2012 Annual Report
Visualize. Act. Change.
Dear Shareholder:
This past year represented a period of exciting growth
in our cancer therapy business. We also made progress
with the transformation of our cancer detection
business model, positioning the company for long-term
growth in both areas. We are executing on our strategy
by delivering a new generation of highly targeted tools
for detection, diagnosis, and treatment of cancers
across the care cycle.
Two years ago, we expanded the company’s oncology
strategy into treatment by acquiring Xoft, Inc. We
are already seeing rapid adoption of electronic
brachytherapy in several areas of cancer treatment.
In fact, in the medical device arena where changes in
treatment protocols often take years, we have made
remarkable progress in only 18 months. The revenue
contributions of the Xoft Axxent eBx system, particularly
in the last two quarters of 2012, were a solid indication
of market interest in Intra-Operative Radiation Therapy
(IORT) for breast cancer, as well as the use of the system
for skin cancer therapy.
Each year, it is estimated that approximately 110,000
women with early stage breast cancer will be potential
candidates for IORT. Between 2011 and 2012, our
revenues for the Xoft Axxent eBx system almost doubled
from $5.9 million in $11 million. This revenue represents
only one percent penetration of the total addressable
market based on breast IORT procedure volume,
which provides a strong indication of future growth
opportunities.
The clinical advantages of the Xoft Axxent eBx
system
Radiation treatment for breast and other cancers
is moving from conventional external beam therapy
to shorter duration, more targeted therapy. The
advantages of our Xoft Axxent eBx system have
significant implications for improved patient care and
quality of life:
• Our system does not require a radioactive isotope
or a costly shielded environment, which enables
the system to be used in any size hospital or clinic.
• Breast IORT treatment can be delivered in as
little as eight minutes, directly following the
lumpectomy, while the patient is still in the
operating room.
• Our treatment delivers the dose directly to the
cancerous areas with minimal impact to healthy
tissue (conventional radiation treatment delivers
treatment from outside the body, potentially
exposing healthy tissue to radiation).
One of the most compelling indications of market
interest in IORT is the fact that we experienced better
than expected adoption in 2012 despite a challenging
reimbursement environment for much of the year. The
fact that we almost doubled the business is a good
indication of clinical interest in IORT. With positive
changes in reimbursement now in place, we expect this
interest to continue to grow.
Xoft technology for skin cancer treatment
The Xoft technology is also FDA-approved for skin cancer.
The U.S. addressable market for skin treatment is even
larger than for breast cancer treatment, estimated at over
750,000 patients per year. Our system offers a desirable
alternative to surgery, where repeated removal of lesions
can cause visible scarring. In 2012, we experienced a 300%
increase in the number of skin procedures.
Dr. Ajay Bhatnagar, Cancer Treatment Services of
Arizona, commented, “Electronic brachytherapy utilizing
the Xoft System is an ideal modality for appropriate
patients with non-melanoma skin cancer. My recently
published paper demonstrated no recurrences, good
to excellent cosmesis and acceptable toxicity in 122
patients in up to two year follow up. Patients also
appreciate both the convenience and avoidance of
surgery benefits of Xoft eBx for skin.”
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
Global Headquarters
98 Spit Brook Road, Suite 100
Nashua, NH 03062 USA
+1 866 280 2239 toll free
+1 603 882 5200 phone
+1 603 880 3843 fax
www.icadmed.com
Offices
1160 Dayton-Yellow Springs Road
Anthony F. Ecock(1), (3)
General Partner,
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)
Chairman of The Villages Health and 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
Investor Relations
Lippert/Heilshorn & Associates, Inc.
Fairborn, OH 45324 USA
+1 866 280 2239 toll free
+1 937 431 1464 phone
+1 937 431 1465 fax
101 Nicholson Lane
San Jose, CA 95134 USA
+1 866 280 2239 toll free
+1 408 493 1500 phone
+1 408 493 1501 fax
www.xoftinc.com
Stock Information
NASDAQ Ticker Symbol:
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
+1 866 280 2239 toll free
+1 937 431 1464 phone
Transfer Agent
Continental Stock
Transfer & Trust Company
17 Battery Place
New York, NY 10004
Independent Auditors
BDO USA, LLP
Boston, MA
Legal Counsel
Blank Rome, LLP
New York, NY
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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iC
AD | 20
AD | 20
1
2 Ann
l Rua
epo
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2
2
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 2
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 3
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, 2012
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 the 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 29, 2012 was $20,227,150. Shares of voting stock held by each officer and director and by each person who,
as of June 29, 2012, 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 February 20, 2013, the registrant had 10,813,080 shares of Common Stock outstanding.
Documents Incorporated by Reference: Certain portions of the registrant’s definitive Proxy Statement for its 2013 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.
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“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 is an industry-leading provider of advanced image analysis, workflow solutions and radiation therapy for the early
identification and treatment of cancer.
The Company has grown primarily through acquisitions including Qualia Computing Inc, and its subsidiaries, including
CADx Systems, Inc, 3TP LLC d/b/a CAD Sciences, Inc. (“CAD Sciences”) and its subsidiary Xoft, Inc. (“Xoft”) to
become a broad player in the oncology market. Its industry-leading solutions include advanced image analysis and
workflow solutions that enable healthcare professionals to better serve patients by identifying pathologies and
pinpointing the most prevalent cancers earlier, 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”), and an isotope-free cancer treatment platform technology.
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 U.S. Food and Drug Administration (“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.
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.
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 eBx system (“eBx 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
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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.
The Company intends to continue the extension of its 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’s belief is that early detection in combination with earlier targeted intervention provides patients and care
providers with the best tools available to achieve better clinical outcomes resulting in a market demand that will drive
iCAD’s top line growth.
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 San Jose, California. The San Jose, California facility is also the design, and manufacturing
facility for a portion of the Company’s Xoft products.
Strategy
iCAD is evolving from a business focused on image analysis for the early detection of cancers to a broader player in
the oncology market. The Company’s belief is that early detection in combination with earlier targeted intervention
provides patients and care providers with the best tools available to achieve better clinical outcomes resulting in a
market demand that will drive market adoption for iCAD’s solutions. The Company intends to provide customers
with a broader portfolio of oncology solutions that address four key stages of the cancer care cycle: detection, diagnosis,
treatment and monitoring.
The acquisition of Xoft in 2010 was a transformative event for the Company. The Xoft Axxent eBx system is a
disruptive radiation oncology treatment solution with significant cost, mobility, and treatment time advantages over its
competitors. While the primary application of this system today is localized breast cancer treatment using a ten to
fifteen minute IORT protocol, the Xoft eBx system platform can be used to treat a wide and growing array of additional
cancers, including gynecological and non-melanoma skin cancers.
The Company believes that the Xoft eBx system is uniquely well positioned to offer a differentiated treatment
alternative for the approximately 110,000 annual new cases of early stage breast cancer in the US. The Xoft eBx
system does not require a shielded environment and is relatively small in size, which means that it can easily be
transported for use in virtually any clinical setting (including the operating room where IORT is delivered) under
radiation oncology supervision. The Xoft System may also be used for APBI, which can be delivered twice daily for
five days. Along with the growing body of clinical evidence in support of breast IORT, there is considerable economic
momentum behind the Xoft eBx system for IORT as the Centers for Medicare and Medicaid Services (“CMS”) recently
enacted significantly more favorable hospital and physician reimbursement effective January 1, 2013.
The Company views the additional Xoft eBx system platform indications as important opportunities in both the U.S.
and international markets. Basal and Squamous Cell Carcinoma are two of the most prevalent types of skin cancer in
the US. The Xoft eBx system, which utilizes an isotope-free miniaturized x-ray radiation source, enables radiation
oncologists and dermatologists to collaborate in offering their patients a non-surgical treatment option that is particularly
appropriate for certain challenging lesion locations on the ear, face, and neck. The Xoft eBx system is also marketed
for gynecological cancers including endometrial cancer and in 2013 the Company intends to launch a new application
for the treatment of cervical cancer. Vaginal cancer is the fourth most common cancer affecting women in the US and
cervical cancer incidence rates outside of the US are very high due to inadequate penetration of screening modalities.
The Company believes an additional strategic growth opportunity exists in the application of the Xoft eBx system for
the treatment of other cancers beyond breast cancer in the IORT setting including integration with minimally invasive
surgical techniques and systems.
The Company intends to address the detection and diagnosis stages of the cancer care cycle through continued extension
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of its 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 virtual CTC exams.
The Company believes that MR image analysis for prostate imaging continues to represent a growth opportunity.
Nearly one in six men over age 40 becomes 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.
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. 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.
Existing Markets
Radiation therapy is the medical use of ionizing radiation, generally as part of cancer treatment to control or kill
malignant cells. Radiation therapy may be curative in a number of types of cancer if the cancer cells are localized to
one area of the body. It may also be used as part of curative therapy to prevent tumor recurrence after surgery to
remove a primary malignant tumor (for example, early stages of breast cancer). The clinical goal in radiation oncology
is to deliver the highest radiation dose possible directly to the tumor to kill the cancer cells while minimizing radiation
exposure to healthy tissue surrounding the tumor in order to limit complications and side effects. Global incidence rates
of new cancer cases are rising, primarily due to aging populations and changing lifestyle habits. However, survival rates
are also improving as a result of earlier detection and enhanced treatment options. The global number of new cancer
cases diagnosed is projected to increase from 13 million in 2008 to greater than 21 million in 2030, according to the
International Agency for Research on Cancer.
The three main segments of radiation therapy are external beam radiation therapy (“EBRT”), brachytherapy or sealed
source radiation therapy, and systemic radioisotope therapy or unsealed source radiotherapy. The differences relate to
the position of the radiation source; external is outside the body, brachytherapy uses sealed radioactive sources placed
precisely in the treatment area, and systemic radioisotopes are given by infusion or oral ingestion. Brachytherapy uses
temporary or permanent placement of radioactive sources. Conventional EBRT typically involves multiple treatments
of a tumor in up to fifty radiation sessions (fractions). In the case of brachytherapy, radiation of healthy tissues further
away from the sources is reduced. In addition, if the patient moves or if there is any tumor movement within the body
during treatment, the radiation source(s) retain their correct position in relation to the tumor. These aspects of
brachytherapy offer advantages over EBRT in that it is able to direct high doses of radiation to the size and shape of
the cancerous area while sparing healthy tissue and organs. Brachytherapy is commonly used as an effective treatment
for endometrial, cervical, prostate, breast, and skin cancer, and can also be used to treat tumors in many other body sites.
Electronic Brachytherapy is a type of radiotherapy that utilizes a miniaturized high dose rate X-ray source to apply
radiation directly to the cancerous site. The Xoft eBx system is a proprietary electronic brachytherapy platform designed
to deliver isotope-free (non-radioactive) radiation treatment in virtually any clinical setting without the limitations of
radionuclides.
The process for delivering radiation therapy principally involves a radiation oncologist, a medical physicist responsible
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for planning the treatment and performing appropriate quality assurance procedures and, in certain instances, other
related physicians depending upon the type of cancer e.g. a breast surgeon for breast cancer, a gynecologist for
endometrial or cervical cancer.
Breast cancer is a primary market for the use of radiation therapy. Globally, the incidence rate for breast cancer reached
1.4 million new cases annually in 2008, according to the American Cancer Society 2012 Facts and Figures. Treatment
options have progressed significantly over the past several years from mastectomy to breast conserving surgery which
typically includes lumpectomy followed by a course of radiation therapy. Techniques for the delivery of radiotherapy
associated with breast conserving surgery have evolved from focusing on 5-7 weeks of EBRT to APBI which reduces
the protocol to 10 fractions over 5 days to IORT which delivers a complete dose of radiation during surgery for
appropriately selected patients. This trend toward hypo-fractionation reflects market demand for more cost-efficient,
flexible, and less resource intensive treatment options that also offer significant patient access advantages. Electronic
Brachytherapy, due to its isotope-free energy source and thus minimal shielding requirements, is particularly well
suited to IORT.
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 2012. 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 8,660 facilities (with approximately 12,500 mammography systems) were certified to
provide mammography screening in 2012. Historically, these centers have used conventional film-based medical
imaging technologies to capture and analyze breast images. Of the 8,660 certified facilities, to date approximately 89%
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 cancer-related deaths
among women in the European Union (“EU”). The number of expected breast cancer cases based on the 2007 report
was 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 one 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.
Market Size and Share
GlobalData projects the FFDM sector will grow at a compound annual growth rate of 8% and reach $1.3 billion in 2017.
In its 2010 report, Thomson Reuters estimates, national outpatient MRI procedure volumes grew 2.4% between 2008
and 2010. Frost and Sullivan predicted the use of MRI in the management of breast cancer volumes will heighten to
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3 million by 2014. More than 6,000 MRI systems could be used for breast MRI procedures today. Merge Healthcare,
Inc. (formerly Confirma, Inc. acquired by Merge Healthcare in September 2009) and Invivo Corporation have been and
currently remain the market leaders in breast MR image analysis.
In addition, IMV, a market research company, 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
Radiation Therapy: Electronic Brachytherapy
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.
The Xoft eBx system 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 Xoft 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 eBx. 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. In December 2012, Dr. Vaidya presented
five-year follow up data on the TARGIT-A trial at a forum in conjunction with the San Antonio Breast Cancer
Symposium. The updated results of the trial demonstrated that local recurrence rates in the TARGIT (IORT) group were
within the non-inferiority boundary when compared to the results in the group who received external beam radiation
therapy and that mortality rates from other causes than breast cancer were lower in the TARGIT (IORT) group.
Importantly, the reimbursement landscape for IORT improved substantially in 2011 and 2012. The American Medical
Association (AMA) established category 1 CPT codes for IORT based on strong clinical evidence and a clear economic
advantage relative to alternative treatment options including external beam radiotherapy. Following this significant
development, in October 2012 the Centers for Medicaid and Medicare Services unpackaged the IORT treatment delivery
code and assigned it to a payment value associated with stereotactic radiosurgery. These codes and payment values
became effective beginning January 2013.
Other markets for the use of electronic brachytherapy include non-melanoma skin cancers, gynecological cancers and
other areas where either primary tumors occur or metastatic lesions require treatment. Squamous cell and basal cell
carcinoma are the two main types of skin cancers appropriate for treatment with electronic brachytherapy. With more
than 1 million new cases in the U.S. each year, basal cell carcinoma is the most common type of skin cancer. The
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squamous cell variation is the second most prevalent type with approximately 250,000 new cases per year in the U.S.
Appropriately selected patients with either type may be eligible for treatment with electronic brachytherapy – especially
those lesions in difficult to treat locations such as the ear, nose, and neck. In October 2012, Dr. Ajay Bhatnagar
presented a study at the annual meeting of the American Society for Radiation Oncology (ASTRO) utilizing the Xoft
eBX system for non-melanoma skin cancer. With a mean follow-up of 11 months – but as long as 38 months after
treatment – Dr. Bhatnagar reported no recurrences among 122 patients who had 171 lesions.
Gynecological cancers are also appropriate for treatment with electronic brachytherapy. There are approximately
50,000 new cases of endometrial cancer each year in the U.S. and nearly 300,000 new cases worldwide. Cervical
cancer is highly prevalent in the developing world and there are 75,000 new cases per year in China alone. Additionally,
electronic brachytherapy is appropriate for use in other IORT clinical settings where surgical resection is unable to
completely eliminate all cancer cells. In the U.S. and International settings, IORT for pelvic, gastrointestinal, abdominal,
spinal, and soft tissue sarcoma applications remains a potential market given the minimal shielding requirements
associated with this treatment modality. The growth of minimally invasive surgery, estimated to be 30-40% of all
surgical procedures currently in the U.S., is expected to accelerate the adoption of compatible eBx systems.
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 IMV that over 85.3 million CT procedures were performed in
2011 in the U.S. alone with an installed base of approximately 13,775 scanners at 8,500 locations. 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
present 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 2013. 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 18, 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 picture archiving and communication system (“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
contrast. While screening CTC is not covered by Medicare, coverage continues to increase with approximately half of
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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. In addition, bills were
introduced into both the US House of Representatives (HR4165) and US Senate (S2265) in March 2012 that would
require that CTC screening be reimbursed by Medicare and Medicaid.
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 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
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management strategies involving active surveillance. As more men consider “watchful waiting” or delaying active
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.
Products and Product Development
The table below presents the revenue and percentage of revenue attributable to the Company’s products and services,
in 2012, 2011 and 2010 (in thousands):
For the year ended December 31,
Digital & MRI CAD revenue
Electronic brachytherapy
Film based revenue
Service & supply revenue
Total revenue
2012
$
%
29.6%
28.8%
5.2%
36.4%
8,379
8,130
1,467
10,299
28,275
2011
$
%
46.3%
13.0%
8.2%
32.5%
13,256
3,711
2,361
9,324
28,652
$
$
$
2010
$
15,392
-
3,335
5,848
24,575
%
62.6%
0.0%
13.6%
23.8%
The revenues above exclude the results of Xoft for the year ended December 31, 2010 as the acquisition did
not take place until December 30, 2010.
Electronic Brachytherapy products:
Electronic Brachytherapy (eBx™) Treatment for Breast Cancer
Axxent® eBx™
The portable Axxent eBx system uses isotope-free miniaturized X-ray tube technology to deliver therapy directly to
cancer sites with minimal radiation exposure to surrounding healthy tissue. The Axxent eBx system 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 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 single-use breast IORT and APBI applicators are offered in a variety of sizes based
on clinical need. The endometrial and skin applicators are reusable and are manufactured in various sizes based on the
anatomical requirements of the patient. 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. The 50kV energy source is sold either as an annual contract customized to individual customer
volume/usage requirements or on a single unit basis.
The Company has recently made several enhancements to the Axxent eBx system controller including a new software
interface enabling enhanced system functionality and an upgraded high voltage connection improving system
performance. The Company has recently submitted a 510k application to the FDA for a new applicator for use in the
treatment of cervical cancer. This new applicator would further expand the Company’s product portfolio in the
gynecological cancer market and enable customers to offer comprehensive electronic brachytherapy solutions to their
patients in need of gynecological radiation therapy. Cervical cancer is a particularly large market opportunity outside
of the United States, particularly in areas of the world where screening for cancer of the cervix is less prevalent. Current
customers of the Axxent eBx system include university research and community hospitals, private and governmental
institutions, doctors’ offices, cancer care clinics, and veterinary facilities in the United States, Europe and Asia.
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.
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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.
In June 2012, iCAD introduced its next generation of mammography CAD products, PowerLook Advanced
Mammography Platform® (AMP). The technology expands on iCAD’s SecondLook platform and is the CAD platform
upon which all future breast imaging CAD offerings from iCAD will be built. PowerLook AMP incorporates both the
SecondLook Digital and SecondLook Premier CAD algorithms. PowerLook AMP’s CAD metrics offer industry-
leading tissue and lesion characteristics to support the breast imager’s workflow. In addition, PowerLook AMP is the
first product of its kind to integrate Mātakina’s Volpara® Volumetric Breast Density assessment software that aids
radiologists by standardizing their approach to breast density assessment. The system’s modular design gives
radiologists the freedom to choose the products and functionality they need today and in the future. Included with
PowerLook AMP is a multi-vendor CAD server that allows hospitals and imaging facilities to connect up to four
mammography acquisition devices regardless of vendor. This reduces the need for separate CAD servers while lowering
hardware and service costs. iCAD’s PowerLook AMP also provides the most powerful flexible DICOM connectivity
solution enabling universal compatibility with leading PACS and Review Workstations. Additional modules are
expected to be released and integrated into PowerLook AMP in the future.
PowerLook Advanced Mammography Platform
PowerLook AMP 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 PowerLook AMP products have been optimized
for each digital imaging provider based upon characteristics of their unique detectors. PowerLook AMP incorporates
both the SecondLook Digital and SecondLook Premier CAD algorithms. The Company’s SecondLook Premier CAD
solution was tailored for GE Healthcare and Siemens Medical Systems upon initial release of their systems for Europe.
PowerLook AMP 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 PowerLook AMP 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.
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.
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
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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.
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. Throughout 2012, iCAD continued to globally distribute
the VeraLook product with advanced visualization reading workstations manufactured by Vital Images, a Toshiba
Medical System Group Company, TeraRecon, Inc, and Viatronix, Inc.
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 radiology information systems (“RIS”). Specialized image compression techniques reduce file sizes up to 80%,
minimizing long-term storage requirements.
Sales and Marketing
iCAD, through its Xoft subsidiary, markets the eBx system in the United States and select countries worldwide. The
Company has substantially expanded its installed base of eBx systems in the US and has established initial installations
in Western Europe and Taiwan. 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. The system offers a distinct competitive advantage in that it is a highly mobile unit with
minimal shielding requirements that can easily be moved from room to room within a single healthcare institution or
be transported from facility to facility given its relatively compact form factor. 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
additional clinical applications including skin and gynecological cancers as well as its potential to scale in the future
to address other indications for use highlight the Xoft eBx system’s unique platform flexibility.
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, ISIORT, Milan Breast, 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.
The Company further supports breast IORT through its recent launch of the ExBRT Study – a post-market clinical trial
designed to enroll 1,000 patients at up to 50 sites. The study will enable facilities interested in treating early stage breast
cancer patients with the Xoft eBx system to participate in a common clinical protocol and follow enrolled patients for
up to 10 years. The ExBRT Study is led by a prestigious and diverse group of leading brachytherapy and breast care
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physicians including breast surgeons, radiation oncologists, pathologists, and medical physicists from leading US breast
cancer care institutions.
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 Health, Inc.
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 advanced 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,
where industry leaders discuss the future of CAD in these modalities.
Competition
The Company’s existing eBx products face competition primarily from one company, Carl Zeiss Meditec, Inc., (“Zeiss”)
a multinational company, where eBx products are only one of that company’s many products. Zeiss manufactures and
sells eBx products for the use of intraoperative radiation therapy. Recently, Zeiss has expanded their product portfolio
to include additional anatomical areas beyond breast IORT. Zeiss now offers a range of radiation therapy applicators
for use in various applications including spine, the gastrointestinal tract, skin, and endometrial cancers. Zeiss has an
established base of breast IORT installations in Europe where the majority of the TARGIT-A trial clinical sites are
located. Europe is also the focus of their clinical research and approvals in the various new applications previously
listed. IntraOp/Mobetron is an additional competitor in the high dose rate (“HDR”) 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. New market opportunities including expansion of the gynecological product portfolio
and other IORT applications beyond breast IORT will bring new competitive dynamics to the Company’s efforts.
Larger, more diversified radiation therapy companies offering a wide variety of clinical solutions for HDR
brachytherapy including Varian Medical Systems, Elekta, and Nucletron compete in these areas. These multi-national
firms offer broad product portfolios including a full range of HDR brachytherapy afterloaders and applicators as well
as traditional radiation therapy solutions including linear accelerators, treatment planning solutions, and workflow
management capabilities.
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. 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.
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.
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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 San Jose, 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.
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.
The Company has many 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 a number of
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,
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including CAD for tomosynthesis, 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. The Company has also secured a non-exclusive patent
license from the National Institute of Health which relates broadly to CAD in colonography. a non-exclusive patent
license from Cytyc/Hologic which relates to balloon applicators for breast brachytherapy, a non-exclusive license from
Yeda Research which relates to the 3TP method for the detection of cancer and a non-exclusive license from Zeiss which
relates to brachytherapy. The Company believes it has all the necessary licenses from third parties for software and
other technologies in its products, however we do not know if current or future patent applications will issue with the
full scope of the claims sought, if at all, or whether any patents issued will be challenged or invalidated.
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 $4.5 million in 2012, $6.8 million in 2011 and $9.3 million in 2010 or 16%, 24%, and 38%
of the Company’s revenues, respectively. Fuji Medical Systems accounted for $2.3 million in 2012, $3.2 million in
2011 and $3.1 million in 2010 or 8%, 11% and 13% of the Company’s revenues, respectively.
Engineering and Product Development
The Company spent $7.8 million, $10.8 million, and $6.6 million on research and development activities during the
years ended December 2012, 2011 and 2010, respectively. Research and development expenses for 2012 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, 2013, the Company had 101 employees, all of which are full time employees, with 30 involved in
sales and marketing, 29 in research and development, 31 in service, manufacturing, technical support and operations
functions, and 11 in administrative functions. None of the Company’s employees are represented by labor organizations.
The Company considers its relations with employees to be good.
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 increased to approximately $2.9 million or 10% of sales in 2012 as compared to $1.8
million or 6% of total sales in 2011 and $4.0 million or 16% of total sales in 2010.
The Company’s principal concentration of export sales is in Europe, which accounted for 74% of the Company’s export
sales in 2012, 67% of the Company’s export sales in 2011 and 77% of export sales in 2010. France accounted for
approximately 28% in 2012, 16% in 2011 and 55% in 2010 of the total export sales. In addition approximately 27%
and 10% of export sales in 2012 were to the United Kingdom and Canada, respectively.
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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 2012 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 $9.4 million in fiscal 2012 and have
an accumulated deficit of $136.4 million at December 31, 2012. We may not be able to achieve profitability.
A limited number of customers account for a significant portion of our total revenue. 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 26% and 41% of our total revenue for the years ended December 31, 2012 and 2011, respectively.
In 2012 we had two major customers, GE Healthcare and Fuji Medical Systems, with 16% and 8% of our revenue,
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 revenue. The loss of our relationships with principal customers or a decline in sales to
principal customers could materially adversely affect our business and operating results.
Our business is dependent upon future market growth 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 an impairment of $26.8 million on our goodwill. Under current
accounting guidelines, we must assess, at least annually and potentially more frequently, whether the value of our
goodwill of $21.1 million and our 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.
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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 for our currently offered products. Before we are able to commercialize any new
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 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.
Our products may be recalled even after we have received FDA or other governmental approval or clearance.
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 revenue 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;
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•
•
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.
Sales and market acceptance of our products is dependent upon the coverage and reimbursement decisions
made by third-party payors. The failure of third-party payors to provide appropriate levels of coverage and
reimbursement for the use of our products and treatments facilitated by our products could harm our business
and prospects.
Sales and market acceptance of our medical products and the treatments facilitated by our products in the United States
and other countries is dependent upon the coverage decisions and reimbursement policies established by government
healthcare programs and private health insurers. Market acceptance of our products and treatments has and will continue
to depend upon our customers’ ability to obtain an appropriate level of coverage for, and reimbursement from third-
party payors for, these products and treatments. In the U.S., CMS establishes coverage and reimbursement policies for
healthcare providers treating Medicare and Medicaid beneficiaries. Under current CMS policies, varying reimbursement
levels have been established for our products and treatments. Coverage policies for Medicare patients may vary by
regional Medicare carriers in the absence of a national coverage determination and reimbursement rates for treatments
may vary based on the geographic price index. Coverage and reimbursement policies and rates applicable to patients
with private insurance are dependent upon individual private payor decisions which may not follow the policies and
rates established by CMS. The use of our products and treatments outside the United States is similarly affected by
coverage and reimbursement policies adopted by foreign governments and private insurance carriers.
The markets for our newly developed products and treatments and newly introduced enhancements to our
existing products and treatments may not develop as expected.
The successful commercialization of our newly developed products and treatments and newly introduced enhancements
to our existing products and treatments are subject to numerous risks, both known and unknown, including:
• uncertainty of the development of a market for such product or treatment;
•
trends relating to, or the introduction or existence of, competing products, technologies or alternative
treatments or therapies that may be more effective, safer or easier to use than our products, technologies,
treatments or therapies;
the perceptions of our products or treatments as compared to other products and treatments;
recommendation and support for the use of our products or treatments by influential customers, such as
hospitals, radiological practices, breast surgeons and radiation oncologists and treatment centers;
the availability and extent of data demonstrating the clinical efficacy of our products or treatments;
•
• competition, including the presence of competing products sold by companies with longer operating
•
•
histories, more recognizable names and more established distribution networks; and
• other technological developments.
Often, the development of a significant market for a product or treatment will depend upon the establishment of a
reimbursement code or an advantageous reimbursement level for use of the product or treatment. Moreover, even if
addressed, such reimbursement codes or levels frequently are not established until after a product or treatment is
developed and commercially introduced, which can delay the successful commercialization of a product or treatment.
If we are unable to successfully commercialize and create a significant market for our newly developed products and
treatments and newly introduced enhancements to our existing products and treatments our business and prospects
could be harmed.
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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,
2012 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 revenue.
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.
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
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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. There is a risk that our patent applications
will not result in granted patents or that granted patents will not provide significant protection for our products and
technology. Unauthorized third parties may infringe our intellectual property rights, or copy or reverse engineer portions
of our technology. Our competitors may independently develop similar technology that our patents do not cover. In
addition, because patent applications in the U.S. are not generally publicly disclosed until eighteen months after the
application is filed, applications may have been filed by third parties that relate to our technology. Moreover, there is
a risk that foreign intellectual property laws will not protect our intellectual property rights to the same extent as
intellectual property laws in the U.S. The rights provided by a patent are finite in time. Over the coming years, certain
patents relating to current products will expire in the U.S. and abroad thus allowing third parties to utilize certain of
our technologies. In the absence of significant patent protection, we may be vulnerable to competitors who attempt to
copy our products, processes or technology
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.
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
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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.
Our revenue from sales outside of the United States are increasing, representing approximately 10% of our revenue for
2012. 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.
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.
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.
Acquisition-related accounting impairment and amortization charges may delay and reduce our post-acquisition
profitability.
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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.
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 during 2012; $187,272 for 2013; $192,780 for 2014; $198,288 for 2015 and $203,796 for 2016.
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.
The Company leases a facility consisting of approximately 24,350 square feet of office, manufacturing and warehousing
space located at 101 Nicholson Lane, San Jose, CA. The operating lease commenced September 2012 and provides for
an annual base rent of $248,376, for the first year $260,064, for the second year $271,752, for the third year $283,440
for the fourth year and $295,140 for the fifth year, 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.
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
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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. On April
11, 2012, the above-referenced cases were consolidated for all purposes, excluding trial. On May 2, 2012, plaintiffs
filed a master consolidated complaint, with the same case number as the original filed complaint. On August 2, 2012,
plaintiffs filed fictitious name amendments adding defendants, Mel Silverstein, M.D., Peter Chen, M.D., Lisa Guerrera,
M.D., Ralph Mackintosh, Ph.D., Robert Dillman, M.D., and Jack Cox. On September 14, 2012, an additional Jane Doe
plaintiff and John Doe spouse filed a complaint in the Orange County Superior Court (Docket No. 30-2012-00598740-
CU-PL-CXC) with identical allegations as plaintiffs above against the same original defendants. On October 17, 2012,
plaintiff John Doe No. 11 dismissed his complaint, with prejudice, as to all defendants. On November 26, 2012,
plaintiffs filed an additional fictitious name amendment adding defendant, American Ceramic Technology, Inc. On
January 15, 2013, plaintiffs filed a dismissal, with prejudice, as to defendant, Mel Silverstein, M.D., only. It is alleged
that each Jane Doe plaintiff 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
was 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, however a loss is reasonably possible. Accordingly, since the amount of the potential damages in the event
of an adverse result is not reasonably estimable, we are unable to estimate a range of loss and no expense 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 2012 and 2011.
Fiscal year ended
December 31, 2012
retrauQ tsriF
retrauQ dnoceS
retrauQ drihT
retrauQ htruoF
Fiscal year ended
December 31, 2011
retrauQ tsriF
retrauQ dnoceS
retrauQ drihT
retrauQ htruoF
High
Low
$
54.3
09.2
99.2
21.5
$
2.25
2.10
1.75
1.85
$
55.7
09.6
57.5
00.4
$
5.20
4.90
2.00
2.10
As of February 5, 2013, there were 348 holders of record of the Company’s common stock. In addition, the Company
believes that there are in excess of 5,286 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.
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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, 2012.
Issuer’s Purchases of Equity Securities. For the majority of restricted stock units granted, the number of shares issued
on the date that the restricted stock units vest is net of the minimum statutory tax withholding requirements that we pay
in cash to the appropriate taxing authorities on behalf of our employees. For the three months ended December 31, 2012
there were 211 shares of our common stock that were repurchased to cover employee income tax withholding
obligations in connection with the vesting of restricted stock units under our equity incentive plans.
Total number of
shares purchased
(1)
Average price
paid per share
Total number of
shares purchased as
part of publicly
announced plans or
programs
Maximum dollar value of
shares that may yet be
purchased under the
plans or programs
- $ -
211 $ 2.73
- $ -
$ - $ -
$ - $ -
$ - $ -
Month of purchase
October 1 - October 31, 2012
November 1 - November 30, 2012
December 1 - December 31, 2012
Total
211
$
2.73
$ - $ -
Item 6.
Selected Financial Data.
Not applicable.
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, workflow solutions and radiation therapy for the early
identification and treatment of cancer.
The Company has grown primarily through acquisitions to become a broad player in the oncology market. Its industry-
leading solutions include advanced image analysis and workflow solutions that enable healthcare professionals to better
serve patients by identifying pathologies and pinpointing the most prevalent cancers earlier, 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, and the Xoft eBx system, an isotope-free cancer
treatment platform technology.
The Company intends to continue the extension of its 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’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.
During fiscal year 2012, revenue from the Xoft eBx system and service and supplies revenue have offset the decline
in revenue from MRI and CAD systems. The shift in revenue is primarily due to the market growth in cancer therapy,
the related supplies and the conversion of CAD product revenue from a perpetual sale to a subscription based sale. The
Company expects the product mix to change as the market for cancer therapy continues to grow.
The Company’s headquarters are located in Nashua, New Hampshire, with manufacturing facilities in New Hampshire,
a research and development facility in Ohio and, and, an operation, research, development, manufacturing and
warehousing facility in San Jose, California.
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
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35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 23
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, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates these estimates, including those related
to revenue recognition, allowance for doubtful accounts, inventory valuation and obsolescence, intangible assets,
goodwill, warrants, income taxes, contingencies and litigation. Additionally, the Company uses assumptions and
estimates in calculations to determine stock-based compensation and the value of warrants. 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;
- Warrants
-
-
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 of the related receivable 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 estimated life of the supply agreement.
The Company recognizes revenue from the sale of its digital, film-based CAD and eBx products and services in
accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Update
No.. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”) and ASC Update No. 2009-14,
“Certain Arrangements That Contain Software Elements” (Update No. 2009-14). (“ASU 2009-14”). Revenue for the
sale of certain CAD products is recognized in accordance with ASC 840 (“Leases”) (“ASC 840”). For multiple element
arrangements, revenue is allocated to all deliverables based on their relative selling prices. In such circumstances, a
hierarchy is used to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-
specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best
estimate of the selling price (“BESP”). VSOE generally exists only when the deliverable is sold separately and is the
price actually charged for that deliverable. The process for determining BESP for deliverables without VSOE or TPE
considers multiple factors including relative selling prices; competitive prices in the marketplace, and management
judgment, however, these may vary depending upon the unique facts and circumstances related to each deliverable.
The Company primarily uses customer purchase orders that are subject to the Company’s terms and conditions or, in
the case of an Original Equipment Manufacturer (“OEM”) are governed by distribution agreements. In accordance with
our distribution agreements, the OEM does not have a right of return, and title and risk of loss passes to the OEM 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 probable
by considering a number of factors, including past transaction history with the customer and the creditworthiness of
the customer, as obtained from third party credit references.
If the terms of the sale include customer acceptance provisions and compliance with those provisions cannot be
demonstrated, all revenue is 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 has determined that iCAD’s Digital, MRI and film based sales generally follow the guidance of FASB
ASC Topic 605 “Revenue Recognition” (ASC 605”) as the software has been considered essential to the functionality
of the product per the guidance of ASU 2009-14. Typically, the responsibility for the installation process lies with the
OEM partner. 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 is recognized based on the relative
23
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 24
selling price allocation of the BESP. In prior years (prior to ASU 2009-13), the Company recognized the element on
the residual method.
Sales of the Company’s eBx product typically include a controller, accessories, and service and source agreements. The
Company allocates revenue to the deliverables in the arrangement based on the BESP in accordance with ASU 2009-
13. Product revenue is generally recognized when the product has been delivered and service and source revenue is
typically recognized over the life of the service and source agreement.
The Company defers revenue from the sale of service contracts related to future periods and recognizes revenue on a
straight-line basis in accordance with ASC Topic 605-20, “Services”. The Company provides for estimated warranty
costs on original product warranties at the time of sale.
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, 2012 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 historical 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 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.
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 with a reasonable control premium (“Market Approach”) as the best evidence of fair value (market
capitalization is calculated using the quoted closing share price of the Company’s common stock multiplied by the
number of common shares outstanding). The Company tests goodwill for impairment by comparing its market
capitalization using the Market Approach to its carrying value at the same date as the basis to determine if a potential
impairment exists. The Company also evaluates goodwill using a discounted cash flow analysis (the “Income
Approach”) to corroborate the Market Approach at its annual impairment testing date of October 1.
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:
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35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 25
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.
Warrants
In January 2012, the Company entered into several agreements with Deerfield Management, a healthcare investment
fund (“Deerfield”), which included the issuance of warrants to purchase up to 550,000 shares of common stock at an
exercise price of $3.50 per share, of which 450,000 shares of the Company’s common stock became immediately
exercisable. An additional 100,000 shares of common stock will become exercisable if the Company elects to extend
the debt as described in the agreements. The Company accounts for the warrants as debt in accordance with ASC 480
“Distinguishing Liabilities from Equity”. On a quarterly basis the Company evaluates the fair value of Warrants using
a binomial lattice model. Inputs into the binomial lattice method include expected volatility, interest rate, and
probabilities of a voluntary exercise of the warrants as well as the probability of major transaction (i.e. company sale).
The inputs to determine the value of the warrants in the binomial lattice model require significant accounting judgment
and estimates.
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, 2012 and 2011 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.
Year Ended December 31, 2012 compared to Year Ended December 31, 2011
Revenue. Revenue for the year ended December 31, 2012 was $28.3 million compared with revenue of $28.7 million
for the year ended December 31, 2011, a decrease of $377,000 or 1.3%. eBx revenue increased $4.4 million, service
and supplies revenue increased $1.0 million which offset the decline in digital and MRI CAD revenue of $4.9 million
and the decline of film based revenue of $0.9 million.
25
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 26
The table below presents the components of revenue for 2012 and 2011:
Digital & MRI CAD revenue
Electronic brachytherapy
eunever desab mliF
Service & supplies revenue
eunever latoT
2012
$
For the year ended December 31,
2011
Change
$
$
8,379
8,130
764,1
10,299
572,82
13,256
3,711
2,361
9,324
28,652
$
$
$
% Change
(36.8%)
119.1%
(37.9%)
10.5%
(1.3%)
(4,877)
4,419
(894)
975
(377)
eBx revenue increased 119.1% to $8.1 million for the year ended December 31, 2012 from $3.7 million in the year
ended December 31, 2011. We believe the increase in demand for eBx systems resulted from increased awareness,
additional clinical trial data and an increase in reimbursement rates for customers treating patients.
The Company’s digital and MRI CAD revenue for the year ended December 31, 2012 decreased $4.9 million or 36.8%,
to $8.4 million compared to $13.3 million for the year ended December 31, 2011. The decrease in digital and MRI CAD
revenue was due primarily to a decrease in digital revenue of $4.6 million which was driven by decreases in demand
for digital CAD systems primarily from our OEM customers, a decrease of approximately $0.5 million in MRI CAD
revenue which was offset by an increase in colon revenue of approximately $0.2 million.
Revenue from iCAD’s film based products for the year ended December 31, 2012 decreased 37.9% to $1.5 million
compared to $2.4 million in 2011. The decline in revenue from film-based products and accessories was the result of
the decreasing market for film based products as most customers have transitioned to digital technologies.
Service and supply revenue for the year ended December 31, 2012 increased 10.5% to $10.3 million compared to $9.3
million in 2011. The increase in the Company’s service and supplies revenue was due primarily to approximately $0.7
million of service revenue related to service and supplies for Xoft, which reflects the increased use of supplies as
customers treatment volumes increase. CAD service and supplies revenue increased $0.3 million primarily due to
customization work completed on our MRI products, increased service contract revenue on the Company’s growing
installed base of CAD products offset by a decline in analog service contracts.
Gross Margin. Gross margin was 70.8% for the year ended December 31, 2012 compared to 69.9% for the year ended
December 31, 2011. Gross margin increased slightly despite the reduction in revenue and gross margin percent
increased slightly by 0.9%. The reduction in cost of revenue resulted primarily from a reduction in the cost of service
due to ongoing expense reductions during 2012. Cost of revenue and gross margin for 2012 and 2011 were as follows
(in thousands):
For the year ended December 31,
stcudorP
seilppus dna ecivreS
noitazitromA
eunever fo tsoc latoT
nigram ssorG
% nigram ssorG
2012
2011
$
438,4
974,2
139
442,8
$
4,788
2,906
931
8,625
$
Change % Change
1.0%
(14.7%)
0.0%
(4.4%)
46
(427)
-
(381)
$
130,02
$
20,027
$
4
0.0%
%8.07
%9.96
26
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 27
Operating Expenses:
Operating expenses for 2012and 2011 are as follows (in thousands):
Operating expenses:
Engineering and product development
selas dna gnitekraM
General and administrative
noitaredisnoc tnegnitnoC
Goodw
tnemriapmi lli
Loss on indemnification asset
Total operating expenses
For the year ended December 31,
2012
2011
Change % Change
$
$
$
7,769
807,01
6,966
-
-
-
25,443
10,791
13,684
9,999
(4,900)
26,828
741
57,143
(3,022)
(2,976)
(3,033)
4,900
(26,828)
(741)
(31,700)
(28.0%)
(21.7%)
(30.3%)
(100.0%)
(100.0%)
(100.0%)
(55.5%)
$
$
$
Engineering and Product Development. Engineering and product development costs for the year ended December 31,
2012 decreased by $3.0 million or 28.0%, from $10.8 million in 2011 to $7.8 million in 2012. The decrease in
engineering and product development costs was primarily due to an approximately $1.1 million reduction in salary
expense and a $1.8 million reduction in consulting and professional services expenses. The decrease in salary expense
was due to a decrease in headcount, and the decrease in consulting and professional services expense was due to product
development activities that were completed during 2011.
Marketing and Sales. Marketing and sales expense for the year ended December 31, 2012 decreased by $3.0 million
or 21.7%, from $13.7 million in 2011 to $10.7 million in 2012. The decrease in marketing and sales expense was
primarily due to the decrease of approximately $2.8 million reduction in salary and commission expense reflecting the
reduction in commercial headcount.
General and Administrative. General and administrative expenses for the year ended December 31, 2012 decreased by
$3.0 million or 30.3%, from $10.0 million in 2011 to $6.9 million in 2012. The reduction in general and administrative
expenses was primarily due to a $1.4 million reduction in legal expenses resulting from litigation settled during 2011,
a reduction in consulting and professional services of $0.6 million, a reduction of rent and facilities expense of $0.5
million and a reduction in salaries of $0.3 million.
Contingent Consideration: The gain of $4.9 million during the year ended December 31, 2011 represents a reduction
of contingent consideration resulting from the acquisition of Xoft. The Company is required to determine the fair
value of the contingent 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. As of December 31, 2012, it remains unlikely that the revenue thresholds would be met, and accordingly the
fair value remains at $0.
Goodwill Impairment: During the quarter ended September 30, 2011, the Company recorded an impairment of goodwill
of approximately $26.8 million. There were no impairment charges during 2012.
Loss on indemnification asset: In connection with the settlement of the litigation with Zeiss, 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.
Other Income and Expense
esnepxe tseretnI
Loss from change in fair value of warrants
emocni tseretnI
For the year ended December 31,
2012
$
2011
$
Change
(2,993)
(539)
8
(3,524)
$
Change %
709.2 %
0.0 %
29.6 %
892.2 %
(422)
-
27
(395)
$
$
)514,3(
(539)
53
(3,919)
27
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 28
The Company recorded $3.4 million of interest expense in 2012 as compared to $422,000 of interest expense during
the year ended December 31, 2011. Interest expense in 2012 represents approximately $3.0 million associated with
the Deerfield financing and $0.4 million related to the accretion of the settlement liabilities with Zeiss and Hologic.
Interest expense in 2011 represents the accretion of the settlement liabilities with Zeiss and Hologic.
The warrants were issued in connection with the financing closed in January 2012 and are recorded at fair value using
the binomial lattice method. The loss from the change in the fair value of the warrant in 2012 was due primarily to the
increase in the stock price of the Company from the date of issuance to December 31, 2012.
Year Ended December 31, 2011 compared to Year 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 revenue resulting from the acquisition of Xoft of $3.7 million and a $3.5
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
Electronic brachytherapy
eunever desab mliF
Service & supplies revenue
eunever latoT
2011
$
For the year ended December 31,
2010
Change
$
$
13,256
3,711
163,2
9,324
256,82
15,392
-
3,335
5,848
24,575
$
$
$
% Change
(13.9%)
-
(29.2%)
59.4%
16.6%
(2,136)
3,711
(974)
3,476
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 revenue 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 revenue. The increase of MRI CAD revenue was 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. Revenue 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 59.4% to $9.3 million compared to $5.8
million in 2010. The increase in the Company’s service and supply revenue was primarily due to approximately $2.2
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.
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35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 29
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):
stcudorP
seilppus dna ecivreS
noitazitromA
Total cost of revenue
nigram ssorG
% nigram ssorG
For the year ended December 31,
2011
2010
$
887,4
609,2
139
8,625
$
2,396
2,486
-
4,882
Change % Change
99.8%
$
16.9%
-
76.7%
2,392
420
931
3,743
$
720,02
$
19,693
$
334
1.7%
%9.96
%1.08
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
$
$
$
10,791
13,684
9,999
(4,900)
26,828
741
57,143
6,596
9,750
9,889
-
-
-
26,235
4,195
3,934
110
(4,900)
26,828
741
30,908
63.6%
40.3%
1.1%
-
-
-
117.8%
$
$
$
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
$0.1 million or 1.1%, from $9.9 million in 2010 to $10.0 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 $2.7 million. The decrease of $2.7 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.
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.
29
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 30
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.
Other Income/Expense:
esnepxe tseretnI
emocni tseretnI
emocni rehtO
For the year ended December 31,
2011
$
)224(
72
-
(395)
$
2010
-
$
73
275
348
$
Change
(422)
(46)
(275)
(743)
$
Change %
100.0 %
(63.0)%
(100.0)%
(213.5)%
Interest expense in 2011 of $422,000 represents primarily $156,000 related to the accretion of the Hologic settlement
liability and approximately $266,000 related to the accretion of the Zeiss settlement liability. Interest income decreased
due to the decrease of cash balances during the year. Other income for the year ended December 31, 2010 represents
a gain on a sale of a patent.
Liquidity and Capital Resources
The Company believes that the $13.9 million cash balance as of December 31, 2012, and projected cash balances from
operations are sufficient to sustain operations through at least the next 12 months. 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.
The Company had working capital of $6.9 million at December 31, 2012. The ratio of current assets to current liabilities
at December 31, 2012 and 2011 was 1.5 and 0.9, respectively. The increase in working capital is due to the cash
generated from the debt financing arrangement of approximately $14.3 million which was funded in January 2012,
offset by cash used for operations.
Net cash used for operating activities for the year ended December 31, 2012 decreased by $5.9 million from $4.2
million compared to net cash used for operations of $10.1 million for 2011. The reduction in cash used for operating
activities during the year ended December 31, 2012 was due primarily to the reduction in net loss from $37.6 million
in 2011 to $9.4 million in 2012, which net of adjustments was $10.4 million in 2011 versus $3.5 million in 2012.
During 2012 the Company used cash due to changes in operating assets and liabilities of approximately $0.7 million,
an increase of cash used of approximately $1.0 million. The change in operating assets and liabilities is due primarily
to reductions of accounts payable and accrued expenses from 2011 which included payment of legal costs and settlement
obligations related to Zeiss. Accounts receivable grew by approximately $0.9 million in 2012, as several large eBx
system orders were at the end of the quarter. Deferred revenue grew $0.8 million, reflecting an increase in service and
supplies agreements related to sales of eBx systems and Powerlook AMP. Prepaid expenses and other current assets
increased $0.5 million due primarily to prepaid financing costs related to the debt financing arrangement.
The net cash used for investing activities for the year ended December 31, 2012 was $0.7 million. The cash used for
investing activities in 2012 was primarily for purchases of fixed assets of $0.7 million.
Net cash provided by financing activities for the year ended December 31, 2012 was $14.3 million, which was due to
the proceeds from the debt financing closed in January, 2012
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The following table summarizes as of December 31, 2012, for the periods presented, the Company’s future estimated
cash payments under existing contractual obligations, and the financing obligations 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
$ 2,210
$ 516 $ 949 $ 745 $ -
Royalty Obligations
3,250
$ 775 $ 1,050
1,050 375
Notes Payable
20,144
$ 1,363 $ 6,313
12,468 -
Other Commitments
2,000
Total Contractual Obligations $ 27,604
1,591 409 - -
$ 14,263 $ 375
$ 4,245
$ 8,721
Lease Obligations:
As of December 31, 2012, 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).
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.
The Company leases a facility in San Jose California under a noncancelable operating lease which commenced in
September, 2012. The facility has office, manufacturing and warehousing space. The operating lease provides for an
annual base rent of $248,376, for the first year $260,064, for the second year $271,752, for the third year $283,440 for
the fourth year and $295,140 for the fifth year 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.
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.
Royalty Obligations:
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, 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 four 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 $0.
During December, 2011, the Company settled the litigation with Zeiss. 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 $1.8 million as
of December 31, 2012. The Company has a remaining obligation to pay $0.5 million in June 2013, $0.5 million in June
2015 and $0.5 million in June 2017, for a total of $1.5 million.
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Notes Payable:
In connection with the $15.0 million note dated December 2011 and funded in January 2012, the Company is obligated
to pay quarterly interest payments on the outstanding balance at 5.75%. In addition the Company is obligated to repay
25% of the principal amount of the note 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.
In addition to the contractual obligations related to the interest payments from Notes Payable, the Company is obligated
under a revenue purchase agreement discussed in Note 3 of the accompanying financial statements, to pay 4.25% of
revenue up to $25 million, 2.75% of annual revenue from $25 million to $50 million and 1.0% of annual revenue 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. Notes Payable includes the minimum annual payment related
to the revenue purchase agreement.
Other Commitments:
Other Commitments include non-cancelable purchase orders with two key suppliers executed in the normal course of
business.
Effect of New Accounting Pronouncements
In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income, an amendment to FASB ASC Topic 220. The update requires
disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an
entity is required to present either on the face of the statement of operations or in the notes, significant amounts
reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the
amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts
not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide
additional detail about those amounts. This ASU is effective prospectively for the Company for annual and interim
periods beginning January 1, 2013. The Company will comply with the disclosure requirements of this ASU for the
quarter ending March 31, 2013, and does not expect the disclosure to have a material impact.
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, 2012.
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.
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(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.
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, 2012 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, 2012, 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.
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Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
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
Stacey Stevens
Rachel Brem, MD
Anthony Ecock
Michael Klein
Steven Rappaport
Somu Subramaniam
Elliot Sussman, MD
60
59
42
50
45
54
51
59
64
58
61
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
Senior Vice President of
Marketing and Strategy
Director
Director
Director
Director
Director
Director
2006
2006
2011
2006
2006
2004
2008
2010
2006
2010
2002
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
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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 and healthcare industries. 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 culminating in a successful sale of the company. Prior to joining AMICAS, Mr. Burns worked in finance and
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.
Stacey Stevens has served as the Company’s Senior Vice President of Marketing and Strategy since June 2006.
Prior to joining iCAD, Ms. Stevens experience included a variety of sales, business development, and marketing
management positions with Philips Medical Systems, Agilent Technologies, Inc. and Hewlett Packard’s Healthcare
Solutions Group (which was acquired in 2001 by Philips Medical Systems). From February 2005 until joining the
Company she was Vice President, Marketing Planning at Philips Medical Systems, where she was responsible for the
leadership of all global marketing planning functions for Philips’ Healthcare Business. From 2003 to January 2005,
she was Vice President of Marketing for the Cardiac and Monitoring Systems Business Unit of Philips where she was
responsible for all marketing and certain direct sales activities for the America’s Field Operation. Prior to that, Ms.
Stevens held several key marketing management positions in the Ultrasound Business Unit of Hewlett-Packard/Agilent
and Philips Medical Systems. Ms. Stevens earned a Bachelor of Arts Degree in Political Science from the University
of New Hampshire, and an MBA from Boston University’s Graduate School of Management.
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
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 is a General Partner with the private equity investment firm, Welsh, Carson, Anderson &
Stowe (“WCAS”), which he joined in 2007. He has 26 years of experience in the healthcare field with 8 years in
senior management positions at leading healthcare technology companies. At WCAS, Mr. Ecock leads the Resources
Group, a team responsible for helping its 30 portfolio companies identify and implement initiatives to increase growth,
earnings and cash flow. Before joining WCAS, he served as Vice President and General Manager of GE Healthcare’s
Enterprise Sales organization from 2003 to 2007. From 1999 to 2003, he served as Senior Vice President and Global
General Manager of Hewlett Packard’s, then Agilent’s and finally Philips’ Patient Monitoring divisions. Mr. Ecock
spent his early career at the consulting firm of Bain & Company, where he was a Partner in the healthcare and
technology practices and 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 and technology
markets.
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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.
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.
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.
Dr. Elliot Sussman is currently the Chairman of The Villages Health and 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.
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.
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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, 2012, 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, 2012. The response to this item will be contained
in our proxy statement for our 2013 annual meeting of stockholders under the captions “Executive Compensation,”
“Compensation of Directors,” “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 2013 annual meeting of stockholders in part
under the caption “Stock Ownership of Certain Beneficial Owners and Management” and in part below.
Equity Compensation Plans
The following table provides certain information with respect to all of our equity compensation plans in effect
as of December 31, 2012.
Plan Category:
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))
Equity compensation plans
approved by security
holders:
Equity compensation plans
not approved by security
holders (1):
latoT
1,332,882
360,201
549,434,1
56.4$
20.6$
57.4$
310,942
-0-
310,942
(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.
37
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 38
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The response to this item is contained in our proxy statement for our 2013 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 2013 annual meeting of stockholders
under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm,” and is incorporated
herein by reference.
Item 15.
Exhibits, Financial Statement Schedules.
PART IV
a) The following documents are filed as part of this Annual Report on Form 10-K:
i.
ii.
iii.
2(a)
2(b)
2(c)
2(d)
Financial Statements - See Index on page F1.
Financial Statement Schedule - See Index on page F1. 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].
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]. **
3 (a)
Certificate of Incorporation of the Registrant as amended through August 15, 2012.
3(b)
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].
38
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 39
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)
10(h)
10(i)
10(j)
10(k)
10(l)
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].
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].
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 September 25, 2012 between the
Registrant and Kenneth Ferry [incorporated by reference to Exhibit 10.1 of the
Registrant’s report on Form 8-K filed with the SEC on September 26, 2012] *
10(m) 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]. *
10(n)
10(o)
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]. *
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].
39
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 40
10(p) 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].*
10(q)
10(r)
10(s)
10(t)
10(u)
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].
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. [incorporated by
reference to Exhibit 10(y) to the Registrant’s Report on Form 10-K for the year
ended December 31, 2012]
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, 2012 and
December 31, 2011, (ii) Consolidated Statements of Operations for the twelve
months ended December 31, 2011 and 2011 and 2010, (iii) Consolidated
Statements of Cash Flows for the twelve months ended December 31, 2012 and
2011 and 2010, 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.
40
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 41
(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.
41
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 42
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: February 27, 2013
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
/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.
Chairman of the Board,
Director
February 27, 2013
President, Chief Executive Officer
Director (Principal Executive Officer)
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
February 27, 2013
Executive Vice President of Finance,
Chief Financial Officer, Treasurer
(Principal Financial and Accounting
Officer)
Director
Director
Director
Director
Director
Director
42
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
As of December 31, 2012 and 2011
Consolidated Statements of Operations
For the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Stockholders’ Equity
For the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows
For the years ended December 31, 2012, 2011 and 2010
Page
F2
F3
F4
F5
F6
Notes to Consolidated Financial Statements
F7-F32
F-1
35147 iCAD Text_Layout 1 4/1/13 12:08 PM Page 44
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, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2012. 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, 2012 and 2011, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Boston, Massachusetts
February 27, 2013
F-2
35147 iCAD Text_Layout 1 4/1/13 12:09 PM Page 45
iCAD, INC. AND SUBSIDIARY
Consolidated Balance Sheets
Assets
Current assets:
stnelaviuqe hsac dna hsaC
Trade accounts receivable, net of allowance for doubtful
1102 ni 45$ dna 2102 ni 84$ fo stnuocca
ten ,yrotnevnI
stessa tnerruc rehto dna sesnepxe diaperP
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:
stessa rehtO
Intangible assets, net of accumulated amortization
1102 ni 048,8$ dna 2102 ni 447,01$ fo
lliwdooG
stessa rehto latoT
stessa latoT
Liabilities and Stockholders' Equity
Current liabilities:
elbayap stnuoccA
sesnepxe deurccA
elbayap tseretnI
eunever derrefeD
seitilibail tnerruc latoT
seitilibail mret-gnol rehtO
noitrop mret-gnol ,eunever derrefeD
mret-gnol ,stsoc tnemeltteS
ytilibail tnarraW
elbayap setoN
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 10,993,933 in 2012 and 10,950,902 in 2011;
outstanding 10,808,102 in
latipac ni-diap lanoitiddA
ticifed detalumuccA
1102 dna 2102 ni 138,581 tsoc ta kcots yrusaerT
ytiuqe 'sredlohkcots latoT
1102 ni 170,567,01 dna 2102
December 31,
2012
December 31,
2011
(in thousands except share and per share data)
$
849,31
$
675,4
$
$
089,4
911,2
684
335,12
224,4
801
382
792
5,110
726,3
384,1
836
032,51
901,12
779,63
399,95
049,1
241,4
994
025,6
101,31
86
205,1
372,1
835,1
648,41
823,23
$
$
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
1,198
125,5
-
567,5
484,21
141
644,1
536,1
-
-
607,51
-
-
011
614,561
)644,631(
)514,1(
566,72
011
234,461
)270,721(
)514,1(
550,63
ytiuqe 'sredlohkcots dna seitilibail latoT
$
399,95
$
167,15
See accompanying notes to consolidated financial statements.
F-3
35147 iCAD Text_Layout 1 4/1/13 12:09 PM Page 46
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
Goodw
tnemriapmi lli
tessa noitacifinmedni no ssoL
sesnepxe gnitarepo latoT
2012
For the Years Ended December 31,
2010
2011
(in thousands except per share data)
$
$
679,71
992,01
572,82
$
19,328
9,324
28,652
438,4
974,2
139
442,8
130,02
967,7
807,01
669,6
-
-
-
344,52
4,788
2,906
931
8,625
20,027
10,791
13,684
9,999
(4,900)
26,828
741
57,143
18,727
5,848
24,575
2,396
2,486
-
4,882
19,693
6,596
9,750
9,889
-
-
-
26,235
snoitarepo morf ssoL
)214,5(
(37,116)
(6,542)
Other income (expense):
esnepxe tseretnI
ytilibail tnarraw fo eulav riaf ni egnahc morf ssoL
emocni tseretnI
emocni rehtO
ten ,emocni )esnepxe( rehtO
esnepxe xat emocni erofeb ssoL
esnepxe xat emocnI
ssol evisneherpmoc dna 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.
)514,3(
539)
(
53
-
)919,3(
)133,9(
34
(422)
-
27
-
(395)
-
-
73
275
348
(37,511)
(6,194)
76
30
)473,9(
$
(37,587)
$
(6,224)
$)78.0(
$)78.0(
$)54.3(
$)54.3(
)86.0(
)86.0(
$
$
$
697,01
697,01
019,01
019,01
661,9
661,9
F-4
35147 iCAD Text_Layout 1 4/1/13 12:09 PM Page 47
iCAD, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
(in thousands except shares)
Balance at December 31, 2009
9,149,347 $
91 $
150,429 $
(83,261) $
(950) $
66,309
Common Stock
fo rebmuN
Shares Issued Par Value
Additional
ni-diaP
Capital
detalumuccA
Deficit
yrusaerT
Stock
'sredlohkcotS
Equity
(89)
11,680
1,516
-
163,536
(68)
60
-
904
-
-
-
-
-
-
-
(6,224)
(89,485)
-
(950)
-
-
-
-
-
-
-
(465)
-
164,432
(37,587)
(127,072)
-
(1,415)
(88)
11,697
1,516
(6,224)
73,210
(67)
60
(465)
904
(37,587)
36,055
(12)
996
(12)
996
-
165,416 $
-
-
-
-
(9,374)
(136,446) $
-
(1,415) $
(9,374)
27,665
Issuance of common stock relative to
vesting of restricted stock, net of 10,614
shares forfeited for tax obligations
M erger consideration (Note 2)
noitasnepmoc desab-kcotS
ssol teN
Balance at December 31, 2010
Issuance of common stock relative to
vesting of restricted stock, net of 11,468
shares forfeited for tax obligations
Issuance of common stock pursuant
to stock option plans
Shares added to treasury pursuant to litigation
tnemelttes
noitasnepmoc desab-kcotS
57,702
1,669,700
-
-
10,876,749
59,153
15,000
-
-
ssol teN
Balance at December 31, 2011
-
10,950,902
Issuance of common stock relative to
vesting of restricted stock, net of 4,789
shares forfeited for tax obligations
noitasnepmoc desab-kcotS
ssol teN
Balance at December 31, 2012
43,031
-
-
10,993,933 $
See accompanying notes to consolidated financial statements.
1
17
-
-
109
1
-
-
-
-
110
0
-
-
110 $
F-5
35147 iCAD Text_Layout 1 4/1/13 12:09 PM Page 48
iCAD, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Cash flow from operating activities:
ssol teN
Adjustments to reconcile net loss to net cash (used for) provided
by operating activities:
noitaicerpeD
noitazitromA
tnetap fo elas no niaG
tnemriapmi lliwdooG
stessa fo lasopsid no ssoL
tessa noitacifinmedni no ssoL
ytilibail tnarraw fo eulav riaf ni egnahc morf ssoL
esnepxe noitasnepmoc desab-kcotS
stsoc tbed dna tnuocsid tbed fo noitazitromA
snoitagilbo tnemelttes no tseretnI
noitaredisnoc tnegnitnoc fo eulav riaF
Changes in operating assets and liabilities, net of acquisition:
elbaviecer stnuoccA
Inventory
stessa tnerruc rehto dna diaperP
elbayap stnuoccA
sesnepxe deurccA
eunever derrefeD
stnemtsujda latoT
seitivitca gnitarepo yb dedivorp )rof desu( hsac teN
Cash flow from investing activities:
rehto dna ygolonhcet ,stnetap ot snoitiddA
tnempiuqe dna ytreporp ot snoitiddA
tnetap fo elas morf sdeecorP
deriuqca hsac fo ten ,tfoX fo noitisiuqcA
seitivitca gnitsevni rof desu hsac teN
Cash flow from financing activities:
hsac rof kcots nommoc fo ecnaussI
ecnaussi kcots detcirtser ot detaler diap sexaT
tfoX rof tnemyaP
ten ,gnicnanif tbed morf sdeecorP
seitivitca gnicnanif yb dedivorp )rof desu( hsac teN
stnelaviuqe dna hsac ni )esaerced( esaercnI
raey fo gninnigeb ,stnelaviuqe dna hsaC
Cash and equivalents, end of year
Supplemental disclosure of cash flow information:
Interest paid
diap sexaT
For the Years Ended December 31,
2010
2011
2012
(in thousands)
$
)473,9(
$
(37,587)
$
(6,224)
198
409,1
-
-
471
-
935
699
210,1
883
-
)679(
(79)
964
518
)577,1(
218
071,5
)402,4(
)07(
)566(
-
-
)537(
-
)41(
-
523,41
113,41
273,9
675,4
13,948
1,516
55
$
$
$
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
(67)
(1,268)
-
(1,275)
476
1,167
(275)
-
-
-
-
1,516
-
-
-
1,914
278
78
125
446
706
6,431
207
(28)
(322)
275
(24)
(99)
-
(87)
-
-
(87)
(11,693)
16,269
4,576
$
21
16,248
16,269
$
-
40
$
2
89
$
$
$
Non-cash items from investing and financing activities:
Fair market value of iCAD common stock issued to acquire
noitaredisnoc hsac deurcca dna .cnI ,tfoX
$
$
-
$
-
12,668
Return of common stock from escrow related to acquisition
.8002 ni secneicS DAC dna 1102 ni tfoX fo
$
$
564
$
-
See accompanying notes to consolidated financial statements.
F-6
35147 iCAD Text_Layout 1 4/1/13 12:09 PM Page 49
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 an industry-leading provider of advanced image
analysis, workflow solutions and radiation therapy for the early identification and treatment of cancer.
The Company has grown primarily through acquisitions to become a broad player in the oncology market. Its
industry-leading solutions include advanced image analysis and workflow solutions that enable healthcare
professionals to better serve patients by identifying pathologies and pinpointing the most prevalent cancers
earlier, a comprehensive range of high-performance, upgradeable Computer-Aided Detection (CAD) systems
and workflow solutions for mammography, MRI and CT, and the Axxent eBx system which is an isotope-free
cancer treatment platform technology. CAD is reimbursable in the U.S. under federal and most third-party
insurance programs.
The Company intends to continue the extension of its 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’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.
The Company’s headquarters are located in Nashua, New Hampshire, with manufacturing and contract
manufacturing facilities in New Hampshire and Massachusetts, a research and development facility in Ohio
and, and, an operation, research, development, manufacturing and warehousing facility in San Jose, California.
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 revenue 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.
Certain prior period amounts presented in the consolidated financial statements have been reclassified to
conform to current period presentation as follows: Revenue of approximately $460,000 for the year ended
December 31, 2011 previously classified as Product revenue has been reclassified as Service and supplies
revenue.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary,
Xoft, Inc,. All 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, 2012 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, 2012 approximated $13.1 million.
F-7
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(d) Financial instruments
Financial instruments consist of cash and equivalents, accounts receivable accounts payable, notes payable and
warrants. The carrying amounts of the financial instruments, approximated fair value as of December 31,
2012 and 2011.
(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, 2012 and 2011 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, 2012 and 2011 respectively inventories consisted of the following (in thousands):
Raw materials
Work in process
Finished Goods
yrotnevnI
(g) Property and Equipment
As of December 31,
2012
2011
$
$
878
47
1,194
911,2
643
23
1,374
2,040
$
$
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,
2012, 2011 or 2010.
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 2012 and 2011
are as follows (in thousands):
F-8
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(h) Long Lived Assets (continued)
For the years ended December 31,
Gross Carrying Amount
sesnecil dna stnetaP
ygolonhceT
emanedarT
Total amortizable intangible assets
Accumulated Amortization
Patents and licenses
Technology
emanedarT
Total accumulated amortization
2012
2011
$
396
330,52
842
25,974
$
623
25,033
248
25,904
Weighted
average
useful life
5 years
10 years
10 years
$ 433 $ 409
10,088 8,233
891 322
8,840
10,744
Total amortizable intangible assets, net
$
15,230
$
17,064
Amortization expense related to intangible assets was approximately $1,904, $2,094 and $1,167 for the years
ended December 31, 2012, 2011, and 2010, respectively. Estimated remaining amortization of the Company’s
intangible assets is as follows (in thousands):
For the years ended
December 31:
2013
2014
2015
2016
2017
Thereafter
Estimated
amortization
expense
$
1,712
1,456
1,454
1,447
1,426
7,735
15,230
$
(i) Goodwill
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“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 measures the fair value of its reporting unit by comparing its market capitalization calculated
based on the quoted closing share price of the Company’s common stock, using a reasonable control premium,
multiplied by the number of shares outstanding at each reporting period (the “Market Approach”). If the fair value
F-9
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(i) Goodwill (continued)
of the reporting unit is less than carrying value based on the above measure, the Company will then embark
upon a Step 1 approach to determine the fair value of the reporting unit using a discounted cash flow (“Income
Approach”). On an interim basis the Company may also use a discounted cash flow analysis to corroborate the
control premium to provide greater assurance that the Market Approach is reflective of fair value. The Company
has consistently applied a control premium from period to period, and the premium is supported by industry
transaction data of premiums potential acquirers would pay to gain control of the Company.
The Company assesses the potential impairment of goodwill on an annual basis or whenever events or changes
in circumstances indicate that the carrying value may not be recoverable. 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.
At October 1, 2012 (the date of the last annual impairment assessment), fair value, using the Market Approach
exceeded fair value by approximately $0.1 million. The Company also assessed fair value using an Income
Approach which was approximately $39.2 million and exceeded carrying value by approximately $8.8 million.
Accordingly, the Company did not evaluate goodwill using the second step (“Step 2”) of the goodwill
impairment test as fair value exceeded carrying value. At December 31, 2012, with a reasonable control
premium, fair value using the Market Approach was approximately $67.3 million which exceeded carrying
value by approximately $39.6 million.
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 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.
F-10
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(i) Goodwill (continued)
The changes in the carrying amount of goodwill for the years ended December 31, 2011 and 2012 are as
follows (in thousands):
Balance as of December 31, 2010
Purchase accounting adjustments
tnemriapmI
Balance as of December 31, 2011
$45,969
1,968
)828,62(
21,109
Balance as of December 31, 2012
$21,109
The Company recorded purchase accounting adjustments considered to be measurement period adjustments,
related to the acquisition of Xoft in 2010, which had an immaterial effect on the December 31, 2010 balance
sheet. Accordingly, the adjustments were recorded during 2011.
(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 estimated life of the supply agreement.
The Company recognizes revenue from the sale of its digital, film-based CAD and electronic brachytherapy
products and services in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Update No.. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU
2009-13”) and ASC Update No. 2009-14, “Certain Arrangements That Contain Software Elements” (Update
No. 2009-14). (“ASU 2009-14”). Revenue for the sale of certain CAD products is recognized in accordance
with ASC 840 (“Leases”) (“ASC 840”). Revenue related to certain arrangements was recognized in
accordance with FASB ASC Topic 605-35 “Revenue Recognition – Construction-Type and Production-Type
Contracts” (“ASC 605-35”). For multiple element arrangements, revenue is allocated to all deliverables
based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price
to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of fair
value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price
(“BESP”). VSOE generally exists only when the deliverable is sold separately and is the price actually charged
for that deliverable. The process for determining BESP for deliverables without VSOE or TPE considers
multiple factors including relative selling prices; competitive prices in the marketplace, and management
judgment, however, these may vary depending upon the unique facts and circumstances related to each
deliverable.
The Company primarily uses customer purchase orders that are subject to the Company’s terms and conditions
or, in the case of an Original Equipment Manufacturer (“OEM”) are governed by distribution agreements. In
accordance with our distribution agreements, the OEM does not have a right of return, and title and risk of
loss passes to the OEM 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 probable by considering a number of factors, including past
transaction history with the customer and the creditworthiness of the customer, as obtained from third party
credit references.
If the terms of the sale include customer acceptance provisions and compliance with those provisions cannot be
demonstrated, all revenue is 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.
F-11
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition (continued)
The Company has determined that iCAD’s Digital, MRI and film based sales generally follow the guidance
of FASB ASC Topic 605 “Revenue Recognition” (ASC 605”) as the software has been considered essential
to the functionality of the product per the guidance of ASU 2009-14. Typically, the responsibility for the
installation process lies with the OEM partner. 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 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.
Sales of the Company’s electronic brachytherapy product typically include a controller, accessories, and
service and source agreements. The Company allocates revenue to the deliverables in the arrangement based
on the BESP in accordance with ASU 2009-13. Product revenue is generally recognized when the product
has been delivered and service and source revenue is typically recognized over the life of the service and
source agreement.
The Company defers revenue from the sale of service contracts related to future periods and recognizes
revenue on a straight-line basis in accordance with ASC Topic 605-20, “Services”. The Company provides for
estimated warranty costs on original product warranties at the time of sale.
(k) Cost of Revenue
Cost of revenue consists of the costs of products purchased for resale, cost relating to service including 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, and amortization of acquired technology.
(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, 2012, 2011 and 2010,
were as follows:
Warranty costs: (000's)
Beginning balance
Warranty provision
egasU
Ending balance
$
$
$
2012
89
37
)09(
36
2011
86
107
(104)
89
2010
91
11
(16)
86
$
$
$
The warranty costs above include long-term warranty obligations of $10,000, $13,000 and $15,000 for the
years ended December 31, 2012, 2011 and 2010, 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.
F-12
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(n) Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31,
2012, 2011 and 2010 was approximately $762,000, $938,000 and $666,000 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):
2012
2011
2010
sredloherahs nommoc ot elbaliava ssol teN
$
)473,9(
$
(37,587)
$
(6,224)
Basic shares used in the calculation of earnings per share
10,796
10,910
9,166
Effect of dilutive securities:
snoitpo kcotS
kcots detcirtseR
-
-
-
-
-
-
Diluted shares used in the calculation of earnings per share
10,796
10,910
9,166
Net loss per share :
cisaB
detuliD
$
$
)78.0(
)78.0(
$
$
(3.45)
(3.45)
$
$
(0.68)
(0.68)
The following table summarizes the number of shares of common stock for securities, warrants and restricted
stock that were not included in the calculation of diluted net loss per share because such shares are antidilutive:
snoitpo kcots nommoC
stnarraW
kcotS detcirtseR
2012
2011
2010
549,434,1
000,055
570,76
2,052,020
1,080,722
-
122,795
1,203,517
1,058,705
-
153,215
1,211,920
Restricted common stock is issued to executives and employees of the Company and 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.
(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, 2012 and 2011, 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.
F-13
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(p) Income Taxes (continued)
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
The Company follows the provisions of 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:
• 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.
F-14
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(r) Fair Value Measurements (continued)
The Company’s assets that are measured at fair value on a recurring basis relate to the Company’s money
market accounts. The Company’s liabilities that are measured at fair value on a recurring basis relate to
contingent consideration resulting from the acquisition of Xoft and the warrants issued in connection with the
financing arrangement.
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 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. At December
31, 2012 and 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.
In connection with the financing as further described in Note 3 to the Consolidated Financial Statements, the
Company issued 550,000 Warrants to purchase shares of common stock at an exercise price of $3.50 per
share. The value of the warrants was determined using a binomial lattice model and the value is based on
significant inputs not observable in the market including the probability of exercise and the probability of a
major transaction. The significant assumptions underlying the value of the warrants are as follows:
Warrants
ecirp esicrexE
ytilitaloV
)sraey( mret tnelaviuqE
etar tseretni eerf-ksiR
January 6, 2012
December 31, 2012
$
05.3
$
3.50
%4.08
00.6
%4.1
%4.28
5.00
%8.0
F-15
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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 assets and liabilities which are measured at fair value on a recurring
basis by level within the fair value hierarchy.
Fair value measurements using: (000's) as of December 31, 2012
Level 1 Level 2 Level 3 Total
Assets
Money market accounts
$ 12,336
$ - $ - $ 12,336
Total Assets
$ 12,336
$ - $ - $ 12,336
Liabilities
Contingent Consideration
$ - $ - $ - $ -
stnarraW
Total Liabilities
-
-
835,1
835,1
$ - $ - $ 1,538
$ 1,538
Fair value measurements using: (000's) as of December 31, 2011
Level 1
Level 2
Level 3
Total
Assets
Money market accounts
$ 4,452
$ - $ - $ 4,452
Total Assets
$ 4,452
$ - $ - $ 4,452
Liabilities
Contingent Consideration
$ - $ - $ - $ -
Total Liabilities
$ - $ - $ - $ -
The following table provides a summary of changes in the fair value of contingent consideration and the
warrants during the period are as follows (in thousands):
Contingent Consideration Amount
$
Balance as of December 31,
0102
000,5
Measurement period adjustment
(100)
tekram ot kraM
)009,4(
Balance as of December 31, 2011
-
Balance as of December 31,
2102
$
-
stnarraW
1102 ,13 rebmeceD fo sa ecnalaB
ecnaussi ta eulaV
Loss from change in fair value of warrant
Balance as of December 31,
2102
tnuomA
$
-
999
539
$
835,1
F-16
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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, 2012.
(s) Recently Issued Accounting Standards
In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income, an amendment to FASB ASC Topic 220. The
update requires disclosure of amounts reclassified out of accumulated other comprehensive income by
component. In addition, an entity is required to present either on the face of the statement of operations or in
the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective
line items of net income but only if the amount reclassified is required to be reclassified to net income in its
entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity
is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU
is effective prospectively for the Company for annual and interim periods beginning January 1, 2013. The
Company will comply with the disclosure requirements of this ASU for the quarter ending March 31, 2013
and expects the disclosure to have an immaterial impact.
(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 1,669,700 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 $7.00, 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 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 acquisition the Company recorded $4.9 million of
contingent consideration, however the Company does not expect to reach these thresholds, and accordingly
at December 31, 2012, there is no liability recorded for the earn-out consideration.
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(2)
Acquisition of Xoft (continued)
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 (collectively “Zeiss”), 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, as of December 31, 2012 and 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.
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):
Current and other assets
Long-term assets
lliwdooG
Current liabilities
Long-term liabilities
ecirp esahcruP
Amount
$ 5,956
$ 15,751
224,4
(5,196)
(3,154)
$
977,71
The goodwill of $4.4 million is not deductible for income tax purposes.
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,
however a loss is reasonably possible. Accordingly, since the amount of the potential damages in the event
of an adverse result is not reasonably estimable, we are unable to estimate a range of loss and no expense has
been recorded with respect to the contingent liability associated with this matter.
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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 revenue 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 450,000 shares of common stock at an exercise price of $3.50 per share and (ii) a second
Warrant (the “B Warrant”) to purchase an additional 100,000 shares of common stock at a exercise price of
$3.50 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 will exercise its option 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 paid the Company $4,107,900, in the form of an original issue discount from the
$15.0 million Facility agreement, in exchange for the Purchasers’ right to receive a percentage of the
Company’s revenue. 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 revenue 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 revenue 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
revenue up to $25 million in annual revenue for the calendar year, 2.75% of revenue from $25 million in
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(3)
Financing Arrangements (continued)
annual revenue up to $50 million in annual revenue for such calendar year and 1.0% of revenue in excess of
$50 million in annual revenue for such calendar year. The applicable percentage for the calendar years 2015,
2016, and, if applicable, 2017, are 4.25% of revenue up to $25 million in annual revenue for such calendar
year, 2.25% of revenue from $25 million up to $50 million in annual revenue for such calendar year and 1.0%
of revenue in excess of $50 million in annual revenue 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 550,000 shares of common stock at an exercise price of $3.50 per share (the
“Warrants”). On the Funding Date, the Warrants to purchase 450,000 shares of the Company’s common stock
became immediately exercisable. If the Company extends the maturity date of the Facility Agreement, the
100,000 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.
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
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(3)
Financing Arrangements (continued)
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.
The Company has determined that the Facility Agreement will be accounted for as debt pursuant to ASC 470,
Debt (“ASC 470”). The Facility Agreement had an original issue discount of approximately $4.1 million
which was assigned to the Revenue Purchase Agreement and an additional value allocated to the warrants of
approximately $1.0 million. The original issue discount is being accreted to the $15.0 million face value of
the Note on the effective interest method with an effective interest rate of 17.35% based on the discount of
approximately $5.1 million.
The original issue discount of approximately $4.1 million was assigned to the Revenue Purchase Agreement.
Under this agreement, the Company is obligated to pay 4.25% of revenue up to $25 million, 2.75% of annual
revenue from $25 million to $50 million during 2012, 2013 and 2014, and 2.25% of annual revenue during
2015, 2016 and if the Facility Agreement is extended, in 2017, and 1.0% of annual revenue in excess of $50
million. The proceeds of the Revenue Purchase Agreement will be capitalized as debt in accordance with ASC
470-10-25, “Sales of Future Revenues or Various Other Measures of Income”. Expected revenue related
payments under this agreement are included as interest expense in the period incurred. The repayment of the
$4.1 million original issue discount capitalized as debt will be amortized as a reduction of interest expense over
the term of the arrangement. The effective amortization rate of the repayment is approximately 28.8% which
is calculated based on the expected cash outflows over the term of the arrangement.
The overall effective interest rate of the financing arrangement, which excludes future changes in the fair
value of the warrants, is currently estimated to be approximately 19%.
The Company determined the Warrants should be classified as debt in accordance with ASC 480,
“Distinguishing Liabilities from Equity”, as the Warrants contain a feature whereby the Company could be
required to redeem the Warrants for cash upon the occurrence of a major transaction, as defined in the Warrants.
The value of the Warrants was determined using a binomial lattice model as the provisions in the Warrant could
not be valued using the Black-Scholes model. The Warrant is being valued at fair value at each reporting
period with changes in fair value recorded in the consolidated statement of operations.
The Company has determined that the B Warrant does not have any value as of the Funding Date, as the B
Warrant is exercisable upon the Company’s election to extend the Facility Agreement. The Company does
not plan to extend the Facility Agreement at this time. If the Company determines it will extend the Facility
Agreement, the value of the “B Warrant” will be determined using the binomial lattice model at such time.
The following amounts are included in the consolidated balance sheet as of December 31, 2012 related to the
Facility and Revenue Purchase agreements:
Principal Amount of Facility Agreement 15,000
)691,4(
tnuocsid dezitromanU
10,804
Carrying amount of Facility Agreement
$
tnemeergA esahcruP euneveR
latot elbayap setoN
$
240,4
648,41
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(3)
Financing Arrangements (continued)
The following amounts comprise interest expense included in our consolidated statement of operations for
the twelve months ended December 31, 2012:
esnepxe tseretni hsaC
Non-cash amortization of debt discount
stsoc tbed fo noitazitromA
Amortization of settlement obligations
esnepxe tseretni latoT
December 31, 2012
510,2
$
845
761
388
514,3
$
Cash interest expense represents the amount of interest expected to be paid in cash under the agreements,
which represents the interest of 5.75% on the Facility Agreement and the expected cash payments on the
Revenue Purchase Agreement for the period. Non-cash amortization is the amortization of the discount on
the Facility Agreement. The amortization of debt costs represents the costs incurred with the financing, which
is primarily the facility fee and the finder’s fee which has been capitalized and is expensed using the effective
interest method. The amortization of the settlement obligations represent the interest associated with the
settlement agreements for both Zeiss and Hologic, Inc.(“Hologic”).
(4)
Accrued Expenses
Accrued expenses consist of the following at December 31(in thousands):
Accrued salary and related expenses
elbayap stnuocca deurccA
seef lanoisseforp deurccA
Accrued short term settlement costs
sesnepxe deurcca rehtO
tner derrefeD
(5)
Stockholders’ Equity
(a) Stock Options
2012
$
2011
$
2,112
825
303
721
524
35
4,142
2,249
100,1
753
1,241
203
173
5,521
$
$
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 240,000 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, 2012, there are no further options available for grant
under this plan.
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(5)
Stockholders’ Equity (continued)
(a) Stock Options (continued)
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 100,000 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, 2012, there were no further options available for grant under the 2002 Plan.
The 2004 Stock Incentive Plan (“The 2004 Plan”).
The 2004 Plan was adopted by the Company’s stockholders in June 2004. The 2004 Plan provides for the 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 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 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, 2012 there were 27,612 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 120,000 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, 2012, there were 1,906 shares available for issuance under the 2005 Plan.
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(5)
Stockholders’ Equity (continued)
(a) Stock Options (continued)
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 1,050,000 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 160,000 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.
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, 2012, there were 10,864 shares available for
issuance under the 2007 Plan.
The 2012 Stock Incentive Plan (“The 2012 Plan”).
The 2012 Plan was adopted by the Company’s stockholders in May 2012. The 2012 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 2012 Plan, (i) the 2012 Plan provides for a total of 600,000 shares of
the Company’s common stock to be available for distribution pursuant to the 2012 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 2012 Plan during
any calendar year or part of a year may not exceed 100,000 shares.
The 2012 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 2012 Plan, determine participants who will be granted awards under the
2012 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 2012 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.
With respect to options granted under the 2012 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, 2012, there were 208,630 shares available for
issuance under the 2012 Plan.
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(5)
Stockholders’ Equity (continued)
(a) Stock Options (continued)
A summary of stock option activity for all stock option plans is as follows:
Outstanding, January 1, 2010
detnarG
desicrexE
detiefroF
Outstanding, December 31, 2010
detnarG
desicrexE
detiefroF
Outstanding, December 31, 2011
detnarG
desicrexE
detiefroF
Outstanding, December 31, 2012
Option
Shares
1,031,824
083,46
-
)005,73(
1,058,705
753,136
)000,51(
)933,495(
1,080,722
106,396
-
)879,933(
1,434,345
Price range
per share
$4.00-$26.40
$7.00-$9.75
-
$7.50-$24.40
$4.00-$26.40
$2.75-$7.10
$4.00
$3.00-$24.40
$2.75-$26.40
$2.00-$3.70
-
$2.85-$24.40
$2.00-$26.40
Weighted
Average
$12.50
$7.80
$0.00
$11.35
$12.25
$5.35
$4.00
$9.60
$9.75
$2.43
$0.00
$15.95
$4.75
Exercisable at
year-end
Option Shares
Price range per
share
Weighted
average
exercise price
2010
2011
2012
1,018,476 $4.00-$26.40
679,716 $2.80-$26.40
485,553 $2.00-$26.40
$12.35
$12.40
$7.06
Available for future grants at December 31, 2012 from all plans: 249,012
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,
2011
41 $
172
422
494
$ 904
2012
51 $
178
242
561
$ 996
2010
41 $
138
763
997
$ 1,516
As of December 31, 2012, there was $1.3 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 1.14 years.
F-25
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(5)
Stockholders’ Equity (continued)
(a) Stock Options (continued)
Options granted under the stock incentive plans were valued utilizing the Black-Scholes model using the
following assumptions and had the following fair values:
etar tseretni eerf-ksir egarevA
dleiy dnedivid detcepxE
efil detcepxE
ytilitalov detcepxE
Weighted average exercise price
Weighted averag
eulav riaf e
Years Ended December 31,
2011
2012
2010
%89.0
enoN
sraey 5.3
%15.2
enoN
sraey 5.3
%9.86 ot %9.56
%3.96 ot %0.76
$2.43
71.1$
$5.35
56.2$
%49.1
enoN
sraey 5.3
%4.96
$7.80
03.3$
The Company’s 2012, 2011 and 2010, 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, 2012, 2011 and 2010 was $1.8 million,
$2,050 and $91,523, respectively. The aggregate intrinsic value of the options exercisable at December 31,
2012, 2011 and 2010 was $0.3 million, $250 and $85,790, respectively. The aggregate intrinsic value of stock
options exercised during 2012, 2011 and 2010 was $0, $24,088 and $0, respectively. The Company used the
market price of $4.79, $2.85 and $6.75 per share at December 31, 2012, 2011 and 2010, 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, 2012, there were 67,075 unvested restricted stock awards
outstanding. A summary of restricted stock activity for all stock option plans is as follows:
Years Ended December 31,
2011
2012
2010
Beginning outstanding balance
detnarG
detseV
detiefroF
Ending outstanding balance
122,795
-
)783,34(
)333,21(
67,075
153,215
000,26
)351,95(
)762,33(
122,795
118,431
001,801
)207,75(
)416,51(
153,215
The aggregate intrinsic value of restricted stock outstanding at December 31, 2012, 2011 and 2010 was $0.3
million, $0.3 million, and $1.0 million, respectively. The aggregate intrinsic value of restricted stock vested
during 2012, 2011 and 2010 was $0.2 million, $0.2 million and $0.4 million, respectively. The Company
used the market price of $4.79, $2.85 and $6.75 per share at December 31, 2012, 2011 and 2010, respectively,
to determine the aggregate intrinsic values.
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(6)
Income Taxes
The components of income tax expense for the years ended December 31, 2012, 2011 and 2010 are as follows:
Current provision (benefit):
laredeF
etatS
2102
1102
0102
$
$
$ -
34
$ 34
$ -
67
$ 67
-
03
03
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, 2012, 2011 and 2010 is as follows:
etar yrotutats laredeF
State income taxes, net of federal benefit
Net state impact of deferred rate change
esnepxe noitasnepmoc kcotS
Goodwill impairment
noitaredisnoc tnegnitnoC
secnereffid tnenamrep rehtO
Change in valuation allowance
rehtO
xat emocni evitceffE
2012
2011
2010
%0.43
4.0%
0.1%
)%8.1(
%0.0
%0.0
)%4.2(
(34.4%)
%0.0
)%5.0(
%0.43
1.8%
0.2%
)%4.0(
)%3.42(
%4.4
)%5.0(
(15.6%)
%4.0
%0.0
%0.43
0.0%
0.0%
%0.0
%0.0
%0.0
%2.3
(37.3%)
%1.0
%0.0
Deferred tax assets and liabilities are recognized for the expected future tax consequences of net operating loss
carryforwards, tax credit carryforwards and temporary differences between the financial statement carrying
amounts and the income tax basis of assets and liabilities. A valuation allowance is applied against any net
deferred tax asset if, based on the available evidence, it is more likely than not that the deferred tax assets will
not be realized.
Deferred income taxes reflect the impact of “temporary differences” between the amount of assets and liabilities
for financial reporting purposes and such amounts as measured by tax laws and regulations. The Company has
fully reserved the net deferred tax assets, as it is more likely than not that the deferred tax assets will not be
utilized. Deferred tax assets (liabilities) are comprised of the following at December 31 (in thousands):
Inventory (Section 263A)
sevreser yrotnevnI
sevreser elbavieceR
Other accruals
eunever derrefeD
Accumulated
depreciation/amortization
snoitpo kcotS
Developed technology
stiderc xaT
NOL carryforward
Net deferred tax assets
Valuation allowance
$
2012
2011
$
298
281
25
1,159
798
179
808,1
(3,915)
896,1
34,288
36,646
320
262
77
2,525
205
138
1,646
(4,268)
1,297
31,786
33,988
(36,646)
(33,988)
$
-
$
-
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(6)
Income Taxes (continued)
The valuation allowance as of December 31, 2012 and 2011 totaled approximately $36.6 million and $34.0
million 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, 2012, the Company has net operating loss carryforwards totaling approximately $96.0
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, 2012, 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,
2012 and 2011.
The Company currently has approximately $17.0 million (including approximately $9.0 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 2032. 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 $1.7 million. The Company currently has approximately
$3.5 million (including approximately $1.8 million that relate to Xoft, Inc.) in tax credit carryforwards that
are subject to limitations. The tax credits related to Xoft have been fully reserved for and as a result no
deferred tax asset has been recorded. The credits expire in various years through 2032.
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, 2012 and 2011, 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, 2012, 2011 and 2010. 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
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, 2012 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, electronic brachytherapy
equipment and other medical equipment, and to foreign distributors of mammography and electronic
brachytherapy equipment. Export sales to a single country did not exceed 10% of total revenue in any year.
Total export sales were approximately $2.9 million or 10% of revenue in 2012 as compared to $1.8 million
or 6% of total revenue in 2011 and $4.0 million or 16% of total revenue in 2010.
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(7)
Segment Reporting, Geographical Information and Major Customers (continued)
(b) Geographic Information (continued)
As of December 31, 2012 and 2011, the Company had outstanding receivables of $0.8 million and $0.1
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 $4.5 million in 2012, $6.8 million in 2011 and $9.3 million in 2010 or 16%, 24%,
and 38% of the Company’s revenue, respectively, with accounts receivable balances of $0.6 and $0.2 million
at December 31, 2012 and 2011, respectively. Fuji Medical Systems accounted for $2.3 million in 2012, $3.2
million in 2011 and $3.1 million in 2010 or 8%, 11% and 13% of the Company’s revenue, respectively, with
accounts receivable balances of $0.3 million and $0.2 million at December 31, 2012 and 2011, respectively.
(8)
Commitments and Contingencies
(a) Lease Obligations
As of December 31, 2012, 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).
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.
The Company leases a facility in San Jose California under a noncancelable operating lease which commenced
in September, 2012. The facility has office, manufacturing and warehousing space. The operating lease
provides for an annual base rent of $248,376, for the first year $260,064, for the second year $271,752, for
the third year $283,440 for the fourth year and $295,140 for the fifth year 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.
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.
Rent expense for all leases for the years ended December 31, 2012, 2011 and 2010 was $799,000, $957,000
and $656,000, net of sublease income of $0, $0, and $200,046, respectively.
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(8)
Commitments and Contingencies (continued)
(a) Lease Obligations (continued)
Future minimum rental payments due under these agreements as of December 31, 2012 are as follows (in
thousands):
Fiscal Year
Operating
Leases
3102
4102
5102
6102
7102
$
615
674
374
094
552
2,210
$
(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, 2012.
(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, 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 four
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 $0.
During December, 2011, the Company settled the litigation with Zeiss. 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 $1.8 million as of December 31, 2012. The Company has a remaining obligation to pay $0.5
million in June 2013, $0.5 million in June 2015 and $0.5 million in June 2017, for a total of $1.5 million.
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(8)
Commitments and Contingencies (continued)
(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. On April 11, 2012, the above-referenced cases were
consolidated for all purposes, excluding trial. On May 2, 2012, plaintiffs filed a master consolidated complaint,
with the same case number as the original filed complaint. On August 2, 2012, plaintiffs filed fictitious name
amendments adding defendants, Mel Silverstein, M.D., Peter Chen, M.D., Lisa Guerrera, M.D., Ralph
Mackintosh, Ph.D., Robert Dillman, M.D., and Jack Cox. On September 14, 2012, an additional Jane Doe
plaintiff and John Doe spouse filed a complaint in the Orange County Superior Court (Docket No. 30-2012-
00598740-CU-PL-CXC) with identical allegations as plaintiffs above against the same original defendants.
On October 17, 2012, plaintiff John Doe No. 11 dismissed his complaint, with prejudice, as to all defendants.
On November 26, 2012, plaintiffs filed an additional fictitious name amendment adding defendant, American
Ceramic Technology, Inc. On January 15, 2013, plaintiffs filed a dismissal, with prejudice, as to defendant,
Mel Silverstein, M.D., only. It is alleged that each Jane Doe plaintiff 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 was 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, however a
loss is reasonably possible. Accordingly, since the amount of the potential damages in the event of an adverse
result is not reasonably estimable, we are unable to estimate a range of loss and no expense has been recorded
with respect to the contingent liability associated with this matter.
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iCAD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(9)
Quarterly Financial Data (unaudited in thousands, except per share data)
2012
First quarter
Second quarter
Third quarter
Fourth quarter
2011
First quarter
Second quarter
Third quarter
Fourth quarter
Loss
per share
available to
to common
Weighted
average
number of
$
Gross
Net
Net
sales profit loss stockholders shares outstanding
(2,264)
(2,943)
(1,465)
(2,702)
($0.21)
($0.27)
($0.14)
($0.25)
10,776
10,794
10,805
10,808
6,343
5,931
8,183
7,818
4,427
4,169
5,882
5,553
$
$
$
7,344
6,646
8,052
6,610
$
5,132
4,503
5,889
4,503
$
(4,312)
(5,411)
(25,637)
(2,227)
($0.40)
($0.50)
($2.35)
($0.20)
10,873
10,910
10,936
10,918
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F-33
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F-34
Dear Shareholder:
This past year represented a period of exciting growth
• Our system does not require a radioactive isotope
in our cancer therapy business. We also made progress
or a costly shielded environment, which enables
with the transformation of our cancer detection
the system to be used in any size hospital or clinic.
business model, positioning the company for long-term
• Breast IORT treatment can be delivered in as
growth in both areas. We are executing on our strategy
by delivering a new generation of highly targeted tools
little as eight minutes, directly following the
lumpectomy, while the patient is still in the
for detection, diagnosis, and treatment of cancers
operating room.
across the care cycle.
Two years ago, we expanded the company’s oncology
strategy into treatment by acquiring Xoft, Inc. We
are already seeing rapid adoption of electronic
brachytherapy in several areas of cancer treatment.
• Our treatment delivers the dose directly to the
cancerous areas with minimal impact to healthy
tissue (conventional radiation treatment delivers
treatment from outside the body, potentially
exposing healthy tissue to radiation).
In fact, in the medical device arena where changes in
One of the most compelling indications of market
treatment protocols often take years, we have made
interest in IORT is the fact that we experienced better
remarkable progress in only 18 months. The revenue
than expected adoption in 2012 despite a challenging
contributions of the Xoft Axxent eBx system, particularly
reimbursement environment for much of the year. The
in the last two quarters of 2012, were a solid indication
fact that we almost doubled the business is a good
of market interest in Intra-Operative Radiation Therapy
indication of clinical interest in IORT. With positive
(IORT) for breast cancer, as well as the use of the system
changes in reimbursement now in place, we expect this
for skin cancer therapy.
interest to continue to grow.
Each year, it is estimated that approximately 110,000
Xoft technology for skin cancer treatment
women with early stage breast cancer will be potential
candidates for IORT. Between 2011 and 2012, our
The Xoft technology is also FDA-approved for skin cancer.
revenues for the Xoft Axxent eBx system almost doubled
The U.S. addressable market for skin treatment is even
from $5.9 million in $11 million. This revenue represents
larger than for breast cancer treatment, estimated at over
only one percent penetration of the total addressable
750,000 patients per year. Our system offers a desirable
market based on breast IORT procedure volume,
alternative to surgery, where repeated removal of lesions
which provides a strong indication of future growth
can cause visible scarring. In 2012, we experienced a 300%
increase in the number of skin procedures.
The clinical advantages of the Xoft Axxent eBx
Dr. Ajay Bhatnagar, Cancer Treatment Services of
opportunities.
system
Radiation treatment for breast and other cancers
patients with non-melanoma skin cancer. My recently
is moving from conventional external beam therapy
published paper demonstrated no recurrences, good
to shorter duration, more targeted therapy. The
advantages of our Xoft Axxent eBx system have
to excellent cosmesis and acceptable toxicity in 122
patients in up to two year follow up. Patients also
significant implications for improved patient care and
appreciate both the convenience and avoidance of
quality of life:
surgery benefits of Xoft eBx for skin.”
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)
General Partner,
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)
Chairman of The Villages Health and 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
Arizona, commented, “Electronic brachytherapy utilizing
the Xoft System is an ideal modality for appropriate
(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.
2012 Annual Report
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