Summary of ICAD INC - Yahoo! Finance

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

"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 and expense levels, protection of patents and other proprietary rights, the impact of supply and manufacturing constraints or difficulties, regulatory changes and requirements applicable to our products, product market acceptance, possible technological obsolescence of products, increased competition, integration of the acquired businesses, the impact of 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 Securities and Exchange Commission. The words "believe", "plan", "intend", "expect", "estimate", "anticipate", "likely", "seek", "should" "would", "could" 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.

Results of Operations

Overview

iCAD is an industry-leading provider of advanced image analysis and workflow solutions that enable radiologists and other healthcare professionals to better serve patients by identifying pathologies and pinpointing cancer earlier. iCAD offers a comprehensive range of high-performance, expandable Computer-Aided Detection (CAD) systems and workflow solutions for mammography (film-based, digital radiography (DR) and computed radiography (CR), Magnetic Resonance Imaging (MRI), and Computed Tomography (CT)). iCAD's solutions aid in the early detection of the most prevalent cancers including breast, prostate and colon cancer. Early detection of cancer is the key to better prognosis, less invasive and lower treatment costs, and higher survival rates. Performed as an adjunct to mammography screening, CAD has quickly become the standard of care in breast cancer detection, helping radiologists improve clinical outcomes while enhancing workflow. Computer-enhanced breast and prostate MRI analysis streamlines case interpretation workflow and generates more robust information for more effective patient treatment. CAD for mammography screening is also reimbursable in the U.S. under federal and most third-party insurance programs. Since receiving approval from the FDA for the Company's first breast cancer detection product in January 2002, over 4,000 of iCAD's CAD systems have been placed in mammography practices worldwide. iCAD is the only stand-alone company offering CAD solutions for the early detection of breast cancer.

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

The Company 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 the oncology market that could leverage its opportunities for growth beyond its historic core markets.

iCAD has applied its patented detection technology and algorithms to the development of CAD solutions for use with virtual colonoscopy or CT Colonography (CTC) to improve the detection of colonic polyps. The Company's pattern recognition and image analysis expertise are readily applicable to colonic polyp detection and the Company has developed a CTC CAD solution. Virtual colonoscopy (CTC) is a technology that has evolved rapidly in recent years. Based on the results of the National CT Colonography trial completed in September 2008, 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 and commenced marketing Veralook™, 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, and is now commercially available. Colorectal cancer has been shown to be highly preventable with early detection and removal of polyps.

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

The acquisition of Xoft Inc. ("Xoft"), in December 2010, brought an isotope-free cancer treatment platform technology to the Company's product line. Xoft designs, develops, manufactures, markets and sells electronic brachytherapy (eBx) products for the treatment of breast and other cancers, used in a broad range of clinical settings. The portable Axxent System which delivers electronically controlled radiation therapy directly to cancer sites with minimal radiation exposure to surrounding healthy tissue is FDA-cleared. Electronic Brachytherapy (eBx™) is a type of brachytherapy that utilizes a miniaturized high dose rate X-ray source to apply radiation directly to the cancerous site. The goal is to direct the radiation dose to the size and shape of the cancerous area, sparing healthy tissue and organs. The Xoft technology delivers similar clinical dose rates to traditional radio-active systems. Electronic Brachytherapy can be delivered during an operative procedure and may be used as a primary or secondary modality over a course of days. This technology enables radiation oncology departments in hospitals, clinics and physician offices to perform traditional radiotherapy treatments and offer advanced treatments such as Intra-Operative Radiation Therapy (IORT). Current customers for the Xoft eBx system include university research and community hospitals, private and governmental institutions, doctors' offices and cancer care clinics.

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, with its acquisition of Xoft, an operation, research, development, manufacturing and warehousing facility in Sunnyvale, California.

Critical Accounting Policies

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, the Company evaluates these estimates, including those related to accounts receivable allowance, inventory valuation and obsolescence, intangible assets, income taxes, warranty obligations, contingencies and litigation. Additionally, the Company uses assumptions and estimates in calculations to determine stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a comprehensive list of the Company's critical accounting policies, reference should be made to the Annual Report on Form 10-K for the year ended December 31, 2011 filed on March 9, 2012.

Three months ended March 31, 2012 compared to the three months ended March 31, 2011

Revenue:

Three months ended March 31:

Total revenue for the three month period ended March 31, 2012 was $6.3 million compared with revenue of $7.3 million for the three month period ended March 31, 2011, an decrease of $1.0 million or 13.6%. The decrease in revenue was primarily due to a reduction in digital, MRI and film based revenues offset by increases from the electronic brachytherapy products and increases in service and supply revenue.

                                             Three months ended March 31,
                                    2012        2011        Change        % Change
        Digital & MRI revenue      $ 2,190     $ 3,763     $ (1,573 )         (41.8 )%
        Film based revenue             427         517          (90 )         (17.4 )%
        Electronic Brachytherapy     1,462         935          527            56.4 %
        Service & supply revenue     2,264       2,129          135             6.3 %

        Total revenue              $ 6,343     $ 7,344     $ (1,001 )         (13.6 )%

Our digital and MRI CAD revenue for three month period ended March 31, 2012 decreased $1.6 million or 41.8%, to $2.2 million compared to revenue of $3.8 million in the three month period ended March 31, 2011. This decrease was due primarily to a decrease in market share by our customers which led to decreased demand for our systems.

Revenue from iCAD's film based products decreased 17.4% or $90,000, to $427,000 in the three month period ended March 31, 2012 from $517,000 in the three month period ended March 31, 2011. This decrease was primarily attributed to the decline in sales of our 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 sites are preparing to transition to digital mammography. In addition, and as expected, the demand for film-based products and accessories continues to decline as the marketplace continues to transition to digital technologies.

Revenue from our Axxent Electronic Brachytherapy System and accessories, was $1.5 million in the three month period ended March 31, 2012 an increase of 56.4% from $935,000 for the three month period ended March 31, 2011. Demand for the Axxent Electronic Brachytherapy System improved during the quarter, with sales increases for the controllers as well as the related accessories. We believe that there is continued momentum for the Axxent Electronic Brachytherapy System driven primarily for its use in the intra-operative radiation therapy ("IORT") market, particularly breast IORT.

Service and supply revenue increased 6.3% or $135,000 in the three month period ended March 31, 2012, to $2.3 million compared to $2.1 million in three months ended March 31, 2011. Service and supply revenue relating to our digital CAD and TotalLookMammoAdvantage systems was approximately $1.7 million for the three month period ended March 31, 2012 and remained flat as compared to the three months ended March 31, 2011. Service and supply revenue in the first quarter of 2012 included approximately $542,000 related to the Axxent Electronic Brachytherapy products, which represented an increase of $151,000 or 38.6% as compared to $391,000 in the three months ended March 31, 2011. Service and supply revenue related to our Electronic Brachytherapy products increased primarily due to increases in service agreements related to sales of the Electronic Brachytherapy system. We expect service and supply revenue for our Electronic Brachytherapy products to increase as our installed base increases.

Gross Margin:



                                                  Three months ended March 31,
                                          2012        2011       Change        % Change
   Products                              $ 1,107     $ 1,207     $  (100 )          (8.3 )%
   Service & supply                          577         772        (195 )         (25.3 )%
   Amortization of acquired technology       232         233          (1 )          (0.4 )%

   Total cost of revenue                 $ 1,916     $ 2,212     $  (296 )         (13.4 )%

   Gross Margin                          $ 4,427     $ 5,132     $  (705 )         (13.7 )%

Gross margin for the three month period ended March 31, 2012 was $4.4 million or 69.8% of revenue as compared to $5.1 million or 69.9% of revenue in the three month period ended March 31, 2011. Gross margin percent remained flat despite the decrease in revenue, due to ongoing expense reductions. Gross margin percent is impacted by amortization of acquired technology, and costs related to the fixed cost of our manufacturing operation. We expect the gross margin percent to improve as revenues increase and absorb the fixed manufacturing costs and amortization expense.

Operating Expenses:



                                                  Three months ended March 31,
                                          2012        2011        Change       Change %
   Operating expenses:
   Engineering and product development   $ 2,212     $ 2,776     $   (564 )        (20.3 )%
   Marketing and sales                     2,646       3,727       (1,081 )        (29.0 )%
   General and administrative              1,618       2,804       (1,186 )        (42.3 )%
   Loss on indemnification asset              -           43          (43 )       (100.0 )%

   Total operating expenses              $ 6,476     $ 9,350     $ (2,874 )        (30.7 )%

Engineering and Product Development. Engineering and product development costs for the three month period ended March 31, 2012 decreased by $564,000 or 20.3%, from $2.8 million in 2011 to $2.2 million in 2012. The decrease in engineering and product development costs was primarily due to the decrease in personnel and related expenses and consulting costs, as a result of cost saving measures implemented during the second quarter of 2011.

Marketing and Sales. Marketing and sales expenses decreased by $1.1 million or 29%, from $3.7 million in the three month period ended March 31, 2011 to $2.6 million in three month period ended March 31, 2012. The decrease in marketing and sales expenses primarily resulted from reductions in personnel and related expenses and overhead expenses due to operating expense reductions related to cost saving initiatives implemented at the end of the second quarter of 2011.

General and Administrative. General and administrative expenses decreased by $1.2 million or 42.3%, from $2.8 million in the three month period ended March 31, 2011 to $1.6 million in for the three month period ended March 31, 2012. The decrease in general and administrative expense is primarily due to reductions in personnel costs related to the cost saving initiatives implemented during the second quarter of 2011, legal expenses related to on-going patent litigation that was settled in December 2011, and transaction related costs incurred during the first quarter of 2011 due to the acquisition of Xoft, that did not occur in the first quarter of 2012.

Other Income and Expense:



                                                      Three months ended March 31,
                                              2012        2011       Change        Change %
 Gain from change in fair value of Warrant   $  599      $   -           599              -
 Interest expense                              (835 )      (105 )       (730 )         695.2 %
 Interest income                                 21          11           10            90.9 %

                                             $ (215 )    $  (94 )    $  (121 )         128.7 %

Gain from change in fair value of Warrant. The gain from change in fair value of the Warrants resulted from a reduction in the fair value of the Warrants under the binomial lattice based valuation methodology, due primarily to the decline in our stock price between the date of issuance and March 31, 2012.

Interest (Expense)/Income. Interest expense increased by $730,000 or 695% for the three month period ended March 31, 2012 as compared to interest expense of $105,000 in the three month period ended March 31, 2011. Interest expense is due primarily to $723,000 of interest expense related to the financing obligation incurred in January 2012. Interest related to the Hologic and Zeiss settlement obligations was $112,000 as compared to $105,000 in the first quarter of 2011. Interest income reflects income earned from our money market accounts which increased in 2012.

Liquidity and Capital Resources

We believe that our 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 generation from operations. Our ability to generate cash adequate to meet our 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, we may require additional financing, although there are no guarantees that we will be able to obtain the financing if necessary, on acceptable terms or at all.

As of March 31, 2012, the Company had cash and equivalents of $15.0 million, current assets of $22.2 million, current liabilities of $11.2 million and working capital of $11.0 million. The ratio of current assets to current liabilities was 1.98:1.

On December 29, 2011, we entered into several agreements with entities affiliated with Deerfield pursuant to which Deerfield agreed to provide $15 million in funding to the Company. Pursuant to the terms of the Facility Agreement, on the Funding Date we issued to Deerfield Notes in the aggregate principal amount of $15 million. Under the Revenue Purchase Agreement, we agreed to pay Deerfield a portion of our revenues until the maturity date of the Notes, whether or not the Notes are outstanding through that date. On the Funding Date, we issued to Deerfield, Warrants at an exercise price of $0.70 per share and a second B Warrant (to purchase an additional 500,000 shares of common stock at an exercise price of $0.70 per share, which may become exercisable if certain conditions are met, as described in the Warrant Agreement. We are obligated to pay interest at 5.75% on the balance of the Notes that are outstanding, which is approximately $216,000 per quarter until the fourth quarter of 2014. In 2015, interest is approximately $162,000 and in 2016, interest is approximately $108,000, with the final payment of $7.5 million on the Notes balance due in January 2017 (unless we elect to extend). We are also required to pay a minimum commitment of $125,000 per quarter under the Revenue Purchase Agreement, however this minimum is met at approximately $2.9 million of revenue per quarter. We expect to exceed the minimum revenue thresholds, on a quarterly basis.

Net cash used for operating activities for the three month period ended March 31, 2012 was $3.9 million, compared to net cash used for operating activities of $3.7 million for the three month period ended March 31, 2011. The cash used for operating activities for the three months ended March 31, 2012 resulted primarily from a reduction in accrued expenses of approximately $2.3 million and net loss of $2.3 million offset by adjustments to net income of approximately $1.3 million. We expect that cash used or provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, specifically the timing of when we recognize revenue, our accounts receivable collections and the timing of other payments.

The net cash used for investing activities for the three month period ended March 31, 2012 was $34,000 as compared $36,000 for the three month period ended March 31, 2011. Cash used for investing activities consisted primarily of additions to property and equipment.

Net cash provided by financing activities for the three month period ended March 31, 2012 was $14.3 million, which consisted of cash received in connection with the financing. Cash used for financing activities in the three months ended March 31, 2011 consisted primarily of cash paid related to the acquisition of Xoft.

Contractual Obligations

The following table summarizes, for the periods presented, our future estimated
cash payments under existing contractual obligations (in thousands).



                                                                 Payments due by period
                                                      Less than 1
Contractual Obligations                  Total           year           1-3 years       3-5 years       5+ years
Lease Obligations                       $  1,779     $         999     $       627     $       153     $       -

Settlement Obligations                     3,500             1,000           1,750             750             -

Notes Payable                             21,166             1,363           6,475          13,328             -

Other Commitments                            800               800              -               -              -

Total Contractual Obligations           $ 27,245     $       4,162     $     8,852     $    14,231     $       -

Settlement obligations represent the minimum payments attributable to the obligations related to Zeiss and Hologic.

In addition to the contractual obligations related to the interest payments from the Notes, the Company is obligated under the revenue purchase agreement discussed in Note 3 of the accompanying financial statements, to pay 4.25% of revenues up to $25 million, either 2.75% or 2.25% of annual revenues from $25 million to $50 million and 1.0% of annual revenues in excess of $50 million. Included in the above amounts are the minimum annual payments under the revenue purchase agreement of $125,000 per quarter payable in arrears. The Company is unable to estimate the variable contractual payments related to the Revenue Purchase Agreement, and accordingly only the minimum annual payments have been included.

Recent Accounting Pronouncements

See Note 10 to the Condensed Consolidated Financial Statements.