iCAD - 10-Q quarterly report FY

 

(Mark One)

(603) 882-5200

Not Applicable

iCAD, INC.

INDEX

(unaudited)

(unaudited)

(unaudited)

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: Certain information included in this Item 2 and elsewhere in this Form 10-Q that are not historical facts contain forward looking statements that involve a number of known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward looking statements. These risks and uncertainties include, but are not limited to, uncertainty of future sales levels, protection of patents and other proprietary rights, the impact of supply and manufacturing constraints or difficulties, product market acceptance, possible technological obsolescence of products, increased competition, litigation and/or government regulation, changes in Medicare reimbursement policies, competitive factors, the effects of a decline in the economy in markets served by the Company and other risks detailed in the Company’s other filings with the SEC. The words “believe”, “demonstrate”, “intend”, “expect”, “estimate”, “anticipate”, “likely”, “seek”, “should” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date the statement was made.

iCAD is an industry-leading provider of advanced image analysis and workflow solutions that enable radiologists and other healthcare professionals to better serve patients by identifying pathologies and pinpointing cancer earlier. iCAD offers a comprehensive range of high-performance, expandable Computer-Aided Detection (CAD) systems and workflow solutions for mammography (film-based, digital radiography (DR) and computed radiography (CR), Magnetic Resonance Imaging (MRI), and Computed Tomography (CT)). iCAD’s solutions aid in the early detection of the most prevalent cancers including breast, prostate and colon cancer. Early detection of cancer is the key to better prognosis, less invasive and lower treatment costs, and higher survival rates. Performed as an adjunct to mammography screening, CAD has quickly become the standard of care in breast cancer detection, helping radiologists improve clinical outcomes while enhancing workflow. Computer-enhanced breast and prostate MRI analysis streamlines case interpretation workflow and generates more robust information for more effective patient treatment. CAD for mammography screening is also reimbursable in the U.S. under federal and most third-party insurance programs. Since receiving approval from the U.S. Food and Drug Administration (“FDA”) for the Company’s first breast cancer detection product in January 2002, over thirty eight hundred of iCAD’s CAD systems have been placed in mammography practices worldwide. iCAD is the only stand alone company offering CAD solutions for the early detection of breast cancer.

iCAD’s CAD mammography products have been shown to detect up to 72 percent of the cancers that biopsy proved were missed on the previous mammogram, an average of 15 months earlier. Our advanced pattern recognition technology analyzes images to identify patterns and then uses sophisticated mathematical analysis to mark suspicious areas.

The Company’s CAD systems include proprietary algorithm and other technology together with standard computer and display equipment. CAD systems for the film-based analog mammography market also include a radiographic film digitizer, either manufactured by the Company or others for the digitization of film-based medical images.

The Company intends to apply its core competencies in pattern recognition and algorithm development in disease detection to its future product development efforts. Its focus is on the development and marketing of cancer detection products for disease states where there are established or emerging protocols for screening as a standard of care. iCAD expects to pursue development or acquisition of products for select disease states that demonstrate one or more of the following: it is clinically proven that screening has a significant positive impact on patient outcomes, where there is an opportunity to lower health care costs, where screening is non-invasive or minimally invasive and where public awareness is high. The Company also intends to pursue opportunities beyond CAD through possible strategic acquisitions as part of its growth strategy, as such the Company continues to actively evaluate strategic opportunities in adjacent markets that could leverage its opportunities for growth beyond its historic core markets.

iCAD has applied its patented detection technology and algorithms to the development of CAD solutions for use with virtual colonoscopy or CT Colonography (CTC) to improve the detection of colonic polyps. The Company’s pattern recognition and image analysis expertise are readily applicable to colonic polyp detection and the Company has developed a CTC CAD solution. Virtual colonoscopy (CTC) is a technology that has evolved rapidly in recent years. Based on the results of the National CT Colonography trial, the Company expects that the market for virtual colonoscopy will grow along with the procedures for early detection of colon cancer. This trial demonstrated that CTC is highly accurate for the detection of intermediate and large polyps and that the accuracy of CTC is similar to a colonoscopy. CT Colonography or CTC is emerging as an alternative imaging procedure for evaluation of the colon. The Company has developed VeralookÔ, a product for computer aided detection of polyps in the colon using CTC and completed the clinical testing of its CTC CAD product in the first quarter of 2009. The Company filed a 510(k) application with the FDA in May 2009 seeking FDA clearance to market Veralook in the U.S. and received FDA clearance on August 4, 2010. Colorectal cancer has been shown to be highly preventable with early detection and removal of polyps.

In July 2008, the Company acquired pharmaco-kinetic based CAD products that aid in the interpretation of contrast enhanced MRI images of the breast and prostate and began marketing these products in the fourth quarter of 2008. The interpretation of MRI exams also benefits from advanced image analysis and clinical decision support tools. MRI is an excellent tool to detect breast cancer as well as prostate cancer. While MRI is a more expensive option than traditional mammography, it enables physicians to view tumors which may have been missed during routine screenings. MRI uses magnets and radio waves instead of x-rays to produce very detailed, cross-sectional images of the body, and can be used to look specifically at those areas.

The Company’s headquarters are located in Nashua, New Hampshire, with manufacturing and contract manufacturing facilities in New Hampshire and Massachusetts and a research and development facility in Ohio.

The Company’s discussion and analysis of its financial condition, results of operations, and cash flows are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to accounts receivable allowance, inventory valuation and obsolescence, intangible assets, income taxes, warranty obligations, contingencies and litigation. Additionally, the Company uses assumptions and estimates in calculations to determine stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company’s critical accounting policies are set forth in its Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The Company believes that revenue recognition is a critical accounting policy because it is governed by multiple complex accounting rules; however, there are no significant estimates or assumptions used in recording the Company’s revenue.

Revenue. Total revenue for the three month period ended June 30, 2010 was $6,097,312 compared with revenue of $5,729,887 for the three month period ended June 30, 2009, for an increase of $367,425 or 6.4%. Total revenue for the six month period ended June 30, 2010 was $12,617,808 compared with revenue of $12,894,885 for the six month period ended June 30, 2009, for a slight decrease of $277,077 or 2.1%. These results for the three and six month periods were due primarily to an increase in digital and MRI CAD revenue and in service and supply revenue, offset by a decline in film-based CAD revenue.

The Company’s digital and MRI CAD revenue for the second quarter of 2010 increased $891,921 or 28.8%, to $3,991,346, compared to revenue of $3,099,425 in the same period in 2009. Revenue during the second quarter of 2009 was particularly soft due to the weakened economy and budget freezes in healthcare capital spending. The Company’s digital and MRI CAD revenue for the six months ended June 30, 2010 increased $280,082 or 3.6%, to $8,156,628, compared to revenue of $7,876,546 in the same period in 2009.

Revenue from iCAD’s film based products for the three and six month periods ended June 30, 2010 decreased 57.9% and 46.1%, respectively, to $725,088 and $1,771,458, compared to $1,722,669 and $3,285,169 in the three and six month periods ended June 30, 2009. This decrease can be attributed to current economic conditions and deferred hospital spending, as the majority of film-based revenue is derived from sales of the Company’s TotalLook MammoAdvantage. The TotalLook MammoAdvantage product is used for digitizing film based prior mammography exams for comparative reading and is sold to further optimize workflow in a digital mammography environment. The TotalLook MammoAdvantage product is typically sold as customers are preparing to go digital. In addition, the demand for film-based products and accessories continues to decline as the marketplace continues to transition to digital technologies.

Service and supply revenue for the three and six month periods ended June 30, 2010 increased 52.1% and 55.2%, respectively, to $1,380,878 and $2,689,722, compared to $907,793 and $1,733,170 in the three and six month periods ended June 30, 2009. The increase in the Company’s service and supply revenue is due primarily to increased service contract revenue on the Company’s growing installed base of products as customers migrate from warranty to service contracts, and to renewed service contract agreements. Service contract revenue as a percentage of the Company’s total service and supply revenue for the three and six months ended June 30, 2010 represented 94% and 91%, respectively, compared to 92% and 93% for the same periods of 2009.

Gross Margin. Gross margin increased to 88.1% and 87.6% for the three and six month periods ended June 30, 2010 compared to 81.6% and 82.1%, respectively, in the same three and six month periods in 2009. The increase in total gross margin is primarily attributable to component cost reductions, the realization of some average selling price increases, overhead cost reduction efforts and lower repair costs related to service contracts on a growing installed base of digital products and the new TotalLook MammoAdvantage product. Gross margin on product revenue increased to 88.2% and 87.7% for the three and six months ended June 30, 2010 compared to 81.5% and 82.5%, respectively, in the same period in 2009. Gross margin on service and supply revenue increased to 88.0% and 87.1% for the three and six month periods ended June 30, 2010 compared to 82.4 and 79.3%, respectively, in the same three and six month periods in 2009.

Engineering and Product Development. Engineering and product development costs for the three and six month periods ended June 30, 2010 decreased by $212,932 or 12.2% and $818,021 or 21.0%, respectively, from $1,738,278 and $3,899,493 in 2009 to $1,525,346 and $3,081,472, respectively, in 2010. The decrease in engineering and product development costs during the three and six month periods ended June 30, 2010 was primarily due to decreases in compensation related expenses of $86,000 and $301,000, respectively, resulting primarily from staff reductions, and in consulting services of $28,000 and $340,000 principally relating to the licensing and clinical trial costs for the Company’s CT Colon product which was completed in the first quarter of 2009. In addition, during the three and six month periods, the Company recorded decreases in legal, depreciation and various other expenses totaling $99,000 and $177,000, respectively.

Marketing and Sales. Marketing and sales expense for the three and six month periods ended June 30, 2010 increased by $389,272 or 14.7% and $277,314 or 5.0%, respectively, from $2,652,312 and $5,597,433 in 2009 to $3,041,584 and $5,874,747, respectively, in 2010. The increase in marketing and sales expense during this three and six month period was primarily due to the increase of $252,000 and $278,000, respectively, in consulting services, an increase in compensation related expenses of $219,000 and $226,000, and in sales commissions of $62,000 and $41,000 due to the increase in revenue during the second quarter of 2010. These increases were offset by decreases in public relations, tradeshow, marketing, depreciation, and various administrative expenses totaling $144,000 and $268,000, respectively, for the three and six month periods ended June 30, 2010.

General and Administrative. General and administrative expenses for the three and six month periods ended June 30, 2010 increased by $123,825 or 7.2%, and $774,759 or 21.8%, respectively, from $1,716,083 and $3,551,394 in 2009 to $1,839,908 and $4,326,153, respectively, in 2010. The increase in general and administrative expense during this three and six month period of 2010 was due primarily to an increased bonus accrual of $184,000 and $189,000, respectively, and in legal and professional fees of $70,000 and $751,000 associated primarily with a potential acquisition that was not consummated. This increase in general and administrative expense was offset by decreases in consulting, legal, taxes and various other administrative expenses totaling $130,000 and $165,000, respectively, for the three and six month periods ended June 30, 2010.

Other Income: During the second quarter of 2010 the Company received a one-time payment of $275,000 related to the sale of a patent that was acquired as part of the Qualia Computing, Inc. acquisition in 2003. The patent is for technology that is outside of the medical device industry and unrelated to the Company’s core business.

Interest Income/Expense. Net interest income for the three and six month periods ended June 30, 2010 decreased by $9,269 and $26,179, respectively, from $30,750 and $65,676 in 2009 to $21,481 and $39,497 in the same period of 2010. The decrease in interest income is due primarily to the reduction of the interest rate earned from the Company’s money market accounts.

Net Loss. As a result of the foregoing, the Company recorded a net loss of ($736,119) or ($0.02) per share for the three month period ended June 30, 2010 on revenue of $6,097,312, compared to a net loss of ($1,399,253) or ($0.03) per share for the three month period ended June 30, 2009 on revenue of $5,729,887. The net loss for the six months ended June 30, 2010 was ($1,920,726) or ($0.04) per share on revenue of $12,617,808, compared to a net loss of ($2,397,780) or ($0.05) per share on revenue of $12,894,885 for the six months ended June 30, 2009.

Backlog. The Company’s product backlog (excluding service and supplies) as of June 30, 2010 totaled approximately $583,000 as compared to $511,000 at June 30, 2009 and $762,000 at March 31, 2010. It is expected that the majority of the backlog at June 30, 2010 will be shipped within the current fiscal year. Backlog as of any particular period should not be relied upon as indicative of the Company’s net revenues for any future period as a large amount of the Company’s product is booked and shipped within the same quarter.

The Company believes that its current liquidity and capital resources are sufficient to sustain operations through at least the next 12 months, primarily due to cash on hand and projected cash balances from continuing operations. The Company’s ability to generate cash adequate to meet its future capital requirements will depend primarily on operating cash flow. If sales or cash collections are reduced from current expectations, or if expenses and cash requirements are increased, the Company may require additional financing, although there are no guarantees that the Company will be able to obtain the financing if necessary. We will continue to closely monitor our liquidity and the capital and credit markets.

At June 30, 2010, the Company had current assets of $22,654,598, current liabilities of $7,015,635 and working capital of $15,638,963. The ratio of current assets to current liabilities was 3.2:1.

Net cash provided by operating activities for the six months ended June 30, 2010 was $823,540, compared to net cash provided by operating activities of $217,967 for the same period in 2009. The cash provided by operating activities for the six months ended June 30, 2010 resulted from decreases in accounts receivable of $540,122, inventory of $228,768, accrued expenses of $509,078 and deferred revenue of $575,185, plus non-cash items including depreciation and amortization totaling $831,799 and stock based compensation of $980,865, which were offset by the net loss of $1,920,726, the gain on the sale of a patent of $275,000, an increase in prepaid expenses, other current assets and deposits of $15,699 and a decrease in accounts payable of $630,852.

The net cash provided by investing activities for the six months ended June 30, 2010 was $161,511, which consisted of proceeds from the sale of a patent of $275,000 offset by additions to patents, technology and other assets of $28,578 and additions to property and equipment of $84,911, compared to net cash used for investing activities for the six months ended June 30, 2009 of $161,585, which consisted of additions to patents, technology and other assets of $99,467 and additions to property and equipment of $62,118.

Net cash used for financing activities for the six months ended June 30, 2010 was $36,580 relating to taxes paid with respect to the issuance of restricted stock, compared to net cash provided by financing activities for the six months ended June 30, 2009 of $3,201 due to cash received from the issuance of common stock relating to the exercise of stock options.

The following table summarizes, for the periods presented, the Company’s future estimated cash payments under existing contractual obligations at June 30, 2010.

Effective January 1, 2009, the Company adopted guidance now codified as FASB ASC Topic 805,“Business Combinations” (“ASC 805”). This topic requires an acquirer to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values as of the acquisition date. The topic requires acquisition costs and any restructuring costs associated with the business combination to be recognized separately from the fair value of the business combination. ASC 805 establishes requirements for recognizing and measuring goodwill acquired in the business combination or a gain from a bargain purchase as well as disclosure requirements designed to enable users to better interpret the results of the business combination. Early adoption of this topic was not permitted. The adoption of ASC 805 will impact the Company’s financial position, results of operations and cash flows to the extent it conducts acquisition-related activities and/or consummates business combinations. In the first six months of 2010, the Company recorded expenses of approximately $751,000 primarily related to a potential acquisition that was not consummated.

Not applicable.

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (”Exchange Act”)) were effective at the reasonable level of assurance.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations to enhance, where necessary its procedures and controls.

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 June 30, 2010, 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.

The following table represents information with respect to purchases of common stock made by the Company during the three months ended June 30, 2010:

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.