2011, 2010, and 2009, respectively. Estimated remaining amortization of the Company’s
intangible assets is as follows (in thousands):
Estimated
For the years ended amortization
amortization
December 31: expense
expense
D
2012
2
2013
2014
2015
2016
Future years
$
1,899
1,701
1,445
1,443
1,437
9,139
9,139
17,064
1
(i) Goodwill
$
In accordance with FASB ASC Topic 350-20, “Intangibles - Goodwill and Other”, (“ASC 350-20”), the
Company tests goodwill for impairment on an annual basis and between annual tests if events and
circumstances indicate it is more likely than not that the fair value of the Company is less than the carrying
value of the Company.
The Company’s goodwill arose in connection with its acquisitions in June 2002, December 2003 and
December 2010. The Company operates in one segment and one reporting unit since operations are supported
by one central staff and the results of operations are evaluated as one business unit. In general, the Company’s
medical device products are similar in nature based on production, distribution, services provided and
regulatory requirements. The Company uses market capitalization as the best evidence of fair value (market
capitalization is calculated using the quoted closing share price of the Company’s common stock at its annual
impairment testing date of October 1, multiplied by the number of common shares outstanding) of the
Company. The Company tests goodwill for impairment by comparing its market capitalization (fair value) to
its carrying value. The fair value of the Company is compared to the carrying amount at the same date as the
basis to determine if a potential impairment exists.
F-9
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(i) Goodwill (continued)
The Company assesses the potential impairment of goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable, or at least annually. Factors management considers
important, which could trigger an impairment of such asset, include the following:
significant underperformance relative to historical or projected future operating results;
significant changes in the manner or use of the assets or the strategy for our overall business;
significant negative industry or economic trends;
significant decline in our stock price for a sustained period; and
•
•
•
•
• a sustained decline in our market capitalization below net book value.
During the quarter ended September 30, 2011, as a result of the sustained decline in the market capitalization
of the Company, an interim first step (“Step 1”) analysis was completed. The interim Step 1 test resulted in
the determination that the carrying value of equity exceeded the fair value of equity, thus requiring the
Company to measure the amount of any goodwill impairment by performing the second step of the impairment
test. The Company corroborated the Step 1 value using an income approach.
The second step (“Step 2”) of the goodwill impairment test, used to measure the amount of impairment loss,
compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.
The implied fair value of goodwill was determined in the same manner as the manner in which the amount of
goodwill recognized in a business combination is determined. The excess of the fair value of the single
reporting unit over the amounts assigned to its assets and liabilities is the implied amount of goodwill. The
Company identified several intangible assets that were valued during this process, including technology,
customer relationships, trade names, non-compete agreements, and the Company’s workforce. The allocation
process was performed only for purposes of testing goodwill for impairment.
The Company determined the value of the select assets utilizing the income approach. This approach was selected
as it measures the income producing assets, primarily technology and customer relationships. This method
estimates the fair value based upon the ability to generate future cash flows, which is particularly applicable
when future profit margins and growth are expected to vary significantly from historical operating results.
Other significant assumptions include terminal value margin rates, future capital expenditures, and changes
in future working capital requirements. The Company also compared and reconciled the overall fair value to
the Company’s market capitalization. While there are inherent uncertainties related to the assumptions used
and to the application of these assumptions to this analysis, the income approach provides a reasonable estimate
of the fair value of the Company’s single reporting unit.
The Step 2 test resulted in determining the fair value of goodwill of $21,109 which resulted in an impairment
loss of $26,828.
The changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2011, are as
follows (in thousands):
Balance as of December 31, 2009
noitsiuqca tfoX
Retrospective adjustments
Balance as of December 31, 2010
$43,515
471,2
082
45,969
Purchase accounting adjustments 1,968
)828,62(
Impairment
Balance as of December 31, 2011 $21,109
F-10
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(i) Goodwill (continued)
Purchase accounting adjustments, considered to be measurement period adjustments, were recorded in the
six months subsequent to the acquisition and consisted primarily of a $1.5 million decrease of the acquired
patent asset, a decrease of $500,000 in the acquired technology asset, a decrease in the fair value estimate of
the royalty obligation of $200,000 a decrease of $100,000 related to contingent consideration and an increase
of approximately $300,000 related to unrecorded liabilities. The measurement period adjustments had no
effect on the Company’s operations and results and had an immaterial effect on the December 31, 2010 balance
sheet. Accordingly, the adjustments were recorded during 2011.
No goodwill impairment loss was recorded in 2010 or 2009. For 2011 and 2010 the Company performed the
annual step one fair value comparison as of October 1, 2011 and October 1, 2010. At October 1, 2010, the
Company’s market capitalization (or market capitalization with a reasonable control premium) exceeded its
carrying value. At October 1, 2011, the Company’s market capitalization with a reasonable control premium
was less than the carrying value of goodwill. However, the Company completed a goodwill impairment
analysis as of September 30, 2011, and concluded that the October 1, 2011 step one fair value comparison was
consistent with the results at September 30, 2011. At December 31, 2011 and 2010, the Company’s market
capitalization (or market capitalization with a reasonable control premium) exceeded its carrying value.
(j) Revenue Recognition
The Company recognizes revenue primarily from the sale of products and from the sale of services and
supplies. Revenue is recognized when delivery has occurred, persuasive evidence of an arrangement exists,
fees are fixed or determinable and collectability is probable. For product revenue delivery has occurred upon
shipment, provided title and risk of loss has passed to the customer. Services and supplies revenue are
considered to be delivered as the services are performed or over the estimate life of the supply agreement.
The Company recognizes revenue from the sale of certain of its MRI CAD products and services in accordance
with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 985-605,
(“Software, Revenue Recognition”) (“ASC 985-605”).
The Company recognizes revenue from the sale of its digital, film-based CAD and electronic brachytherapy
products and services in accordance with ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements
(“ASU 2009-13”). In accordance with the guidance of ASU 2009-13, fair value as the measurement criteria
is replaced with the term selling price and establishes a hierarchy for determining the selling price of a
deliverable. ASU 2009-13 also eliminates the use of the residual value method for determining the allocation
of arrangement consideration. For multi-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 a 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. Sales of the electronic brachytherapy product typically include several devices, accessories,
service and supply. The Company generally allocates revenue to the deliverables in the arrangement based
on the BESP. Revenue is recognized when the product has been delivered, and service and supply revenue is
recognized over the life of the service and supply agreement.
For most of iCAD’s Digital, MRI and film based sales, the responsibility for the installation process lies with
its Original Equipment Manufacturer (“OEM”) partners, including GE Healthcare, Siemens Medical and
others. On occasion, when iCAD is responsible for product installation, the installation element is considered
a separate unit of accounting because the delivered product has stand alone value to the customer. In these
instances, the Company allocates the deliverables based on the framework established within ASU 2009-13.
Therefore, the installation and training revenue is recognized as the services are performed according to the
VSOE of the element. Revenue from the Digital, MRI and film based equipment when there is installation
F-11
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition (continued)
is recognized based on the relative selling price allocation of the BESP. In prior years (prior to ASU 2009-
13), the Company recognized the element on the residual method. The adoption of ASU 2009-13 did not
have a material effect on the financial condition or results of operations of the Company.
The Company uses customer purchase orders that include all terms of the arrangement and in the case of OEM
customers are also supported by distribution agreements. . In accordance with the distribution agreement, the
OEM customers do not have a right of return, and title and risk of loss passes to the OEM customer upon
shipment. The Company generally ships Free On Board shipping point and uses shipping documents and third-
party proof of delivery to verify delivery and transfer of title. In addition, the Company assesses whether
collection is reasonably assured 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.
If the terms of the sale include customer acceptance provisions and compliance with those provisions cannot
be demonstrated, all revenues are deferred and not recognized until such acceptance occurs. The Company
considers all relevant facts and circumstances in determining when to recognize revenue, including contractual
obligations to the customer, the customer’s post-delivery acceptance provisions, if any, and the installation
process.
The Company defers revenue from the sale of extended service contracts related to future periods and
recognizes revenue on a straight-line basis in accordance with FASB ASC Topic 605-20, “Services”. The
Company provides for estimated warranty costs on original product warranties at the time of sale.
The Company also adopted ASC Update No. 2009-14, Certain Arrangements That Contain Software Elements
(Update No. 2009-14). This Update amended the scope of ASC Subtopic No. 985-605, “Revenue
Recognition”, to exclude tangible products that include software and non-software components that function
together to deliver the product’s essential functionality. The adoption of this standard did not have a material
effect on the Company’s financial condition or results of operations.
(k) Cost of Revenue
Cost of revenue consists of the costs of products purchased for resale, cost relating to service including costs
of service contracts to maintain equipment after the warranty period, inbound freight and duty, manufacturing,
warehousing, material movement, inspection, scrap, rework, depreciation and in-house product warranty
repairs. The Company has reclassified on the statements of operations the cost of product installation, training,
customer support and certain warranty repair costs of approximately $1.74 million and $1.67 million in the
years ended December 31, 2010 and 2009, respectively, that were previously included in sales and marketing
expenses to cost of revenue to conform to current period classifications.
(l) Warranty Costs
The Company provides for the estimated cost of standard product warranty against defects in material and
workmanship based on historical warranty trends, including in the volume and cost of product returns during
the warranty period. Warranty provisions and claims for the years ended December 31, 2011, 2010 and 2009,
were as follows:
Warranty costs: (000's)
2011
Beginning balance 86
701
Warranty provision
(104)
Usage
98
Ending balance
$
$
F-12
$
$
2010
19
11
)61(
68
2009
741
21
)86(
19
$
$
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(l) Warranty Costs (continued)
The warranty costs above include long-term warranty obligations of $13,000, $15,000 and $23,000 for the
years ended December 31, 2011, 2010 and 2009, respectively.
(m) Engineering and Product Development Costs
Engineering and product development costs relate to research and development efforts including company
sponsored clinical trials which are expensed as incurred.
(n) Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31,
2011, 2010 and 2009 was approximately $938,000, $666,000 and $724,000 respectively.
(o) Net Loss per Common Share
The Company follows FASB ASC 260-10, “Earnings per Share”, which requires the presentation of both
basic and diluted earnings per share on the face of the Statements of Operations. The Company’s basic net
loss per share is computed by dividing net loss by the weighted average number of shares of common stock
outstanding for the period and, if there are dilutive securities, diluted income per share is computed by
including common stock equivalents which includes shares issuable upon the exercise of stock options, net
of shares assumed to have been purchased with the proceeds, using the treasury stock method.
A summary of the Company’s calculation of net loss per share is as follows (in thousands, except per share
amounts):
$
$
(6,224)
(1,968)
B
2011
2010
2009
Net loss available to common shareholders
$
(37,587)
$
(6,224)
$
(1,968)
Basic shares used in the calculation of earnings per share
R
Effect of dilutive securities:
D
earnings per share
Stock options
Restricted stock
N
Diluted shares used in the calculation of earnings per share
D
Net loss per share :
T
Basic
Diluted
54,548
5
-
-
54,548
-
45,828
-
45,828
-
-
-
45,512
-
45,512
-
-
$
$
(0.14)
45,828
(0.14)
$
$
(0.04)
45,512
(0.04)
$
$
(0.69)
(0.69)
$
$
(0.14)
(0.14)
$
$
(0.04)
(0.04)
The following table summarizes the number of shares of common stock for securities that were not included
in the calculation of diluted net loss per share because such shares are antidilutive:
2011
2010
2009
Common stock options
5,403,611
5,293,524
5,159,122
The calculation of basic loss per share for 2011, 2010 and 2009 does not include 613,976, 766,075 and 592,155
shares, respectively, of restricted common stock issued to executive officers and employees of the Company
as they are subject to time-based vesting. These potential shares were excluded from the computation of basic
loss per share as these shares are not considered outstanding until vested.
5,159,122
5,293,524
F-13
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(p) Income Taxes
The Company follows the liability method under ASC Topic 740, “Income Taxes”, (“ASC 740”). The primary
objectives of accounting for taxes under ASC 740 are to (a) recognize the amount of tax payable for the current
year and (b) recognize the amount of deferred tax liability or asset for the future tax consequences of events
that have been reflected in the Company’s financial statements or tax returns. The Company has provided a
full valuation allowance against its deferred tax assets at December 31, 2011 and 2010, as it is more likely than
not that the deferred tax asset will not be realized. Any subsequent changes in the valuation allowance will
be recorded through operations in the provision (benefit) for income taxes.
ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements and 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. ASC 740-10 also
provides guidance on de-recognition, classification, interest and penalties, disclosure and transition.
In addition, uncertain tax positions assumed in connection with a business combination are initially estimated
as of the acquisition date and the Company evaluates these items quarterly, with any adjustments to preliminary
estimates being recorded to goodwill, provided that the Company is within the measurement period (which
may be up to one
year from the acquisition date) and continues to collect information in order to determine their estimated
values. Subsequent to the measurement period changes to these uncertain tax positions may affect the provision
for income taxes presented in the Company’s statement of operations.
(q) Stock-Based Compensation
The Company maintains stock-based incentive plans, under which it provides stock incentives to employees,
directors and contractors. The Company grants to employees, directors and contractors, restricted stock and/or
options to purchase common stock at an option price equal to the market value of the stock at the date of
grant. The Company follows FASB ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”),
for all stock-based compensation. Under this application, the Company is required to record compensation
expense over the vesting period for all awards granted.
The Company uses the Black-Scholes option pricing model which requires extensive use of accounting
judgment and financial estimates, including estimates of the expected term participants will retain their vested
stock options before exercising them, the estimated volatility of its common stock price over the expected term,
the risk free rate, expected dividend yield, and the number of options that will be forfeited prior to the
completion of their vesting requirements. Application of alternative assumptions could produce significantly
different estimates of the fair value of stock-based compensation and consequently, the related amounts
recognized in the Consolidated Statements of Operations.
(r) Fair Value Measurements
On January 1, 2008, the Company adopted FASB ASC Topic 820, “Fair Value Measurement and Disclosures”,
(“ASC 820”). This topic 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
under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820
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:
F-14
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(r) Fair Value Measurements (continued)
• Level 1 - Quoted prices in active markets for identical assets or liabilities.
• Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
• Level 3 - Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is
significant to the fair value measurement.
The Company’s assets that are measured at fair value on a recurring basis relate to the Company’s money
market accounts and an indemnification asset resulting from the acquisition of Xoft completed on December
30, 2010. The Company’s liabilities that are measured at fair value on a recurring basis relate to contingent
consideration resulting from the acquisition of Xoft.
The money market funds are included in cash and cash equivalents in the accompanying balance sheet, and
are considered a level 1 investment as they are valued at quoted market prices in active markets. The fair value
measurement for the indemnification asset is based on the value of the underlying iCAD stock and the cash
in escrow. The fair value is considered a level 1 input as the stock price is a quoted price in an active market.
The indemnification asset was recorded as a retrospective measurement period adjustment, as a result of the
settlement of the litigation with Carl Zeiss Meditec, Inc and Carl Zeiss Surgical, GmbH.
The fair value measurement for the contingent consideration liability is valued using Level 3 inputs. The
Company recorded a contingent consideration liability of $5.0 million based upon the estimated fair value of
the additional earn-out potential for the sellers that is tied to cumulative net revenue of Xoft products from
January 1, 2011 through December 31, 2013, payable January, 2014. During the quarter ended March 31,
2011, the Company recorded a measurement period adjustment of $100,000 and reduced the value of the
contingent consideration to $4.9 million. The Company determines the fair value of the contingent
consideration liability based on a probability-weighted approach derived from earn-out criteria estimates and
a probability assessment with respect to the likelihood of achieving the various earnout criteria. Accordingly,
the value of contingent consideration is evaluated each quarter. During the quarter ended June 30, 2011, the
Company reduced the value of contingent consideration to $3.8 million as a result of lower expectations of
Xoft product revenue. In the quarter ended September 30, 2011, the Company evaluated the revenue
expectations of Xoft products and determined that the thresholds were unlikely to be met, and therefore
reduced the value of the contingent consideration to $0.0 million. The measurement is based upon significant
inputs not observable in the market. Subsequent changes in the value of this liability will be recorded in the
statement of operations.
F-15
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(r) Fair Value Measurements (continued)
The following table sets forth Company’s liabilities which are measured at fair value on a recurring basis by
level within the fair value hierarchy.
F
Fair value measurements using: (000's) as of December 31, 2011
Level 1
4,452
$ - $ - $ 4,452
Level 3
Level 2
Total
Assets
I
Money market accounts
T
Indemnification asset
Total Assets
L
Liabilities
- - - -
$ 4,452
$ - $ - $ 4,452
$ - $ - $ 4,452
4,452
- - - -
$ 4,452
$ - $ - $ 4,452
- $ - $ - $ -
Contingent Consideration
$ - $ - $ - $ -
Fair value measurements using: (000's) as of December 31, 2010
L
Level 1
15,151
Level 2
$ - $ - $ 15,151
Level 3
Total
Assets
I
Money market accounts
T
Indemnification asset
Total Assets
L
Liabilities
1,283 - - 1,283
$ - $ - $ 15,151
$ 15,151
$ - $ - $ 16,434
16,434
1,283 - - 1,283
$ 16,434
$ - $ - $ 16,434
- $ - $ 5,0 $ 5,000
Contingent Consideration
$ - $ - $ 5,000 $ 5,000
The following table provides a summary of changes in the fair value of contingent consideration during the
period are as follows (in thousands):
9002
Balance as of December 31,
Contingent consideration liability established at
acquistion
Balance as of December 31,
C
0102
tnemtsujda doirep tnemerusaeM
B
tekram ot kraM
1102 ,13 rebmeceD fo sa ecnalaB
Amount
$
-
5,000
000,5
5,000
)001(
)009,4(
$
-
)
)
-
As noted above, the Company recorded an additional $4.9 million reduction in the fair value of the contingent
consideration as a gain in the consolidated statement of operations during the year ended December 31, 2011.
F-16
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(r) Fair Value Measurements (continued)
Items Measured at Fair Value on a Nonrecurring Basis
Certain assets, including our goodwill, are measured at fair value on a nonrecurring basis. These assets are
recognized at fair value when they are deemed to be impaired. We recorded an estimated impairment charge
for goodwill of $26.8 million during the year ended December 31, 2011. We did not consider any other assets
to be impaired during the twelve months ended December 31, 2011.
(s) Recently Issued Accounting Standards
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting
Standards” (Topic 820)—Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair
value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP
and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement
principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU
2011-04 is effective for fiscal years and interim periods within those years, beginning after December 15,
2011. The Company does not expect the adoption to have a material impact on its financial statements.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income (“ASU 2011-05”). ASU 2011-05 increases the prominence of other comprehensive
income in financial statements. Under ASU 2011-05, companies will have the option to present the
components of net income and comprehensive income in either one or two consecutive financial statements.
ASU 2011-05 eliminates the option to present other comprehensive income in the statement of changes in
equity and is applied retrospectively. For public companies, ASU 2011-05 is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2011. The Company does not expect the
adoption to have a material impact on its financial statements.
In December 2011, the FASB issued Accounting Standards Update No. 2011-12: Comprehensive Income
(Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items
Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU
2011-12”). The Update defers the specific requirement to present items that are reclassified from accumulated
other comprehensive income to net income separately with their respective components of net income and
other comprehensive income. As part of this update, the FASB did not defer the requirement to report
comprehensive income either in a single continuous statement or in two separate but consecutive financial
statements. ASU 2011-12 is effective for annual periods beginning after December 15, 2011.
In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and
Other (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative
approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative
assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than
its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-
step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08
is effective for fiscal years beginning after December 15, 2011, however early adoption is permitted. The
Company does not expect this to have a material impact on its financial statements.
F-17
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(2)
Acquisition of Xoft
On December 30, 2010, the Company completed its acquisition of Xoft, a privately held company based in
California. Xoft designs, develops, manufactures, markets and sells electronic brachytherapy (eBx) products
for the treatment of breast and other cancers, used in a broad range of clinical settings. The acquisition was
made pursuant to an Agreement and Plan of Merger dated December 15, 2010, by and between the Company,
XAC, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”), Xoft and Jeffrey Bird as the
representative of the stockholders of Xoft (“Merger Agreement”). Upon the closing, Xoft was merged with
and into the Merger Sub with the Merger Sub surviving the merger (the “Merger”).
The Company acquired 100% of the outstanding stock of Xoft in exchange for 8,348,501 shares of the
Company’s common stock and approximately $1.2 million in cash, for a total consideration at closing of
approximately $12.9 million based on a per share value of $1.40, the closing price of the Company’s common
stock on the closing date. The Company also paid certain transaction expenses of Xoft totaling approximately
$1.0 million which were accrued as of December 31, 2010 and paid in January 2011.
The Company deemed the 8,348,501 shares of common stock issuable to the former stockholders of Xoft, Inc
pursuant to the Merger Agreement to be issued and outstanding as of December 31, 2010 for accounting
purposes, although none of these shares were issued by the Company’s transfer agent until 2011.
Under the Merger Agreement, there is an additional earn-out potential for the sellers that is tied to cumulative
net revenue of Xoft products over the three years from the closing, payable at the end of that period. The
threshold for earn-out consideration begins at $50,000,000 of cumulative revenue of “Xoft Products” (as
defined in the Merger Agreement) over the three year period immediately following the closing. The “targeted”
earn-out consideration of $20,000,000 will occur at $76,000,000 of cumulative revenue of Xoft Products and
the maximum earn-out consideration of $40,000,000 would be achieved at $104,000,000 of cumulative
revenue of Xoft Products over the three year period.
At closing, 10% of the cash amount and 10% of the amount of the Company’s common stock comprising the
merger consideration was placed in escrow. The escrow was to remain for a period of 15 months following
the closing of the Merger to secure post-closing indemnification obligations of Xoft stockholders.
On December 22, 2011, the Company agreed to settle an outstanding litigation with Carl Zeiss Meditec Inc.
and Carl Zeiss Surgical GmbH, which was partially indemnified under the Xoft merger agreement.
In connection with the settlement, the Company determined the settlement was a measurement period
adjustment and recorded, retrospectively, approximately $1.6 million as the fair value of the settlement liability,
an indemnification asset of approximately $1.3 million to reflect the value of the escrow shares and cash as
of the date of acquisition, and approximately $0.3 million of additional goodwill. The fair value of the
indemnification asset was recorded based on the value of the underlying stock at the date of acquisition.
Subsequent changes in the value of the stock and the fair value of the indemnification asset were recorded as
a loss on the asset of approximately $0.7 million in the consolidated statement of operations through the
settlement on December 22, 2011. The indemnification asset was extinguished upon recovery of the cash
and escrow shares on December 23, 2011, and the escrow shares were recorded to treasury stock.
The purchase price of $17.8 million, which includes $12.9 million of merger consideration and $4.9 million of
contingent consideration, has been allocated to net assets acquired based upon the estimated fair value of those
assets. As discussed in Note 1(r), the Company has determined that the fair value of the contingent consideration
is $0.0. million, as of December 31, 2011. The change in fair value of approximately $4.9 million has been
included in the consolidated statement of operations for the twelve months ended December 31, 2011.
F-18
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(2)
Acquisition of Xoft (continued)
The following is a summary of the allocation of the total purchase price based on the estimated fair values of
the assets acquired and liabilities assumed as of the date of the acquisition and the amortizable lives of the
intangible assets (amounts in thousands):
C
I
L
Current assets
Property and equipment
Identifiable intangible assets
Patent license
Other assets
lliwdooG
Current liabilities
Long-term liabilities
ecirp esahcruP
Estimated
Amortizable Life
3 – 7 Years
15 Years
s
3 – 7 Years
15 Years
sraeY 6
Amount
1,951
13,700
313,5 $
1,951
13,700
001
(5,196)
346
(3,154)
224,4
9
(5,196)
(3,154)
977,71
$
The goodwill of $4.4 million is not deductible for income tax purposes.
The Company’s Consolidated Statement of Operations does not include the financial results of Xoft for the
periods ended December 31, 2010 and 2009.
The unaudited proforma operating results for the Company, assuming the acquisition of Xoft occurred as of
January 1, 2009 are as follows:
Year ended December 31,
Revenue
Loss from operations
Net loss
L
Net loss per share:
N
Basic and diluted
N
2010
$ 30,298
2010
$ (16,104)
$ 30,298
$ (16,325)
$ (16,104)
$ (16,325)
$(0.30)
$(0.30)
2009 .
$34,016
$34,016
2009 .
(22,213)
(22,942)
(22,213)
(22,942)
$(0.43)
$(0.43)
On February 3, 2011, the Company in cooperation with the FDA, voluntarily recalled its Axxent Flexishield
Mini acquired as part of its acquisition of Xoft in December 2010. The voluntary recall was prompted after
the Company was notified in January 2011 of the presence of microscopic particles found in certain patients’
breasts during post-surgery follow up imaging exams, which were later determined to be tungsten and alleged
to be originating from the Axxent Flexishield Mini, an optional accessory device to the Company’s Axxent
Electronic Brachytherapy system. On June 9, 2011, the Company received notification from the FDA that the
recall was complete and that the FDA considered the recall terminated at that time. The Company expensed
approximately $128,000 for the year ended December 31, 2011 in connection with the recall.
As discussed in Note 8(e) to the Consolidated Financial Statements, the Company is a defendant in multiple
suits brought in Orange County Superior Court by plaintiffs who allege personal injury resulting from gross
negligence and product liability relating to their treatment with the Axxent Electronic Brachytherapy System
that incorporated the Axxent Flexishield Mini.
The Company believes that all of the Jane Doe plaintiffs were part of the group of 29 patients treated using
the Axxent Flexishield Mini as part of a clinical trial. The Axxent Flexishield Mini was the subject of a
voluntary recall. Because of the preliminary nature of the complaints, the Company is unable to evaluate the
merits of the claims; however, based upon its preliminary analysis, it plans to vigorously defend the lawsuits.
Accordingly, since the amount of the potential damages in the event of an adverse result is not reasonably
estimable, no expense or purchase price adjustment has been recorded with respect to the contingent liability
associated with this matter.
F-19
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(3)
Financing Arrangements
On December 29, 2011, the Company entered into several agreements with entities affiliated with Deerfield
Management, a healthcare investment fund (“Deerfield”), pursuant to which Deerfield agreed to provide $15
million in funding to the Company. Pursuant to the terms of a Facility Agreement, dated as of December 29,
2011 (the “Facility Agreement”), on January 9, 2012 (the “Funding Date”), the Company issued to Deerfield
promissory notes in the aggregate principal amount of $15 million (the “Notes”). Under a Revenue Purchase
Agreement, dated as of December 29, 2011 (the “Revenue Purchase Agreement”), the Company agreed to pay
Deerfield a portion of the Company’s revenues until the maturity date of the Notes, whether or not the Notes
are outstanding through that date. On the Funding Date, the Company issued to Deerfield (i) six-year warrants
to purchase up to 2,250,000 shares of common stock at an exercise price of $0.70 per share and (ii) a second
Warrant (the “B Warrant”) to purchase an additional 500,000 shares of common stock at a exercise price of
$0.70 per share, which may become exercisable if certain conditions are met, as described below. Collectively,
these transactions are referred to as the “Transactions.” In January, 2012, the Company received net proceeds
of $14,325,000 from the Transactions, representing $15,000,000 of gross proceeds, less a $225,000 facility
fee and a $450,000 finders fee before deducting other expenses of the Transactions.
Facility Agreement
Under the terms of the Facility Agreement, the Company issued the Notes in the aggregate principal amount
of $15 million. The Notes bear interest at an annual rate of 5.75%. The maturity date of the Notes is the fifth
anniversary of the date of the Facility Agreement, unless the Company notifies the lenders prior to the fourth
anniversary of the date of the Facility Agreement that the Company would like to extend the maturity date for
another year, in which case the maturity date will be the sixth anniversary of the date of the Facility Agreement.
The Company must pay 25% of the original principal amount of the Notes on each of the third and fourth
anniversaries of the date of the Facility Agreement and 50% of such principal amount on the fifth anniversary
of the date of the Facility Agreement. If, however, the final payment date is extended to the sixth anniversary
of the date of the Facility Agreement, then the Company must pay 25% of the principal amount on each of
the fifth and sixth anniversaries of the date of the Facility Agreement. There is no penalty for prepayment and
the Notes are due on the earlier of the final payment date or an event of default. Deerfield has the option to
require the Company to repay the Notes if the Company completes a major transaction, which includes, but
is not limited to, a merger or sale of the Company.
Security Agreement
In connection with the Facility Agreement, on the Funding Date, Deerfield and each of the Company and
Xoft,, a wholly owned subsidiary of the Company, entered into Security Agreements on the Funding Date
(the “Security Agreements”), pursuant to which each of the Company and Xoft has granted to Deerfield a
security interest in substantially all of their respective assets, including their respective intellectual property,
accounts, receivables, equipment, general intangibles, inventory and investment property, and all of the
proceeds and products of the foregoing.
Revenue Purchase Agreement
In connection with the Facility Agreement, the Company entered into a Revenue Purchase Agreement with
Deerfield Private Design Fund II, L.P. and Deerfield Special Situations Fund, L.P. and Horizon Sante TTNP
SARL (these entities collectively referred to as the “Purchasers”). Pursuant to the Revenue Purchase
Agreement, the Purchasers will pay to the Company $4,107,900 in exchange for the Purchasers’ right to
receive a percentage of the Company’s revenues. For the first three quarters of each fiscal year during the term
of the Revenue Purchase Agreement, the Company must pay to the Purchasers the greater of the applicable
percentage of revenues for such quarter and the applicable quarterly minimum, which is $125,000 per quarter.
In the final quarter of each calendar year during the term of the Revenue Purchase Agreement, the Company
must pay to the Purchasers the amount equal to the difference between the greater of the applicable percentage
of revenues for the applicable calendar year and the applicable annual minimum of $500,000 minus the
aggregate revenue participation payments the Company made for the first three quarters of the applicable
year. If the Company extends the maturity date of the Facility Agreement, then the Company must pay the
Purchasers the revenue payments through 2017. The applicable percentage for the calendar years 2012, 2013
and 2014 are 4.25% of revenues up to $25 million in annual revenues for the calendar year, 2.75% of revenues
F-20
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(3)
Financing Arrangements (continued)
from $25 million in annual revenues up to $50 million in annual revenues for such calendar year and 1.0% of
revenues in excess of $50 million in annual revenues for such calendar year. The applicable percentage for
the calendar years 2015, 2016, and, if applicable, 2017, are 4.25% of revenues up to $25 million in annual
revenues for such calendar year, 2.25% of revenues from $25 million up to $50 million in annual revenues
for such calendar year and 1.0% of revenues in excess of $50 million in annual revenues for such calendar year.
Additionally, if the Company sells assets in excess of $500,000 in the aggregate during the term of the Revenue
Purchase Agreement, the proceeds of which are not recorded as revenue in accordance with generally accepted
accounting principles, the Company must pay the Purchasers certain percentages of the gross proceeds of any
such asset sale. The percentage of any such payment varies with the total amount of the gross proceeds and
when the asset sale takes place.
Warrant to Purchase Common Stock and Registration Rights Agreement
In connection with the Transactions, on the Funding Date, the Company issued to Deerfield six-year warrants
to purchase an aggregate of 2,750,000 shares of common stock at an exercise price of $0.70 per share (the
“Warrants”). On the Funding Date, the Warrants to purchase 2,250,000 shares of the Company’s common
stock became immediately exercisable. If the Company extends the maturity date of the Facility Agreement,
the 500,000 shares of common stock underlying the B Warrants will become exercisable. The B Warrants will
become exercisable on the first business day following the four year anniversary of the date of the Facility
Agreement. The B Warrants shall otherwise have the same terms, including exercise price and expiration
date, as the Warrants. The exercise price may be paid, at the election of the holder, in cash, by a reduction of
the principal amount of the holder’s Note outstanding under the Facility Agreement or, pursuant to certain
cashless exercise provisions. If the Company declares and pays dividends or makes other distributions to the
holders of its common stock, the holders of the Warrants are entitled to receive the dividends or distributions
as if the holders had exercised the Warrants and held common stock. All Warrants issued under the Facility
Agreement expire on the six year anniversary of the Funding Date and contain certain limitations that prevent
the holder from acquiring shares upon exercise of a Warrant that would result in the number of shares
beneficially owned by it to exceed 9.985% of the total number of shares of the Company’s common stock then
issued and outstanding. Upon certain change of control transactions, or upon certain “events of default” (as
defined in the Warrants), each holder has the right to net exercise the Warrants for an amount of shares of the
Company’s common stock equal to the Black-Scholes value of the shares issuable under the terms of the
Warrants divided by 95% of the closing price of the Company’s common stock on the day immediately prior
to the consummation of such change of control or event of default, as applicable. In certain circumstances
where a Warrant or portion of a Warrant is not net exercised in connection with a change of control or event
of default, the holder will be paid an amount in cash equal to the Black-Scholes value of such portion of the
Warrant not treated as a net exercise.
In connection with the Transactions, the Company entered into a registration rights agreement with Deerfield,
pursuant to which the Company agreed to register for resale all of the shares issuable under the Warrants upon
exercise or otherwise, including the B Warrants. The Company is required to use its commercially reasonable
best efforts to have the registration statement declared effective as soon as practicable (but in no event later
than sixty (60) days after the Funding Date). The Company completed the registration statement and it was
declared effective on January 20, 2012.
The Company is required to file additional registration statements to register the resale of any shares underlying
warrants which are not included in the registration statement. The Company’s registration obligations terminate
on the earlier of (i) the date on which all of the shares of common stock covered by an applicable registration
statement have been sold and (ii) the date on which all of such shares (in the opinion of counsel to Deerfield)
may be immediately sold to the public (other than pursuant to a Cash Exercise (as defined in the Warrants))
without registration or restriction (including without limitation as to volume by each holder thereof) under the
Securities Act.
The maximum number of shares of common stock the Company may issue under the Transactions may not
exceed 19.9% of the Company’s outstanding stock immediately prior to the Transactions.
F-21
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(3)
Financing Arrangements (continued)
The sale of the Warrants was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the “Securities Act”). The Warrants and the securities to be issued upon exercise of the Warrants
have not been registered under the Securities Act or state securities laws and may not be offered or sold in the
United States absent registration with the SEC or an applicable exemption from the registration requirements.
(4)
Accrued Expenses
Accrued expenses consist of the following at December 31(in thousands):
Accrued salary and related expenses
Accrued accounts payable
Accrued professional fees
Accrued short term settlement costs
Other accrued expenses
2011
2010
$
$
2,249
1,001
357
1,241
302
5,150
$
$
2,446
2,218
449
237
171
5,521
(5)
Stockholders’ Equity
(a) Stock Options
The Company has five stock option or stock incentive plans, which are described as follows:
The 2001 Stock Option Plan (“The 2001 Plan”).
The 2001 Plan was adopted by the Company’s stockholders in August 2001. The 2001 Plan provides for the
granting of non-qualifying and incentive stock options to employees and other persons to purchase up to an
aggregate of 1,200,000 shares of the Company’s common stock. The purchase price of each share for which
an option is granted is determined by the Board of Directors or the Committee appointed by the Board of
Directors provided that the purchase price of each share for which an incentive option is granted cannot be
less than the fair market value of the Company’s common stock on the date of grant, except for options granted
to 10% stockholders for whom the exercise price cannot be less than 110% of the market price. Incentive
options granted to date under the 2001 Plan vest 100% over periods extending from six months to five years
from the date of grant and expire no later than ten years after the date of grant, except for 10% holders whose
options shall expire not later than five years after the date of grant. Non-qualifying options granted under the
2001 Plan are generally exercisable over a ten year period, vesting 1/3 each on the first, second, and third
anniversaries of the date of grant. At December 31, 2011, there are no further options available for grant
under this plan.
The 2002 Stock Option Plan (“The 2002 Plan”).
The 2002 Plan was adopted by the Company’s stockholders in June 2002. The 2002 Plan provides for the
granting of non-qualifying and incentive stock options to employees and other persons to purchase up to an
aggregate of 500,000 shares of the Company’s common stock. The purchase price of each share for which an
option is granted is determined by the Board of Directors or the Committee appointed by the Board of Directors
provided that the purchase price of each share for which an incentive option is granted cannot be less than the
fair market value of the Company’s common stock on the date of grant, except for options granted to 10%
stockholders for whom the exercise price cannot be less than 110% of the market price. Incentive options
granted to date under the 2002 Plan vest 100% over periods extending from six months to five years from the
date of grant and expire no later than ten years after the date of grant, except for 10% holders whose options
expire not later than five years after the date of grant. Non-qualifying options granted under the 2002 Plan are
generally exercisable over a ten year period, vesting 1/3 each on the first, second, and third anniversaries of the
date of grant. At December 31, 2011, there were 38,999 options available for issuance under the 2002 Plan.
F-22
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(5)
Stockholders’ Equity (continued)
(a) Stock Options (continued)
The 2004 Stock Incentive Plan (“The 2004 Plan”).
The 2004 Plan was adopted by the Company’s stockholders in June 2004. The 2004 Plan provides for the grant
of any or all of the following types of awards: (a) stock options, (b) restricted stock, (c) deferred stock and
(d) other stock-based awards. The 2004 Plan provides for the granting of non-qualifying and incentive stock
options to employees and other persons to purchase up to an aggregate of 1,000,000 shares of the Company’s
common stock. The purchase price of each share for which an option is granted is determined by the Board
of Directors or the Committee appointed by the Board of Directors provided that the purchase price of each
share for which an option is granted cannot be less than the fair market value of the Company’s common
stock on the date of grant, except for incentive options granted to 10% stockholders for whom the exercise
price cannot be less than 110% of the market price. Incentive options granted under the 2004 Plan generally
vest 100% over periods extending from the date of grant to five years from the date of grant and expire not
later than ten years after the date of grant, except for 10% holders whose options expire not later than five years
after the date of grant. Non-qualifying options granted under the 2004 Plan are generally exercisable over a
ten year period, vesting 1/3 each on the first, second, and third anniversaries of the date of grant. At December
31, 2011 there were 26,561 shares available for issuance under the 2004 Plan.
The 2005 Stock Incentive Plan (“The 2005 Plan”).
The 2005 Plan was adopted by the Company’s stockholders in June 2005. The 2005 Plan provides for the grant
of any or all of the following types of awards: (a) stock options, (b) restricted stock, (c) deferred stock and
(d) other stock-based awards. The 2005 Plan provides for the granting of non-qualifying and incentive stock
options to employees and other persons to purchase up to an aggregate of 600,000 shares of the Company’s
common stock. The purchase price of each share for which an option is granted is determined by the Board
of Directors or the Committee appointed by the Board of Directors provided that the purchase price of each
share for which an option is granted cannot be less than the fair market value of the Company’s common
stock on the date of grant, except for incentive options granted to 10% stockholders for whom the exercise
price cannot be less than 110% of the market price. Incentive options granted under the 2005 Plan generally
vest 100% over periods extending from the date of grant to three years from the date of grant and expire not
later than five years after the date of grant, except for 10% stockholders whose options expire not later than
five years after the date of grant. Non-qualifying options granted under the 2005 Plan are generally exercisable
over a ten year period, vesting 1/3 each on the first, second, and third anniversaries of the date of grant. At
December 31, 2011, there were 262,140 shares available for issuance under the 2005 Plan.
The 2007 Stock Incentive Plan (“The 2007 Plan”).
The 2007 Plan was adopted by the Company’s stockholders in July 2007 and amended in June 2009. The 2007
Plan provides for the grant of any or all of the following types of awards: (a) stock options, (b) restricted
stock, (c) deferred stock and (d) other stock-based awards. Awards may be granted singly, in combination, or
in tandem. Subject to anti-dilution adjustments as provided in the 2007 Plan, (i) the 2007 Plan provides for a
total of 5,250,000 shares of the Company’s common stock to be available for distribution pursuant to the 2007
Plan, and (ii) the maximum number of shares of the Company’s common stock with respect to which stock
options, restricted stock, deferred stock, or other stock-based awards may be granted to any participant under
the 2007 Plan during any calendar year or part of a year may not exceed 800,000 shares.
The 2007 Plan provides that it will be administered by the Company’s Board of Directors (“Board”) or a
committee of two or more members of the Board appointed by the Board.
The administrator will generally have the authority to administer the 2007 Plan, determine participants who
will be granted awards under the 2007 Plan, the size and types of awards, the terms and conditions of awards
and the form and content of the award agreements representing awards. Awards under the 2007 Plan may be
granted to employees, directors, consultants and advisors of the Company and its subsidiaries. However, only
employees of the Company and its subsidiaries will be eligible to receive options that are designated as
incentive stock options.
F-23
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(5)
Stockholders’ Equity (continued)
(a) Stock Options (continued)
With respect to options granted under the 2007 Plan, the exercise price must be at least 100% (110% in the
case of an incentive stock option granted to a 10% stockholder) of the fair market value of the common stock
subject to the award, determined as of the date of grant. Restricted stock awards are shares of common stock
that are awarded subject to the satisfaction of the terms and conditions established by the administrator. In
general, awards that do not require exercise may be made in exchange for such lawful consideration, including
services, as determined by the administrator. At December 31, 2011, there were 534,874 shares available for
issuance under the 2007 Plan.
A summary of stock option activity for all stock option plans is as follows:
Outstanding, January 1, 2009
detnarG
desicrexE
detiefroF
Outstanding, December 31, 2009
detnarG
desicrexE
detiefroF
Outstanding, December 31, 2010
detnarG
desicrexE
detiefroF
Outstanding, December 31, 2011
Option
Shares
5,158,726
698,192
)942,08(
)152,112(
5,159,122
209,123
-
)005,781(
5,293,524
387,651,3
)000,57(
)696,179,2(
5,403,611
Price range
per share
$0.80-$5.28
$0.86-$2.03
$0.80-$1.45
$0.81-$4.88
$0.80-$5.28
$1.40-$1.95
-
$1.50-$4.88
$0.80-$5.28
$0.55-$1.42
$0.80
$0.60-$4.88
$0.55-$5.28
Weighted
Average
$2.55
$1.32
$0.85
$2.84
$2.50
$1.56
00.0$
$2.27
$2.45
$1.07
$0.80
$1.92
$1.95
Exercisable at
year-end
Option Shares
Price range per
share
Weighted
average
exercise price
2009
2010
2011
4,631,324
5,092,379
3,398,580
$0.80-$5.28
$0.80-$5.28
$0.56-$5.28
$2.42
$2.47
$2.48
Available for future grants at December 31, 2011 from all plans:
862,574
The weighted-average remaining contractual life of stock options outstanding for all plans at December 31,
2011 was 1.23 years.
172
138
250
F-24
494
904
997
$ 1,516
1,374
$ 1,994
E
E
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(5)
Stockholders’ Equity (continued)
(a) Stock Options (continued)
The Company’s stock-based compensation expense by categories is as follows (amounts in thousands):
eunever fo tsoC
Engineering and product development
selas dna gnitekraM
General and administrative expense
Years Ended December 31,
2010
41 $
138
138
763
997
997
$ 1,516
$ 1,516
2011
41 $
172
172
422
494
494
904
$ 904
2009
34 $
250
250
723
1,374
1,374
$ 1,994
$ 1,994
As of December 31, 2011, there was $1.5 million of total unrecognized compensation costs related to unvested
options and restricted stock. That cost is expected to be recognized over a weighted average period of 1.23
years.
Options granted under the stock incentive plans were valued utilizing the Black-Scholes model using the
following assumptions and had the following fair values:
Years Ended December 31,
2010
2011
2009
etar tseretni eerf-ksir egarevA
dleiy dnedivid detcepxE
efil detcepxE
ytilitalov detcepxE
Weighted average exercise price
eulav riaf egareva dethgieW
%15.2
enoN
sraey 5.3
%3.96 ot %0.76
$1.07
35.0$
%49.1
enoN
sraey 5.3
%4.96
$1.56
66.0$
%30.2
enoN
sraey 5.3
%5.36
$1.32
94.0$
The Company’s 2011, 2010 and 2009, average expected volatility and average expected life is based on the
average of the Company’s historical information. The risk-free rate is based on the rate of U.S. Treasury zero-
coupon issues with a remaining term equal to the expected life of option grants.
The aggregate intrinsic value of options outstanding at December 31, 2011, 2010 and 2009 was $2,050,
$91,523 and $145,798, respectively. The aggregate intrinsic value of the options exercisable at December 31,
2011, 2010 and 2009 was $250, $85,790 and $132,799, respectively. The aggregate intrinsic value of stock
options exercised during 2011, 2010 and 2009 was $24,088, $0 and $53,484, respectively. The Company
used the market price of $0.57, $1.35 and $1.52 per share at December 31, 2011, 2010 and 2009, respectively,
to determine the aggregate intrinsic values.
(b) Restricted Stock
The Company’s restricted stock awards vest in three equal annual installments with the first installment vesting
one year from grant date. At December 31, 2011, there were 613,976 unvested restricted stock awards
outstanding. A summary of restricted stock activity for all stock option plans is as follows:
Years Ended December 31,
2010
2011
2009
Beginning outstanding balance
detnarG
detseV
detiefroF
Ending outstanding balance
766,075
000,013
)367,592(
)633,661(
613,976
592,155
005,045
)015,882(
)070,87(
766,075
814,753
0
00,001
)741,292(
)154,03(
592,155
F-25
$
$
-
-
-
$
$
(55,968)
12,398
(43,570)
$
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(5)
Stockholders’ Equity (continued)
(b) Restricted Stock (continued)
The aggregate intrinsic value of restricted stock outstanding at December 31, 2011, 2010 and 2009 was
$349,966, $1,034,201, and $900,076, respectively. The aggregate intrinsic value of restricted stock vested
during 2011, 2010 and 2009 was $168,585, $389,489 and $444,063, respectively. The Company used the
market price of $0.57, $1.35 and $1.52 per share at December 31, 2011, 2010 and 2009, respectively, to
determine the aggregate intrinsic values.
(6)
Income Taxes
The significant components of income tax expense for the years ended December 31, 2011, 2010 and 2009
are as follows:
Current provision (benefit):
Federal
State
2011
2010
2009
$
$
- $
-
- $
-
-
-
$
$
(55,968)
12,398
(43,570)
A summary of the differences between the Company’s effective income tax rate and the Federal statutory
income tax rate for the years ended December 31, 2011, 2010 and 2009 is as follows:
Federal statutory rate
State income taxes, net of federal benefit
Net state impact of deferred rate change
Stock compensation expense
Goodwill impairment
Contingent consideration
Other permanent differences
Change in valuation allowance
Other
Effective income tax
2009
2010
2011
34.0%
34.0%
34.0%
(0.4%)
1.8% 0.0%
-
-
0.2%
-
-
(0.4%)
-
-
(24.3%)
4.4%
-
-
(0.5%) 3.2% 3.8%
(15.6%)
0.1%
0.4%
0.0% 0.0%
(37.3%) (27.8%)
(7.5%)
2.2%
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.
F-26
S
138
( 22)
N
F
S
S
G
C
O
C
O
E
2011
34.0%
2010
34.0%
1.8% 0.0%
0.2%
(0.4%)
(24.3%)
4.4%
-
-
-
-
2009
34.0%
(0.4%)
-
-
-
-
(0.5%) 3.2% 3.8%
(15.6%)
(37.3%) (27.8%)
0.4%
0.1%
0.0% 0.0%
(7.5%)
2.2%
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(6)
Income Taxes (continued)
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 (in
thousands):
2011
2010
Inventory (Section 263A)
Inventory reserves
Receivable reserves
Other accruals
Deferred revenue
Accumulated depreciation/amortization
Stock options
Developed technology
Tax credits
NOL carryforward
Net deferred tax assets
Valuation allowance
$
$
320
262
77
2,525
205
138
1,646
( 4,268)
1,297
31,786
33,986
( 33,986)
-
$
$
314
288
51
1,353
562
( 22)
1,625
( 5,680)
1,170
30,475
30,136
( 30,136)
-
The valuation allowance as of December 31, 2011 and 2010 totaled approximately $33,986 and $30,136
respectively. The increase in net deferred tax asset and corresponding valuation allowance is primarily
attributable to the additional net operating losses created in the current year.
As of December 31, 2011, the Company has net operating loss carryforwards totaling approximately $89
million expiring between 2016 and 2031. A portion of the total net operating loss carryforwards amounting
to approximately $9.5 million relate to the acquisition of Xoft, Inc. As of December 31, 2011, the Company
has provided a valuation allowance for its net operating loss carryforwards due to the uncertainty of the
Company’s 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. There were no net operating losses utilized for the years ended December 31,
2010 and December 31, 2011.
The Company currently has approximately $18 million (including approximately $9 million that relate to
Xoft, Inc.) in net operating losses that are subject to limitations, of which approximately $2 million (including
approximately $473,000 that relate to Xoft, Inc.) can be used annually through 2031. The Company has
available tax credit carryforwards (adjusted to reflect provisions of the Tax Reform Act of 1986) to offset
future income tax liabilities totaling approximately $1.3 million. The amount of tax credits available for
utilization may be subject to limitations based upon changes in ownership of the Company. The credits expire
in various years through 2031.
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.
As of December 31, 2011 and 2010, the Company had no unrecognized tax benefits and no adjustments to
liabilities or operations were required under ASC 740-10. The Company’s practice was and continues to be
to recognize interest and penalty expenses related to uncertain tax positions in income tax expense, which was
zero for the years ended December 31, 2011, 2010 and 2009. The Company files United States federal and
various state income tax returns. Generally, the Company’s three preceding tax years remain subject to
examination by federal and state taxing authorities. The Company completed an examination by the Internal
F-27
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(6)
Income Taxes (continued)
Revenue Service with respect to the 2008 tax year in January 2011, which resulted in no changes to the tax
return originally filed. The Company is not under examination by any other federal or state jurisdiction for
any tax year.
The Company does not anticipate that it is reasonably possible that unrecognized tax benefits as of December
31, 2011 will significantly change within the next 12 months.
(7)
Segment Reporting, Geographical Information and Major Customers
(a) Segment Reporting
The Company follows FASB ASC 280-10, “Segment Reporting”, which establishes standards for reporting
information about operating segments. Operating segments are defined as components of a company about
which the chief operating decision maker evaluates regularly in deciding how to allocate resources and in
assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer. The
Company operates in one segment and as one reporting unit for all years presented since operations are
supported by one central staff and the results of operations are evaluated as one business unit.
(b) Geographic Information
The Company’s sales are made to distributors and dealers of mammography and other medical equipment, and
to foreign distributors of mammography medical equipment. Total export sales were approximately $1.8
million or 6% of sales in 2011 as compared to $4.0 million or 16% of total sales in 2010 and $3.7 million or
13% of total sales in 2009.
As of December 31, 2011 and 2010, the Company had outstanding receivables of $0.1 million and $1.1
million, respectively, from distributors of its products who are located outside of the U.S.
(c) Major Customers
The Company’s two major customers over the past three years were GE Healthcare and Fuji Medical Systems.
GE Healthcare accounted for $6.8 million in 2011, $9.3 million in 2010 and $8.8 million in 2009 or 24%, 38%,
and 31% of the Company’s revenues, respectively, with accounts receivable balances of $0.2 and $0.7 million
at December 31, 2011 and 2010, respectively. Fuji Medical Systems accounted for $3.2 million in 2011, $3.1
million in 2010 and $4.8 million in 2009 or 11%, 13% and 17% of the Company’s revenues, respectively, with
accounts receivable balances of $0.2 million at both December 31, 2011 and 2010.
(8)
Commitments and Contingencies
(a) Lease Obligations
As of December 31, 2010, the Company had four lease obligations related to its facilities.
The Company’s executive offices are located in Nashua, New Hampshire and are leased pursuant to a five-
year lease (the “Lease”) that commenced on December 15, 2006, and renewed on January 1, 2012 (the
“Premises”). The Lease renewal provided for annual base rent of $181,764 for the first year; $187,272 for
the second year; $192,780 for the third year; $198,288 for the fourth year and $203,796 for the fifth year.
Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses
and obtain insurance for the Premises. The Company also has the right to extend the term of the Lease for an
additional five year period at the then current market rent rate (but not less than the last annual rent paid by
the Company).
F-28
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(8)
Commitments and Contingencies (continued)
(a) Lease Obligations (continued)
The Company leases office space located in Fairborn Ohio. The Ohio Lease provides for a three (3) year and
three (3) month term, which commenced on January 1, 2011 for approximately $43,650 per year, with all
amounts payable in equal monthly installments. The Ohio Lease provides the Company with the option to
renew the lease for an additional three (3) year period. The monthly payments for the renewal term, if any,
will be substantially similar to the payments referred to above.
As a result of its acquisition of Xoft on December 30, 2010, the Company leases a facility and certain office
equipment under a noncancelable operating lease which expires in January and February 2013, respectively.
The facility has office, manufacturing and warehousing space in Sunnyvale, CA. The operating lease provides
for annual minimum lease payment of $885,000 in 2012 and $76,000 in 2013 with all amounts payable in equal
monthly installments. Additionally, the Company is required to pay its proportionate share of the building
and real estate tax expenses and obtain insurance for the facility. Given local market conditions the Sunnyvale
lease is at a rate above market rate. The Company has a liability recorded of approximately $402,000 as of
December 31, 2011 to reflect the off-market value of the rent.
In addition to the foregoing leases relating to its principal properties, the Company also has a lease for an
additional facility in Nashua, New Hampshire used for product repairs, manufacturing and warehousing.
If the Company is required to seek additional or replacement facilities, it believes there are adequate facilities
available at commercially reasonable rates.
Rent expense for all leases for the years ended December 31, 2011, 2010 and 2009 was $957,000, $656,000
and $718,000, net of sublease income of $0, $200,046, and $197,594, respectively.
Future minimum rental payments due under these agreements as of December 31, 2011 are as follows (in
thousands):
Fiscal
Year
2012
2013
2014
2015
2016
Operating
Leases
$
$
1,143
315
204
199
204
2,065
(b) Employment Agreements
The Company has entered into employment agreements with certain key executives. The employment
agreements provide for minimum annual salaries and performance-based annual bonus compensation as
defined in their respective agreements. In addition, the employment agreements provide that if employment
is terminated without cause, the executive will receive an amount equal to their respective base salary then in
effect for the greater of the remainder of the original term of employment or for Mr. Ferry a period of two years
from the date of termination and for all other executives a period of one year from the date of termination plus
the pro rata portion of any annual bonus earned in any employment year through the date of termination.
(c) Foreign Tax Claim
In July 2007, a dissolved former Canadian subsidiary of the Company, CADx Medical Systems Inc. (“CADx
Medical”), received a tax re-assessment of approximately $6,800,000 from the Canada Revenue Agency
(“CRA”) resulting from CRA’s audit of CADx Medical’s Canadian federal tax return for the year ended
December 31, 2002. In February 2010, the CRA reviewed the matter and reduced the tax re-assessment to
approximately $703,000, excluding interest and penalties. The CRA has the right to pursue the matter until
July 2017. The Company believes that it is not liable for the re-assessment against CADx Medical and no
accrual was recorded as of December 31, 2011.
F-29
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(8)
Commitments and Contingencies (continued)
(d) Royalty Obligation
As a result of the acquisition of Xoft, the Company recorded a royalty obligation pursuant to a settlement
agreement entered into between Xoft and Hologic, Inc.(“Hologic”) in August 2007. Xoft received a
nonexclusive, irrevocable, perpetual, worldwide license, including the right to sublicense certain Hologic
patents, and a non-compete covenant as well as an agreement not to seek further damages with respect to the
alleged patent violations. In return the Company has a remaining obligation to pay a minimum annual royalty
payment of $250,000 payable through 2016. In addition to the minimum annual royalty payments, the
litigation settlement agreement with Hologic also provided for payment of royalties based upon a specified
percentage of future net sales on any products that practice the licensed rights. The estimated fair value of
the patent license and non-compete covenant is $100,000 and is being amortized over the estimated remaining
useful life of approximately six years. In addition, a liability has been recorded within accrued expenses and
long-term settlement cost for future payment and for future minimum royalty obligations totaling $1,047,000.
On December 22, 2011, the Company agreed to a settlement related to the litigation with Carl Zeiss Meditec
Inc. and Carl Zeiss Surgical GmbH. The Company determined that this settlement should be recorded as a
measurement period adjustment and accordingly recorded the present value of the litigation to the opening
balance sheet of Xoft. The present value of the liability was estimated at approximately $1.6 million and $1.8
million as of December 31, 2010 and 2011, respectively. The Company is obligated to pay $1.0 million in
payments throughout 2012, and an additional $0.5 million in June 2013, $0.5 million in June 2015 and $0.5
million in June 2017, for a total of $2.5 million.
(e) Litigation
On February 18, 2011, in the Orange County Superior Court (Docket No. 30-2011-00451816-CU-PL-CXC),
named plaintiffs Jane Doe and John Doe filed a complaint against Xoft, the Company, and Hoag Memorial
Hospital Presbyterian asserting causes of action for general negligence, breach of warranty, and strict liability
and seeking unlimited damages in excess of $25,000. On March 2, 2011, the Company received a Statement
of Damages – specifying that the damages being sought aggregated an amount of at least approximately $14.5
million. On April 6, 2011, plaintiffs Jane Doe and John Doe amended their complaint alleging only medical
malpractice against Hoag Memorial Hospital Presbyterian. On April 8, 2011, another complaint was filed in
the Orange County Superior Court (Docket No. 30-2011-00465448-CU-MM-CXC) on behalf of four
additional Jane Doe plaintiffs and two John Doe spouses with identical allegations against the same defendants.
One John Doe spouse from this group of plaintiffs was later dismissed on August 18, 2011. On April 19,
2011, a sixth Jane Doe plaintiff filed an identical complaint in the Orange County Superior Court (Docket No.
30-2011-00468687-CU-MM-CXC), and on May 4, 2011, a seventh Jane Doe plaintiff and John Doe spouse
filed another complaint in the Orange County Superior Court (Docket No. 30-2011-00473120-CU-PO-CXC),
again with identical allegations against the same defendants. On July 12, 2011, an eighth Jane Doe plaintiff
and John Doe spouse filed a complaint in the Orange County Superior Court (Docket No. 30-2011-00491068-
CU-PL-CXC), and on July 14, 2011, a ninth Jane Doe plaintiff and John Doe spouse filed another complaint
in the Orange County Superior Court (Docket No. 30-2011-00491497-CU-PL-CXC), each with identical
allegations as the previously filed complaints. On August 18, 2011, these two groups of Jane Doe plaintiffs
and John Doe spouses amended their complaints to correct certain deficiencies. Additionally on August 18,
2011, a tenth Jane Doe plaintiff and two additional John Doe spouses filed a complaint in the Orange County
Superior Court (Docket No. 30-2011-501448-CU-PL-CXC), again with identical allegations against the same
defendants. On January 18, 2012, three additional Jane Doe plaintiffs and one additional John Doe spouse
filed a complaint in the Orange County Superior Court (Docket No. 30-2012-00538423-CU-PL-CXC) with
identical allegations against the same defendants.
It is alleged that each plaintiff Jane Doe was a patient who was treated with the Axxent Electronic
Brachytherapy System that incorporated the Axxent Flexishield Mini. The Company believes that all of the
Jane Doe plaintiffs were part of the group of 29 patients treated using the Axxent Flexishield Mini as part of
a clinical trial. The Axxent Flexishield Mini is the subject of a voluntary recall. Because of the preliminary
nature of this complaint, the Company is unable to evaluate the merits of the claims; however, based upon our
preliminary analysis, we plan to vigorously defend the lawsuits. Accordingly, since the amount of the potential
damages in the event of an adverse result is not reasonably estimable, no expense or purchase price adjustment
has been recorded with respect to the contingent liability associated with this matter.
F-30
iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(9) Quarterly Financial Data (unaudited in thousands, except per share data)
Loss
per share
available to
Weighted
average
Gross
profit
Net
loss
to common number of
stockholders shares outstanding
2011
First quarter
Second quarter
Third quarter
Fourth quarter
2010
First quarter
Second quarter
Third quarter
Fourth quarter
$
Net
sales
7,344
6,646
8,052
6,610
$
5,132
4,503
5,889
4,503
$
(4,312)
(5,411)
(25,637)
(2,227)
$
6,520
6,097
5,587
6,371
$
5,238
4,950
4,456
5,049
$
(1,185)
(735)
(1,392)
(2,912)
($0.08)
($0.10)
($0.47)
($0.04)
($0.03)
($0.02)
($0.03)
($0.06)
54,366
54,550
54,681
54,591
45,686
45,737
45,922
45,962
Quarterly results for the first, second and third quarters of 2011 do not agree with the Company’s Form 10Q’s
as filed due to retrospective adjustments related to the settlement of litigation with Carl Zeiss, Meditec, Inc
and Carl Zeiss Surgical, GmbH., as described in Note 2. The impact of the retrospective adjustments increased
net loss by $111,000, $318,000 and $654,000 for the quarters ended March 31, June 30, and September 30,
2011, respectively. The quarterly adjustments are due to approximately $78,000 of additional goodwill
impairment recorded during the quarter ended September 30, 2011, a loss of $43,000, $250,000, and $508,000,
for the quarters ended March 31, June 30, and September 30, 2011, respectively, related to losses on the
indemnification asset, and $68,000, for each of the quarters ended March 31, June 30, and September 30,
2011, respectively, related to the accretion of the settlement obligation.
F-31
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F-32
Dear Shareholder:
As healthcare institutions begin reinvesting to refresh
miniaturized x-ray to deliver a precise isotope-free
technology, iCAD is well positioned to capitalize on more
radiation dose directly to the cancerous areas with
vigorous spending in the area of cancer detection and,
minimal impact to healthy tissue. Conventional external
especially, cancer treatment alternatives.
beam technology, in contrast, delivers treatment from
outside the body, potentially exposing healthy tissue to
Having proven our ability to build and sustain leadership
radiation.
in one focused area — early cancer detection — our
long-term plan has been to expand into complementary
IORT market size and momentum
market segments. There is no question that
diversification is the launch pad for larger market
We have been extremely encouraged about the
opportunities and for developing a broader oncology
growth prospects for eBx technology. Our platform is
strategy.
affordable and portable, so it can be used in a wide
variety of clinical settings to give us a larger potential
In 2010, we identified several complementary markets
served market. We are talking to new stakeholders in
that would enable us to expand our customer base and
hospitals, including radiation and surgical oncologists.
build relationships with more clinical specialties. Our
acquisition of Xoft at the end of 2010 was an exceptional
Rose Medical Center in Denver, Colorado, is one of five
fit. With the acquisition, we are immediately positioned
leading hospitals in the U.S. that adopted the Xoft
at the forefront of electronic brachytherapy (eBx®)
system in 2011. Dr. Barbara Schwartzberg, Chair of
technology for the delivery of Intra-Operative Radiation
Cancer Services at Rose Medical Center, says, “The Xoft
Therapy (IORT) for early stage breast cancer.
Which would you choose – eight minutes or six
creating opportunities for our physicians to treat breast
weeks of treatment?
Axxent eBx System gives us the ability to provide a full
course of radiation treatment at the time of surgery,
cancer patients in a manner that is less disruptive
and less burdensome on the patient’s lifestyle. Most
In the U.S., there are approximately 261,000 new breast
importantly, this is a great improvement in patient care,
cancer cases per year. Approximately 110,000 of these
and it may also lower the cost of treatment.”
women have early stage breast cancer, and meet
candidates for IORT.
the clinical criteria that would make them potential
In early 2012, we announced that iCAD is sponsoring a
multi-center study that will follow up to 1,000 patients
at as many as 50 study sites across the U.S. and Europe
These are the facts: conventional radiation treatment
for 10 years after IORT treatment. We expect this study
requires women to travel to radiation treatment centers
will offer further validation that IORT is as safe and
five days a week for as long as six weeks. These centers
effective as external beam radiation, adding to the
can be miles or even hours away. Studies have shown
clinical literature that includes the landmark TARGIT-A
that compliance to radiation treatment can vary greatly
trial, published in The Lancet.
— some women actually opt for a mastectomy instead
of breast conservation surgery with radiation therapy, or
stop treatment because of the fatigue, loss of time, and
other burdens of such a long course of treatment.
IORT is delivered in the surgical suite, directly after
the lumpectomy, before the patient even wakes up
from surgery. The procedure can take as little as eight
minutes, compared to six weeks of conventional
radiation treatment.
The Xoft Axxent® eBx system uses a proprietary
Board of Directors
Dr. Lawrence Howard
Chairman of the Board, General Partner, Hudson Ventures, LP
Ken Ferry
President and Chief Executive Officer, iCAD, Inc.
Rachel Brem, M.D.(2), (3)
Professor and Vice Chair, Department of Radiology,
The George Washington University, Washington DC
Associate Director of the GW Cancer Institute
Anthony F. Ecock(1), (3)
Senior Operating Executive,
Welsh, Carson, Anderson and Stowe
Michael Klein(2)
Chief Executive Officer US HIFU
Former President and CEO of Xoft, Inc.
Steven Rappaport(1)
Partner, RZ Capital, LLC
Somu Subramaniam(3)
Managing Partner and Co-founder of New Science Ventures
Elliot Sussman, M.D.(1), (2)
Professor of Medicine at the
University of South Florida College of Medicine
Executive Officers
Ken Ferry
President and Chief Executive Officer
Kevin Burns
Executive Vice President, Finance and Chief Financial Officer
Jonathan Go
Senior Vice President of Research and Development
Stacey Stevens
Senior Vice President of Marketing and Strategy
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating & Corporate Governance Committee Member
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1
iCAD | 2012 Annual Report
Ken Ferry
President and Chief
Executive Officer
© 2012 iCAD, Inc. All rights reserved. iCAD, the iCAD logo, Never Stop Looking, TotalLook, SecondLook, VersaVue, MammoAdvantage,
SpectraLook, VividLook, VeraLook, Xoft, Axxent, and eBx are registered trademarks. Other company, product, and service names may be
trademarks or service marks of others.
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2011 Annual Report