Foley
Hoag Letterhead
October
26, 2007
CORRESPONDENCE
VIA EDGAR
U.S.
Securities and Exchange Commission
100
F
Street, N.E.
Washington,
D.C. 20549
Attention:
Angela J. Crane, Accounting Branch Chief
Form
10-K for the fiscal year ended December 31, 2006
Filed
March 22, 2007
File
No. 1-09341
Dear
Ms.
Crane:
On
behalf
of our client, iCAD, Inc. (the “Company”), we are forwarding this letter to
provide the Company’s response to the Staff’s comment letter dated October 12,
2007 (the “Comment Letter”) to the Company’s Form 10-K for the fiscal year ended
December 31, 2006 filed by the Company on March 22, 2007, File No. 1-09341.
We
have
numbered the responses contained herein to correspond to the comments contained
in the Comment Letter which are repeated below.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations, page
26.
Overview,
page 26
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1. |
We
note that customers will substitute analog technology with digital
technology in the near future. With a view toward clearer disclosure,
please revise future filings to discuss the trend toward digital
technology and the anticipated impact on your results of operations.
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RESPONSE:
The Company will revise future filings to discuss the trend toward digital
technology and the anticipated impact on its results of operations. The Company
believes that the shift to digital technology will have a positive impact on
its
overall financial performance primarily because the Company expects to realize
a
higher adoption rate of digital CAD technology as compared to analog CAD
technology and from higher gross margins realized on the Company’s digital
products. Results from the DMIST (Digital Mammography Imaging Screening Trial)
Trial published in late 2005, comparing digital and analog mammography
technology, showed that the majority of the screening population benefited
from
digital screening technology. Additionally, digital mammography offers better
clinical images combined with significant workflow improvements for the
radiologist. Digital CAD technology has a higher attachment rate with digital
mammography compared to a lower attachment rate for analog CAD technology.
U.S.
Securities and Exchange Commission
Page
2
October
26, 2007
Critical
Accounting Policies, page 27
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2. |
We
see your critical accounting policy regarding revenue recognition.
However, the disclosure merely repeats the policies from your significant
accounting policies footnote without elaboration. Please expand future
filings to describe the specific factors that in your view make it
critical. Discuss the nature of estimates and uncertainties about
those
estimates inherent to your revenue recognition policy, including
how you
make those estimates. Discuss how different assumptions, methods
or
conditions might effect your financial statements.
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RESPONSE:
The Company will expand future filings to describe the specific factors that
make Revenue Recognition a critical accounting policy. The Company believes
that
Revenue Recognition is a critical accounting policy because it is governed
by
multiple complex accounting rules. In addition, the Company believes that its
investors value the Company and track its progress based to a large extent
upon
revenues. For this reason the Company believes that it is critical for readers
of its financial statements to understand the basis upon which revenues are
recorded. There are no significant estimates or assumptions used in the
Company’s Revenue Recognition.
Note
2. Summary of Significant Accounting Policies, page
57
(e)
Accounts Receivable and Allowance for Doubtful Accounts,
page
58
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3. |
We
note you significantly reduced your allowance for doubtful accounts
from
fiscal year 2005 to fiscal year 2006. We also note your disclosure
that
the actual write-offs might exceed the recorded allowance. Given
the
minimum decrease in your accounts receivable, please explain why
you
believe your current allowance is adequate.
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U.S.
Securities and Exchange Commission
Page
3
October
26, 2007
(i)
Goodwill, page 60
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4. |
We
see that goodwill is approximately 73% of your total assets at December
31, 2006. Please tell us the specific facts, assumptions and estimates
that you considered in your goodwill impairment analysis supporting
your
conclusion that no impairment of goodwill existed at October 1, 2006.
For
reference see paragraphs 19 - 22 of SFAS 142. Revise future filing
to
state in sufficient detail your accounting policy for reviewing goodwill
for impairment. Discuss the annual date when you test goodwill for
impairment, whether you apply the two-step method under SFAS 142,
the
level at which you test goodwill for impairment, and how you estimate
fair
value including any significant assumptions.
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RESPONSE:
The Company operates in one segment and as one reporting unit since its chief
operating decision maker makes decisions related to resource allocation based
on
the consolidated operating results as products perform the same basic function,
have common sales channels and reseller and is developed and supported by one
central staff. Therefore, the Company uses its market capitalization as the
best
evidence of fair value (market capitalization is calculated using the quoted
closing share price of its common stock at October 1 multiplied by the number
of
common shares outstanding) of the entity. The Company tests goodwill for
impairment by comparing its market capitalization (fair value) to its carrying
value in accordance with paragraph 23 of SFAS 142, which notes that
quoted
market prices in active markets are the best evidence of fair value and shall
be
used as the basis for the measurement. The
fair
value of the entity is compared to its carrying amount at the same date as
the
basis to determine if an impairment exists. At October 1, 2006 the
Company’s market capitalization exceeded its carrying amount and the Company
determined that there was no impairment to its goodwill. Additionally, the
Company reviews its fair value and goodwill impairment quarterly to determine
if
facts or circumstances have occurred that would trigger impairment prior to
the
annual impairment date. Since the Company’s carrying amount has not exceeded its
fair value, the second step of the goodwill impairment test has been
unnecessary. The Company will revise future filings to disclose the annual
impairment date testing and its method of determining the fair value of the
reporting unit.
(j)
Revenue Recognition, page 60
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5. |
We
note that you recognize a portion of the revenue when the product
is
shipped and a portion when the installation occurs. Please describe
all
the installation obligations and explain your reasons for concluding
that
they are not essential to the functionality of the product. Document
for
us how you have met the criteria outlined in SAB 104 to recognize
revenue
upon shipment.
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RESPONSE:
The Company’s revenue transactions can on occasion include product sales with
multiple element arrangements, generally for installation. For the majority
of
the Company’s product sales the responsibility for the installation process lies
with its OEM partners such as GE Medical Systems, Siemens Medical, and Hologic.
When the Company is responsible for the product installation, the installation
element is considered a separate unit of accounting because the delivered
product has stand alone value to the customer and there is objective and
reliable evidence of the fair value of the undelivered installation element.
Fair market value of the installation is determined using entity specific and
third party evidence. The fair value of the installation is evidenced by the
Company’s published price list as well as invoices issued for installation
services by third party installation service companies in the medical imaging
industry.
The
Company’s products are installed in radiology/mammography departments in
hospitals and medical imaging centers. Product installation involves set up,
configuration and testing. In situations where the Company is responsible
for installation, the Company’s obligations include, un-boxing of the product,
assembly of hardware, connecting and powering on and system configuration.
The
Company believes that installation is not essential to the functionality of
the
product as the product is a standard product sold as a stand alone cancer
detection device or sold with installation. The installation does not change
the
functionality of the product and can easily be done by a number of third parties
that provide installation services or at times can be done by the customer
themselves.
The
Company generally recognizes revenue upon shipment of product to customers
and
the fulfillment of all contractual terms and conditions, pursuant to the
guidance provided by Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin No. 104, Revenue
Recognition
(“SAB
104”). The Company uses signed customer purchase orders which include all terms
of the arrangement to determine the existence of an arrangement and whether
the
fee is fixed or determinable based on the terms of the agreement. The Company
generally ships F.O.B. shipping point and uses shipping documents and
third-party proof of delivery to verify delivery and transfer of title. In
addition, management assesses whether collection is reasonably assured by
considering a number of factors, including past transaction history with the
customer and the creditworthiness of the customer, as obtained from third party
credit references.
U.S.
Securities and Exchange Commission
Page
4
October
26, 2007
We
hope
that the foregoing responses satisfactorily address the Staff’s comments. Please
do not hesitate to call Dave Broadwin of Foley Hoag LLP at 781-895-5905, John
Hancock of Foley Hoag at 617-832-1201 or Darlene Deptula-Hicks of iCAD Inc.
at
603-882-5200 if we can address any follow-up questions or if the staff has
any
further comments.
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Very
truly yours,
/s/
David Broadwin
David
Broadwin
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Ms.
Darlene Deptula-Hicks
John
Hancock, Esq.