Company Quick10K Filing
iCAD
Price7.86 EPS-1
Shares19 P/E-11
MCap152 P/FCF-32
Net Debt-15 EBIT-13
TEV137 TEV/EBIT-11
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-11
10-K 2019-12-31 Filed 2020-03-11
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-03-29
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-03-30
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-11
10-K 2016-12-31 Filed 2017-03-24
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-15
10-Q 2016-03-31 Filed 2016-05-10
10-K 2015-12-31 Filed 2016-03-11
10-Q 2015-09-30 Filed 2015-11-04
10-Q 2015-06-30 Filed 2015-08-06
10-Q 2015-03-31 Filed 2015-05-07
10-K 2014-12-31 Filed 2015-03-13
10-Q 2014-09-30 Filed 2014-11-14
10-Q 2014-06-30 Filed 2014-08-14
10-Q 2014-03-31 Filed 2014-05-14
10-K 2013-12-31 Filed 2014-03-03
10-Q 2013-09-30 Filed 2013-11-13
10-Q 2013-06-30 Filed 2013-08-08
10-Q 2013-03-31 Filed 2013-05-09
10-K 2012-12-31 Filed 2013-02-27
10-Q 2012-09-30 Filed 2012-11-13
10-Q 2012-06-30 Filed 2012-08-08
10-Q 2012-03-31 Filed 2012-05-15
10-K 2011-12-31 Filed 2012-03-09
10-Q 2011-09-30 Filed 2011-11-10
10-Q 2011-06-30 Filed 2011-08-05
10-Q 2011-03-31 Filed 2011-05-13
10-K 2010-12-31 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-09
10-Q 2010-06-30 Filed 2010-08-06
10-Q 2010-03-31 Filed 2010-05-07
10-K 2009-12-31 Filed 2010-03-23
8-K 2020-06-22
8-K 2020-05-26
8-K 2020-05-11
8-K 2020-04-23
8-K 2020-04-17
8-K 2020-03-30
8-K 2020-02-27
8-K 2020-02-21
8-K 2020-02-18
8-K 2020-01-13
8-K 2020-01-13
8-K 2019-12-06
8-K 2019-10-30
8-K 2019-10-03
8-K 2019-08-20
8-K 2019-08-01
8-K 2019-06-13
8-K 2019-05-02
8-K 2019-03-28
8-K 2019-03-18
8-K 2019-03-14
8-K 2019-01-15
8-K 2019-01-07
8-K 2018-12-19
8-K 2018-12-12
8-K 2018-11-16
8-K 2018-11-13
8-K 2018-11-07
8-K 2018-10-26
8-K 2018-10-15
8-K 2018-09-26
8-K 2018-08-14
8-K 2018-05-14
8-K 2018-03-22
8-K 2018-03-22
8-K 2018-01-04

ICAD 10Q Quarterly Report

Note 1 - Basis of Presentation and Significant Accounting Policies
Note 2 - Net Loss per Common Share
Note 3 - Inventory
Note 4 - Financing Arrangements
Note 5 - Lease Commitments
Note 6 - Stock - Based Compensation
Note 7 - Commitments and Contingencies
Note 8 - Fair Value Measurements
Note 9 - Income Taxes
Note 10 - Goodwill
Note 11 - Long - Lived Assets
Note 12 - Segment Reporting
Note 13 - Recent Accounting Pronouncements
Note 14 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 5. Other Information.
Item 6. Exhibits
EX-31.1 d916347dex311.htm
EX-31.2 d916347dex312.htm
EX-32.1 d916347dex321.htm
EX-32.2 d916347dex322.htm

iCAD Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1008060402002012201420172020
Assets, Equity
156-3-12-21-302012201420172020
Rev, G Profit, Net Income
3021123-6-152012201420172020
Ops, Inv, Fin

10-Q 1 d916347d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

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 001-09341

 

 

iCAD, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   02-0377419

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

98 Spit Brook Road, Suite 100, Nashua, NH   03062
(Address of principal executive offices)   (Zip Code)

(603) 882-5200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Trading symbol(s)

  

Name of each exchange on which registered

Common Stock, $0.01 par value    ICAD    The Nasdaq Stock Market LLC

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  ☒    NO  ☐.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    YES  ☒    NO  ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, an emerging growth company or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    YES  ☐    NO  ☒.

As of the close of business on May 1, 2020 there were 22,853,545 shares outstanding of the registrant’s Common Stock, $0.01 par value.

 

 

 


Table of Contents

iCAD, Inc.

INDEX

 

         Page  

PART I

  FINANCIAL INFORMATION   

Item 1

  Financial Statements (unaudited)   
 

Condensed Consolidated Balance Sheets as of March  31, 2020 and December 31, 2019

     3  
 

Condensed Consolidated Statements of Operations for the three-months ended March 31, 2020 and March 31, 2019

     4  
 

Condensed Consolidated Statements of Cash Flows for the three-months ended March 31, 2020 and March 31, 2019

     5  
 

Consolidated Statements of Stockholders’ Equity for the three-months ended March 31, 2020 and March 31, 2019

     6  
 

Notes to Condensed Consolidated Financial Statements

     7-34  

Item 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      35-44  

Item 3

  Quantitative and Qualitative Disclosures about Market Risk      45  

Item 4

  Controls and Procedures      45  

PART II

  OTHER INFORMATION   

Item 1

  Legal Proceedings      46  

Item 1A

  Risk Factors      47  

Item 2

  Unregistered Sales of Equity Securities and Use of Proceeds      48  

Item 5

  Other Information      48  

Item 6

  Exhibits      49  
  Signatures      50  

 

2


Table of Contents

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands except for share data)

 

     March 31,     December 31,  
     2020     2019  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 14,256     $ 15,313  

Trade accounts receivable, net of allowance for doubtful accounts of $255 in 2020 and $136 in 2019

     7,090       9,819  

Inventory, net

     2,462       2,611  

Prepaid expenses and other current assets

     1,497       1,453  
  

 

 

   

 

 

 

Total current assets

     25,305       29,196  
  

 

 

   

 

 

 

Property and equipment, net of accumulated depreciation of $6,580 in 2020 and $6,510 in 2019

     636       551  

Operating lease assets

     2,322       2,406  

Other assets

     93       50  

Intangible assets, net of accumulated amortization of $8,263 in 2020 and $8,186 in 2019

     1,107       1,183  

Goodwill

     8,362       8,362  
  

 

 

   

 

 

 

Total assets

   $ 37,825     $ 41,748  
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 1,674     $ 1,990  

Accrued and other expenses

     6,100       6,590  

Notes payable - current portion

     —         4,250  

Lease payable - current portion

     809       758  

Deferred revenue

     5,259       5,248  
  

 

 

   

 

 

 

Total current liabilities

     13,842       18,836  
  

 

 

   

 

 

 

Lease payable, long-term portion

     1,707       1,837  

Notes payable, long-term portion

     6,957       2,003  

Convertible debentures payable to non-related parties, at fair value

     —         12,409  

Convertible debentures payable to related parties, at fair value

     —         1,233  

Deferred revenue, long-term portion

     232       356  

Deferred tax

     4       3  
  

 

 

   

 

 

 

Total liabilities

     22,742       36,677  
  

 

 

   

 

 

 

Commitments and Contingencies (Note 7)

    

Stockholders’ equity:

    

Preferred stock, $ .01 par value: authorized 1,000,000 shares; none issued.

     —         —    

Common stock, $ .01 par value: authorized 30,000,000 shares; issued 21,425,916 in 2020 and 19,546,151 in 2019 outstanding 21,240,085 in 2020 and 19,360,320 in 2019.

     215       195  

Additional paid-in capital

     252,419       230,615  

Accumulated deficit

     (236,136     (224,324

Treasury stock at cost, 185,831 shares in 2020 and 2019

     (1,415     (1,415
  

 

 

   

 

 

 

Total stockholders’ equity

     15,083       5,071  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 37,825     $ 41,748  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands except for per share data)

 

     Three Months Ended March 31,  
     2020     2019  

Revenue:

    

Products

   $ 3,795     $ 3,822  

Service and supplies

     2,756       2,951  
  

 

 

   

 

 

 

Total revenue

     6,551       6,773  

Cost of revenue:

    

Products

     1,017       680  

Service and supplies

     927       717  

Amortization and depreciation

     97       94  
  

 

 

   

 

 

 

Total cost of revenue

     2,041       1,491  
  

 

 

   

 

 

 

Gross profit

     4,510       5,282  
  

 

 

   

 

 

 

Operating expenses:

    

Engineering and product development

     2,211       2,127  

Marketing and sales

     3,608       2,573  

General and administrative

     2,532       1,546  

Amortization and depreciation

     52       70  
  

 

 

   

 

 

 

Total operating expenses

     8,403       6,316  
  

 

 

   

 

 

 

Loss from operations

     (3,893     (1,034

Interest expense

     (130     (209

Other income

     42       59  

Loss on extinguishment of debt

     (341     —    

Loss on fair value of convertible debentures

     (7,464     (2,525
  

 

 

   

 

 

 

Other expense, net

     (7,893     (2,675

Loss before income tax expense

     (11,786     (3,709
  

 

 

   

 

 

 

Tax expense

     (26     (8
  

 

 

   

 

 

 

Net loss and comprehensive loss

   $ (11,812   $ (3,717
  

 

 

   

 

 

 

Net loss per share:

    

Basic

   $ (0.59   $ (0.22
  

 

 

   

 

 

 

Diluted

   $ (0.59   $ (0.22
  

 

 

   

 

 

 

Weighted average number of shares used in computing loss per share:

    

Basic

     20,175       17,200  
  

 

 

   

 

 

 

Diluted

     20,175       17,200  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     For the three months ended
March 31
 
     2020     2019  
     (in thousands)  

Cash flow from operating activities:

    

Net loss

   $ (11,812   $ (3,717

Adjustments to reconcile net loss to net cash used for operating activities:

    

Amortization

     79       95  

Depreciation

     70       69  

Bad debt provision

     119       —    

Stock-based compensation expense

     464       212  

Amortization of debt discount and debt costs

     40       39  

Loss on extinguishment of debt

     341       —    

Deferred tax expense

     1       —    

Change in fair value of convertible debentures

     7,464       2,525  

Changes in operating assets and liabilities:

    

Accounts receivable

     2,610       (984

Inventory

     149       (403

Prepaid and other current assets

     (72     (347

Accounts payable

     (317     330  

Accrued expenses

     (439     414  

Deferred revenue

     (113     (46
  

 

 

   

 

 

 

Total adjustments

     10,396       1,904  
  

 

 

   

 

 

 

Net cash used for operating activities

     (1,416     (1,813
  

 

 

   

 

 

 

Cash flow from investing activities:

    

Additions to patents, technology and other

     (1     (1

Additions to property and equipment

     (155     (28
  

 

 

   

 

 

 

Net cash used for investing activities

     (156     (29
  

 

 

   

 

 

 

Cash flow from financing activities:

    

Stock option exercises

     196       1,175  

Principal payments of capital lease obligations

     —         (3

Principal repayment of debt financing

     (4,638     (200

Repayment of line of credit

     (2,000     —    

Proceeds from debt financing

     7,000       —    

Debt issuance costs

     (43     —    
  

 

 

   

 

 

 

Net cash provided by financing activities

     515       972  
  

 

 

   

 

 

 

Decrease in cash and equivalents

     (1,057     (870

Cash and equivalents, beginning of period

     15,313       12,185  
  

 

 

   

 

 

 

Cash and equivalents, end of period

   $ 14,256     $ 11,315  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 122     $ 82  
  

 

 

   

 

 

 

Taxes paid

   $ 26     $ 8  
  

 

 

   

 

 

 

Issuance of stock upon conversion of debentures

     21,164       —    
  

 

 

   

 

 

 

Right-of-use assets obtained in exchange for new operating lease liabilities

   $ 69     $ 907  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

iCAD, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity Quarter Ended March 31, 2020

(In thousands except shares)

 

     Common Stock      Additional                     
     Number of             Paid-in      Accumulated     Treasury     Stockholders’  
     Shares Issued      Par Value      Capital      Deficit     Stock     Equity  

Balance at December 31, 2019

     19,546,151      $ 196      $ 230,616      $ (224,325   $ (1,415   $ 5,071  

Issuance of common stock relative to vesting of restricted stock

     23,500        —          —          —         —         —    

Issuance of common stock pursuant to stock option plans

     36,799        1        195        —         —         196  

Issuance of stock for Debentures

     1,819,466        18        21,146        —         —         21,164  

Stock-based compensation

           464            464  

Net loss

     —          —          —          (11,812     —         (11,812
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2020

     21,425,916      $ 215      $ 252,421      $ (236,137   $ (1,415   $ 15,083  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Consolidated Statements of Stockholders’ Equity Quarter Ended March 31, 2019

(In thousands except shares)

 

     Common Stock      Additional                    
     Number of             Paid-in     Accumulated     Treasury     Stockholders’  
     Shares Issued      Par Value      Capital     Deficit     Stock     Equity  

Balance at December 31, 2018

     17,066,510      $ 171      $ 218,914     $ (210,774   $ (1,415   $ 6,896  

Issuance of common stock relative to vesting of restricted stock

     66,334        1        (1     —         —         —    

Issuance of common stock pursuant to stock option plans

     367,421        3        1,172       —         —         1,175  

Stock-based compensation

     —          —          212       —         —         212  

Net loss

     —          —          —         (3,717     —         (3,717
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

     17,500,265      $ 175      $ 220,297     $ (214,491   $ (1,415   $ 4,566  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

6


Table of Contents

Note 1 - Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of iCAD, Inc. and subsidiaries (“iCAD” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). In the opinion of management, these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position of the Company at March 31, 2020, the results of operations of the Company for the three- month period ended March 31, 2020 and 2019, and cash flows of the Company for the three-month period ended March 31, 2020 and 2019.

Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in the footnotes prepared in accordance with US GAAP has been omitted as permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 11, 2020. The results for the three-month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020, or any future period.

Segments

The Company reports the results of two segments: Cancer Detection (“Detection”) and Cancer Therapy (“Therapy”). The Detection segment consists of advanced image analysis and workflow products. The Therapy segment consists of radiation therapy (“Axxent”) products.

Risk and Uncertainty

On March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. As a provider of devices and services to the health care industry, our operations have been materially affected. Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our continuing operations and on the global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. The COVID-19 pandemic has resulted in significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our common stock. Accessing capital may be impacted by the fact that there is a minimum revenue covenant contained in the Company’s Loan and Security Agreement with Western Alliance Bank (see note 4 (b) for details) that could be impacted by the COVID 19 pandemic. If at any point the Company is not in compliance with such covenant and is unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Loan and Security Agreement, which could result in acceleration of the outstanding indebtedness and require the Company to repay such indebtedness before the scheduled due date. The Company believes even if that event of default were to occur, the Company’s current liquidity and capital resources are sufficient to sustain operations through at least the next 12 months, primarily due to cash on hand, which now includes an additional estimated $12.2 million the Company received following the sale of 1,562,500 shares of the Company’s common stock at $8.00 per share, pursuant to a registered direct offering which closed on April 27, 2020.

 

7


Table of Contents

Our results for the quarter ending March 31, 2020 reflect a negative impact from, among other things, the COVID-19 pandemic as shipping, logistics, acceptance and installation and training have been delayed and ordering patterns disrupted. Although we do not provide guidance to investors relating to our future results of operations, we expect that our results for the quarter ending June 30, 2020, and possibly future quarters, will reflect a negative impact from the COVID-19 pandemic for similar reasons. Depending upon the duration and severity of the pandemic, the continuing effect on our results over the long term is uncertain.

The Company’s exposure to trade accounts receivable losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19 pandemic, or other customer-specific factors. Although the Company has historically not experienced significant trade account receivable losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade account receivables as hospitals’ cash flows are impacted by their response to the COVID-19 pandemic.

Recently Adopted Accounting Pronouncements

There are no significant recently adopted accounting pronouncements. For a full list of the Company’s response to all recent accounting pronouncements please refer to Note 13 below.

Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for these goods or services and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities.

Disaggregation of Revenue

The following tables presents our revenues disaggregated by major good or service line, timing of revenue recognition, and sales channel, reconciled to our reportable segments (in thousands).

 

8


Table of Contents
     Three months ended March 31, 2020  
     Reportable Segments         
     Detection      Therapy      Total  

Major Goods/Service Lines

        

Products

   $ 3,100      $ 1,346      $ 4,446  

Service contracts

     1,347        347        1,694  

Supply and source usage agreements

     —          371        371  

Professional services

     —          11        11  

Other

     29        —          29  
  

 

 

    

 

 

    

 

 

 
   $ 4,476      $ 2,075      $ 6,551  
  

 

 

    

 

 

    

 

 

 

Timing of Revenue Recognition

        

Goods transferred at a point in time

   $ 3,129      $ 1,383      $ 4,512  

Services transferred over time

     1,347        692        2,039  
  

 

 

    

 

 

    

 

 

 
   $ 4,476      $ 2,075      $ 6,551  
  

 

 

    

 

 

    

 

 

 

Sales Channels

        

Direct sales force

   $ 2,172      $ 1,469      $ 3,641  

OEM partners

     2,304        —          2,304  

Channel partners

     —          606        606  
  

 

 

    

 

 

    

 

 

 
   $ 4,476      $ 2,075      $ 6,551  
  

 

 

    

 

 

    

 

 

 

 

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Three months ended March 31, 2019

 
     Reportable Segments         
    

Detection

     Therapy      Total  

Major Goods/Service Lines

        

Products

   $ 2,790      $ 1,519      $ 4,309  

Service contracts

     1,322        516        1,838  

Supply and source usage agreements

     —          537        537  

Professional services

     —          33        33  

Other

     56        —          56  
  

 

 

    

 

 

    

 

 

 
   $ 4,168      $ 2,605      $ 6,773  
  

 

 

    

 

 

    

 

 

 

Timing of Revenue Recognition

        

Goods transferred at a point in time

   $ 2,790      $ 1,632      $ 4,422  

Services transferred over time

     1,378        973        2,351  
  

 

 

    

 

 

    

 

 

 
   $ 4,168      $ 2,605      $ 6,773  
  

 

 

    

 

 

    

 

 

 

Sales Channels

        

Direct sales force

   $ 2,057      $ 1,812      $ 3,869  

OEM partners

     2,111        —          2,111  

Channel partners

     —          793        793  
  

 

 

    

 

 

    

 

 

 
   $ 4,168      $ 2,605      $ 6,773  
  

 

 

    

 

 

    

 

 

 

Products. Product revenue consists of sales of cancer detection products, cancer therapy systems, cancer therapy applicators (including disposable applicators) and other accessories that are typically shipped with a cancer therapy system. The Company transfers control and recognizes a sale when the product is shipped from the manufacturing or warehousing facility to the customer.

Service Contracts. The Company sells service contracts in which it provides professional services including product installations, maintenance, training, and service repairs, and in certain cases leases equipment, to hospitals, imaging centers, radiology practices, radiation oncologists and treatment centers. These represent separate performance obligations to the Company. The Company allocates revenue to each performance obligation based on the Standalone Selling Price (“SSP”). Upon the Company’s adoption of ASC 842 effective January 1, 2019, the lease components of the Company’s service contracts are no longer being separately accounted for under the lease guidance. As the lease component is not considered the predominant component of these service contracts, the Company is accounting for the whole contract under ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). Prior to the adoption of ASC 842, the Company accounted for the lease components of these arrangements in accordance with ASC 840 and the remaining consideration was allocated to the other performance obligations identified in

 

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accordance with ASC 606. The consideration allocated to the lease component was recognized as lease revenue on a straight-line basis over the specified term of the agreement, as this is consistent with how the service is consumed. Revenue for the non-lease components, or the entire arrangement when accounted for under ASC 606, is recognized on a straight-line basis over the term of the agreement. The service contracts range from 12 months to 48 months. The Company typically receives payment at the inception of the contract and recognizes revenue on a straight-line basis over the term of the agreement.

Supply and Source Usage Agreements. Revenue from supply and source usage agreements is recognized on a straight-line basis over the term of the supply or source usage agreement. These agreements represent a separate performance obligation to the Company. The Company allocates revenue to each performance obligation based on the SSP.

Professional Services. Revenue from fixed fee service contracts is recognized on a straight-line basis over the term of the agreement. Revenue from professional service contracts entered into with customers on a time and materials basis is recognized over the term of the agreement in proportion to the costs incurred in satisfying the obligations under the contract.

Other. Other revenue consists primarily of miscellaneous products and services. The Company transfers control and recognizes a sale when the installation services are performed or when the product is shipped from the manufacturing or warehousing facility to the customer.

Contract Balances

Contract liabilities are a component of deferred revenue, and contract assets are a component of prepaid and other current assets. The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers (in thousands).

Contract balances

 

     Balance at  
   March 31, 2020  

Receivables, which are included in ‘Trade accounts receivable’

   $ 7,090  

Contract assets, which are included in “Prepaid and other current assets”

     14  

Contract liabilities, which are included in “Deferred revenue”

     5,491  

Timing of revenue recognition may differ from timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to receipt of cash payment and the Company has the unconditional right to such consideration, or unearned revenue when cash payments are received or due in advance of performance. For multi-year agreements, the Company generally invoices customers annually at the beginning of each annual service period.

 

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The Company’s accounts receivable from contracts with customers, net of allowance for doubtful accounts, was $7.1 million and $9.8 million as of March 31, 2020 and December 31, 2019, respectively.

The Company will record a contract asset for unbilled revenue when the Company’s performance is in excess of amounts billed or billable. The Company has classified the contract asset balance as a component of prepaid expenses and other current assets as of March 31, 2020 and December 31, 2019. The contract asset balance was $14,000 as of March 31, 2020 and December 31, 2019.

Deferred revenue from contracts with customers is primarily composed of fees related to long-term service arrangements, which are generally billed in advance. Deferred revenue also includes payments for installation and training that has not yet been completed and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. Deferred revenue from contracts with customers is included in deferred revenue in the consolidated balance sheets.

The balance of deferred revenue at March 31, 2020 and December 31, 2019 is as follows (in thousands):

Contract liabilities

 

     March 31, 2020      December 31, 2019  

Short term

   $ 5,259      $ 5,248  

Long term

     232        356  
  

 

 

    

 

 

 

Total

   $ 5,491      $ 5,604  
  

 

 

    

 

 

 

Changes in deferred revenue from contracts with customers were as follows (in thousands):

 

     Three Months Ended  
     March 31, 2020  

Balance at beginning of period

   $ 5,604  

Deferral of revenue

     2,226  

Recognition of deferred revenue

     (2,339
  

 

 

 

Balance at end of period

   $ 5,491  
  

 

 

 

We expect to recognize approximately $4.8 million of the deferred amount in 2020, $0.5 million in 2021, and $0.2 million thereafter.

 

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Note 2 – Net Loss per Common Share

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.

A summary of the Company’s calculation of net loss per share is as follows (in thousands except per share amounts):

 

     Three Months Ended  
     March 31,  
     2020      2019  

Net loss

   $ (11,812    $ (3,717
  

 

 

    

 

 

 

Shares used in the calculation of basic and diluted net loss per share

     20,175        17,200  
  

 

 

    

 

 

 

Diluted shares used in the calculation of net loss per share

     20,175        17,200  
  

 

 

    

 

 

 

Net loss per share - basic and diluted

   $ (0.59    $ (0.22
  

 

 

    

 

 

 

The shares of the Company’s common stock issuable upon the exercise of convertible securities, stock options and vesting of restricted stock that were excluded from the calculation of diluted net loss per share because their effect would have been antidilutive are as follows:

 

     Period Ended  
     March 31,  
     2020      2019  

Stock options

     1,747,363        1,548,818  

Restricted stock

     74,492        270,064  

Convertible Debentures

     —          1,742,500  
  

 

 

    

 

 

 

Stock options and restricted stock

     1,821,855        3,561,382  
  

 

 

    

 

 

 

Note 3 – Inventory

Inventory is valued at the lower of cost or net realizable value, with cost determined by the first-in, first-out method. The Company regularly reviews inventory quantities on hand and records a reserve for excess and/or obsolete inventory primarily based upon the estimated usage of its inventory as well as other factors. Inventories consisted of the following (in thousands) and include an inventory reserve of approximately $0.3 million and $.5 million as of March 31, 2020 and December 31, 2019, respectively.

 

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     as of March 31,
2020
     as of December 31,
2019
 

Raw materials

   $ 1,502      $ 1,572  

Work in process

     97        39  

Finished Goods

     1,147        1,469  
  

 

 

    

 

 

 

Inventory Gross

     2,746        3,080  

Inventory Reserve

     (284      (469
  

 

 

    

 

 

 

Inventory Net

   $ 2,462      $ 2,611  
  

 

 

    

 

 

 

Note 4 – Financing Arrangements

(a) Loan and Security Agreement – Silicon Valley Bank

On August 7, 2017, the Company entered into a Loan and Security Agreement, which has since been modified, most recently by the Fifth Loan Modification Agreement dated as of November 1, 2019 (as amended, the “SVB Loan Agreement”) with Silicon Valley Bank (“SVB”) that provided an initial term loan facility of $6.0 million and a $4.0 million revolving line of credit.

On March 30, 2020, the Company elected to repay all outstanding obligations (including accrued interest) and retire the SVB Loan Agreement. The Company accounted for this repayment and retirement as an extinguishment of the SVB Loan Agreement. In addition to the outstanding principal and accrued interest, the Company was required to pay the $510,000 final payment (of which approximately $325,000 was accrued through March 31, 2020), a termination fee of $114,000 and other costs totaling $10,000. The Company also wrote off any unamortized original closing costs as of the extinguishment date. The Company recorded a loss on extinguishment of approximately $341,000 related to the repayment and retirement of the SVB Loan Agreement. The loss on extinguishment was composed of approximately $185,000 for the unaccrued final payment, $114,000 termination fee, and $42,000 for the unamortized and other closing costs.

(b) Loan and Security Agreement – Western Alliance Bank

On March 30, 2020 the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Western Alliance Bank (the “Bank”) that provided an initial term loan (“Term Loan”) facility of $7.0 million and a $5.0 million revolving line of credit.

The Loan Agreement includes certain financial covenants tied to minimum revenue and maximum net loss. The Company was compliant with such covenants as of March 31, 2020. Subsequent to March 31, 2020 the Company, in accordance with the Loan Agreement, triggered the equity event that relieved the covenant related to maximum net loss, leaving only the minimum revenue requirement. Although the Company is no longer subject to the loan covenant tied to net loss, with the COVID-19 pandemic affecting the world economy, the Company cannot assure that it will be able to continue to satisfy the minimum revenue covenant. If at any point the Company is not in compliance with the covenant and is unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Loan Agreement, which could permit acceleration of the outstanding indebtedness and require the Company to repay such indebtedness before the scheduled due date. The Company was required, historically, to seek modifications from its prior lender to avoid non-compliance with its earlier covenants.

 

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Interest in arrears on the Term Loan will begin to be repaid on April 1, 2020 and continues the first of each successive month thereafter until the principal repayment starts. Commencing on the principal repayment date on of September 1, 2021 (or March 1, 2022 if the Company achieves a specified revenue target for any trailing six month period prior to December 31, 2020) and continuing on the first day of each month thereafter, the Company shall make equal monthly payments of principal, together with applicable interest in arrears, to Bank. The interest rate is set at 1% above the Prime Rate. Prime Rate is defined in the Loan Agreement as the greater of four and a quarter percent (4.25%) or the Prime Rate published in the Money Rates section of the Western Edition of the Wall Street Journal.

The Company has the option to prepay all, but not less than all, of the Term Loan advanced by the Bank under the Loan Agreement. The Company prepayment is subject to payment of (1) all outstanding principal of the Term Loan plus accrued and unpaid interest thereon through the prepayment date, (2) the final payment ($122,500 or 1.75% of the original loan amount), (3) the prepayment fee (3% of principal balance if prepaid prior to first March 30, 2021, 2% if principal of prepaid after March 30, 2021 but before March 31, 2022, or 1% of principal if prepaid after March 30, 2022) plus (4) all other obligations that are due and payable, including Bank’s expenses and interest at the default rate with respect to any past due amounts.

The Company did not draw against its revolving line of credit as of March 31, 2020. The interest rate on such borrowings, if the Company were to take an advance, is three quarters percent (0.75%) above the Prime Rate as defined above.

Obligations to the Bank under the Loan Agreement are secured by a first priority security interest in the Company’s assets, except for certain permitted liens that have priority to the Bank’s security interest by operation of law.

In connection with the Loan Agreement, the Company incurred approximately $43,000 of closing costs as of March 31, 2020. The closing costs have been deduced from the carrying value of the debt and will be amortized through March 30, 2022, the maturity date of the Term Loan.

The maturity of the revolving loan is March 30, 2022.

 

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(c) Convertible Debentures

On December 20, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain institutional and accredited investors, including, but not limited to, all directors and executive officers of the Company at the time (the “Investors”), pursuant to which the Investors purchased unsecured subordinated convertible debentures (the “Convertible Debentures”) with an aggregate principal amount of approximately $7.0 million in a private placement.

On February 21, 2020 (the “Conversion Date”), the conditions permitting a forced conversion were met, and the Company elected to exercise its forced conversion right under the terms of the Convertible Debentures.

On June 21, 2019, the Company commenced paying interest to the Investors on the outstanding principal amount of the Convertible Debentures at the rate of 5.0% per annum, payable semi-annually on December 21st and June 21st as well as on each conversion date (as to that principal amount then being converted) and on the maturity date. The Convertible Debentures were due to mature on December 21, 2021.

At any time prior to the maturity date, the Convertible Debentures were convertible into shares of the Company’s common stock at a conversion price of $4.00 per share, at an Investor’s option, subject to certain anti-dilution adjustments. Upon the satisfaction of certain conditions, the Company had the right to cause the Investors to convert all or part of the then outstanding principal amount of the Convertible Debentures (a “Forced Conversion”). In connection with such Forced Conversion, the Company was required to pay accrued but unpaid interest, an interest make-whole amount determined based on the timing of the Forced Conversion and interest payments made to that date, liquidated damages and other amounts owing to the Investors under the Convertible Debentures. The conversion price in both the optional conversion and Forced Conversion provisions were subject to adjustment due to certain ‘down-round’ dilutive issuances as well for typical anti-dilutive actions, such as stock splits and stock dividends.

The Convertible Debentures also included certain liquidated damages provisions, whereby the Company would have been required to compensate the Investors for certain contingent events, such as the failure to timely deliver conversion shares of common stock, failure to timely pay any accrued interest when due and failure to timely issue certain public reports.

Certain Investors in the Convertible Debentures included directors and employees of the Company. These related parties comprised approximately 9.6% of the principal value of the Convertible Debentures, or $670,000. The Convertible Debentures issued to the related parties had substantially the same rights and provisions as the unrelated third party investors, with the exception of certain terms where the related parties received less favorable terms than the unrelated third parties (such as with determination of the make-whole conversion rate, as defined in the SPA; or limits on the impact of potential ‘down-round’ adjustments to the conversion price).

 

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On the Conversion Date, the required conditions were met, and the Company elected to exercise its forced conversion right under the terms of the Convertible Debentures. As a result of this election, all of the outstanding Convertible Debentures were converted, at a conversion price of $4.00 per share, into 1,742,500 shares of the Company’s common stock. In accordance with the make-whole provisions in the Debenture, the Company also issued an additional 76,966 shares of the Company’s common stock. The make-whole amount represented the total interest which would have accrued through the maturity date of the Convertible Debentures, less the amounts previously paid, totaling $697,000. The conversion prices related to the make-whole amount were dependent on whether the Investors were related parties or unrelated third parties.

Accounting Considerations and Fair Value Measurements Related to the Convertible Debentures

The Company had previously elected to make a one-time, irrevocable election to utilize the fair value option to account for the Convertible Debentures as a single hybrid instrument at its fair value, with changes in fair value from period to period being recorded either in current earnings, or as an element of other comprehensive income (loss), for the portion of the change in fair value determined to relate to the Company’s own credit risk. The Company believed that the election of the fair value option allowed for a more meaningful representation of the total fair value of its obligation under the Convertible Debentures and allowed for a better understanding of how changes in the external market environment and valuation assumptions impact such fair value.

As of the December 31, 2019 valuation and the prior measurement dates, the Company utilized a Monte Carlo simulation model to estimate the fair value of the Convertible Debentures. The simulation model was designed to capture the potential settlement features of the Convertible Debentures, in conjunction with simulated changes in the Company’s stock price and the probability of certain events occurring. The simulation utilized 100,000 trials or simulations to determine the estimated fair value.

The simulation utilized the assumptions that if the Company was able to exercise its Forced Conversion right (if the requirements to do so are met), that it would do so in 100% of such scenarios. Additionally, if an event of default occurred during the simulated trial (based on the Company’s probability of default), the Investors would opt to redeem the Convertible Debentures in 100% of such scenarios. If neither event occurs during a simulated trial, the simulation assumed that the Investor would hold the Convertible Debentures until the maturity date. The value of the cash flows associated with each potential settlement were discounted to present value in each trial based on either the risk-free rate (for an equity settlement) or the effective discount rate (for a redemption or cash settlement).

The Company also recorded a final adjustment to the Convertible Debentures based on their fair value on the Conversion Date, just prior to the forced conversion being completed. Given that the Company’s prior simulation model included the assumption that the Company would elect to force conversion in 100% of scenarios when the requirements were met, the final valuation was based on the actual results of the forced conversion. As such, the Company based the final fair value adjustment to the Convertible Debentures just prior to conversion on the number of shares of common stock that were issued to the Investors upon conversion and the fair value of the Company’s common stock as of the Conversion Date.

 

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The Company notes that the key inputs to the valuation models that were utilized to estimate the fair value of the Convertible Debentures included:

 

   

Input

   December 31, 2019     February 21, 2019  
  Company’s stock price    $ 7.77     $ 11.64  
  Conversion price      4.00       4.00  
  Remaining term (years)      1.97       0.00  
  Equity volatility      49.00     N/A  
  Risk free rate      1.57     N/A  
1    Probabilty of default event      0.45     N/A  
1    Utilization of Forced Conversion (if available)      100.00     100.00
1    Exercise of Default Redemption (if available)      100.00     N/A  
1    Effective discount rate      18.52     N/A  

 

1

Represents a Level 3 unobservable input, as defined in Note 8—Fair Value Measurements, below.

The Company’s stock price was based on the closing stock price on the valuation date. The conversion price was based on the contractual conversion price included in the SPA.

The remaining term was determined based on the remaining time period to maturity of the Convertible Debentures, or remaining term under the expectation of the Company’s election of its forced conversion right.

The Company’s equity volatility estimate was based on the Company’s historical equity volatility, the Company’s implied and observed volatility of option pricing, and the historical equity and observed volatility of option pricing for a selection of public companies.

The risk-free rate was determined based on U.S. Treasury securities with similar terms.

The probability of the occurrence of a default event was based on Bloomberg’s 1-year estimate of default risk for the Company (extrapolated over the remaining term).

The utilization of the forced conversion right and the default redemption right was based on management’s best estimate of both features being exercised upon the occurrence of the related contingent events.

The effective discount rate utilized at the December 31, 2019 valuation date was based on yields on CCC-rated debt instruments with terms equivalent to the remaining term of the Convertible Debentures. The credit rating estimate was based on the implied credit rating determined at issuance and no changes were identified by the Company that would impact this assessment.

 

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The fair value and principal value of the Convertible Debentures as of December 31, 2019 and the Conversion Date was as follows (in thousands):

 

Convertible Debentures

   December 31,
2019
     February 21,
2020
 

Fair value, in accordance with fair value option

   $ 13,642      $ 21,164  
  

 

 

    

 

 

 

Principal value outstanding

   $ 6,970      $ 6,970  
  

 

 

    

 

 

 

The Company recorded a loss from the change in fair value of the Convertible Debentures of approximately $7.5 million for period through the conversion date which are described in the additional fair value disclosures related to the Convertible Debentures in Note 8.

Upon the consummation of the Forced Conversion, the Company issued 1,816,466 shares of common stock with a fair value of approximately $21.2 million, which was reclassified to stockholders’ equity. The Convertible Debenture balance as of March 31, 2020 was $0.

(d) Principal and Interest Payments Related to Financing Arrangements

Future principal, interest payments, and final payment related to the Loan Agreement are as follows (in thousands):

 

Fiscal Year

   Amount Due  

2020

   $ 281  

2021

   $ 1,238  

2022

   $ 2,875  

2023

   $ 2,735  

2024

   $ 1,004  
  

 

 

 

Total

   $ 8,133  
  

 

 

 

The following amounts are included in interest expense in our consolidated statement of operations for the three months ended March 31, 2020 and 2019 (in thousands):                

 

     Three Months
Ended March 31,
 
     2020      2019  

Cash interest expense

   $ 43      $ 82  

Interest on convertible debentures

     49        87  

Accrual of notes payable final payment

     31        32  

Amortization of debt costs

     7        7  

Interest expense capital lease

     —          1  
  

 

 

    

 

 

 

Total interest expense

   $ 130      $ 209  
  

 

 

    

 

 

 

 

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Note 5 – Lease Commitments

On January 1, 2019, the Company adopted ASC 842 and has applied its transition provisions at the beginning of the period of adoption (i.e., on the effective date), and so did not restate comparative periods. Under this transition provision, the Company has applied the legacy guidance under ASC 840, including its disclosure requirements, in the comparative periods presented.

Under ASC 842, the Company determines if an arrangement contains a lease at inception. A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (i.e., an identified asset) for a period of time in exchange for consideration. Leases are classified as either operating or financing. At lease inception, the Company recognizes a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as for lease incentives. The Company used its incremental borrowing rate to determine the present value of the lease payments. The Company determined the incremental borrowing rates for its leases by applying its applicable, fully collateralized borrowing rate, with adjustment as appropriate for lease term. The lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option. The Company considered a number of factors when evaluating whether the options in its lease contracts were reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties. Right-of-use assets and obligations for short-term leases (leases with an initial term of 12 months or less) are not recognized in the consolidated balance sheet. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. The Company does not sublease any of its leased assets to third parties. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. The Company has lessor agreements that contain lease and non-lease components. As the Company has determined that the non-lease component of these agreements is the predominant component, the Company is accounting for the complete agreement under ASC 606 upon adoption of ASC 842.

ASC 842 includes a number of reassessment and re-measurement requirements for lessees based on certain triggering events or conditions, including whether a contract is or contains a lease, assessment of lease term and purchase options, measurement of lease payments, assessment of lease classification and assessment of the discount rate. The Company reviewed the reassessment and re-measurement requirements and identified two lease modifications which are reflected in the table below showing the maturity of the Company’s lease liabilities as of March 31, 2020. This includes an extension of an operating lease for the facility leased by the Company in San Jose as well as some equipment. In addition, there were no impairment indicators identified during the quarter ended March 31, 2020 that required an impairment test for the Company’s right-of-use assets or other long-lived assets in accordance with ASC 360-10 Property Plant and Equipment (“ASC 360”).

 

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Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as common area maintenance services. The Company has elected to not separate the accounting for lease components and non-lease components for real estate and equipment leases.

Required Disclosures under ASC 842

The Company has leases for office space and office equipment. The leases have remaining lease terms ranging from less than one year to three years and six months as of March 31, 2020.

The components of lease expense for the period are as follows (in thousands):

 

Lease Cost

  

Classification

   Three Months Ended
March 31, 2020
 

Operating lease cost

   Operating expenses    $ 224  

Finance lease costs

     

Amortization of leased assets

   Amortization and depreciation      4  

Interest on lease liabilities

   Interest expense      1  
     

 

 

 

Total

      $ 229  
     

 

 

 

Other information related to leases was as follows (in thousands)

 

     Three Months Ended
March 31, 2020
 

Cash paid for operating cash flows from operating leases

   $ 216  

Cash paid for operating cash flows from finance leases

     1  

Cash paid for financing cash flows from finance leases

     4  

 

     As of March 31, 2020  

Weighted-average remaining lease term of operating leases (in years)

     2.89  

Weighted-average remaining lease term of finance leases (in years)

     1.00  

Weighted-average discount rate for operating leases

     5.6

Weighted-average discount rate for finance leases

     11.0

 

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Maturity of the Company’s lease liabilities as of March 31, 2020 was as follows (in thousands):

 

Three Months Ended March 31:

   Operating
Leases
     Finance
Leases
     Total  

2020

     692        9        701  

2021

     920        —          920  

2022

     899        —          899  

2023

     211        —          211  

2024

     5        —          5  
  

 

 

    

 

 

    

 

 

 

Total lease payments

     2,727        9        2,736  

Less: imputed interest

     (219      (1      (220
  

 

 

    

 

 

    

 

 

 

Total lease liabilities

     2,508        8        2,516  

Less: current portion of lease liabilities

     (801      (8      (809
  

 

 

    

 

 

    

 

 

 

Long-term lease liabilities

   $ 1,707      $ —        $ 1,707  
  

 

 

    

 

 

    

 

 

 

Note 6 - Stock-Based Compensation

The Company granted options to purchase 48,285 and 196,737 shares of the Company’s stock during the three months ended March 31, 2020. Options granted under the Company’s stock incentive plans were valued utilizing the Black-Scholes model using the following assumptions and had the following fair values:

 

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     Three Months Ended
March 31,
     2020   2019

Average risk-free interest rate

   1.24%   2.38%

Expected dividend yield

   None   None

Expected life

   3.5 years   3.5 years

Expected volatility

   50.2% to 64.0%   53.1% to 54.2%

Weighted average exercise price

   $8.26   $4.35

Weighted average fair value

   $3.19   $1.78

Remaining expense

   $1,632   $1,579

Weighted average term

   1.0   1.0

The Company’s stock-based compensation expense, including options and restricted stock by category is as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2020      2019  

Cost of revenue

   $ 1      $ 1  

Engineering and product development

     54        87  

Marketing and sales

     58        59  

General and administrative

     351        65  
  

 

 

    

 

 

 
   $ 464      $ 212  
  

 

 

    

 

 

 

As of March 31, 2020, unrecognized compensation cost (in thousands) related to unvested options and unvested restricted stock and the weighted average term of such equity instruments is as follows:

 

Remaining expense

   $ 1,632  

Weighted average term

     1.0  

The Company’s restricted stock awards typically vest in either one year or three equal annual installments with the first installment vesting one year from grant date.

During the three-month period ended March 31, 2020, the Company did not grant any restricted stock with time-based vesting while granting 14,000 shares in the three-month period ended March 31, 2019.

 

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The Company’s aggregate intrinsic value for stock options and restricted stock outstanding is as follows (in thousands):

 

     Three Months Ended
March 31,
 

Aggregate intrinsic value

   2020      2019  

Stock options

   $ 4,749      $ 2,273  

Restricted stock

     547        1,396  

The Company issued 36,799 shares of common stock upon the exercise of outstanding stock options in the three-month period ended March 31, 2020. The Company received cash proceeds of approximately $0.2 million in the three-month period ended March 31, 2020. The intrinsic value of restricted shares that vested in the three months ended March 31, 2020 was $0.4 million.

Employee Stock Purchase Plan

In December 2019, the 2019 Employee Stock Purchase Plan (“ESPP”) was adopted by the Company’s Board of Directors and approved by stockholders, effective January 1, 2020.

The ESPP provides for the issuance of up to 950,000 shares of common stock, subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The ESPP may be terminated or amended by the Board of Directors at any time. Certain amendments to the ESPP require stockholder approval.

Substantially all of the Company’s employees whose customary employment is for more than 20 hours a week are eligible to participate in the ESPP. Any employee who owns 5% or more of the voting power or value of the Company’s shares of common stock is not eligible to participate in the ESPP.

Any eligible employee can enroll in the ESPP as of the beginning of a respective quarterly accumulation period. Employees who participate in the ESPP may purchase shares by authorizing payroll deductions of up to 15% of their base compensation during an accumulation period. Unless the participating employee withdraws from participation, accumulated payroll deductions are used to purchase shares of common stock on the last business day of the accumulation period (the “Purchase Date”) at a price equal to 85% of the lower of the fair market value on (i) the Purchase Date or (ii) the first day of such accumulation period. Under applicable tax rules, no employee may purchase more than $25,000 worth of common stock, valued at the start of the purchase period, under the ESPP in any calendar year.

No shares had been issued under the ESPP as of March 31, 2020 and the company recorded approximately $34,000 of stock-based compensation expense pursuant to ESPP. The first accumulation period under the ESPP commenced on January 1, 2020 and was completed on March 31, 2020, and the related shares purchased by the participants were issued in April 2020. As of March 31, 2020, The Company recorded a liability of $151,000 related to employee withholdings, which was included as a component of accrued expenses and other current liabilities.

 

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Note 7 - Commitments and Contingencies

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 the 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 2020. The Company believes that it is not liable for the re-assessment against CADx Medical and continues to defend its position. As the Company believes that the probability of a loss is remote, no accrual has been recorded for this matter as of March 31, 2020.

Other Commitments

The Company is obligated to pay approximately $5.9 million for firm purchase obligations to suppliers for future product and service deliverables.

Litigation

In December 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation. In accordance with the agreement, the Company sold to Invivo all right, title and interest to certain intellectual property relating to the Company’s VersaVue Software and DynaCAD product and related assets for $3.2 million. The Company closed the transaction on January 30, 2017 less a holdback reserve of $350,000 for a net of approximately $2.9 million.

On September 5, 2018, third-party Yeda Research and Development Company Ltd. (“Yeda”), filed a complaint (“the Complaint”) against the Company and Invivo in the United States District Court for the Southern District of New York, captioned Yeda Research and Development Company Ltd. v. iCAD, Inc. and Invivo Corporation, Case No. 1:18-cv-08083-GBD, related to the Company’s sale of the VersaVue software and DynaCAD product under the Asset Purchase Agreement. In the Complaint, Yeda asserted claims for: (i) copyright infringement and misappropriation of trade secrets against both the Company and Invivo; (ii) breach of contract against the Company only; and (iii) tortious interference with existing business relationships and unjust enrichment against Invivo only. The Company and Invivo filed Motions to Dismiss the Complaint on December 21, 2018. On January 18, 2019, Yeda filed Oppositions to the Motions to Dismiss. The Company and Invivo submitted responses to the Opposition to the Motion to Dismiss on February 8, 2019. The Court held oral argument on the Motions to Dismiss on March 27, 2019. On September 5, 2019, the Court granted Invivo’s Motion to Dismiss in its entirety and granted the Company’s Motion to Dismiss as it relates to Yeda’s breach of contract and misappropriation of trade secrets claims. On October 22, 2019, Yeda filed an Amended Complaint against only the Company asserting claims for (i) copyright infringement; and (ii) a replead breach of contract claim. The Company filed its Answer to Yeda’s Amended Complaint on November 5, 2019. Yeda alleges, among other things, that the Company infringed upon Yeda’s source code, which was originally licensed to the Company, by using it in the products that the Company sold to Invivo and that it is entitled to damages that could include, among other things, profits relating to the sales of these products. If the Company is found to have infringed Yeda’s copyright or breached its agreements with Yeda, the Company could be obligated to pay to Yeda substantial monetary damages.

 

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The Company may be a party to various legal proceedings and claims arising out of the ordinary course of its business. Although the final results of all such matters and claims cannot be predicted with certainty, the Company currently believes that there are no current proceedings or claims pending against it the ultimate resolution of which would have a material adverse effect on its financial condition or results of operations. However, should the Company fail to prevail in any legal matter or should several legal matters be resolved against the Company in the same reporting period, such matters could have a material adverse effect on our operating results and cash flows for that particular period. The Company may be a party to certain actions that have been filed against the Company which are being vigorously defended. The Company has determined that potential losses in these matters are neither probable or reasonably possible at this time. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450, Contingencies. Legal costs are expensed as incurred.

Note 8 - Fair Value Measurements

Fair value is defined 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 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.

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and notes payable and convertible debentures. Due to their short-term nature and market rates of interest, the carrying amounts of the financial instruments (except the Convertible Debentures, which were measured at fair value in accordance with the fair value option election) approximated fair value as of February 21, 2020 and December 31, 2019.

 

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The Company’s assets and liabilities that are measured at fair value on a recurring basis include the Company’s money market accounts and convertible debentures.

The money market funds are included in cash and cash equivalents in the accompanying balance sheet and are considered a Level 1 measurement as they are valued at quoted market prices in active markets.

The Convertible Debentures were recorded as a separate component of the Company’s consolidated balance sheet and are considered a Level 3 measurement due to the utilization of significant unobservable inputs in their valuation. See Note 4(b) for a discussion of these fair value measurements.

The following table sets forth the Company’s assets and liabilities which are measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands).

 

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Fair Value Measurements (000’s) as of December 31, 2019  
     Level 1      Level 2      Level 3      Total  

Assets

           

Money market accounts

   $ 15,313      $ —        $ —        $ 15,313  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 15,313      $ —        $ —        $ 15,313  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Convertible debentures

   $ —        $ —        $ 13,642      $ 13,642  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ —        $ —        $ 13,642      $ 13,642  
  

 

 

    

 

 

    

 

 

    

 

 

 
Fair Value Measurements (000’s) as of March 31, 2020  
     Level 1      Level 2      Level 3      Total  

Assets

           

Money market accounts

   $ 14,256      $ —        $ —        $ 14,256  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 14,256      $ —        $ —        $ 14,256  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Convertible debentures

   $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

The following sets forth a reconciliation of the changes in the fair value of the Convertible Debentures that were converted to equity during the period (in thousands):

 

     Convertible Debenture  

Balance, December 31, 2019

   $ 13,642  

Fair value adjustments

     7,522  

Conversion

     (21,164
  

 

 

 

Balance, March 31, 2020

   $ —    
  

 

 

 

 

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Note 9 - Income Taxes

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted by the United States on March 27, 2020. Although the Company is continuing to analyze the impact of the CARES Act on its business, the CARES Act did not have a material impact on our provision for income taxes for the three months ended March 31, 2020.

The Company recorded an income tax provision of $26,000 and $8,000 for the three-months ended March 31, 2020 and March 31, 2019, respectively. The Company had no material unrecognized tax benefits and a deferred tax liability of approximately $4,000 related to tax amortizable goodwill. No other adjustments were required under ASC 740, “Income Taxes”. The Company does not expect that the unrecognized tax benefits will materially increase within the next 12 months. The Company did not recognize any interest or penalties related to uncertain tax positions at March 31, 2020.

The Company files United States federal income tax returns and income tax returns in various states and local jurisdictions. The Company’s three preceding tax years remain subject to examination by federal and state taxing authorities. In addition, because the Company has net operating loss carry-forwards, the Internal Revenue Service and state jurisdictions are permitted to audit earlier years and propose adjustments up to the amount of net operating loss generated in those years. The Company is not currently under examination by any federal or state jurisdiction for any tax years.

Note 10 - Goodwill

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 reporting unit is less than the carrying value of the reporting unit.

Factors the Company 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 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.

The Company considered the goodwill impairment factors due to the uncertainty around the potential impact of the COVID-19 pandemic on the Company’s continuing operations and on the global economy as a whole. Under this consideration the Company performed scenario testing of the projections to the most recent impairment analysis performed as of October 1, 2019. The Company concluded that it did not have a triggering event or impairment indicators in the quarter ended March 31, 2020.

 

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The Company would record an impairment charge when such assessment indicates that the fair value of a reporting unit was less than the carrying value. In evaluating potential impairments outside of the annual measurement date, judgment is required in determining whether an event has occurred that may impair the value of goodwill or intangible assets.

The Company utilizes either discounted cash flow models or other valuation models, such as comparative transactions and market multiples, to determine the fair value of reporting units. The Company makes assumptions about future cash flows, future operating plans, discount rates, comparable companies, market multiples, purchase price premiums and other factors in those models. Different assumptions and judgment determinations could yield different conclusions that would result in an impairment charge to income in the period that such change or determination was made.

The Company determines the fair values for each reporting unit using a weighting of the income approach and the market approach. For purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk adjusted rate. The Company uses internal forecasts to estimate future cash flows and includes estimates of long-term future growth rates based on our most recent views of the long-term forecast for each segment. Accordingly, actual results can differ from those assumed in our forecasts. Discount rates are derived from a capital asset pricing model and by analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts.

In the market approach, the Company uses a valuation technique in which values are derived based on market prices of publicly traded companies with similar operating characteristics and industries. A market approach allows for comparison to actual market transactions and multiples. It can be somewhat limited in its application because the population of potential comparable publicly-traded companies can be limited due to differing characteristics of the comparative business and ours, as well as market data may not be available for divisions within larger conglomerates or non-public subsidiaries that could otherwise qualify as comparable, and the specific circumstances surrounding a market transaction (e.g., synergies between the parties, terms and conditions of the transaction, etc.) may be different or irrelevant with respect to the business.

The Company corroborates the total fair values of the reporting units using a market capitalization approach; however, this approach cannot be used to determine the fair value of each reporting unit value. The blend of the income approach and market approach is more closely aligned to the business profile of the Company, including markets served and products available. In addition, required rates of return, along with uncertainties inherent in the forecast of future cash flows, are reflected in the selection of the discount rate. In addition, under the blended approach, reasonably likely scenarios and associated sensitivities can be developed for alternative future states that may not be reflected in an observable market price. The Company will assess each valuation methodology based upon the relevance and availability of the data at the time the valuation is performed and weights the methodologies appropriately.

 

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The Company has two operating segments, Detection and Therapy, in its SEC filings.

A rollforward of goodwill activity by reportable segment is as follows (in thousands):

 

     Consolidated
reporting unit
     Detection      Therapy      Total  

Accumulated Goodwill

     47,937      $ —        $ —          47,937  

Accumulated impairment

     (26,828      —          —          (26,828

Fair value allocation

     (21,109      7,663        13,446        —    

Acquisition of DermEbx and Radion

     —          —          6,154        6,154  

Acquisition measurement period adjustments

     —          —          116        116  

Acquisition of VuComp

     —          1,093        —          1,093  

Sale of MRI assets

     —          (394         (394

Impairment

     —          —          (19,716      (19,716
  

 

 

    

 

 

    

 

 

    

 

 

 

Prior to December 31, 2018

     —          8,362        —          8,362  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2018

   $ —        $ 8,362      $ —        $ 8,362  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2019

   $ —        $ 8,362      $ —        $ 8,362  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2020

   $ —        $ 8,362      $ —        $ 8,362  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 11 – Long-lived assets

The Company assesses long-lived assets for impairment if events and circumstances indicate it is more likely than not that the fair value of the asset group is less than the carrying value of the asset group.

There is no set interval or frequency for recoverability evaluation rather when to determine when, if at all, an asset (or asset group) is evaluated for recoverability is based on “events and circumstances.” The following factors are examples of events or changes in circumstances that indicate the carrying amount of an asset (asset group) may not be recoverable and thus is to be evaluated for recoverability.

 

   

A significant decrease in the market price of a long-lived asset (asset group);

 

   

A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition;

 

   

A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator;

 

   

An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group);

 

   

A current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group).

 

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The Company determined there were no triggering events in the quarter ended March 31, 2020.

If the carrying amount of an asset or asset group (in use or under development) is evaluated and found not to be fully recoverable (the carrying amount exceeds the estimated gross, undiscounted cash flows from use and disposition), then an impairment loss must be recognized. The impairment loss is measured as the excess of the carrying amount over the fair value of the asset (or asset group). The Company determined the “Asset Group” of the Company to be the assets of the Cancer Therapy segment and the Cancer Detection segment, which the Company considers to be the lowest level for which the identifiable cash flows were largely independent of the cash flows of other assets and liabilities.

A considerable amount of judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of the asset group and the reporting unit. While the Company believes the judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore additional impairment charges could be required. Significant negative industry or economic trends, disruptions to the Company’s business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets may adversely impact the assumptions used in the fair value estimates and ultimately result in future impairment charges.

Note 12 – Segment Reporting

Operating segments, are defined as components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance.

The Company’s CODM is the Chief Executive Officer. Each reportable segment generates revenue from the sale of medical equipment and related services and/or sale of supplies. The Company has determined there are two segments, Detection and Therapy.

The Detection segment consists of our advanced image analysis and workflow products, and the Therapy segment consists of our radiation therapy products, “Axxent,” and related services. The primary factors used by our CODM to allocate resources are based on revenues, gross profit, operating income, and earnings or loss before interest, taxes, depreciation, amortization, and other specific and non-recurring items of each segment. Included in segment operating income are stock compensation, amortization of technology and depreciation expense. There are no intersegment revenues.

 

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The Company does not track assets by operating segment and our CODM does not use asset information by segment to allocate resources or make operating decisions.

Segment revenues, gross profit, segment operating income or loss, and a reconciliation of segment operating income or loss to US GAAP loss before income tax is as follows (in thousands):

 

     Three Months Ended  
     March 31,  
     2020      2019  

Segment revenues:

     

Detection

   $ 4,476      $ 4,168  

Therapy

     2,075        2,605  
  

 

 

    

 

 

 

Total Revenue

   $ 6,551      $ 6,773  
  

 

 

    

 

 

 

Segment gross profit:

     

Detection

   $ 3,467      $ 3,467  

Therapy

     1,043        1,815  
  

 

 

    

 

 

 

Segment gross profit

   $ 4,510      $ 5,282  
  

 

 

    

 

 

 

Segment operating income (loss):

     

Detection

   $ (346    $ 302  

Therapy

     (1,006      221  
  

 

 

    

 

 

 

Segment operating income (loss)

   $ (1,352    $ 523  
  

 

 

    

 

 

 

General, administrative, depreciation and amortization expense

   $ (2,541    $ (1,557

Interest expense

     (130      (209

Other income

     42        59  

Loss on extinguishment of debt

     (341       

Fair value of convertible debentures

     (7,464      (2,525
  

 

 

    

 

 

 

Loss before income tax

   $ (11,786    $ (3,709
  

 

 

    

 

 

 

Note 13 - Recent Accounting Pronouncements

Recently Adopted Accounting Standards

On January 1, 2020, the Company adopted ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes, modifies and adds certain disclosure requirements of ASC Topic 820. ASU 2018-13 is effective for Company for the fiscal year and interim periods therein beginning January 1, 2020. The Company notes that the adoption of ASU 2018-13 did not have a material impact on its consolidated financial statements.

 

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Recently Issued Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)” (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. These changes will result in earlier recognition of credit losses. In November 2019, the FASB elected to defer the adoption date of ASU 2016-13 for public business entities that meet the definition of a smaller reporting company to fiscal years beginning after December 15, 2022. Early adoption of the guidance in ASU 2016-13 is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-13 will have on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for the Company for the fiscal year and interim periods therein beginning January 1, 2021. The Company is currently evaluating the impact that the adoption of ASU 2019-12 will have on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 was issued because the London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons. ASU 2020-04 provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022). The Company is currently evaluating the impact that the adoption of ASU 2020-04 will have on its consolidated financial statements.

Note 14 – Subsequent Events

On April 27, 2020, the Company issued 1,562,500 shares of common stock to several institutional investors at a price of $8.00 per share in a registered direct offering. The gross proceeds of the offering were approximately $12.5 million, and the Company received net proceeds of approximately $12.2 million. The Company intends to use the net proceeds for working capital and for other general corporate purposes, including for the conduct of post-market studies for the Company’s Xoft intra-operative radiation therapy (IORT) for glioblastoma and other brain cancers.

 

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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 following; the impact of the COVID-19 pandemic on our business and the macro economy; 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, Inc. is a global medical technology company providing innovative cancer detection and therapy solutions. The Company reports in two segments: Detection and Therapy.

In the Detection segment, the Company’s solutions include (i) advanced image analysis and workflow solutions that enable healthcare professionals to better serve patients by identifying pathologies and pinpointing the most prevalent cancers earlier, and (ii) a comprehensive range of high-performance, Artificial Intelligence and Computer-Aided Detection (CAD) systems and workflow solutions for 2D and 3D mammography, Magnetic Resonance Imaging (MRI) and Computed Tomography (CT).

In the Therapy segment, the Company offers an isotope-free cancer treatment platform technology the Xoft Electronic Brachytherapy System (“Xoft System”). The Xoft System can be used for the treatment of early- stage breast cancer, endometrial cancer, cervical cancer and skin cancer. We believe the Xoft System platform indications represent strategic opportunities in the United States and international markets to offer differentiated treatment alternatives. In addition, the Xoft System generates additional recurring revenue for the sale of consumables and related accessories which will continue to drive growth in this segment.

 

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The Company’s headquarters are located in Nashua, New Hampshire, with a manufacturing facility in New Hampshire and an operations, research, development, manufacturing and warehousing facility in San Jose, California.

COVID-19 Impact

On March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. As a provider of devices and services to the health care industry, our operations have been materially affected. Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our continuing operations and on the global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. The COVID-19 pandemic has resulted in significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our common stock. Our results for the quarter ending March 31, 2020 reflect a negative impact from, among other things, the COVID-19 pandemic as shipping, logistics, acceptance and installation and training have been delayed and ordering patterns disrupted. Although we do not provide guidance to investors relating to our results of operations, we expect that our results for the quarter ending June 30, 2020, and possibly future quarters, will reflect a negative impact from the COVID-19 pandemic for similar reasons. With this impact happening so late in the three-month period ended March 31, 2020, the Company was unable to make significant changes to costs for the period. The Company has since taken steps to lower operating expenses and will continue to assess its cost structure while the COVID-19 pandemic is still impacting the Company. These steps include but are not limited to cutting non-essential travel, employee furloughs and terminations, and cutting most in person trade shows. Depending upon the duration and severity of the pandemic, the continuing effect on our results over the long term is uncertain. We will continue to evaluate the nature and extent of the impact of COVID-19 to our business.

On April 27, 2020, the Company issued 1,562,500 shares of common stock to several institutional investors at a price of $8.00 per share in a registered direct offering. The gross proceeds of the offering were approximately $12.5 million, and the Company received net proceeds of approximately $12.2 million. During the first quarter of fiscal 2020 the company also entered into an equity distribution agreement with JMP Securities to provide for an at- the-market offering program to provide additional potential liquidity through the sale of common stock having a value of up to $25.0 million. The Company did not make any sales under this equity distribution agreement in the period ended March 31, 2020. In light of the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic, the Company believes the above events as well as the expected current cash and cash equivalent balances and cash flows that are generated from operations will be sufficient to meet our working capital needs and other capital and liquidity requirements for at least the next 12 months.

 

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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 ongoing basis, the Company evaluates these estimates, including those related to revenue recognition, allowance for doubtful accounts, inventory valuation and obsolescence, intangible assets, goodwill, income taxes, contingencies and litigation. Additionally, the Company uses assumptions and estimates in calculations to determine stock-based compensation, the fair value of convertible notes, and evaluation of litigation. 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. As of January 1, 2019, we adopted accounting standards codification (“ASC”) Topic 842. Refer to Note 1 of this Form 10-Q for a discussion of the changes related to this adoption.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of May 11, 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Other than as described herein, there have been no additional material changes to our critical accounting policies as discussed in our 2019 Annual Report on Form 10-K (the “2019 10-K”). For a comprehensive list of the Company’s critical accounting policies, reference should be made to the 2019 10-K.

 

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Revenue: (in thousands)

 

     Three months ended March 31,  
     2020      2019      Change      % Change  

Detection revenue

           

Product revenue

   $ 3,100      $ 2,790      $ 310        11.1

Service and supplies revenue

     1,376        1,378        (2      (0.1 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     4,476        4,168        308        7.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Therapy revenue

           

Product revenue

     695        1,032        (337      (32.7 )% 

Service and supplies revenue

     1,380        1,573        (193      (12.3 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     2,075        2,605        (530      (20.3 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 6,551      $ 6,773      $ (222      (3.3 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue decreased by approximately $0.2 million, or 3.3%, from $6.8 million for the three-months ended March 31, 2019 to $6.6 million for the three-months ended March 31, 2020. The decrease is due to a decrease in Therapy revenue of approximately $0.5 million offset by an increase in Detection revenue of $0.3 million.

Detection product revenue increased by approximately $0.3 million, or 11.1%, from $2.8 million for the three months ended March 31, 2019 to $3.1 million for the three-months ended March 31, 2020. The increase was due primarily to growth in direct customer revenue of $0.1 million and OEM customer revenue of $0.2 million, relating primarily to revenue from 3D imaging and density assessment products. Detection product revenue was impacted in the three months ended March 31, 2020 due to the COVID-19 pandemic. The Company observed a decrease in order volume in March 2020, which we believe may have been due to “stay-at-home orders” and uncertainty in the market, as patients refrained from procedures.

Detection service and supplies revenue remained relatively the same at $1.4 million in each of the three months ended March 31, 2019 and 2020. The Company did not see a significant impact of the COVID-19 pandemic on service revenue for the three months ended March 31, 2020, however the Company is not able to estimate the extent of the negative impact that the COVID-19 pandemic will have on future service revenues.

Therapy product revenue decreased by approximately $0.3 million, or 32.7%, from $1.0 million for the three months ended March 31, 2019 to $0.7 million for the three months ended March 31, 2020. Therapy product revenue is related to the sale of our Axxent systems and can vary significantly from quarter to quarter due to changes in the number of units sold, and the average selling price. The Company was able to ship firm orders for Axxent systems for the three months ended March 31, 2020, however the Company is not able to anticipate the effect of the COVID-19 pandemic on future Axxent system sales.

 

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Therapy service and supply revenue decreased by approximately $0.2 million, or 12.3%, from $1.6 million for the three-months ended March 31, 2019 to $1.4 million for the three months ended March 31, 2020. The Company did not see a significant impact from the COVID-19 pandemic on Therapy service and supply revenue for the three months ended March 31, 2020, however it is not able to estimate the extent of the negative impact that the COVID-19 pandemic will have on future service and supply revenues.

Cost of Revenue and Gross Profit: (in thousands)

 

     Three months ended March 31,  
     2020     2019     Change      % Change  

Products

   $ 1,017     $ 680     $ 337        49.6

Service and supplies

     927       717       210        29.3

Amortization and depreciation

     97       94       3        3.2
  

 

 

   

 

 

   

 

 

    

 

 

 

Total cost of revenue

   $ 2,041     $ 1,491     $ 550        36.9
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

   $ 4,510     $ 5,282     $ (772      (14.6 )% 

Gross profit %

     68.8     78.0     
     Three months ended March 31,  
     2020     2019     Change      % Change  

Detection gross profit

   $ 3,467     $ 3,467     $ —          .0

Therapy gross profit

     1,043       1,815       (772      (42.5 %) 
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

   $ 4,510     $ 5,282     $ (772      (14.6 %) 
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit %

     68.8     78.0     

Gross profit for the three months ended March 31, 2020 was $4.5 million, or 68.8%, of revenue, as compared to $5.3 million, or 78.0% of revenue, for the three months period ended March 31, 2019. The COVID-19 pandemic impacted order volumes of the Detection products in March 2020, resulting in a lower than expected gross profit in the segment. The Company had increased personnel and other fixed costs prior to the onset of the COVID-19 pandemic. Accordingly, gross profit was negatively impacted in both segments without the commensurate increase in revenue.

Cost of products increased by approximately $0.3 million, or 49.6%, from $0.7 million for the three months ended March 31, 2019 to $1.0 million for the three months ended March 31, 2020. Cost of product revenue as a percentage of product revenue was approximately 17.8% for the three months ended March 31, 2019 as compared to 26.8% for the three-months ended March 31, 2020. The increase is due primarily to increased costs for server hardware and increased personnel costs.

 

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Cost of service and supplies increased by approximately $0.2 million, or 29.3%, from $0.7 million for the three months ended March 31, 2019 as compared to $0.9 million for the three months ended March 31, 2020. Cost of service and supplies revenue as a percentage of service and supplies revenue was approximately 24.3% for the three months ended March 31, 2019 as compared to 33.6% for the three months ended March 31, 2020. The increase is due primarily to personnel and other fixed costs in costs of sales.

Amortization and depreciation expense remained consistent at approximately $0.1 million for the three months ended March 31, 2020 and 2019.

Operating Expenses: (in thousands)

 

     Three months ended March 31,  
     2020      2019      Change      Change %  

Operating expenses:

           

Engineering and product development

   $ 2,211      $ 2,127      $ 84        3.9

Marketing and sales

     3,608        2,573        1,035        40.2

General and administrative

     2,532        1,546        986        63.8

Amortization and depreciation

     52        70        (18      (25.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 8,403      $ 6,316      $ 2,087        33.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses increased by approximately $2.1 million, or 33.0%, from $6.3 million in the three months ended March 31, 2019 to $8.4 million in the three months ended March 31, 2020. The Company’s operating expenses continued to grow throughout 2019 and the Company had the same expectation for three months ended March 31, 2020 due to the expectation of increased sales orders, shipments, and overall revenue. Although the onset of the COVID-19 pandemic impacted revenue, due to its onset late in the three-month period ended March 31, 2020, the Company was unable to make significant changes to operating expenses for the period. The Company has since taken steps to lower operating expenses and will continue to assess its cost structure while the COVID-19 pandemic is still impacting the Company. These steps include but are not limited to cutting non-essential travel, employee furloughs and terminations, and cutting most in person trade shows.

Engineering and Product Development. Engineering and product development costs increased by $0.1 million, or 3.9%, from $2.1 million for the three months ended March 31, 2019 to $2.2 million for the three months ended March 31, 2020. Detection engineering and product development costs remained relatively constant at $1.4 million in both periods. Therapy engineering and product development costs increased $0.1 million, from $0.7 million in the three months ended March 31, 2019 to $0.8 million for the three months ended March 31, 2020. The increase was due primarily to increased personnel costs.

Marketing and Sales. Marketing and sales expenses increased by $1.0 million, or 40.2%, from $2.6 million in the three months ended March 31, 2019 to $3.6 million in the three months ended March 31, 2020. Detection marketing and sales expense increased by $0.7 million, or 40%, from $1.7 million in the three months ended March 31, 2019 to $2.4 million in the three months ended March 31, 2020. Therapy marketing and sales expense increased by $0.3 million, or 44.6%, from $0.9 million in the three months ended March 31, 2019 to $1.2 million in the three months ended March 31, 2020. The increase in both Detection and Therapy marketing and sales expense is due primarily to increased personnel costs and commissions as the Company has invested in additional commercial resources to help drive sales of the new Detection products.

 

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General and Administrative. General and administrative expenses increased by $1.0 million, or 63.8%, from $1.5 million in the three months ended March 31, 2019 to $2.5 million for the three months ended March 31, 2020. The increase is due primarily to increases in stock compensation expense, legal and other costs associated with the conversion of the debentures, and personnel costs.

Amortization and Depreciation. Amortization and depreciation relates primarily to acquired intangible assets and depreciation of machinery and equipment. Amortization and depreciation decreased by $18,000, or 25.7%, from $70,000 for the three months ended March 31, 2019 to approximately $52,000 for the three months ended March 31, 2020.

Other Income and Expense: (in thousands)

 

     Three months ended March 31,  
     2020      2019      Change      Change
%
 

Interest expense

   $ (130    $ (209    $ 79        (37.8 )% 

Loss on extinguishment of debt

   $ (341    $ —        $ (341      0.0

Other income

     42        59        (17      (28.8 )% 

Loss on fair value of debentures

     (7,464      (2,525      (4,939      195.6
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ (7,893    $ (2,675    $ (5,218      195.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Tax expense

   $ (26    $ (8    $ (18      225.0

Interest expense. Interest expense decreased by approximately $0.1 million, or 37.8%, from $0.2 million for the three months ended March 31, 2019 to $0.1 million for the three months ended March 31, 2020. The decrease is due primarily to the interest on the Company’s loan with SVB.

Other income. Other income decreased by approximately $17,000, from $59,000 for the three months ended March 31, 2019 to $42,000 for the three months ended March 31, 2020. The increase resulted primarily from lower cash balances in interest-generating accounts and investments.

Loss on fair value of debentures. The Company recorded a loss of approximately $7.5 million in the three months ended March 31, 2020, which reflects an increase in the fair value of the unsecured subordinated convertible debentures issues in December 2018 (the “Convertible Debentures”) from $13.7 million at December 31, 2019 to $21.2 million as of February 21, 2020. Upon the consummation of the Forced Conversion, the Company issued 1,816,466 shares of common stock with a fair value of approximately $21.2 million, which was reclassified to stockholders’ equity. The Convertible Debenture balance as of March 31, 2020 was $0.

 

 

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Loss on extinguishment of debt: The Company recorded a loss on extinguishment of approximately $341,000 related to the repayment and retirement of the SVB Loan Agreement. The loss on extinguishment was composed of approximately $185,000 for the unaccrued final payment, the $114,000 termination fee, $42,000 for the unamortized and other closing costs. There were no such costs in 2019.

Tax expense. Tax expense increased by approximately $18,000 from $8,000 for the three months ended March 31, 2019 to $26,000 for the three months ended March 31, 2020. Tax expense is due primarily to state non-income and franchise-based taxes.

Liquidity and Capital Resources

The Company’s cash on hand includes proceeds from the Loan Agreement entered into with Western Alliance Bank on March 31, 2020. The Company’s Loan Agreement includes certain financial covenants tied to minimum revenue and maximum net loss. The Company was compliant with such covenants as of March 31, 2020.

Subsequent to March 31, 2020 the Company, in accordance with the Loan Agreement, triggered the equity event that relieved the covenant related to maximum net loss, leaving only the minimum revenue requirement. The COVID-19 pandemic has resulted in significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on the Company’s ability to maintain compliance with the minimum revenue covenant. If at any point the Company is not in compliance with the covenant and is unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Loan Agreement, which could permit acceleration of the outstanding indebtedness and require the Company to repay such indebtedness before the scheduled due date.

The Company believes even if that event of default were to occur, our current liquidity and capital resources are sufficient to sustain operations through at least the next 12 months, primarily due to cash on hand, which now includes an additional estimated $12.2 million the Company received following the sale of 1,562,500 shares of the Company’s common stock at $8.00 per share, pursuant to a registered direct offering which closed on April 27, 2020. The Company also entered into an equity distribution agreement with JMP Securities to provide for an at-the-market offering program to provide additional potential liquidity through the sale of common stock having a value of up to $25.0 million. Our projected cash needs include planned capital expenditures, loan interest payments, lease commitments, and other long-term obligations. 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.

 

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As of March 31, 2020, the Company had current assets of $25.3 million including $14.3 million of cash and cash equivalents. Current liabilities are $13.9 million and working capital is $11.4 million. The ratio of current assets to current liabilities is 1.82:1.

 

     For the three months ended March 31,  
     2020      2019  
     (in thousands)  

Net cash used for operating activities

   $ (1,416    $ (1,813

Net cash used for investing activities

     (156      (29

Net cash provided by financing activities

     515        972  
  

 

 

    

 

 

 

Decrease in cash and equivalents

   $ (1,057    $ (870
  

 

 

    

 

 

 

Net cash used for operating activities for the three-month period ended March 31, 2020 was $1.4 million, compared to net cash used for operating activities of $1.8 million for the three-month period ended March 31, 2019. The cash used for operating activities for the three-month period ended March 31, 2020 resulted primarily from our net loss offset by working capital changes resulting from increases prepaid expenses and inventory, offset by increases in accounts payable, accrued expenses and notes and lease payable. We expect that cash used for or provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the timing of when we recognize revenue, collections of accounts and the timing of other payments.

Net cash used for investing activities for the three-month period ended March 31, 2020 was $156,000 compared to $29,000 for the three-month period ended March 31, 2019. The cash used for investing activities for the three-month period ended March 31, 2020 was primarily for purchases of property and equipment.

Net cash provided by financing activities for the three-month period ended March 31, 2020 was $515,000 as compared to cash used for financing activities of $972,000 for the three-month period ended March 31, 2019. Cash provided by financing activities for the three-month period ended March 31, 2020 is due primarily to $7.0 million of cash provided from the new debt facility with the Bank, offset by approximately $4.6 million for the payment to SVB to pay off the term loan and $2.0 million to pay down the SVB line of credit. There was also $0.2 million of cash provided from exercises of options to purchase common stock. Cash used for financing activities for the three-month period ended March 31, 2019 is due primarily to cash from exercises of options to purchase common stock.

Contractual Obligations

In accordance with the transition disclosure requirements under ASC 840, the Company had the following commitments as of March 31, 2020:

 

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Contractual Obligations

 

     Payments due by period  
     Total      Less than 1
year
     1-3 years      3-5 years      5+ years  

Operating Lease Obligations

   $ 2,640      $ 880      $ 1,760         $ —    

Capital Lease Obligations

     9        9        —          —          —    

Settlement Obligations

     463        463        —          —          —    

Notes Payable - principal and interest

     8,133        373        4,021        3,739        —    

Other Commitments

     5,905        5,874        31        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

   $ 17,150      $ 7,599      $ 5,812      $ 3,739      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating and Capital Lease Obligations are the minimum payments due under these obligations.

Settlement Obligations represent the remaining payments under the settlement agreement with Hologic, Inc.

Notes Payable – principal and interest represents the payments due under the term loan from the Bank.

Other Commitments represent firm purchase obligations to suppliers for future product and service deliverables.

Recent Accounting Pronouncements

See Note 13 to the Condensed Consolidated Financial Statements.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company believes that it is not subject to material foreign currency exchange rate fluctuations, as substantially all of its sales and expenses are denominated in the U.S. dollar. The Company does not hold derivative securities and has not entered into contracts embedded with derivative instruments, such as foreign currency and interest rate swaps, options, forwards, futures, collars or warrants, either to hedge existing risks or for speculative purposes. The Company is subject to a 19% fluctuation in interest expense on for every 1% change in interest rate on its floating rate Term Loan with the Bank.

Item 4. Controls and Procedures

The Company’s management, with the participation of 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, as of March 31, 2020, 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 the Company’s 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)) and have determined there are no changes in its internal controls over financial reporting during the quarter ended March 31, 2020, that have materially affected or which are reasonably likely to materially affect internal control over financial reporting.

 

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PART II  OTHER INFORMATION

Item 1. Legal Proceedings

Please refer to the detailed discussion regarding litigation set forth in Note 7 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.

In December 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation. In accordance with the agreement, the Company sold to Invivo all right, title and interest to certain intellectual property relating to the Company’s VersaVue Software and DynaCAD product and related assets for $3.2 million. The Company closed the transaction on January 30, 2017 less a holdback reserve of $350,000 for a net of approximately $2.9 million.

On September 5, 2018, third-party Yeda Research and Development Company Ltd. (“Yeda”), filed a complaint (“the Complaint”) against the Company and Invivo in the United States District Court for the Southern District of New York, captioned Yeda Research and Development Company Ltd. v. iCAD, Inc. and Invivo Corporation, Case No. 1:18-cv-08083-GBD, related to the Company’s sale of the VersaVue software and DynaCAD product under the Asset Purchase Agreement. In the Complaint, Yeda asserted claims for: (i) copyright infringement and misappropriation of trade secrets against both the Company and Invivo; (ii) breach of contract against the Company only; and (iii) tortious interference with existing business relationships and unjust enrichment against Invivo only. The Company and Invivo filed Motions to Dismiss the Complaint on December 21, 2018. On January 18, 2019, Yeda filed Oppositions to the Motions to Dismiss. The Company and Invivo submitted responses to the Opposition to the Motion to Dismiss on February 8, 2019. The Court held oral argument on the Motions to Dismiss on March 27, 2019. On September 5, 2019, the Court granted Invivo’s Motion to Dismiss in its entirety and granted the Company’s Motion to Dismiss as it relates to Yeda’s breach of contract and misappropriation of trade secrets claims. On October 22, 2019, Yeda filed an Amended Complaint against only the Company asserting claims for (i) copyright infringement; and (ii) a replead breach of contract claim. The Company filed its Answer to Yeda’s Amended Complaint on November 5, 2019. Yeda alleges, among other things, that the Company infringed upon Yeda’s source code, which was originally licensed to the Company, by using it in the products that the Company sold to Invivo and that it is entitled to damages that could include, among other things, profits relating to the sales of these products. If the Company is found to have infringed Yeda’s copyright or breached its agreements with Yeda, the Company could be obligated to pay to Yeda substantial monetary damages.

In addition to the forgoing, the Company maybe party to various legal matters that are in the process of litigation or settled in the ordinary course of business. Although the final results of all such matters and claims cannot be predicted with certainty, we believe that the ultimate resolution of all such matters and claims will not have a material adverse effect on our financial condition. However, such matters could have a material adverse effect on our operating results and cash flows for a particular period.

 

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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. Factors that have affected our Company are described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on March 11, 2020 and are incorporated by reference herein, and include the following risk factor.

We expect the novel coronavirus (COVID-19) pandemic to have a significant effect on our results of operations. In addition, it has resulted in significant financial market volatility, and its impact on the global economy appears to be significant. A continuation or worsening of the pandemic will have a material adverse impact on our business, results of operations and financial condition and on the market price of our common stock.

On March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. As a provider of devices and services to the health care industry, our operations have been materially affected. Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our continuing operations and on the global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. The COVID-19 pandemic has resulted in significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our common stock. Our results for the quarter ending March 31, 2020 reflect a negative impact from, among other things, the COVID-19 pandemic as shipping, logistics, acceptance and installation and training have been delayed and ordering patterns disrupted. Although we do not provide guidance to investors relating to our results of operations, we expect that our results for the quarter ending June 30, 2020, and possibly future quarters, will reflect a negative impact from the COVID-19 pandemic for similar reasons. Depending upon the duration and severity of the pandemic, the continuing effect on our results over the long term is uncertain.

These effects could impact the Company’s ability to remain in compliance with its minimum revenue covenant under its Loan and Security Agreement with Western Alliance Bank. If at any point the Company is not in compliance with such covenant and is unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Loan Agreement, which could permit acceleration of the outstanding indebtedness and require the Company to repay such indebtedness before the scheduled due date. The Company was required, historically, to seek modifications from its prior lender to avoid non-compliance with its earlier covenants. With the COVID-19 pandemic affecting the world economy, the company cannot assure that it will be able to continue to satisfy the applicable minimum revenue covenant.

The Company’s exposure to trade accounts receivable losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19 pandemic, or other customer-specific factors. Although the Company has historically not experienced significant trade account receivable losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade account receivables as hospitals’ cash flows are impacted by their response to the COVID-19 pandemic.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On March 20, 2019, the Company issued 3,377 shares of its common stock to certain holders of its Convertible Debentures as a make-whole payment under the Securities Purchase Agreement pursuant to which the Convertible Debentures were issued. Such shares of common stock were exempt from registration in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended.

Item 5. Other Information.

Given the timing of the events, the following information is included in this Form 10-Q pursuant to Item 5.02 “Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers,” Item 5.08 “Shareholder Director Nominations,” and Item 8.01 “Other Information” of Form 8-K in lieu of filing a Form 8-K.

Bonus Awards

On May 7, 2020, the Compensation Committee and the Company’s Board of Directors approved bonus payments to the Company’s officers attributable to performance for the year ended December 31, 2019, as follows: Michael Klein, Chief Executive Officer, was awarded $95,370, with $71,527 of such amount to be paid in stock options granted on May 7, 2020; Stacey Stevens, President, was awarded $163,519, with $122,639 of such amount to be paid in stock options granted on May 7, 2020; R. Scott Areglado, Chief Financial Officer, was awarded $94,500, with $70,875 of such amount to be paid in stock options granted on May 7, 2020; and Jonathan Go, Chief Technology Officer was awarded $135,000, with $101,250 of such amount to be paid in stock options granted on May 7, 2020. In addition, on May 7, 2020, the Compensation Committee and the Company’s Board of Directors approved an additional bonus payment to Michael Klein, the Company’s Chief Executive Officer, for his performance during 2020, in the form of a cash bonus of $32,408 and options to purchase up to 18,373 shares of the Company’s common stock. All options are immediately exercisable at an exercise price of $12.84 per share.

Scheduling of Annual Meeting; Stockholder Proposals and Nominations

On May 7, 2020, the Company scheduled its 2020 annual meeting of stockholders (the “2020 Annual Meeting”) to be held virtually via the internet, on June 26, 2020. The Company has established April 29, 2020, as the record date for determining stockholders entitled to notice of, and to vote at, the 2020 Annual Meeting.

Because the date of the 2020 Annual Meeting will be more than 30 days from the anniversary of the Company’s 2019 annual meeting of stockholders, the deadline for submission of proposals by stockholders for inclusion in the Company’s proxy materials in accordance with Rule 14a-8 under the Exchange Act, will be the close of business on May 21, 2020, which the Company has determined to be a reasonable time before it expects to begin to print and distribute its proxy materials prior to the 2020 Annual Meeting. Any such proposal must also meet the requirements set forth in the rules and regulations of the Exchange Act and the Company’s Amended and Restated Bylaws (the “Bylaws”) in order to be eligible for inclusion in the proxy materials for the 2020 Annual Meeting.

In accordance with the Bylaws, any stockholder who wishes to nominate a person for election as a director or submit a proposal for inclusion at the 2020 Annual Meeting must provide written notice (“Stockholder Notice”) on or before May 21, 2020. Any Stockholder Notice must comply with the specific requirements set forth in the Bylaws in order to be considered at the 2020 Annual Meeting. Any such proposal must be mailed to the Nominating and Corporate Governance Committee, c/o Corporate Secretary, iCAD, Inc., 98 Spit Brook, Suite 100, Nashua, NH 03062, and received by May 21, 2020.

 

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Item 6. Exhibits

 

Exhibit No.   

Description

10.1    Employment Agreement, dated as of January  13, 2020, between iCAD, Inc. and Michael Klein (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on January 17, 2020).
10.2    Equity Distribution Agreement, dated as of March  30, 2020, by and between iCAD, Inc. and JMP Securities LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on March 31, 2020).
10.3†    Loan and Security Agreement, dated as of March  30, 2020, by and between Western Alliance Bank, iCAD, Inc., Xoft, Inc. and Xoft Solutions LLC (incorporate by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on March  31, 2020).
10.4    Form of Securities Purchase Agreement, dated as of April  23, 2020, between iCAD, Inc. and the purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on April 27, 2020).
31.1*    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**    Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**    Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*    The following materials formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019, and (iv) Notes to Consolidated Financial Statements.

 

*

Filed herewith

**

Furnished herewith

Portions of this exhibit, marked by brackets, have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K under the Securities Act of 1933, as amended, because they are both (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed.

 

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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.

 

            iCAD, Inc.            
(Registrant)

 

Date: May 11, 2020     By:  

/s/ Michael Klein

    Name:   Michael Klein
    Title:   Chief Executive Officer
      (Principal Executive Officer)
Date: May 11, 2020     By:  

/s/ R. Scott Areglado

    Name:   R. Scott Areglado
    Title:   Chief Financial Officer
      (Principal Financial Officer)

 

 

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