##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 OR
 o
    
    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, NH
    
    03062(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o o
  Large Accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(do not check if a smaller reporting company)
 o þ




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##### 



PAGEPART I FINANCIAL INFORMATIONItem 1 Financial Statements (unaudited)Consolidated Balance Sheets as of March 31, 2011
and December 31, 2010
    
    
    3Consolidated Statements of Operations for the
three months ended March 31, 2011
and March 31, 2010
    
    
    4Consolidated Statements of Cash Flows for the three
months ended March 31, 2011 and
March 31, 2010
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-19Item 2 Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    20-26Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4 Controls and Procedures
    
    
    27PART II OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    28Item 1A Risk Factors
    
    
    29Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 4 [Removed and Reserved]Item 6 Exhibits
    
    
    29Signatures
    
    
    30Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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iCAD, INC. AND SUBSIDIARY
 
 Consolidated Balance Sheets
   March 31,
    
    
    December 31,2011
    
    
    2010AssetsCurrent assets:Cash and cash equivalents
    
    $
    11,312
    
    
    $
    16,269Trade accounts receivable, net of allowance for doubtful
accounts of $50 in 2011 and 2010
    
    
    4,075
    
    
    
    3,389Inventory, net
    
    
    3,074
    
    
    
    3,489Prepaid expenses and other current assets
    
    
    680
    
    
    
    581Total current assets
    
    
    19,141
    
    
    
    23,728Property and equipment, net of accumulated depreciation
and amortization of $2,767 in 2011 and $2,852 in 2010
    
    
    2,555
    
    
    
    2,774Other assets
    
    
    620
    
    
    
    675Intangible assets, net of accumulated amortization
of $7,269 in 2011 and $6,746 in 2010
    
    
    18,631
    
    
    
    21,165Goodwill
    
    
    47,365
    
    
    
    45,689Total assets
    
    $
    88,312
    
    
    $
    94,031Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    2,556
    
    
    $
    2,500Accrued and other expenses
    
    
    4,138
    
    
    
    5,902Deferred revenue
    
    
    4,781
    
    
    
    4,906Total current liabilities
    
    
    11,475
    
    
    
    13,308Contingent consideration
    
    
    4,900
    
    
    
    5,000Deferred revenue long term portion
    
    
    1,601
    
    
    
    961Other long-term liabilities
    
    
    1,085
    
    
    
    1,552Total liabilities
    
    
    19,061
    
    
    
    20,821Commitments and contingencies (Note 5)Stockholders equity:Preferred stock, $.01 par value:authorized 1,000,000 shares;
none issued
    
    
    
    
    
    
    Common stock, $.01 par value: authorized 85,000,000
shares; issued 54,551,140 in 2011 and 54,383,747 in 2010;
outstanding 54,483,264 in 2011 and 54,315,871 in 2010
    
    
    545
    
    
    
    544Additional paid-in capital
    
    
    163,342
    
    
    
    163,101Accumulated deficit
    
    
    (93,686
    )
    
    
    (89,485
    )Treasury stock at cost (67,876 shares)
    
    
    (950
    )
    
    
    (950
    )Total stockholders equity
    
    
    69,251
    
    
    
    73,210Total liabilities and stockholders equity
    
    $
    88,312
    
    
    $
    94,031
 See accompanying notes to consolidated financial statements.
  3




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iCAD, Inc.
 
 Consolidated Statements of Operations
   Three Months Ended
    
    
    Three Months EndedMarch 31, 2011
    
    
    March 31, 2010Revenue:Products
    
    $
    5,240
    
    
    $
    5,211Service and supplies
    
    
    2,104
    
    
    
    1,309Total revenue
    
    
    7,344
    
    
    
    6,520Cost of revenue:Products
    
    
    1,207
    
    
    
    667Service and supplies
    
    
    772
    
    
    
    615Amortization of acquired technology
    
    
    233
    
    
    
    Total cost of revenue
    
    
    2,212
    
    
    
    1,282Gross margin
    
    
    5,132
    
    
    
    5,238Operating expenses:Engineering and product development
    
    
    2,776
    
    
    
    1,556Marketing and sales
    
    
    3,727
    
    
    
    2,398General and administrative
    
    
    2,804
    
    
    
    2,487Total operating expenses
    
    
    9,307
    
    
    
    6,441Loss from operations
    
    
    (4,175
    )
    
    
    (1,203
    )Interest (expense) income  net
    
    
    (26
    )
    
    
    18Net loss
    
    $
    (4,201
    )
    
    $
    (1,185
    )Net loss per share:Basic and diluted
    
    $
    (0.08
    )
    
    $
    (0.03
    )Weighted average number of shares used in
computing loss per share:Basic and diluted
    
    
    54,365,955
    
    
    
    45,686,285
 See accompanying notes to consolidated financial statements.
  4




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iCAD, Inc.
 
 Consolidated Statements of Cash Flows
   Three Months Ended
    
    
    Three Months EndedMarch 31, 2011
    
    
    March 31, 2010Cash flows from operating activities:Net loss
    
    $
    (4,201
    )
    
    $
    (1,185
    )Adjustments to reconcile net loss
to net cash (used for) provided by operating activities:Depreciation
    
    
    295
    
    
    
    126Amortization
    
    
    524
    
    
    
    292Loss on disposal of assets
    
    
    6
    
    
    
    Stock based compensation
    
    
    268
    
    
    
    483Interest of royalty obligation
    
    
    36
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (686
    )
    
    
    469Inventory
    
    
    415
    
    
    
    94Prepaid expenses, other current assets and deposits
    
    
    (99
    )
    
    
    (33
    )Accounts payable
    
    
    55
    
    
    
    (75
    )Accrued salaries, warranty and other expenses
    
    
    (822
    )
    
    
    (227
    )Deferred revenue
    
    
    523
    
    
    
    159Net cash (used for) provided by operating activities
    
    
    (3,686
    )
    
    
    103Cash flows from investing activities:Disposals (additions) to patents, technology and other
    
    
    46
    
    
    
    (9
    )Additions to property and equipment
    
    
    (82
    )
    
    
    (41
    )Cash paid for acquisition of Xoft
    
    
    (1,209
    )
    
    
    Net cash used for investing activities
    
    
    (1,245
    )
    
    
    (50
    )Cash flows from financing activities:Taxes paid related to restricted stock issuance
    
    
    (26
    )
    
    
    (5
    )Net cash used for financing activities
    
    
    (26
    )
    
    
    (5
    )Increase (decrease) in cash and equivalents
    
    
    (4,957
    )
    
    
    48Cash and equivalents, beginning of period
    
    
    16,269
    
    
    
    16,248Cash and equivalents, end of period
    
    $
    11,312
    
    
    $
    16,296
 See accompanying notes to consolidated financial statements.
  5




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iCAD, Inc.
 
 Notes to Consolidated Financial Statements
 (Unaudited)
March 31, 2011
 Note 1  Basis of Presentation and Significant Accounting Policies
  Subsequent Events
  Revenue Recognition
    6




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2011
 Note 1  Basis of Presentation and Significant Accounting Policies
    7




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2011
 Note 1  Basis of Presentation and Significant Accounting Policies
      Cost of Revenue
   8




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2011
 Note 2  Net Loss per Common Share
   Three Months EndedMarch 31,2011
    
    
    2010Net loss
    
    $
    (4,201
    )
    
    $
    (1,183
    )Basic shares used in the calculation of net loss per share
    
    
    54,365,955
    
    
    
    45,686,285Effect of dilutive securities:Stock options
    
    
    
    
    
    
    Restricted stock
    
    
    
    
    
    
    Diluted shares used in the calculation of net loss per share
    
    
    54,365,955
    
    
    
    45,686,285Net loss per share  basic
    
    $
    (0.08
    )
    
    $
    (0.03
    )Net loss per share  diluted
    
    $
    (0.08
    )
    
    $
    (0.03
    )
   9




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2011
 Note 3  Acquisition of Xoft
       10




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2011
 Note 3  Acquisition of Xoft
  EstimatedAmount
    
    
    Amortizable(000s)
    
    
    LifeCurrent assets
    
    $
    4,030Property and equipment
    
    
    2,006Identifiable intangible assets
    
    
    13,700
    
    
    15 YearsPatent license
    
    
    100
    
    
    6 YearsOther assets
    
    
    643Goodwill
    
    
    3,850Current liabilities
    
    
    (4,959
    )Long-term liabilities
    
    
    (1,591
    )Purchase price
    
    $
    17,779
   Quarter ended March 31,
    
    2010(In thousands, except 
for per share data)Revenue
    
    $
    7,700Loss from operations
    
    $
    (4,661
    )Net loss
    
    $
    (4,775
    )Net loss per share:Basic and diluted
    
    $
    (0.09
    )
  11




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2011
 Note 4  Stock-Based Compensation
 Compensation  Stock
Compensation,
  Three Months EndedMarch 31,2011
    
    
    2010Average risk-free interest rate
    
    
    3.18
    %
    
    
    2.49
    %Expected dividend yield
    
    None
    
    
    NoneExpected life
    
    3.5 years
    
    
    3.5 yearsExpected volatility
    
    
    68.7
    %
    
    
    65.6
    %Weighted average exercise price
    
    $
    1.33
    
    
    $
    1.50Weighted average fair value
    
    $
    0.63
    
    
    $
    0.58
    12




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CAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2011
 Note 5  Commitments and Contingencies
 Foreign Tax Claim
  Royalty Obligation
  Litigation
   13




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2011
 Note 5  Commitments and Contingencies
     14




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 March 31, 2011
 Note 6  Fair Value Measurements
 Fair Value Measurement and
Disclo
 
    
    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.
     15




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2011
 Note 6  Fair Value Measurements
   Fair value measurements using: (000s)
 Liabilitiesat FairLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    ValueContingent consideration
    
    
    
    
    
    
    
    
    
    $
    4,900
    
    
    $
    4,900Royalty obligation
    
    
    
    
    
    
    
    
    
    
    900
    
    
    
    900Total
    
    
    
    
    
    
    
    
    
    $
    5,800
    
    
    $
    5,800
  Three months ended March 31, 2011Balance as of December 31, 2010
    
    $
    5,000Fair value adjustment
    
    
    (100
    )Balance as of March 31, 2011
    
    $
    4,900
  Three months ended March 31, 2011Balance as of December 31, 2010
    
    $
    1,372Fair value adjustment
    
    
    (235
    )Interest expense
    
    
    36Royalty payment
    
    
    (240
    )Balance as of March 31, 2011
    
    $
    933
 Items Measured in Fair Value on a Nonrecurring Basis
   16




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2011
 Note 7  Income Taxes
 Income Taxes
 Note 8  Goodwill
 Intangibles  Goodwill and Other
   17




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 March 31, 2011
 Note 8  Goodwill
  Three months ended March 31, 2011Balance as of December 31, 2010
    
    $
    45,689Purchase accounting adjustments
    
    
    1,676Balance as of March 31, 2011
    
    $
    47,365
  Note 9  Recent Accounting Pronouncements
   18




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iCAD, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2011
 Note 9  Recent Accounting Pronouncements
   19




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
  Results of Operations
 Overview
    20




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Ô
   21




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Critical Accounting Policies
   22




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Quarter Ended March 31, 2011 compared to Quarter Ended March 31, 2010
 Revenue.
 Three months ended March 31,2011
    
    
    2010
    
    
    Change
    
    
    % ChangeDigital & MRI revenue
    
    $
    3,763
    
    
    $
    4,165
    
    
    $
    (402
    )
    
    
    (9.7
    %)Film based revenue
    
    
    517
    
    
    
    1,046
    
    
    
    (529
    )
    
    
    (50.6
    %)Electronic brachytherapy
    
    
    960
    
    
    
    
    
    
    
    960
    
    
    
    100

    %Service & supply revenue
    
    
    2,104
    
    
    
    1,309
    
    
    
    795
    
    
    
    60.7
    %Total revenue
    
    $
    7,344
    
    
    $
    6,520
    
    
    $
    824
    
    
    
    12.6
    %
      23




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Three months ended March 31,2011
    
    
    2010
    
    
    Change
    
    
    % ChangeProducts
    
    $
    1,207
    
    
    $
    667
    
    
    $
    540
    
    
    
    81.0
    %Service & supply
    
    
    772
    
    
    
    615
    
    
    
    157
    
    
    
    25.5
    %Amortization of acquired technology
    
    
    233
    
    
    
    
    
    
    
    233
    
    
    
    100.0
    %Total cost of revenue
    
    $
    2,212
    
    
    $
    1,282
    
    
    $
    930
    
    
    
    72.5
    %Gross Margin
    
    $
    5,132
    
    
    $
    5,238
    
    
    $
    (106
    )
    
    
    (2.0
    )%
 Gross Margin.
 Engineering and Product Development.
 Marketing and Sales.
 General and Administrative.
 Interest (Expense)/Income
 Net Loss.
  24




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Liquidity and Capital Resources
       25




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Contractual Obligations
  Payments due by periodLess than 1Contractual Obligations
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5+ yearsLease Obligations
    
    $
    1,823,533
    
    
    $
    870,042
    
    
    $
    953,491
    
    
    $
    
    
    
    $
    Royalty Obligation
    
    $
    1,496,945
    
    
    $
    246,945
    
    
    $
    750,000
    
    
    $
    500,000
    
    
    $
    Total Contractual Obligations
    
    $
    3,320,478
    
    
    $
    1,116,987
    
    
    $
    1,703,491
    
    
    $
    500,000
    
    
    $
    
 Recent Accounting Pronouncements
   26




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
     27




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PART II OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
 On February 18, 2011, in the Orange County Superior Court (Docket No.
30-2011-00451816-CU-PL-CJC), 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, we received a Statement of Damages
specifying that the damages being sought aggregated an amount of at least approximately
$14.5 million. On or about April 29, 2011, we received two additional complaints filed on
behalf of six additional Jane Doe plaintiffs and two John Doe spouses.
 The complaints were filed in the Orange County Superior Court (Docket Nos. 30-2011
00465448-CU-MM-CJC & 30-2011-00468687-CU-MM-CJC) 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. It is alleged that
each plaintiff Jan Doe was a patient who was treated with the Axxent Electronic
Brachytherapy System that incorporated the Axxent Flexishield Mini. We believe that all six
patients were one of the twenty nine patients treated using the Axxent Flexishield Mini as
part of a clinical trial. The Axxent Flexishield Mini is the subject of a voluntary recall.
Because of the preliminary nature of the complaints we are unable to evaluate the merits of
the claims, however based upon our preliminary analysis; we plan to vigorously defend the
lawsuits.
 We recently acquired the Axxent Electronic Brachytherapy System and Axxent Flexishield Mini
as part of our acquisition of Xoft in December 2010. Since the initial commercial sale of
the Axxent Flexishield Mini in August 2009, this accessory has been sold on a very limited
basis. We have developed a replacement for this accessory and have filed a 510(k) with the
FDA.
 On April 16, 2010, Carl Zeiss Meditec Inc. and Carl Zeiss Surgical GmbH filed suit against
Xoft in the Federal District Court of Delaware asserting infringement of 4 U.S. Patent Nos.
The complaint requests the court to (1) make a declaration, (2) preliminarily and
permanently adjoin Xoft from infringing the named patents, and (3) order the payment of
unspecified damages and attorneys fees in connection with such patent infringement
allegations. We intend to vigorously defend the lawsuit and are currently unable to estimate
the potential financial impact this action may have. Since the amount of potential damages
in the event of an adverse result is not reasonably estimable, no expense has been recorded
with respect to the contingent liability associated with this matter. In addition, the
Merger Agreement provides for indemnity for certain losses relating to the Zeiss litigation,
subject to limitations specified in the Merger Agreement.
  28




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Item 1A.
    
    Risk Factors
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
  Total number of
    
    
    Maximum dollarshares
    
    
    value of sharespurchased as
    
    
    that may yet beTotal number
    
    
    Average
    
    
    part of publicly
    
    
    purchaed underof shares
    
    
    price paid per
    
    
    announced plans
    
    
    the plans orMonth of purchase
    
    purchased (1)
    
    
    share
    
    
    or programs
    
    
    programsJanuary 1 - January 31, 2011
    
    
    2,073
    
    
    $
    1.45
    
    
    $
    
    
    
    $
    February 1 - February 28, 2011
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    March 1 - March 31, 2011
    
    
    31,555
    
    
    $
    1.19
    
    
    $
    
    
    
    $
    Total
    
    
    33,628
    
    
    $
    1.32
    
    
    $
    
    
    
    $
    
 (1)
    
    Represents shares of common stock surrendered by employees to the Company to pay
employee withholding taxes due upon the vesting of restricted stock. 
 Item 6.
    
    Exhibits
 Exhibit No.

    
    Description31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.32.1
    
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
  29




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iCAD, Inc.(Registrant)Date: May 13, 2011
    By:
    /s/ Kenneth M. FerryKenneth M. FerryPresident, Chief Executive Officer,
DirectorDate:    May 13, 2011
    By:
    /s/ Kevin C. BurnsKevin C. BurnsExecutive Vice President of Finance
and Chief Financial Officer, Treasurer  30