iCAD
Annual Report 2016

Plain-text annual report

2016 Annual ReportFocus on Growing Opportunities in Cancer Treatment 2016 also brought increased awareness of our Xoft® Electronic Brachytherapy (eBx®) System® in the treatment of nonmelanoma skin cancer (NMSC) and early-stage breast cancer. This technology platform, with the ability to target radiation therapy directly to a tumor site, is supported by a growing body of clinical data, consistently demonstrating eBx to be as safe and effective as a traditional radiation treatment for appropriate selected patients. With a growing incidence rate of NMSC and our ability to treat lesions in a painless, non-invasive manner, we believe that our skin eBx system represents a significant market opportunity for us. In 2016, our revenues in skin eBx were negatively impacted by the disruption initially caused in 2015 related to the uncertainty of reimbursement codes and payment rates for the treatment of NMSC. In January 2016, new skin-specific level III reimbursement codes for skin eBx were established in the U.S. As 2016 progressed, dermatologists became aware of the new reimbursement levels, and we experienced growth in new sites and procedure volumes which continued into the first half of 2017. Supporting this growth, we have completed targeted investments to improve our onboarding process for new customers and selectively added marketing resources to support dermatologists in attracting new patients to their practice. As part of our long-term strategy to secure national reimbursement for our skin cancer treatment, we continued to make strategic investments in clinical trials. In 2016, we completed one such key study, which compared patients treated with electronic brachytherapy to those with similar lesions treated with Mohs surgery. This important and encouraging data, published in a peer-reviewed medical journal, indicated that the Xoft skin eBx system delivered a cancer recurrence rate similar to Mohs surgery at 3 years of patient follow-up. Dear Shareholder: In 2016, we made significant progress in advancing our key product lines and enhancing our market presence. This led to the strengthening of our competitive position, and presents us with expanded and new opportunities for revenue growth in the years ahead. On both the cancer detection and therapy sides of our business, our team is moving forward with key initiatives in clinical research, product and pipeline development and new market development, all aimed at building commercial opportunities around the world. Delivering Leading-Edge Technology in Cancer Detection We continued to deliver innovative software and launched a revolutionary new workflow and cancer detection solution built on artificial intelligence and deep learning, which enhances 3D tomosynthesis breast exams. Our PowerLook® Tomo Detection software was CE marked in Europe in April 2016, and we received PMA approval from the FDA in March of 2017. This is the first product of its kind in the breast health market, and we are extremely excited about its potential. While delivering considerable advantages to patients and clinicians, Powerlook Tomo Detection is a proven- effective technology and presents us with a major new substantial opportunity for global growth. Our cancer detection software now has a platform of over 5,000 existing installed customers. This large installed base positions us well to rapidly leverage the advantages of our tomosynthesis cancer detection software, a landmark workflow tool with the potential to transform breast cancer detection capabilities for radiologists. The installation of our PowerLook software in existing 3D tomosynthesis platforms and potential conversion of 2D platforms represents a significant market opportunity for iCAD of over $250 million, as well as ongoing software maintenance fees. In addition to our direct sales efforts, the PowerLook Tomo Detection software is being offered to customers through a partnership with the GE Healthcare. Together, we are marketing the PowerLook Tomo Detection software to both current and potential new customers. Strong initial interest in the product reflects the need for interpretive tools to support radiologists in reading data-intensive exams in an accurate and efficient manner. iCAD’s U.S. clinical reader study demonstrated that radiologists could improve throughput by reducing their average reading time by approximately 30% without compromising detection accuracy Board of Directors Dr. Lawrence Howard (2) Chairman of the Board, General Partner, Hudson Ventures, LP Ken Ferry Chief Executive Officer, iCAD, Inc. Rachel Brem, M.D.(2), (3) Director of Breast Imaging and Intervention Center Professor & Vice Chair, Department of Radiology The George Washington University Medical Center Anthony F. Ecock (1), (3) Managing Director, The Carlyle Group Steven Rappaport (1) Partner, RZ Capital, LLC Somu Subramaniam (2), (3) Managing Partner and Co-founder of New Science Ventures Robert Goodman, M.D. University of Pennsylvania School of Medicine Elliot Sussman, M.D. (1), (2) Chairman of The Villages Health and Professor of Medicine at the University of South Florida College of Medicine Andrew H. Sassine Director Executive Officers Ken Ferry Chief Executive Officer Richard Christopher Executive Vice President, Chief Financial Officer Stacey Stevens Executive Vice President, Chief Strategy and Commercial Officer (1) Audit Committee Member (2) Compensation Committee Member (3) Nominating & Corporate Governance Committee Member Global Headquarters 98 Spit Brook Road, Suite 100 Nashua, NH 03062 USA +1 866 280 2239 toll free +1 603 882 5200 phone +1 603 218 6658 fax www.icadmed.com Offices 101 Nicholson Lane San Jose, CA 95134 USA +1 866 280 2239 toll free +1 408 493 1500 phone +1 408 493 1501 fax www.xoftinc.com Stock Information NASDAQ Ticker Symbol: ICAD Investor Relations LifeSci Advisors Bob Yedid, 646-597-6989 Bob@lifesciadvisors.com Public Relations ARPR, LLC Erin Bocherer erin@arpr.com +1 855 300 8209 ext 120 phone Sales sales@icadmed.com +1 866 280 2239 toll free +1 603 882 5200 phone Service and Support support@icadmed.com +1 866 280 2239 toll free +1 603 882 5200 phone Transfer Agent Continental Stock Transfer & Trust Company 1 State Street, 30th Floor New York, NY 10004-1561 Independent Auditors BDO USA, LLP Boston, MA Legal Counsel Blank Rome, LLP New York, NY 1 iCAD | 2016 Annual Report Ken Ferry Chief Executive Officer © 2017, iCAD Inc. All rights reserved. iCAD, the PowerLook logos, Xoft, the Xoft logo, Axxent, Electronic Brachytherapy System and eBx are registered trademarks of iCAD, Inc. Reproduction of any of the material contained herein in any format or media without the express written permission of iCAD, Inc. is prohibited. Looking Forward to Maximizing Our Opportunities As we work to take steps to maximize our opportunities for growth in cancer detection and therapy, we once again thank our shareholders, team members, customers, and industry partners for your support. Looking forward, we will continue to focus on effective execution in order to achieve new levels of success, while remaining dedicated to our core mission of making a positive difference in the lives of people affected by cancer. Sincerely, Ken Ferry Chief Executive Officer In our Intra-Operative Radiation Therapy (IORT) business for breast and gynecological applications, we now have over 60 sites treating, with over half of the sites located outside of United States. Physician adoption continues to grow, as measured by our disposable balloon applicator sales, which increased by 19% globally. To support this growth, we are investing in, and are intently focused on, achieving regulatory approvals in key international markets, such as China, India, Egypt, and Saudi Arabia. Our long-term strategy is to expand our applicator line to allow physicians to treat additional cancers in more body locations. Building on this momentum, iCAD is currently conducting one of the largest breast IORT clinical studies to date, with approximately 1,000 patients enrolled, using the Xoft System. We remain committed to expanding the body of literature demonstrating the proven efficacy and safety of this important treatment for women with early-stage breast cancer. A Continuing Commitment to Research and Innovation With our business focus in cancer detection and treatment, we are targeting two of the largest areas of unmet need in global health. Our success will continue to be driven by our investments in research, product development and innovation, combined with marketing and education programs for patients and clinicians. As noted above, we are investing in clinical trials, which have already reported important clinical data, or expect them to in the near future. We expect these trials to enhance clinical understanding and adoption of each of our key product lines including 3D tomosynthesis detection software, skin eBx and breast and gynecological IORT treatments. We believe our most compelling opportunity is with our 3D PowerLook Tomo Detection system. This innovative technology is an excellent example of iCAD’s capabilities in the emerging fields of Artificial Intelligence (AI) and machine learning software platforms. This proprietary software is one of the first implementations of AI and machine learning in healthcare, and is already generating meaningful revenues as a PMA-approved platform. The launch of the PowerLook Tomo Detection software demonstrates our core expertise in this field. We are in the process of developing a roadmap to broaden our AI product offerings beyond breast cancer detection to other diagnostic applications. We have a robust platform and significant development experience in this area, and we look forward to expanding our portfolio of solutions in the coming years. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 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 1-9341 iCAD, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 98 Spit Brook Road, Suite 100, Nashua, New Hampshire (Address of principal executive offices) 02-0377419 (I.R.S. Employer Identification No.) 03062 (Zip Code) Registrant’s telephone number, including area code: (603) 882-5200 Securities registered pursuant to Section 12(b) of the Act: Title of Class Common Stock, $.01 par value Name of each exchange on which registered The Nasdaq Stock Market LLC Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes___ No X . Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes___ No X 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 X No___ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated filer ____ Accelerated filer ____ Non-accelerated filer ____ Smaller reporting company X (do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes___ No X . The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price for the registrant's Common Stock on June 30, 2016 was $70,242,336. Shares of voting stock held by each officer and director and by each person who, as of June 30, 2016, may be deemed to have beneficially owned more than 10% of the outstanding voting stock have been excluded. This determination of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose. As of March 21, 2017, the registrant had 16,157,466 shares of Common Stock outstanding. Documents Incorporated by Reference: Certain portions of the registrant’s definitive Proxy Statement for its 2017 Annual Meeting of Stockholders are incorporated by reference into Items 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K. “ Saf e H arbor ” Statement under the P riva te Securities L itigation Ref orm A ct of 1995: ’ s ab ility to def end itself in litigation matters, to achiev e b usiness and strategic ob Certain inf ormation included in this annual report on Form 10-K that are not historical f acts contain f orward look ing statements that inv olv e a numb er of k nown and unk nown risk s, uncertainties and other f actors that could cause the actual results, perf ormance or achiev ements of the Company to b e materially dif f erent f rom any f uture results, perf ormance or achiev ement expressed or implied b y such f orward look ing statements. These risk s and uncertainties include, b ut are not j ectiv es, the limited to, the Company risks of uncertainty of patent protection, the impact of supply and manufacturing constraints or difficulties, uncertainty of f uture sales lev els, protection of patents and other proprietary rights, the impact of supply and manuf acturing constraints or difficulties, product market acceptance, possible technological obsolescence of products, increased competition, litigation and/ or gov ernment regulation, changes in M edicare reimb ursement policies, risk s relating to our existing and f uture deb t ob ligations, competitiv e f actors, the ef and other risks detailed in this report and in the Company’s other filings with the United States Securities and Exchange Commission (“SEC”). The words “believe”, “demonstrate”, “intend”, “expect”, “estimate”, “anticipate”, “likely”, “seek”, “would”, “could”, “may”, “consider”, “confident” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these f orward-look ing statements, which speak only as of the date the statement was made. Unless the context otherwise requires, the terms “iCAD”, “Company”, “we”, “our” “registrant”, and “us” means iCAD, Inc. and any consolidated subsidiaries. f ects of a decline in the economy or mark ets serv ed b y the Company I tem 1 . G eneral u si ness. PA I iCAD, Inc. is an industry-leading provider of advanced image analysis, workflow solutions and radiation therapy for the early identification and treatment of cancer. The Company reports in two operating segments: Cancer Detection (“Detection”) and Cancer Therapy (“Therapy”). The Company was incorporated in 1984 as Howtek, Inc. under the laws of the state of Delaware. In 2002 the Company changed its name to iCAD, Inc. and changed its ticker symbol to ICAD. The iCAD website is www.i cadmed.c om. On this webs ite the f ollowing documents are ava ilabl e at no charge: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Our SEC filings are also available on the SEC’s website at http: lternative ly , you may access any document we have filed by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC- 0330. The information on the website listed above, is not and should not be considered part of this annual report on Form 10-K and is not incorporated b ef erence in this document. / www.s ec.gov y r . A The Company’s headquarters are located in Nashua, New Hampshire, with manufacturing facilities in Nashua, New H ampshire and, an operations, research, deve lopment, manuf acturing and warehousing f acility in San J ose, Calif ornia. C om pany O ve rv i ew and S trateg iCAD continues to evolve from a business focused on image analysis for the early detection of cancers to a broader playe r in the oncology marke t. The Company solutions that address f our ke y stages of the cancer care cyc le: detection, diagnosis, treatment and monitoring. The Company be lieve s that early detection, together with earlier targeted interve ntion, provi des patients and healthcare provi ders with the be st tools ava ilabl e to achieve be tter clinical outcomes resulting in marke t demand that will drive adoption of iCAD’s solutions. ’ s strategy is to provi de customers with a br oad portf olio of oncology Cancer Therapy: is the medical use of ioniz ing radiation, generally as part of cancer treatment to control or ki ll Radiation therapy malignant cells. Radiation therapy may b e curativ e in a numbe r of type s of cancer if the cancer cells are localiz ed to one area of the body. It may also be used as part of curative therapy to prevent tumor recurrence after surgery to remove a primary malignant tumor (for example, early stages of breast cancer). The clinical goal in radiation oncology is to delive r the highest radiation dose possibl e directly to the tumor to ki ll the cancer cells while minimiz ing radiation loba l incidence exposure to healthy tissue surrounding the tumor in order to limit complications and side ef f ects. G 1 R T B / y rates of new cancer cases are rising, primarily due to aging populations and changing lif estyl e habi ts. H oweve r, survi va l rates are also improvi ng as a result of earlier detection and enhanced treatment options. The three main type s of radiation therapy are external be am radiation therapy (“EBRT”), brachytherapy or sealed source radiation therapy , and sys temic radioisotope therapy or unsealed source radiotherapy f erences relates to the position of the radiation source; external is outside the body , br achyt herapy uses sealed radioactive inf usion or oral ingestion. sources placed precisely Brachytherapy uses temporary or permanent placement of radioactive sources. Conventional EBRT typically involves multiple treatments of a tumor in up to 50 radiation sessions (fractions). In the case of brachytherapy, radiation of healthy tissues further away from the sources is reduced. In addition, if the patient moves or if there is any tumor movement within the body during treatment, the radiation source(s) retain their correct position in relation to the tumor. These aspects of brachytherapy offer advantages over EBRT in that brachytherapy is able to direct high doses of radiation to the siz e and shape of the cancerous area while sparing healthy t issue and organs. in the treatment area, and sys temic radioisotopes are give n b . One of the dif y Brachytherapy is commonly used as an effective treatment for endometrial, cervical, prostate, breast, and skin cancer, and can also be used to treat tumors in many other body sites. Electronic Brachytherapy (eBx) is a type of radiotherapy that utiliz es a miniaturiz ed high dose rate X Axxent® Electronic Brachytherapy (eBx®) System® (“Xoft System”) is a proprietary electronic brachytherapy platform designed to deliver isotope-free (non-radioactive) radiation treatment in virtually any clinical setting without the limitations of radionuclides. radiation directly to the cancerous site. The X of t® -ray source to apply The process f or deliv ering radiation therapy ty pically includes a radiation oncologist, a medical phys icist responsibl e for planning the treatment and performing appropriate quality assurance procedures and, in certain instances, other specialty phys icians depending upon the type of cancer e.g. a br east surgeon f or br east cancer, a dermatologist f or ski n cancer, a gyne cologist f or endometrial or cervi cal cancer. The Company’s Xoft System is a disruptive radiation oncology treatment solution with significant cost, mobility, and treatment time advantages over its competitors or other standards of care. While the primary applications of this system currently are localized breast cancer treatment using a ten to fifteen minute breast Intraoperative Radiation Therapy (“IORT”) protocol and the treatment of non-melanoma skin cancers (“NMSC”), the Xoft System platform can also be used to treat a wide and growing array of additional cancers, including gyne cological and other non-br east IORT clinical indications. There are approximately 300,000 new cases of breast cancer in the United States each year. The Company believes that the Xoft System is uniquely well positioned to offer a differentiated treatment alternative for the approximately 111,000 of these 300,000 annual new cases of early stage breast cancer in the U.S. where patients fit the clinical criteria to make this treatment a viable alternative to conventional radiation treatments. The Xoft System does not require a shielded envi ronment and is relative ly small in siz e, which means that it can easily be transported f or use in vi rtually any clinical setting (including the operating room where IORT is delivered) under radiation oncology supervision. The Xoft System may also be used for Accelerated Partial Breast Irradiation (“APBI”), which can be delivered twice daily for five days. There is a growing body of clinical evidence in support of breast IORT and Category I Current Procedural Terminology (“CPT”) codes have been in place for several years, providing reimbursement for the hospital, radiation oncologist, and surgeon for performing the IORT treatment. Basal and Squamous Cell Carcinoma are two of the most prevalent types of NMSC in the U.S., with more than 3.5 million cases being diagnosed annually. The Xoft System enables radiation oncologists and dermatologists to collabo rate in of f ering their patients a non-surgical treatment option that is particularly appropriate f or certain challenging lesion locations on the ear, f ace, scalp, neck and extremities. X of t provi des comprehensive ski n cancer treatment solutions to the dermatology marke t including all the necessary components to enabl e dermatologists and radiation oncologists to deve lop, launch and expand their electronic br achyt herapy programs f or the treatment of NMSC. Xoft also offers physics support, billing support, assistance with radiation oncology provider selection, as well as the A xxent H ub web- ba sed sof tware platf orm that enabl es centers to improve patient saf ety , conduct treatment planning, enhance and monitor workflow, and improve communication between clinical specialties. In May 2015 the Company announced that one of the regional Medicare Administrative Contractors instructed physicians to report CPT code (17999) rather than the established CPT code (0182T) for electronic brachytherapy for treatment of NMSC. This announcement resulted in a significant disruption in the Therapy segment as a result of the reimbursement uncertainty. Revenues for the years ended December 31, 2015 and December 31, 2016 were negatively impacted as a result of the uncertainty. In January 2016 a new CPT code (0394T) for the treatment on non-melanoma skin cancer utilizing electronic brachytherapy went into effect. Despite the new codes, the Company believes that potential customers were still cautious in starting treatments under this code during 2016. 2 cove rage policies adopted b f actors disclosed in this annual report the Company f ected A s the Company has noted in the risk edicaid, as well y as priva te paye rs, which of ten f ollow the cove rage policies of these publ ic programs. Such policies may af f ect which products customers purchase and the prices customers are willing to pay f or those products in a particular j urisdiction. The change in CPT codes for the Company’s electronic brachytherapy treatment of NMSC had a negative impact on the Company’s revenues for the fiscal years ended December 31, 2015 and December 31, 2016. f ederal and state gove rnmental authorities, such as M ’ s bus iness can be af edicare and M y In connection with the preparation of the financial statements for the second quarter ended June 30, 2015, the Company eva luated the Therapy reporting unit f or bot h long-live d asset and goodwill impairment. A s a result of this assessment, the Company recorded material impairment charges in the Therapy reporting unit (see Note h and Note i to the consolidated financial statements included herein for additional discussion). The Company views additional Xoft System platform indications as important opportunities in both the U.S. and international marke ts. The X of t Sys tem is also marke ted f or gyne cological cancers including endometrial and cervi cal cancer. In 2013 the Company received FDA clearance for an application for the treatment of cervical cancer and launched a new applicator to treat cervical cancer in 2015. Vaginal cancer is the fourth most common cancer affecting women worldwide and cervical cancer incidence rates outside of the U.S. are very high due to inadequate penetration of screening modalities. The Company be lieve s an additional strategic growth opportunity exists in the application of the Xoft System for the treatment of other cancers beyond NMSC and breast cancer in the IORT setting including integration with minimally invasive surgical techniques and systems. Cancer Detection: Approximately 40 million mammograms were performed in the U.S. in 2016. Although mammography is the most effective method for early detection of breast cancer, studies have shown that an estimated 20% or more of all breast cancers go undetected in the screening stage. M ore than half of the cancers missed are due to obs erva tional errors. CAD, when used in conjunction with mammography, has been proven to help reduce the risk of these observational errors by as much as 20%. Earlier cancer detection typically leads to more effective, less invasive, and less costly treatment options which ultimately s hould translate into improve d patient survi va l rates. The Company intends to address the detection and diagnosis stages of the cancer care cyc le through continued extension of its image analys is and clinical decision support solutions f or mammography , br east tomosynt hesis, and CT imaging. iCAD believes that advances in digital imaging techniques should bolster its efforts to develop additional commercially viable CAD and breast density assessment advanced image analysis and workflow products. CAD and density assessment for breast tomosynthesis is a growth area which the Company believes will provide additional benefits for early breast cancer detection. The Company believes that CAD and breast density assessment for tomosynthesis has the potential to help radiologists better detect cancer and manage the workflow efficiency issues created by large 3D datasets. The Company completed development of a tomosynthesis CAD and workflow tool in 2015 and launched the product in the European market in April 2016 and in Canada in June 2016. Pending FDA clearance, the Company expects to begin marketing the product in the U.S. in conjunction with GE Healthcare in the first half of 2017. The Company also developed a breast density assessment product for tomosynthesis that assesses breast density using 2D synthetic images that are generated from 3D tomosynthesis datasets. The Company’s tomosynthesis breast density solution is currently pending FDA clearance. The Company believes that the CAD and breast density assessment solutions for breast tomosynthesis may represent a significant growth opportunity over the next three to five years. With over 12,000 installation opportunities for tomosynthesis systems in the U.S., there is a significant future opportunity for CAD and density assessment solutions for tomosynthesis. The Company anticipates that CAD for tomosynthesis will become the standard of care in the near future, similar to what CAD for 2D mammography is today in the U.S. In the U.S., approximately 8,747 facilities (with approximately 16,959 full field digital mammography (“FFDM”) and tomosynthesis mammography systems) were Mammography Quality Standards Act (MQSA) certified to provide mammography screening in 2016. The majority of these centers are using 2D digital mammography FFDM systems and we believe approximately 25% of the market has converted to 3D mammography or tomosynthesis. With several European countries currently exploring the advantages of radiologists reading digital mammograms with CAD, the Company believes there is growth opportunity for mammography CAD in the international markets both from the analog to digital conversion and as more countries accept the use of radiologists using CAD, rather than two radiologists having to read each case. Based on the report published by the European Commission in April 2012, br east cancer is one of the most preva lent f orms of cancer and it is also responsib le f or the most cancer-related deaths among women in the European Union (“EU”). The number of expected breast cancer cases based on the 2012 report . On ave rage was expected to continue to rise as the incidence of cancer increases steeply with age and lif e expectancy 3 b one out of every 10 women in the EU is expected to develop breast cancer at some point in her life. As a result, most countries in Western Europe have or are planning to implement mammography screening programs resulting in an expected increase in the numbe r of mammograms perf ormed in the coming ye ars. Although sales of CAD with 2D mammography in Europe have been historically lower than in the U.S., the Company believes sales of its CAD for tomosynthesis will be adopted with a higher attachment rate in Europe than previously due to workflow improvements and reading time reduction that we believe the solution will offer. Reve nue: The tabl e be low presents the rev enue and percentage of reve nue attribut abl e to the Company in 2016, 2015 and 2014 (in thousands): ’ s products and servi ces, F or th e y ear end ed D ecem b er 3 D etection: igital & M RI CA rev enue eunever desab mliF Serv ice D etection rev enue Therapy P roduct Serv ice Therapy rev enue $ 8,682 - 8,451 17,133 33. 0% %0.0 %1.23 %1.56 $ 11,216 01 710,8 342,91 27. 0% %0.0 %3.91 %3.64 $ 9,765 713 225,8 406,81 22. 2% %7.0 %4.91 42. 4% 1,789 7,416 9,205 %8.6 %2.82 %9.43 279,2 933,91 113,22 %2.7 %5.64 %7.35 106,8 917,61 023,52 %6.91 38. 1% 57. 6% Total rev enue $ 26,338 100. 0% $ 41,554 %0.001 $ 429,34 %0.001 C ancer T h erapy S eg ent O ve rv i ew and Prod u cts The X of t Sys tem utiliz es a miniaturiz ed high dose rate ye t low energy -ray source to apply radiation directly to the cancerous site. The goal is to direct the radiation dose to the siz e and shape of the cancerous area while sparing healthy tissue and organs. The X of t Sys tem delive rs clinical dose rates similar to traditional radioactive sys tems. H oweve r, f is much f aster, thus lowering the radiation be cause of the electronic nature of the X of t technology , the dose f all of f , there is no need f or a lead va ult as compared to exposure outside of the prescribe d area. G traditional isotope ba sed radiation therapy , enabl ing the X of t Sys tem to be transported to dif f erent locations within the same f acility or be tween multiple f acilities. ive n this rapid dose f all of IORT Electronic Brachytherapy can be delivered during an operative procedure, in as little as eight minutes, and may be used as a primary or secondary modality ove r a course of days . This technology enabl es radiation oncology departments in hospitals, clinics and physician offices to perform traditional radiotherapy treatments and offer advanced treatments such as IORT. Current customers of the Xoft System include university research and community hospitals, private and governmental institutions, doctors’ offices, cancer care clinics, veterinary facilities, and strategic partnerships with radiation oncology service providers that enable the supervised delivery of the technology in dermatologist offices. Of the approximately 300,000 women who are diagnosed with breast cancer every year in the U.S., the majority, or 60% are diagnosed with early stage breast cancer. About 60% of early stage breast cancers qualify as candidates for treatment with eBx. Currently, a majority of early stage breast cancer patients who are treated with radiation therapy follow a five to seven week daily protocol of traditional external beam radiation while a small portion are treated with a five-day protocol using b rachy therapy Breast cancer is a relatively common disease and is often treatable by surgery, followed by radiotherapy with an additional therapy such as chemotherapy and/or hormonal therapy. Early detection has led to earlier diagnosis with small, early stage diseases that can b e remov ed b icroscopic cancerous cells can b e present and easily managed with the application of radiotherapy . The protocol f or many y ears f or most women included a day procedure for a lumpectomy and five to seven weeks of daily radiation. IORT allows the physician to treat the remaining breast tissue in the operating room while the patient is still under anesthesia, eliminating the need for five to seven weeks y local excision rather than a complete mastectomy . M 4 m X . 2 0 1 6 % 2 0 1 5 % 2 0 1 4 % D D : 1 , of daily traditional radiation therapy. In the last few years, in Europe and in the U.S., shorter treatment protocols of external b eam radiation therapy hy po-f ractionated to as f ew as three week s hav e emerged as alternativ es. In a scientific paper presented at the 2010 ASCO Meeting, Dr. Jayant Vaidya of the University College London, UK, concluded that in the 2,200 patient multinational clinical trial (TARGIT-A trial) IORT, generated with 50 kV electronic brachytherapy, is equivalent to conventional external beam radiotherapy. In December 2012, Dr. Vaidya presented five-year follow up data on the TARGIT-A trial at a forum in conjunction with the San Antonio Breast Cancer Symposium. Following this presentation, in November 2013 the Lancet online published the five-year update results of the TARGIT-A trial. The updated results of the trial demonstrated that local recurrence rates in the TARGIT (IORT) group were within the non-inf eriority bounda ry when compared to the results in the group who receive d external be am radiation therapy and that mortality rates from causes other than breast cancer were lower in the TARGIT (IORT) group. In addition, the data revealed that at five years, the local recurrence rate in patients who were treated with IORT “concurrent” with lumpectomy was 2.3% compared with the recurrence rate for patients who received traditional external beam radiation therapy which was 1.3%. Given the study had a non-inferiority boundary of 2.5%, the study revealed that IORT is a non-inferior treatment relative to external beam radiation therapy for patients who meet the establ ished clinical criteria. Additionally, in 2016, Melinda Epstein, PhD, et al. of Hoag Memorial Hospital Presbyterian in Newport Beach, CA publ ished two clinical papers on their experience with the X of t Sys tem f or the treatment of early- stage br east cancer with IORT. In June, the Annals of Surgical Oncology published data on 702 patients treated from June 2010 to January 2016, demonstrating a 1.7% recurrence rate. Further, less than 5% of patients had significant complications, concluding that IORT safely delivers radiation and allows some women who cannot (or decline to) undergo whole breast radiation to consider breast-conserving therapy rather than mastectomy. In August, The Breast Journal published 20-month mean follow-up data on 146 patients with pure ductal carcinoma in situ (DCIS) treated with IORT. The data showed a 2.1% recurrence rate with relatively few complications and again concluded that x-ray based IORT is a promising treatment modality that greatly simplifies the delivery of post-excision radiation therapy. The reimbursement for IORT has improved from 2011 when the American Medical Association (AMA) established Category I CPT codes for IORT based on clinical evidence. These codes and payment values became effective beginning January 2013. In 2014, CMS raised the payment value for the IORT treatment delivery code by 27% and overall IORT reimbursement increased. Current IORT payment values have remained consistent with the values established in 2014. NMSC is considered an epidemic in the U.S. with over 3.5 million cases diagnosed annually. Of those cases, approximately 20%-30% have specific diagnoses and lesion characteristics that make such patients potential candidates f or electronic br achyt herapy treatment. The X of t Sys tem is a vi abl e alternative treatment option f or patients with lesions in cosmetically challenging locations (ear, nose, scalp, neck), locations that experience difficulties in healing (lower legs, upper chest, fragile skin), patients on anticoagulants, and patients who are anxious about surgery. The Xoft System has been used to treat more than 10,000 NMSC lesions. Additionally, the Xoft System is the only electronic br achyt herapy sys tem with peer-revi ewed pub lished clinical data. Recent clinical data demonstrates promising local control and supports eBx as a convenient, effective, nonsurgical treatment option offering minimal toxicity and excellent cosmesis for eligible NMSC patients. In 2016, electronic brachytherapy for the treatment for NMSC was reimbursed under a new skin-specific Category III CPT code. Reimbursement is provided through a Category III electronic brachytherapy treatment delivery CPT code along with other Category I medical physics and treatment-planning CPT codes as determined by medical necessity. In 2015, new Category III reimbursement CPT codes for multi-fraction electronic brachytherapy applications for skin, breast and gynecological cancers were approved by the American Medical Association (AMA) and became active as of January 2016. Coverage policies and payment values associated with CPT codes are determined by the regional U.S. Medicare Administrative Contractors. yne cological cancers are also appropriate f or treatment with electronic br achyt herapy . There are approximately 50,000 new cases of endometrial cancer each year in the U.S. and nearly 300,000 new cases worldwide. Additionally, electronic brachytherapy is appropriate for use in other IORT clinical settings where surgical resection is unable to completely eliminate all cancer cells. In the U.S. and international settings, IORT for prostate, pelvic, gastrointestinal, abdom inal, spinal, and sof t tissue sarcoma applications remains a potential marke t give n the minimal shielding requirements associated with this treatment modality. 5 G Electronic Brachytherapy products: Electronic Brachytherapy (eBx®) Treatment for Breast Cancer A xxent® eBx® The portable Axxent eBx system uses isotope-free miniaturized X-ray tube technology to deliver therapy directly to cancer sites with minimal radiation exposure to surrounding healthy tissue. The Axxent eBx system is FDA-cleared f or the treatment of early stage b reast cancer, endometrial cancer, cerv ical cancer, and sk in cancer, as well as f or the treatment of other cancers or conditions where radiation therapy is indicated, including IORT. The Company offers FDA-cleared applicators for the utilization of the Axxent eBx system including breast applicators for IORT and APBI in the treatment of b reast cancer, v aginal applicators f or the treatment of endometrial cancer, cerv ical applicators f or the treatment of cerv ical cancer, and sk in applicators f or the treatment of non-melanoma sk in cancers. The single-use breast IORT and APBI applicators are offered in a variety of sizes based on clinical need. The endometrial, cervical and skin applicators are reusable and are manufactured in various sizes based on the anatomical requirements of the patient or the size of the lesion. The Company also provides the 50kV isotope-free energy source, a comprehensive service warranty program, and various accessories such as the Axxent eBx Rigid Shield for internal IORT shielding. The 50kV energy source is typically sold as an annual contract customized to individual customer volume/usage requirements. The Company has made several enhancements to the Axxent eBx system controller including a new software interface enabl ing enhanced sys tem f unctionality and an upgraded high vol tage connection improvi ng sys tem perf ormance. In 2014, the Company developed and launched a new Axxent SPX Controller which includes an optimized skin treatment arm customized for compatibility in confined patient treatment rooms in physician office-based facilities. This controller complements the Axxent MPX Controller which is designed for multi-application use. In 2016, the Company unveiled a new Streamlined Module for Advanced Radiation Therapy (SMART) solution for its Xoft System and Axxent Hub cloud-based oncology collaboration software solution. Comprising a new Wi-Fi enabled Xoft System and enhanced Axxent Hub cloud software, the SMART solution improves workflow efficiency and the flexibility and security of skin eBx treatments while also improving clinical collaboration and supervision. In early 2013, the Company received FDA clearance for a new applicator for use in the treatment of cervical cancer and launched this product in the U.S and international markets in 2015. This new applicator further expands the Company f er comprehensive electronic br achyt herapy solutions to their patients in need of gyne cological radiation therapy . Current customers of the X of t Sys tem include unive rsity research and community hospitals, priva te and gove rnmental institutions, doctors’ offices, cancer care clinics, and veterinary facilities in the United States, the EU and Asia. ’ s product portf olio in the gy necological cancer marke t and enabl es customers to of C ancer D etecti on S eg ent O ve rv i ew and Prod u cts Mammography CAD systems use sophisticated algorithms to analyze image data and mark suspicious areas in the indicate cancer. The locations of the abnor malities are marke d in a manner that allows the reader of the image that may image to reference the same areas in the original mammogram for further review. The use of CAD aids in the detection of potential abnormalities for the radiologist to review. After initially reviewing the case films or digital images, a radiologist reviews the CAD results and subsequently re-examines suspicious areas that warrant a second look before making a final interpretation of the study. The radiologist determines if a clinically significant abnormality exists and whether further diagnostic evaluation is warranted. As a medical imaging tool, CAD is most prevalent as an adjunct to mammography given the documented success of CAD for detecting breast cancer. Digital Mammography CAD products: Advanced Image Analysis and Workflow Solutions in Breast Imaging (Mammography) iCAD develops and markets a comprehensive range of high-performance CAD solutions for digital mammography systems. iCAD’s PowerLook Mammo Detection is based on sophisticated patented algorithms that analyze the data, automatically identifying and marking suspicious regions in 2D mammography images. The solution provides the radiologist with a “ second look which helps the radiologist detect actionabl e missed cancers earlier than screening mammography alone. PowerLook Mammo Detection detects and identifies suspicious masses and micro-calcifications utilizing image processing, pattern recognition and artificial intelligence techniques. Information from thousands images are incorporated into these algorithms enabl ing the product to distinguish be tween of mammography characteristics of cancerous and normal tissue. The result is earlier detection of hard-to-find cancers, improved workflow for radiologists, and higher quality patient care. In June 2012, iCAD introduced its next generation PowerLook Advanced Mammography Platform® (AMP). The technology expands on iCAD’s legacy SecondLook Digital platform and is the mammography platform upon which 6 m ” all future breast imaging offerings from iCAD will be built. PowerLook AMP is the first product of its kind to integrate CAD and breast density assessment software, which aids radiologists by standardizing their approach to breast density assessment and categorization. The Company acquired the breast density assessment solution from VuComp in April 2015 and subsequently released it to market under the product name iReveal. Twenty-six states now mandate reporting of a br east density score to patients as part of the annual mammogram, iReve al provi des a consistent and standardiz ed reporting tool to assist with this process. Included with PowerLook is a multi-vendor CAD and density assessment server that allows hospitals and imaging facilities to connect up to four mammography acquisition devices regardless of vendor. This reduces the need for separate CAD servers while lowering hardware and service costs. iCAD’s PowerLook also provides a powerful flexible DICOM connectivity solution enabling universal compatibility with leading PACS and Review Workstations. A dditional modules are expected to be released and integrated into P owerL ook A in the f uture. PowerLook Advanced Mammography Platform is designed to f unction with leading digital mammography sys tems ( digital br east tomosyn thesis, P owerL ook FFDM and computed radiography) – including systems sold by GE Healthcare, Siemens Medical Systems, Fuji Medical Systems, Hologic, Inc., Sectra Medical Systems, Philips, Carestream, IMS Giotto, Agfa Corporation, and products have be en optimiz ed f or each digital imaging provi der ba sed lanmed. The algorithms in P owerL ook A upon characteristics of their unique detectors. P owerL ook A is a computer serve r residing on a customer’ s network that receive s patient studies f rom the imaging modality, performs CAD and density assessment analysis and sends the results to PACS and/or review workstations. Workflow and efficiency are critical in digital imaging environments therefore iCAD has developed flexible, powerful DICOM integration capabilities that enable PowerLook AMP to integrate with leading picture archiving and communication systems (“PACS”) archives and review workstations from multiple providers. iCAD has worked with its OEM partners to ensure CAD and density assessment results are integrated and easily viewed using each review workstation’s graphical user interface. To further improve efficiency and clinical efficacy, the most urgent or important patient studies can be prioritized and analyzed with CAD and density assessment software first. Magnetic Resonance Imaging (“MRI”) In July 2012, iCAD entered into a strategic partnership agreement with Invivo Corp., a subsidiary of Philips Healthcare. With this agreement, iCAD began developing the DynaCAD product software for breast and prostate MR image analysis workstations to help radiologists find cancer earlier and more efficiently. Invivo sells the DynaCAD product both directly and through the Philips global distribution network. In August, 2015, Invivo exercised a contractual right to a perpetual paid up license in exchange for a payment of approximately $2.0 million. In January 2017, the MRI products and related assets were sold to Invivo Corp. for $3.2 million. Prior to the January 2017 sale of the MRI products and related assets, the paid up license f ee was be ing amortiz ed ove r the remaining lif e of the agreement. Breast Tomosynthesis Breast Tomosynthesis was introduced in the United States in 2010 by Hologic, Inc.. GE received FDA approval for their tomosynthesis system in August 2014, Siemens approval followed in April 2015, and Fuji was approved in early 2017. Tomosynthesis has been demonstrated to have multiple advantages over traditional 2D mammography. It has improve d tissue vi sualiz ation and detection and results in lower recall rates f or patients. Tomosynt hesis improve s the sensitivity and specificity of cancer diagnosis when compared to mammography. Clinical studies indicate that digital to distinguish malignant f rom be nign tumors and can detect early signs br east tomosy nthesis improve s the abi lity of cancer hidden b ove rlapping tissues. This helps reduce the ove rall numbe r of bi opsies perf ormed and the call back rates. Initial studies have indicated that tomosynthesis has the ability to detect 41% more invasive cancers than conventional mammography, and it also reduces false-positives by up to 40%. y CAD technology can play an important role in improving the accuracy and efficiency of reading breast tomosynthesis cases by automatically identifying breast masses and micro-calcifications. In 2015, the Company completed development of its CAD solution for tomosynthesis to aid radiologists in their review of breast tomosynthesis as a means of improvi ng lesion detection and reducing the time to read the large tomosynt hesis datasets. The initial solution is developed for use with GE Healthcare’s digital breast tomosynthesis for the detection of soft tissue densities (masses, architectural distortions and asymmetries). In January 2017, the Company submitted an amendment to its original PMA application for its 3D tomosynthesis product, the Company is waiting for final approval from the FDA on the application. The Company is continuing to develop a multi-vendor tomosynthesis CAD solution that will also detect micro-calcifications. 7 M P A M P P M P M P Computed Tomography Applications and Colonic Polyp Detection CT is a well-establ ished and widely used imaging technology that is used to image cross-sectional “ slices” of va rious parts of the human body. When combined, these “slices” provide detailed volumetric representations of the imaged areas. With recent image quality improvements and greatly increased imaging speeds, CT imaging use has expanded in both the number of procedures performed as well as the applications for which it is utilized. While the increased image quality and number of cross sectional slices per scan provides valuable diagnostic information, it adds to the challenge of managing and interpreting the large vol ume of data generated. The Company be lieve s that the challenges in CT imaging present it with opportunities to provi de automated image analys is and clinical decision support solutions. CTC is a less invasive technique than traditional colonoscopy for imaging the colon. However, the process of reading a CTC exam can be lengthy and tedious as the interpreting physician is often required to traverse the entire length of the colon multiple times. CAD technology can play an important role in improving the accuracy and efficiency of reading CTC cases by automatically identifying potential polyps. CAD technology has been developed to aid radiologists in their review of CTC images as a means of improving polyp detection. The Company believes that CAD could become an important adj unct to CTC. Advanced Image Analysis and Workflow Solutions in CT Colonography VeraLook™ iCAD introduced a CAD solution, VeraLook, in August 2010 following FDA clearance of the product. This solution is designed to support detection of colonic polyps in conjunction with CTC. iCAD believes that CAD for CTC is a natural extension of iCAD’s core competencies in image analysis and image processing. The system works in conjunction with third party display workstations and PACS vendors. Field testing of the product was initiated in 2008 and iCAD conducted a multi-reader clinical study of iCAD’s CT Colon CAD product, for use with CTC. Results of the Company ’ s clinical study , “Impact of Computer-Aided Detection for CT Colonography in a Multireader, Multicase Trial” demonstrated that reader sensitivity improved 5.5% for patients with both small and large polyps with use of CAD. Use of CAD reduced specificity of readers by 2.5%. The clinical relevance of this CAD program was improved reader performance while maintaining high reader specificity. Throughout 2016, iCAD distributed the VeraLook product with advanced visualization reading workstations manufactured by Vital Images, a Toshiba Medical System Group Company. In Q4 2014, iCAD received CFDA (China Food and Drug Administration) approval to sell VeraLook in China. S ales and M ark eti ng iCAD, through its Xoft subsidiary, markets the eBx system in the United States and select countries worldwide. The Company has expanded its installed base of eBx systems in the U.S. and has established initial installations in a number of countries located in Europe and Asia. Xoft has signed distribution agreements in Spain, The Netherlands, Turkey, Italy, Switzerland, Portugal, Bulgaria, Russia, France, Mexico, Canada, China, Australia / New Zealand, Taiwan, Germany, Egypt / Saudi Arabia, India, Iran, South Korea, UK and Ireland and is actively exploring market entry i n South and Central A merica. Xoft’s direct U.S. sales force sells the system on the basis of its clinical effectiveness as a platform high dose rate, low energy radiation therapy solution f or hospitals, ambul atory care centers and f ree standing radiation oncology facilities and other office-based uses, e.g. dermatology clinical practices. The Xoft System offers a distinct competitive advantage in that it is a highly mobile unit with minimal shielding requirements that can easily be moved from room to f acility give n its relative ly compact to room within a single healthcare institution or be transported f rom f acility f orm f actor. Breast IORT is a strategic focus of the Company due to the significant clinical /lifestyle benefits to the patient and economic advantages to the facility. NMSC is an additional strategic priority given the high incidence rate of the disease and the benefits of the Xoft System in this clinical indication. Based on the additional clinical applications including gynecological cancers, other IORT applications (in addition to breast IORT), as well as its potential to scale in the future to address other indications for use, the Company believes the Xoft System offers unique flexibility and opportunities f or growth. Core to the Company’s eBx market development strategy is a comprehensive medical education program. Xoft actively participates in several key industry scientific conferences in the United States and Europe including but not limited to Miami Breast, ASBS, ABS, SSO, AAPM, ESTRO, Milan Breast, and ASTRO on an annual basis. More recently, Xoft has participated in key dermatology conferences in the U.S. including AAD, Fall and Winter Dermatology Conferences, ASDS, and ACMS. At select industry conferences and at independent venues, the Company provides specific additional 8 eBx professional education programs and product demonstrations in the form of live symposia in U.S. markets. The Company expanded its medical education program in 2015 to include breast IORT and NMSC educational webinars in both CME and non-CME formats to broaden physician awareness of the Xoft System and eBx technology in the U.S. The Company also maintains a scientific advisory board composed of leading clinician experts who share a commitment to raising awareness of the unique benefits the Xoft eBx system offers to providers and patients alike. The Company further supports breast IORT through its ongoing ExBRT Clinical Trial– a post-market clinical trial designed to enroll 1,000 patients at up to 50 sites. The study enabl es f acilities interested in treating early stage br east cancer patients with the X of t Sys tem to participate in a common clinical protocol and f ollow enrolled patients f or up to ten years. The Company believes that the ExBRT study is led by brachytherapy and breast care physicians including breast surgeons, radiation oncologists, pathologists, and medical physicists from leading U.S. breast cancer care institutions. From its inception in 2012 through February 2017, the ExBRT study has enrolled more than 800 patients at more than 20 facilities in the U.S. and Europe. Initial clinical results from the ExBRT study are expected to be presented at key breast cancer medical conferences in 2017. iCAD’s mammography products are sold through its direct regional sales organization in the U.S. as well as through its OEM partners, including GE Healthcare, Fuji Medical Systems, Siemens Medical, Philips Healthcare, Agfa Corporation, Sectra Medical Systems, Planmed, Fuji Medical Systems, IMS Giotto, and Carestream Health, Inc. The VeraLook CTC CAD product is primarily distributed by Vital Images. ’ s cancer detection products are marke ted on the ba sis of their clinical superiority and their abi lity The Company to help radiologists detect more cancers earlier, while seamlessly integrating into the clinical workflow of the radiologist. As part of its sales and marketing efforts, iCAD has developed and executed a variety of public relations and local outreach programs with numerous iCAD customers. Additional investments are being made in cultivating relationships leaders discuss the f uture of with the leaders in br east and colon solutions at national trade shows, where industry image analys is solutions in these clinical disciplines. C om peti ti on The Company’s existing eBx products face competition in breast IORT primarily from one company: Carl Zeiss Meditec, Inc., (“Zeiss”) a multinational company, where eBx products are only one of that company’s many products. Zeiss manufactures and sells eBx products for the delivery of IORT. Zeiss has expanded their product portfolio to include additional anatomical areas beyond breast IORT. Zeiss now offers a range of radiation therapy applicators for use in various applications including spine, the gastrointestinal tract, skin, and endometrial cancers. Zeiss has an established base of breast IORT installations in Europe where the majority of the TARGIT-A trial clinical sites are located. IntraOp Medical is an additional competitor in the high dose rate (“HDR”) radiation therapy market. The Company’s NMSC products face numerous competitors utilizing a variety of technologies. Surface Radiation Therapy (SRT) systems, including Sensus Healthcare, directly compete with the Xoft System in this market in which Dermatologists and Radiation Oncologists seek mobile, efficient, non-surgical treatment options. In late 2013, Elekta received clearance for its electronic brachytherapy system “Esteya” for use in the treatment of NMSC. This system utilizes a low energy 69.5 kV source and a range of surface applicators in a small footprint system profile. Other competitors in the NMSC market include surgery (excision, Mohs surgery, and destruction). Mohs surgery remains the primary treatment option for dermatologists in the majority of NMSC cases. Traditional radiation therapy including external beam radiation therapy is also a treatment modality used to treat NMSC patients. New market opportunities including expansion of the gynecological product portfolio and other IORT applications beyond breast IORT will bring new competitive dynamics to the Company’s efforts. Larger, more diversified radiation therapy companies offering a wide variety of clinical solutions for HDR brachytherapy including Varian Medical Systems and Elekta compete in these areas. These multi-national firms offer broad product portfolios including a full range of HDR brachytherapy afterloaders and applicators as well as traditional radiation therapy solutions including linear accelerators, treatment planning solutions, and workflow management capabilities. The Company currently f aces direct competition in its cancer detection and density assessment bus iness f rom H ologic, Inc., Volpara, Parascript, and StatLife. The Company believes that its market leadership in mammography CAD and density assessment and strong relationships with its strategic partners will provi de it with a competitive adva ntage in the mammography CAD and density assessment market. The Company’s CT Colon solution faces competition from the traditional imaging CT equipment manufacturers and emerging CAD companies. Siemens Medical, GE Healthcare, and Philips Medical Systems currently offer polyp detection products outside the U.S. Siemens Medical received FDA clearance for CT Polyp CAD in 2014. f er a colonic polyp detection solution as an adva nced f eature of The Company expects that CT manuf acturers will of 9 their image management and display products typically sold with their CT equipment. The Company believes that current regulatory requirements present a significant barrier to entry into this market and that its market leadership in mammography CAD provides it with a competitive advantage within the CT Colonography community. iCAD operates in highly competitive and rapidly changing markets with competitive products available from nationally and internationally recognized companies. Many of these competitors have significantly greater financial, technical and human resources than iCAD and these competitors are well established in the healthcare market. In addition, some companies have deve loped or may deve lop technologies or products that could compete with the products the Company manuf actures and distribut es or that would render our products obs olete or noncompetitive . M oreove r, competitors may achieve patent protection, regulatory approva l, or product commercializ ation be f ore we do, which would limit our abi lity to compete with them. These and other competitive pressures could have a material adve rse ef f ect on the Company ’ s bus iness. M anu factu ri ng and Professi onal S erv i ces The Company’s CAD products are manufactured and assembled by the Company. In addition, the Company conducts purchasing and supply chain management, planning/scheduling, manufacturing engineering, service repairs, quality assurance, inv entory management, and warehousing. Once the product has shipped, it is usually installed b one of the Company’s OEM partners at the customer site. When a product sale is made directly to the end customer by iCAD, the product is generally installed by iCAD personnel at the customer site. y iCAD’s professional services staff is composed of a team of trained and specialized individuals providing comprehensive product support on a pre-sales and post-sales ba sis. This includes pre-sale product demonstrations, product installations, applications training, and call center management (or technical support). The support center is the single point of contact f or the customer, provi ding remote diagnostics, troubl eshooting, training, and servi ce dispatch. Servi ce repair ef third party servi ce organiz ations or in the Company f orts are generally perf ormed at the customer site b ’ s repair technicians. ’ s repair depot b he Company y t y Controller is manuf actured and assembl ed f or X of t b contract manuf acturers. X of t’ s X of t’ s portabl e A xxent® -ray source, which is used to delive r radiation directly to the cancerous site, electronic br achyt herapy miniaturiz ed X is manuf actured in the Company . X of t operations consist of manuf acturing, engineering, administration, purchasing, planning and scheduling, service repairs, quality assurance, inventory management, and warehousing. O nce the product has shipped, it is typi cally i nstalled b of t personnel at the customer site. ’ s San J ose, CA f acility y y X Xoft’s field service and customer service staff is composed of a team of trained and specialized individuals providing comprehensive product support, phys ics support, radiation therapists and bi lling support on a pre-sales and post- sales basis. The field service staff also provides product installations, maintenance, training and service repair efforts generally perf ormed at the customer site. The customer servi ce staf f provi des pre-sale product demonstrations, customer support, troubl eshooting, servi ce dispatch and call center management. G ove rnm ent R eg lati on The Company’s systems are medical devices subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act with potentially significant costs for compliance. The FDA’s regulations govern, among other things, product dev elopment, product testing, product lab eling, product storage, pre-mark et clearance or approv al, adv ertising and promotion, and sales and distribution. The Company’s devices are also subject to FDA clearance or approval before they can be marketed in the U.S. and may be subject to additional regulatory approvals before they can be marketed outside the U.S. There is no guarantee that future products or product modifications will receive the necessary approvals. The FDA’s Quality System Regulations require that the Company’s operations follow extensive design, testing, control, documentation and other quality assurance procedures during the manufacturing process. The Company is subject to FDA regulations covering labeling regulations and adverse event reporting including the FDA’s general prohibi tion of promoting products f or unapprove d or of f -labe l uses. The Company’s manufacturing facilities are subject to periodic inspections by the FDA and corresponding state agencies. Compliance with extensive international regulatory requirements is also required. Failure to fully comply with applicabl e regulations could result in the Company receiv ing warning letters, non-approva ls, suspensions of existing approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions, injunctions, and criminal prosecution. We are also subject to a variety of federal, state and foreign laws which broadly relate to our interactions with healthcare practitioners and other participants in the healthcare sys tem, including, among others, the f ollowing: 10 u • • • • ba ck, laws, such as the Foreign Corrupt anti-ki ck f alse claims, phys ician self -ref erral, and anti-br ibe ry Practices Act, or FCPA, the UK’s Bribery Act 2010, or the UK Anti-Bribery Act; state law and regulation regarding f ee splitting and other relationships be tween health care provi ders and non-prof essional entities, including companies provi ding management and reimbur sement servi ces; laws regulating the privacy and security of personally identifiable information, such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or HITECH Act; and healthcare ref orm laws, such as the P atient P rotection and A f ordabl e Care A ct and the H ealth Care and Education Affordability Reconciliation Act of 2010, which we refer to together as PPACA, which include new regulatory mandates and other measures designed to constrain medical costs, as well as stringent new reporting requirements of financial relationships between device manufacturers and physicians and teaching hospitals. In addition, we are subject to numerous federal, state, foreign and local laws relating to safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances, among others. We may be required to incur significant costs to comply with these laws and regulations in the f uture, and complyi ng with these laws may result in a material adve rse ef f ect upon our bu siness, financial condition and results of operations. Additionally, in order to market and sell our products in certain countries outside of the U.S., we must obtain and maintain regulatory approvals and comply with the regulations of each specific country. These regulations, including the requirements for approvals, and the time required for regulatory review vary by country. Federal, state, and f oreign regulations regarding the manuf acture and sale of medical devi ces and management servi ces and software are subject to future change. We cannot predict what impact, if any, such changes might have on our bus iness. R ei u rsem ent The federal and state governments of the United States establish guidelines and pay reimbursements to hospitals and edicare at the f ederal leve l and f ree-standing clinics f or diagnostic examinations and therapeutic procedures under M edicaid at the state leve l. P riva te insurers of ten establ ish paym ent leve ls and policies ba sed on reimbur sement rates and guidelines establ ished b y t he gove rnment. The f ederal gove rnment revi ews and adj usts cove rage policies and reimbur sement leve ls periodically and also consider various Medicare and other healthcare reform proposals that could significantly affect both private and public reimbur sement f or healthcare servi ces in hospitals and f ree-standing clinics. State gove rnment reimbur sement f or servi ces is determined pursuant to each state’ s M state law and regulations, subject to requirements of federal law and regulations. edicaid plan, which is estab lished b y Market acceptance of our medical products in the U.S. and other countries is dependent upon the purchasing and procurement practices of our customers, patient demand f or our products and procedures, and the reimbur sement of patients’ medical expenses b rnment healthcare programs, priva te insurers or other healthcare payor s. y gove The provisions of the Affordable Care Act went into effect in 2012. We are continuing to evaluate the Affordable Care Act and its impact on our business. We believe that elements of the program including the shift to value-based healthcare and increased focus on patient satisfaction will benefit the Company in the future. Other elements of this boa rd, paym ent sys tem legislation, including comparative ef reforms (including shared savings pilots) and other provisions, could meaningfully change the way healthcare is deve loped and delive red, and may materially impact numerous aspects of our bus iness, including the demand and ava ilabi lity of our products, the reimbur sement ava ilabl e f or our products f rom gove rnmental and third-party payor s, f ect of the repeal or and reduced medical procedure vol umes. A dditionally , we are now eva luating the possibl e ef replacement of the A f ective ness research, an independent paym ent advi sory f ordabl e Care A ct. In May 2015, the Company announced that one of the regional Medicare Administrative Contractors instructed physicians to report CPT code (17999) rather than the established CPT code (0182T) for electronic brachytherapy for treatment of NMSC. This announcement resulted in a significant disruption in the Therapy segment as a result of the reimbursement uncertainty. Revenues for the year ended December 31, 2015 and December 31, 2016 were negatively impacted as a result of the uncertainty. In January 2016 a new CPT code (0394T) for the treatment on non-melanoma ski n cancer utiliz ing electronic br achyt herapy w ent into ef f ect. 11 f m b M f I ntellectu al Property The Company primarily relies on a comb ination of patents, trade secrets and copyr ight law, third-party and employe e confidentiality agreements, and other protective measures to protect its intellectual property rights pertaining to our products and technologies. The Company has many patents covering its CAD and eBx technologies expiring between 2018 and 2028. These patents help the Company maintain a proprietary position in its marke ts. A dditionally , the Company has a numbe r of patent applications pending domestically, some of which have been also filed internationally, and the Company plans to file additional domestic and foreign patent applications when it believes such protection will benefit the Company. These patents and patent applications relate to current and future uses of iCAD’s CAD and digitizer technologies and products, including CAD for tomosynthesis, CAD for CT colonography and lung and CAD for MRI breast and prostate, as well as Xoft’s current and future eBx technologies and products. The Company has also secured a non- exclusive patent license from the National Institute of Health which relates broadly to CAD in colonography, a non- exclusive patent license f rom Cy tyc / H ologic which relates to ba lloon applicators f or br east br achyt herapy , and a non- exclusive license from Zeiss which relates to brachytherapy. The Company believes it has all the necessary licenses f rom third parties f or sof tware and other technologies in its products; howeve r, we do not know if current or f uture patent applications will issue with the f ull scope of the claims sought, if at all, or whether any patents issued will be challenged or inva lidated. S ou rces and A vai lab i li ty of M ateri als be ava ilabl e f rom a sole or limited numbe r of suppliers. The Company y a sole manuf acturer, b The Company depends upon a limited numbe r of suppliers and manuf acturers f or its products, and certain components in its products may ’ s products are generally a limited numbe r of manuf acturers or assembl ed y either manuf actured and assembl ed f or it b by it from supplies it obtains from a limited number of suppliers. Critical components required to manufacture these products, whether b y outside manuf acturers or directly , may be ava ilabl e f rom a sole or limited numbe r of component suppliers. The Company generally does not have long-term arrangements with any of its manuf acturers or suppliers. The loss of a sole or ke y manuf acturer or supplier would impair the Company ’ s abi lity to delive r products to customers ’ s bus iness would be in a timely manner and would adve rsely af harmed if any of its manufacturers or suppliers could not meet its quality and performance specifications and quantity and delivery requirements. f ect its sales and operating results. The Company M aj or C u stom ers The Company operates in two segments: Cancer Detection (“Detection”) and Cancer Therapy (“Therapy”). The Company marke ts its products f or digital mammography and cancer therapy sys tems through its direct regional sales organization. Cancer detection products are also sold through OEM partners, including GE Healthcare, Fuji Medical Systems, Siemens Medical and Invivo. OEM partners generated approximately 47% of detection revenues and 30% of revenue overall. GE Healthcare was the largest single customer with approximately $3.9 million in 2016, $4.1 million in 2015, and $4.1 million in 2014 or 15%, 10%, and 9% of total revenues, respectively. Eng i neeri ng an d Prod u ct D eve lopm ent The Company spent $10.3 million, $9.8 million, and $8.8 million on research and development activities including depreciation and amortization, during the years ended December 31, 2016, 2015 and 2014, respectively. Research and deve lopment expenses are primarily attribut ed to personnel, consulting, subc ontract, licensing and data collection expenses relating to the Company ’ s new product deve lopment and clinical testing. Em ploye es As of February 2017, the Company had 118 employees, of whom 116 are full time employees, with 30 involved in sales and marketing, 24 in research and development, 52 in service, manufacturing, technical support and operations functions, and 12 in administrative functions. None of the Company’s employees is represented by a labor organization. The Company c onsiders its relations with employe es to be good. Env i ronm ental Protecti on Compliance with f ederal, state and local provi sions which have be en enacted or adopted regulating the discharge of materials into the envi ronment, or otherwise relating to the protection of the envi ronment, has not had a material ef f ect upon the capital expenditures, earnings (losses) or competitive position of the Company. 12 i nanci al G eogr aph i c I nform ati on The Company’s primary market is in the United States through its direct sales force and OEM partners. Export sales are typically through OEM and channel partners. Total export sales represented approximately $2.3 million or 9% of revenue in 2016 as compared to $2.3 million or 6% of revenue in 2015 and $1.8 million or 4% of total revenue in 2014. Export sales by region are as follows (in thousands): Region 2016 2015 2014 Percent of Export sales Europe China Taiwan Canada Other Total 36% 21% 19% 15% 8% 100% 63% 2% 15% 11% 9% 100% - 40% 19% 34% 7% 100% Total Export sales $2,323 $2,278 $1,772 Significant export sales in Europe are as follows: Region 2016 2015 2014 Percent of Export sales France Spain Bulgaria United Kingdom 15% 7% 3% 3% 21% 5% 26% 9% 17% 3% 13% - F orei gn R eg lati ons International sales of the Company’s products are subject to foreign government regulation, the requirements of which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. Obtaining and maintaining foreign regulatory approva ls is an expensive and time consuming process. The Company cannot be certain that it will b e abl e to obt ain the necessary regulatory approva ls timely or at all in any in which it plans to marke t its CAD products and the Axxent eBx system, and if it fails to receive and maintain such approvals, its ability to generate revenue may be significantly diminished. f oreign country Prod u ct L i ab i li ty I nsu rance be lieve s that it maintains appropriate product liabi lity insurance with respect to its products. The The Company Company cannot be certain that with respect to its current or f uture products, such insurance cove rage will continue to be available on terms acceptable to the Company or that such coverage will be adequate for liabilities that may actually be incurred. I tem 1 . i sk F actors. We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could f ected, and/ or in materially adv ersely af the f uture could af f ect our operations. The f ollowing highlights some of the f actors that have af f ect, our operations. We have incurred significant losses from inception through 2016 and there can be no assurance that we will be able to achieve and sustain future profitability. 13 F u A R We have incurred significant losses since our inception. We incurred a net loss of $10.1 million in fiscal 2016 and have an accumulated deficit of $187.6 million at December 31, 2016. We may not be able to achieve profitability. e rely on i ntellectu al property and le to protect th ese ri propri etary ri ts to m ai ntai n ou r com peti ti ve posi ti on and m ay not b e ts. that others will not independently deve lop similar technologies or duplicate any ab We rely heavily on proprietary technology that we protect primarily through licensing arrangements, patents, trade know -how and non-disclosure agreements. There can be no assurance that any pending or f uture secrets, proprietary patent applications will be granted or that any current or f uture patents, regardless of whether we are an owner or a licensee of the patent, will not be challenged, rendered unenf orceabl e, inva lidated, or circumve nted or that the rights will provi de a competitive adva ntage to us. There can also be no assurance that our trade secrets or non- disclosure agreements will provi de meaningf ul protection of our proprietary inf ormation. Further, we cannot assure you us technology deve loped b or that our technology will not inf ringe upon patents or other rights owned b others. There is a risk that our patent applications will not result in granted patents or that granted patents will not provide significant protection for our products and technology. Unauthorized third parties may infringe our intellectual property rights, or copy or reverse engineer portions of our technology. Our competitors may independently develop similar technology that our patents do not cover. In addition, because patent applications in the U.S. are not generally publicly disclosed until eighteen months after the application is filed, applications may have been filed by third parties that relate to our technology. Moreover, there is a risk that foreign intellectual property laws will not protect our intellectual property rights to the same extent as intellectual property laws in the U.S. The rights provided by a patent are finite in time. Over the coming years, certain patents relating to current products will expire in the U.S. and abroad thus allowing third parties to utilize certain of our technologies. In the absence of significant patent protection, we may b e v ulnerab le to competitors who attempt to copy our products, processes or technology y y In addition, in the future, we may be required to assert infringement claims against third parties, and there can be no assurance that one or more parties will not assert inf ringement claims against us. A ny resulting litigation or proceeding could result in significant expense to us and divert the efforts of our management personnel, whether or not such litigation or proceeding is determined in our favor. In addition, to the extent that any of our intellectual property and proprietary rights was eve r deemed to v iolate the proprietary rights of others in any litigation or proceeding or as a result of any claim, we may be preve nted f rom using them, which could cause a termination of our abi lity to sell our products. L itigation could also result in a j udgment or monetary da mages be ing levi ed against us. Unfavorable results of legal proceedings could materially adversely affect our financial results From time to time, we are a party to or otherwise invol ve d in legal proceedings, claims and gove rnment inspections or investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of our bus iness or otherwise. L egal proceedings are of ten lengthy , taki ng place ove r a period of ye ars with interim motions or judgments subject to multiple levels of review (such as appeals or rehearings) before the outcome is final. Litigation is subject to significant uncertainty and may be expensive, time-consuming, and disruptive to our operations. For these and other reasons, we may c hoose to settle legal proceedings and claims, regardless of their actual merit. If a legal proceeding were finally resolved against us, it could result in significant compensatory damages, and in certain circumstances punitive or trebled damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief imposed on us. If our existing insurance does not cover the amount or types of damages awarded, or if other resolution or actions take n as a result of the legal proceeding were to restrain our abi lity to marke t one or more of our material products or services, our consolidated financial position, results of operations or cash flows could be materially adversely affected. In addition, legal proceedings, and any adverse resolution thereof, can result in adverse publ icity a nd damage to our reputation, which could adve rsely i mpact our bus iness. We may be exposed to significant product liability for which we may not have sufficient insurance coverage or be able to procure sufficient insurance coverage. Our product and general liability insurance coverage may be inadequate with respect to potential claims and adequate insurance coverage may not be available in sufficient amounts or at a reasonable cost in the future. If available at all, product liab ility insurance f or the medical dev ice industry generally is expensiv e. Future product liab ility claims could b e costly to def end and/ or costly to resolv e and could harm our reputation and b usiness. i rd y th m ark et acceptance of ou r prod u cts i s d epend ent u pon th e cove rage and - party payor s. T u rsem ent for th e u se of ou r prod S ales and m ad e b rei and Sales and market acceptance of our medical products and the treatments facilitated by our products in the United States gove rnment and other countries is dependent upon the cove rage decisions and reimbur sement policies establ ished b arke t acceptance of our products and treatments has and will healthcare programs and priva te health insurers. M d e appropri ate leve ls of cove rage and ld i rd treatm ents faci li tated - party payor s to prov b h e fai lu re of th u cts and u rsem ent d eci si ons prospects. y ou r prod u si ness u cts cou ou r b h arm rei y 14 W g h g h m b i m b va ry continue to depend upon our customers’ abi lity to obt ain an appropriate leve l of cove rage f or, and reimbur sement from third-party payors for, these products and treatments. In the U.S., CMS establishes coverage and reimbursement policies for healthcare providers treating Medicare and Medicaid beneficiaries. Under current CMS policies, varying reimbur sement leve ls have be en establ ished f or our products and treatments. Cove rage policies f or M edicare patients edicare carriers in the abs ence of a national cove rage determination and reimbur sement may regional M y rates f or treatments may ba sed on the geographic price index. Cove rage and reimbur sement policies and rates va ry applicabl e to patients with priva te insurance are dependent upon indivi dual priva te payor decisions which may not follow the policies and rates established by CMS. The use of our products and treatments outside the United States is similarly af f oreign gove rnments and priva te insurance carriers. We cannot provide assurance that government or private third-party payors will continue to reimburse for our products or services using the existing codes, nor can we provide assurance that the payment rates will be adequate. If provi ders and phys icians are unabl e to obt ain reimbur sement f or our products or servi ces at cost-ef f ective leve ls, this could have a material adverse effect on our business and operations. In addition, in the event that the current coding and/ or pay ment methodology f ect on our bus iness and bus iness operations. f or these products or servi ces changes, this could have a material adve rse ef cove rage and reimbur sement policies adopted b f ected b y y Our business is dependent upon future market growth of full field digital mammography systems, digital computer aided detection products, and tomosynthesis as well as advanced image analysis and workflow solu ti ons for u se w m ay not M occur or may occur too slowly to benefit us. of electroni c b rach th e m ark et gr ow y th erapy i s gr ow I and and : th i th th th C Our f uture bu siness is subs tantially dependent on the continued growth in the mark et f or electronic b rachy therapy , f ull field digital mammography systems, digital computer aided detection products and tomosynthesis as well as advanced image analysis and workflow solutions for use with MRI and CT. The marke t f or these products may not continue to dev elop or may deve lop at a slower rate than we anticipate due to a va riety of f actors, including, general economic conditions, delays in hospital spending for capital equipment, the significant cost associated with the procurement of full field digital mammography systems and CAD products and MRI and CT systems and the reliance on third party insurance reimbursement. In addition we may not be able to successfully develop or obtain FDA clearance for our proposed products. A limited number of customers account for a significant portion of our total revenue. The loss of a principal cu stom er cou seri ou sly h u rt ou r b u si ness. ld Our principal sales distribution channel for our digital products is through our OEM partners which accounted for 30% of our total revenue in 2016, with one major customer, GE Healthcare at 15% of our revenue. In addition six customers accounted for 33% of our total revenue, which includes both OEM partners and direct customers. A limited number of major customers have in the past and may continue in the future to account for a significant portion of our reve nue. The loss of our relationships with principal customers or a decline in sales to principal customers could materially adve rsely af f ect our bus iness and operating results. h e m ark ets for ou r new exi sti ng p rod u cts and ly d eve loped prod treatm ents m ay n ot d eve lop as expected u cts and treatm ents and new ly i ntrod u ced enh ancem ents to ou r The successf ul commercializ ation of our newly deve loped products and treatments and newly introduced enhancements to our existing products and treatments are sub j ect to numerous risks , bot h know n and unknow n, including: • • • • • • • the deve lopment of a marke t f or such product or treatment; uncertainty of trends relating to, or the introduction or existence of , competing products, technologies or alternative f ective , saf er or easier to use than our products, technologies, treatments or therapies that may b e more ef treatments or therapies; the perceptions of our products or treatments as compared to other products and treatments; recommendation and support for the use of our products or treatments by influential customers, such as hospitals, radiological practices, br east surgeons and radiation oncologists and treatment centers; the availability and extent of data demonstrating the clinical efficacy of our products or treatments; competition, including the presence of competing products sold b histories, more recogniz abl e names and more establ ished distribut ion networks ; and other technological deve lopments. companies with longer operating y Often, the development of a significant market for a product or treatment will depend upon the establishment of a reimbur sement code or an appropriate reimbur sement leve l f or use of the product or treatment. M oreove r, eve n if addressed, such reimbursement codes or levels frequently are not established until after a product or treatment is deve loped and commercially introduced, which can delay the successf ul commercializ ation of a product or treatment. 15 b R T T . If we are unable to successfully commercialize and create a significant market for our newly developed products and introduced enhancements to our existing products and treatments, our bus iness and prospects treatments and newly could be harmed. I f good impaired, we could have to take significant charges against earnings. le assets th at w e h ave record ed / or oth er i ntang i ll and i n connecti on w i th ou r acq i si ti ons b ecom e In connection with the accounting for our acquisitions, we have recorded a significant amount of goodwill and other intangible assets. In September 2011, we recorded an impairment of $26.8 million on our goodwill, and in June 2015, we recorded an additional impairment of $14.0 million on our goodwill. Under current accounting guidelines, we must assess, at least annually and potentially more frequently, whether the value of our goodwill of $14.1 million at December 31, 2016 and our other intangible assets has been impaired. Any reduction or impairment of the value of goodwill or other intangibl e assets will result in a charge against earnings which could materially adve rsely af f ect our reported results of operations in f uture periods. The healthcare industry is highly regulated, and government authorities may determine that we have failed to comply with applicable laws, rules or regulations. is sub The healthcare industry j ect to extensive and complex f ederal, state and local laws, rules and regulations, compliance with which imposes subs tantial costs on us. Such laws and regulations include those that are directed at paym ent f or servi ces and the conduct of operations, preve nting f raud and abu se, and prohibi ting general bus iness corporations, such as ours, from engaging in practices that may influence professional decision-making, such as splitting fees with physicians. Many healthcare laws are complex, and their application to specific services and relationships may not be clear. Further, healthcare laws differ from state to state and it is difficult to ensure our business complies with evolving laws in all states. In addition, we believe that our business will continue to be subject to increasing regulation, the scope and ef f ect of which we cannot predict. Federal and state legislatures and agencies periodically consider proposals to revise or create additional statutory and regulatory requirements. Such proposals, if implemented, could impact our operations, the use of our servi ces, and our abi lity t o marke t new servi ces, or could create unexpected liabi lities f or us. be challenged. For example, regulatory authorities or other parties may We may in the future become the subject of regulatory or other investigations or proceedings, and our interpretations of applicab le laws, rules and regulations may assert that our arrangements with the physician practices to which we lease equipment and provide management services violate anti-kickback, fee splitting, or self-referral laws and regulations and could require us to restructure these arrangements, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our common stock. Such investigations, proceedings and challenges could also result in substantial defense costs to us and a diversion of management’s time and attention. In addition, violations of these laws are punishable by monetary fines, civil and criminal penalties, exclusion from participation in government- sponsored healthcare programs, and f orf eiture of amounts collected in vi olation of such laws and regulations, any of which could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our common stock e m ay i ncu r su b stanti al costs d efend lati ons and if we lose, the government could force us to restructure our operations and subject us to fines, monetary penalti es and as i care and i ng ou r i nterpretati ons of fed eral and parti ci pati on i n gove rnm ent- sponsored care progr am possi ed M rnm ent reg d e u s from state gove ly exclu h ealth s su ch i cai ed j ect to extensiv e f ederal and state gov ernment Our operations, including our arrangements with healthcare prov iders, are sub regulation and are subject to audits, inquiries and investigations from government agencies from time to time. Those laws may have related rules and regulations that are subject to interpretation and may not provide definitive guidance as to their application to our operations, including our arrangements with phy sicians and prof essional corporations. We believe we are in substantial compliance with these laws, rules and regulations based upon what we believe are reasonable and def ensib le interpretations of these laws, rules and regulations. H owev er, f ederal and state laws are b roadly worded and y prosecutorial, regulatory or j udicial authorities in way s that we cannot predict. A ccordingly , may b e interpreted or applied b our arrangements and b usiness practices may b e the sub j ect of gov ernment scrutiny or b e f ound to v iolate applicab le laws. If federal or state government officials challenge our operations or arrangements with third parties that we have structured b ased upon our interpretation of these laws, rules and regulations, the challenge could potentially disrupt our b usiness operations and we may incur sub stantial def ense costs, ev en if we successf ully def end our interpretation of these laws, rules and regulations. In addition, if the government successfully challenges our interpretation as to the applicability of these laws, rules and regulations as they relate to our operations and arrangements with third parties, it may hav e a material adv erse effect on our business, financial condition and results of operations. 16 w i b u . W u b M d . In the event regulatory action were to limit or prohibit us from carrying on our business as we presently conduct it or f rom expanding our operations into certain j urisdictions, we may need to mak e structural, operational and organiz ational modifications to our Company or our contractual arrangements with physicians and professional corporations. Our operating costs could increase significantly as a result. We could also lose contracts or our revenues could decrease under existing contracts. A ny restructuring would also negativ ely impact our operations b ecause our management’ s time and attention would b e div erted f rom running our b usiness in the ordinary course. Regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and i ncrease th e cost of certai n m etals u sed i n m anu factu ri ng ou r prod u cts. In August 2012, the SEC adopted a rule requiring disclosures of specified minerals, known as conflict minerals, that are necessary to the f unctionality or production of products manuf actured or contracted to be manuf actured b publ ic companies. The conflict minerals rule requires companies annually to diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and other specified countries. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, including tungsten. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possibl e charges to products, processes or sources of supply as a consequence of such verification activities. Since our supply chain is complex, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified conflict-free, which could place us at a competitive disadva ntage if we are unabl e to do so. i th C om pli ance w marketing practices, and exclusion from such programs as a result of a violation of these laws could have a material ad u lati ons g ov erni ng th e h ealth care i nd restri ct ou r sales and th e m any law s and v erse effect on ou r b u stry cou ld u si ness. reg Once our products are sold, we must comply with various U.S. federal and state laws, rules and regulations pertaining ck laws and phys ician self -ref erral laws, rules to healthcare f raud and abus e, including f alse claims laws, anti-ki ck and regulations. Violations of the fraud and abuse laws are punishable by criminal and civil sanctions, including, in some instances, exclusion f rom participation in f ederal and state healthcare programs, including M edicaid, Veterans Administration health programs, workers’ compensation programs and TRICARE. Compliance with these laws could restrict our sales and marke ting practices, and exclusion f rom such programs as a result of a vi olation of these laws could have a material adve rse ef f ect on our bus iness. edicare, M ba Anti-Kickback Statutes The f ederal A nti-Kick payi ng remuneration, directly or indirectly , in exchange f or or to induce: ck Statute prohibi ts persons f rom know ingly or willf ully soliciting, receivi ng, of ba f ering or • the ref erral of an indivi dual f or a servi ce or product f or which paym ent may be made b y edicare, edicaid or other gove rnment-sponsored healthcare program; or • purchasing, ordering, arranging f or, or recommending the ordering of , any servi ce or product f or which paym ent may be made b y a gove rnment-sponsored healthcare program. b ack Statute is b road and prohib its many arrangements and practices that are lawf ul in b usinesses outside of The A nti-Kick the healthcare industry. The statutory penalties for violating the Anti-Kickback Statute include imprisonment for up to five years and criminal fines of up to $25,000 per violation. In addition, through application of other laws, conduct that violates the A nti-Kick b ack Statute can also giv e rise to False Claims A ct lawsuits, civ il monetary penalties and possib le exclusion from Medicare and Medicaid and other federal healthcare programs. In addition to the Federal Anti-Kickback Statute, many states hav e their own anti-k ick b ack laws. Of ten, these laws closely f ollow the language of the f ederal law, although they do not always have the same scope, exceptions, safe harbors or sanctions. In some states, these anti-kickback laws apply not only to pay ment made b y a gov ernment health care program b ut also with respect to other pay ers, including commercial insurance companies. Government officials have focused recent kickback enforcement efforts on, among other things, the sales and marketing activ ities of healthcare companies, including medical dev ice manuf acturers, and recently hav e b rought cases against f ered unlawf ul inducements to potential or existing customers in an indiv iduals or entities with personnel who allegedly of y healthcare companies attempt to procure their b usiness. This trend is expected to continue. Settlements of these cases b have involved significant fines and/or penalties and in some instances criminal plea or deferred prosecution agreements. 17 y M M Our relationships with healthcare providers and our marketing practices are subject to the federal Anti-Kickback Statute and similar state laws. b ack Statute can b e v iolated if “ one purpose” of a pay ment is to induce ref errals. The A nti-Kick We are subject to the federal Anti-Kickback Statute, which prohibits the knowing and willful offer, payment, solicitation or receipt of any f orm of “ remuneration” in return f or, or to induce, the ref erral of b usiness or ordering of serv ices paid f or b M edicare or other f ederal programs. “ Remuneration” has b een b roadly interpreted to mean any thing of v alue, including, f or example, gif ts, discounts, credit arrangements, and in-k ind goods or serv ices, as well as cash. Certain f ederal courts hav e held that the A nti-Kick Statute is b road and prohib its many arrangements and practices that are lawf ul in b usinesses outside of the healthcare industry. Violations of the Anti-Kickback Statute can result in imprisonment, civil or criminal fines or exclusion from b ack Statute. M edicare and other gov ernmental programs. M any states hav e adopted laws similar to the f ederal A nti-Kick Some of these state prohib itions apply to ref erral of patients f or healthcare items or serv ices reimb ursed b y any pay or, not only the M edicare and M edicaid programs. A dditionally , we could b e sub j ect to priv ate actions b rought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions which, among other things, allege that our practices or relationships b ack Statute. The False Claims A ct imposes liab ility on any person or entity who, among other things, v iolate the A nti-Kick y a f ederal healthcare program. The k nowingly presents, or causes to b e presented, a f alse or f raudulent claim f or pay ment b qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought by private individuals has increased dramatically. In addition, various states have enacted f alse claim laws analogous to the False Claims A ct. M any of these state laws apply where a claim is sub mitted to any third party pay or and not merely a f ederal healthcare program. b ack lthough we hav e attempted to structure our mark eting initiativ es and b usiness relationships to comply with the A nti- Kick b ack Statute, we cannot assure y ou that we will not hav e to def end against alleged v iolations f rom priv ate or pub lic entities or that the Office of Inspector General or other authorities will not find that our marketing practices and relationships violate the statute. If we are found to have violated the Anti-Kickback Statute or a similar state statute, we may be subject to civil and criminal penalties, including exclusion from the Medicare or Medicaid programs, or may be required to enter into settlement agreements with the government to avoid such sanctions. Typically, such settlement agreements require substantial payments to the government in exchange for the government to release its claims, and may also require us to enter into a Corporate Integrity Agreement. Physician Self-Referral Laws . The Stark edicare and M know n as the “ Stark L aw,” prohibi ts, sub j ect to certain The f ederal ba n on phys ician self -ref errals, commonly exceptions, phys ician ref errals of M edicaid patients to an entity provi ding certain “ designated health services” if the physician or an immediate family member of the physician has any financial relationship with the entity L aw also prohibi ts the entity receivi ng the ref erral f rom bi lling f or any good or servi ce f urnished pursuant to an unlawf ul ref erral, and any person collecting any amounts in connection with an unlawf ul ref erral is person who engages in a scheme to circumve nt the Stark L aw’ s ref erral prohibi tion obl igated to ref und these amounts. A may be fined up to $100,000 for each such arrangement or scheme. The penalties for violating the Stark Law also include civi l monetary penalties of up to $15,000 per servi ce, could result in denial of paym ent, disgorgements of reimbur sement receive d under a non-compliant agreement, and possibl e exclusion f rom medicare, M edicaid or other federal healthcare programs. In addition to the Stark Law, many states have their own self-referral laws. Often, these laws closely f ollow the language of the f ederal law, although they do not always have the same scope, exceptions, saf e harbors or sanctions. In some states these self-referral laws apply not only to payment made by a federal health care program but also with respect to other payers, including commercial insurance companies. In addition, some state laws require physicians to disclose any financial interest they may have with a healthcare provider to their patients when ref erring patients to that provi der eve n if the ref erral itself is not prohibi ted. If we fail to comply with federal and state physician self-referral laws and regulations as they are currently interpreted or may be interpreted in the future, or if other legislative restrictions are issued, we could incur a significant loss of revenue and be subject to significant monetary penalties, which could have a material adverse effect on our business, financial condition and results of operations. We are subject to federal and state laws and regulations that limit the circumstances under which physicians who have a financial relationship with entities that furnish certain specified healthcare services may refer to such entities for the provi sion of such servi ces, including clinical labor atory servi ces, radiology and other imaging servi ces and certain other diagnostic servi ces. These laws and regulations also prohibi t such entities f rom bi lling f or servi ces prov ided in vi olation of the laws and regulations. We have financial relationships with physicians in the form of equipment leases and services arrangements. While we be lieve our arrangements with phys icians are in material compliance with applicabl e laws and regulations, gove rnment 18 y A authorities might tak e a contrary position or prohibi ted ref errals may occur. Further, be cause we cannot be certain that we will have know ledge of all phys icians who may hold an indirect ownership interest, ref errals f rom any such phys icians may c ause us to vi olate these laws and regulations. Violation of these laws and regulations may result in the prohibition of payment for services rendered, significant fines and penalties, and exclusion from Medicare, Medicaid and other federal and state healthcare programs, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, expansion of our operations to new j urisdictions, new interpretations of laws in our existing j urisdictions, or new physician self-referral laws could require structural and organizational modifications of our relationships with physicians to comply with those jurisdictions’ laws. Such structural and organizational modifications could result in lower profitability and failure to achieve our growth objectives. False Claims Laws The f ederal False Claims A ct, or FCA , prohibi ts any person f rom know ingly presenting, or causing to be presented, a f alse claim or know ingly maki ng, or causing to made, a f alse statement to obt ain paym ent f rom the f ederal gove rnment. Those found in violation of the FCA can be subject to fines and penalties of three times the damages sustained by the government, plus mandatory civil penalties of between $5,000 and $10,000 (adjusted for inflation) for each separate false claim. Actions filed under the FCA can be brought by any individual on behalf of the government, a “qui tam” action, and this indivi dual, know n as a “ relator” or, more commonly , as a “ whistlebl ower,” may share in any amounts paid by the entity to the government in damages and penalties or by way of settlement. In addition, certain states have enacted laws modeled after the FCA, and this legislative activity is expected to increase. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies, including medical device manuf acturers, to def end f alse claim actions, pay damages and penalties or be excluded f rom M edicaid or other f ederal or state healthcare programs as a result of inve stigations arising out of such actions. edicare, M Increased Regulatory Scrutiny of Relationships with Healthcare Providers Certain state gove rnments and the f ederal gove rnment have enacted legislation, including the P hys ician P aym ents f ordabl e Care A ct, aimed at increasing transparency Sunshine A ct provi sions under the Federal P atient P rotection and A of our interactions with healthcare providers. As a result, we are required by law to disclose payments, gifts, and other transf ers of va lue to certain healthcare provi ders in certain states and to the f ederal gove rnment. A ny f ailure to comply with these legal and regulatory requirements could result in a range of fines, penalties, and/or sanctions, and could affect our business. In addition, we have devoted and will continue to devote substantial time and financial resources to deve lop and implement enhanced structure, policies, sys tems and processes to comply with these enhanced legal and regulatory requirements, which may also impact our business. Third-Party Reimbursement Because we expect to receive payment for our products directly from our customers, we do not anticipate relying edicaid, commercial health directly on paym ent f or any of our products f rom third-party paye rs, such as M insurers and managed care companies. H oweve r, our bus iness will be af f ederal f ected b edicaid, as well as priva te paye rs, which of ten f ollow and state gove rnmental authorities, such as M the cove rage policies of these publ ic programs. Such policies may af f ect which products customers purchase and the prices they are willing to pay f or those products in a particular j urisdiction. For example, our bus iness will be indirectly impacted b the abi lity of a hospital or medical f acility to obt ain cove rage and third-party reimbur sement f or y procedures perf ormed using our products. These third-party paye rs may deny cov erage if they determine that a devi ce f ective treatment methods, used in a procedure was not medically necessary , was not used in accordance with cost-ef as determined by the third-party payer, or was used for an unapproved indication. They may also pay an inadequate amount f or the procedure which could cause healthcare provi ders to use a lower cost competitor’ s devi ce or perf orm a medical procedure without our devi ce. edicare, M y cove rage policies adopted b edicare and M Reimbur sement decisions b paye r’ s determination that use of a product is: y particular third-party paye rs depend upon a numbe r of f actors, including each third-party a covered benefit under its health plan; appropriate and medically necessary for the specific indication; cost ef • • • • neither experimental nor inve stigational. f ective ; and any third-party paye rs use cove rage decisions and paym ent amounts determined b edicare and Medicaid Services, or CMS, which administers the U.S. Medicare program, as guidelines in setting their coverage the Centers f or M y 19 f y M and reimbur sement policies. M edicare periodically revi ews its reimbur sement practices f or va rious products. A s a result, there is no certainty as to the future Medicare reimbursement rate for our products. In addition, those third- party paye rs that do not f ollow the CM S guidelines may adopt dif f erent cove rage and reimbur sement policies f or our current and future products. It is possible that some third-party payers will not offer any coverage for our current or f uture products. In May 2015, the Company announced that one of the regional Medicare Administrative Contractors instructed physicians to report CPT code (17999) rather than the established CPT code (0182T) for electronic brachytherapy for treatment of NMSC. This announcement resulted in a significant disruption in our Therapy segment as a result of the reimbursement uncertainty. Revenues for the years ended December 31, 2015 and December 31, 2016 were negatively impacted as a result of the uncertainty. For a further discussion, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations. Furthermore, the healthcare industry in the United States is increasingly focused on cost containment as government and priv ate insurers seek to control healthcare costs b y imposing lower pay ment rates and negotiating reduced contract rates with third-party payers. If third-party payers deny coverage or reduce their current levels of payment, or if our production costs increase faster than increases in reimbursement levels, we may be unable to sell our products on a profitable basis. H ealth care reform leg slati on i n th e U ni ted S tates m ay ad ve rsely affect ou r b u si ness and / or resu lts of operati ons. In March 2010, significant reforms to the U.S. healthcare system were adopted in the form of the Patient Protection and Affordable Care Act (the “PPACA”). The PPACA includes provisions that, among other things, reduce and/or limit Medicare reimbursement, require all individuals to have health insurance (with limited exceptions) and impose new and/or increased taxes. Specifically, beginning in 2013, the medical device industry was required to subsidize healthcare reform in the form of a 2.3% excise tax on United States sales of most medical devices. In December 2015, as part of the Omnibus Appropriations Act, collection of the medical device excise tax was suspended for 2016 and 2017. We are unable to predict whether the postponement will be continued beyond 2017. While the PPACA is intended to expand health insurance coverage to uninsured persons in the United States, other elements of this legislation, such as Medicare provisions aimed at improving quality and decreasing costs, comparative effectiveness research, an independent paym ent advi sory bo ard, and pilot programs to eva luate alternative paym ent methodologies, make it difficult to determine the overall impact on sales of, and reimbursement for, our products. We are unable to predict what additional legislation or regulation relating to the health care industry or third-party cove rage and reimbur sement may be enacted in the f uture or what ef f ect such legislation or regulation would have on our bu siness. A ny cost containment measures or other health care sys tem ref orms that are adopted could have a material and adve rse ef f ect on our abi lity t o commercializ e our existing and f uture products successf ully Healthcare industry consolidation could impose pressure on our prices, reduce potential customer base and red u ce d em and s for ou r sys tem s. any hospitals and imaging centers hav e consolidated to create larger healthcare enterprises with greater marke t and purchasing power. If this consolidation trend continues, it could reduce the size of our potential customer base and give the resulting enterprises greater ba rgaining or purchasing power, which may lead to erosion of the prices f or our systems or decreased margins for our systems. In addition, when hospitals and imaging centers combine, they often consolidate inf rastructure, and consolidation of our customers could result in f ewer ove rall customers. u r prod u cts and m anu factu ri ng faci li ti es are subject to extensive regulation with potentially significant costs for com pli ance. Our CAD systems for the computer aided detection of cancer and Axxent eBx systems are medical devices subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act. In addition, our manuf acturing operations are subject to FDA regulation and we are also subject to FDA regulations covering labeling, adverse event reporting, and the FDA’s general prohibition against promoting products for unapproved or off-label uses. Our f ailure to f ully comply with applicabl e regulations could result in the issuance of warning letters, non-approva ls, suspensions of existing approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions, inj unctions, and criminal prosecution. Moreover, unanticipated changes in existing regulatory requirements or adoption of new requirements could increase our application, operating and compliance burdens and adversely affect our business, financial condition and results of operations. Sales of our products in certain countries outside of the U.S. are also sub j ect to extensive regulatory approva ls. Obtaining and maintaining foreign regulatory approvals is an expensive and time consuming process. We cannot be certain that we will be abl e to obt ain the necessary regulatory approva ls timely or at all in any f oreign country in which 20 i . M O we plan to market our CAD products and Axxent eBx systems, and if we fail to receive such approvals, our ability to generate revenue may be significantly diminished. e m ay not b e ab le to ob tai n reg latory approval for any of th e oth er prod u cts th at w e m ay consi d er d eve lopi ng We have received FDA approvals for our currently offered products. Before we are able to commercialize any new yi ng these product, we must obt ain regulatory approva ls f or each indicated use f or that product. The process f or satisf regulatory requirements is lengthy and costly and will require us to comply with complex standards for research and development, clinical trials, testing, manufacturing, quality control, labeling, and promotion of products. u r prod u cts m ay b e recalled eve n after w e h ave recei ve d F or oth er gove rnm ental approval or clearance. If the safety or efficacy of any of our products is called into question, the FDA and similar governmental authorities in other countries may require us to recall our products, even if our product received approval or clearance by the FDA or a similar governmental body. Such a recall would divert the focus of our management and our financial resources and f ect our reputation with customers and our financial condition and results of operations. could materially and adv ersely af e m ay b e su i nal or ci and disclosure of sensitive personally identifiable information. l sancti ons i f w e fai l to com ply w j ect to cri i th pri vac y reg lati ons regar d i ng th e u se Numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability and integrity of personally identifiable information personally identifiable information, including The Health Insurance Portability and Accountability Act of 1996, as amended, and the regulations that have been issued thereunder (“HIPAA”). In the provision of services to our customers, we and our third party vendors may collect, use, maintain and transmit patient health inf ormation in way s that are sub j ect to many of these laws and regulations. Our customers are covered entities, and we are a business associate of our customers under HIPAA as a result of our contractual obligations to perform certain functions on behalf of and provide certain services to those customers. If we or any of our subcontractors experience a breach of the privacy or security of patient information, the breach reporting requirements and the liability for business associates under HIPAA could result in substantial financial liability and reputational harm. Federal and state consumer laws are being applied increasingly by the Federal Trade Commission (FTC) and state attorneys general to regulate the collection, use and disclosure of personal or patient health inf ormation, through web sites or otherwise, and to regulate the presentation of web site content. Numerous other federal and state laws protect the confidentiality, privacy, availability, integrity and security of personally identifiable information. These laws in many cases are more restrictive than, and not preempted by, HIPAA and may be subject to varying interpretations y courts and gove rnment agencies, creating complex compliance issues f or us and our customers and potentially exposing us to additional expense, adverse publicity and liability. We may not remain in compliance with the diverse privacy requirements in all of the jurisdictions in which we do business. HIPAA and federal and state laws and regulations may require users of personally identifiable information to implement specified security measures. Evolving laws and regulations in this area could require us to incur significant additional costs to re-design our products in a timely manner to reflect these legal requirements, which could have an adverse impact on our results of operations. New personally identifiable information standards, whether implemented pursuant to HIPAA, congressional action or otherwise, could have a significant effect on the manner in which we must handle healthcare related data, and the cost of complying with standards could be significant. If we do not properly comply with existing or new laws and regulations related to patient health inf ormation, we could be sub j ect to criminal or civi l sanctions. If our security measures are breached or fail and unauthorized access is obtained to a customer’s data, our service may be reduced, and we be perceive d as insecure, the attractive ness of our servi ces to current or potential customers may may incur significant liabilities. Our servi ces invol ve the storage and transmission of customers’ proprietary inf ormation and patient inf ormation, including health, financial, payment and other personal or confidential information. We rely on proprietary and f or commercially ava ilabl e sys tems, sof tware, tools and monitoring, as well as other processes, to provi de security processing, transmission and storage of such information. Because of the sensitivity of this information and due to requirements under applicable laws and regulations, the effectiveness of such security efforts is very important. If our security measures are br eached or f ail as a result of third-party action, employe e error, malf easance or otherwise, someone may be able to obtain unauthorized access to customer or patient data. Improper activities by third-parties, adva nces in computer and sof tware capabi lities and encrypt ion technology , new tools and discove ries and other eve nts 21 W u . O D A W b m v i u b or developments may facilitate or result in a compromise or breach of our computer systems. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, and we may be unable to anticipate these techniques or fail to implement adequate preventive measures. Our security measures may not be effective in preventing such unauthorized access. If a breach of our security occurs, we could f ace damages f or contract br each, penalties f or vi olation of applicabl e laws or regulations, possibl e lawsuits by individuals affected by the breach and significant remediation costs and efforts to prevent future occurrences. In f ective ness of addition, whether there is an actual or a perceive d br each of our security , the marke t perception of the ef our security m easures could be harmed and we could lose current or potential customers. Our effective tax rate may fluctuate and we may incur obligations in tax jurisdictions in excess of amounts that h ave b een accru ed . As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. In preparing our financial statements, we record the amount of tax payable in each of the countries, states and other jurisdictions in which we operate. Our f uture ef f ectiv e tax rate, howev er, may b e lower or higher than prior y ears due to numerous f actors, including a change in our geographic earnings mix, changes in the measurement of our def erred taxes, and recently enacted and future tax law changes in jurisdictions in which we operate. We are also subject to ongoing tax audits in v arious j urisdictions, and tax authorities may disagree with certain positions we hav e tak en and assess additional taxes. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations, which could adversely affect our business, results of operations and cash flows. h ange s i n i nterpretati on or appli cati on of G enerally A ccepted A ccou nti ng Pri nci ples m ay ad ve rsely affect ou r operati ng r esu lts We prepare our financial statements to conform to GAAP. These principles are subject to interpretation by the Financial Accounting Standards Board (“FASB”), American Institute of Certified Public Accountants, the SEC and various other regulatory or accounting bodi es. A change in interpretations of , or our application of , these principles can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. In addition, when we are required to adopt new accounting standards, our methods of accounting for certain items may change, which could cause our results of operations to fluctuate from period to period and make it more difficult to compare our financial results to prior periods. As our operations evolve over time, we may introduce new products or new technologies that require us to apply f erent accounting principles, including ones regarding reve nue recognition, than we have applied in past periods. dif The application of different types of accounting principles and related potential changes may make it more difficult to compare our financial results from quarter to quarter, and the trading price of our common stock could suffer or be come more vol atile as a result. u r recent acq i si ti ons i nvol v e ri sk s. We have recently completed acquisitions and we may make acquisitions in the future. Such transactions involve numerous risks , including possibl e adve rse ef Some of the potential risks involved with acquisitions are the following: f ects on our operating results or the marke t price of our common stock . • • • • difficulty in realizing anticipated financial or strategic benefits of such acquisition; dive rsion of capital and potential dilution of stockhol der ownership; the risks related to increased indebtedness, as well as the risk such financing will not be available on satisf actory t erms or at all; dive rsion of management’ s attention and other resources f rom current operations, including potential strain on financial and managerial controls and reporting systems and procedures; • management of employe e relations across f acilities; • • • • difficulties in the assimilation of different corporate cultures and practices, as well as in the assimilation and retention of br oad and geographically di spersed personnel and operations; difficulties and unanticipated expenses related to the integration of departments, systems (including accounting systems), technologies, books and records, procedures and controls (including internal accounting controls, procedures and policies), as well as in maintaining uniform standards, including envi ronmental management sys tems; assumption of known and unknown liabilities, some of which may be difficult or impossible to quantify; inability to realize cost savings, sales increases or other benefits that we anticipate from such acquisitions, either as to amount or in the expected time frame; non-cash impairment charges or other accounting charges relating to the acquired assets; and • • maintaining strong relationships with our and our acquired companies’ customers after the acquisitions. 22 C O u If our integration efforts are not successful, we may not be able to maintain the levels of revenues, earnings or operating efficiency that we and the acquired companies achieved or might achieve separately. Our acquisitions may not result in the benefits and revenue growth we expect. We integrate companies that we acquire and including the operations, services, products and personnel of each company within our management policies, procedures and strategies. We cannot be sure that we will achieve the benefits of revenue growth that we expect from these acquisitions or that we will not incur unforeseen additional costs or expenses in connection with these acquisitions. To effectively manage our expected future growth, we must continue to successf ully manage our integration of these companies and continue to improve our operational sys tems, internal procedures, working capital management, and financial and operational controls. If we fail in any of these areas, our bus iness could be adve rsely a f f ected. Our quarterly and annual operating and financial results and our gross margins are likely to fluctuate significantly in future periods. Our quarterly and annual operating and financial results are difficult to predict and may fluctuate significantly from period to period. Our reve nue and results of operations may fluctuate as a result of a variety of factors that are outside of our control including, but not limited to, general economic conditions, the timing of orders from our OEM partners, our OEM partners ability to manufacture and ship their digital mammography systems, our timely receipt by the FDA for the clearance to market our products, our ability to timely engage other OEM partners for the sale of our products, the timing of product enhancements and new product introductions b us or our competitors, the pricing of our products, changes in customers’ budge ts, competitive conditions and the possibl e def erral of reve nue under our reve nue recognition policies. y h e m ark ets for m any of ou r prod u cts are su j ect to ch ang i ng t ech nolog j ect to changing technology , new product introductions and product The marke ts f or many products we sell are sub enhancements, and evol vi ng industry standards. The introduction or enhancement of products embodyi ng new technology or the emergence of new industry standards could render our existing products obs olete or result in short product lif e cyc les or our inability to sell our products without offering a significant discount. A ccordingly , our abi lity to compete is in part dependent on our abi lity t o continually of f er enhanced and improve d products. If we are unable to successfully introduce new technology solutions or services or fail to keep pace with advances in technology, our business, financial condition and results of operations will be adversely affected. Our b usiness depends on our ab ility to adapt to ev olv ing technologies and industry standards and introduce new technology solutions and services accordingly. If we cannot adapt to changing technologies, our technology solutions and services may become obsolete, and our business would suffer. Because the healthcare information technology market is constantly evolving, our existing Radion technology may become obsolete and fail to meet the requirements of current and potential customers. Our success will depend, in part, on our ab ility to continue to enhance our existing technology solutions and serv ices, dev elop new technology that addresses the increasingly sophisticated and v aried needs of our customers, and respond to technological adv ances and emerging industry standards and practices on a timely and cost- effective basis. The development of our proprietary technology entails significant technical and business risks. We may not b e successf ul in dev eloping, using, mark eting, selling, or maintaining new technologies ef f ectiv ely or adapting our proprietary Radion technology to evolving customer requirements or emerging industry standards, and, as a result, our business and reputation could suffer. We may not be able to introduce new technology solutions on schedule, or at all, or such solutions may not achiev e mark et acceptance. M oreov er, competitors may dev elop competitiv e products that could adv ersely af y us to introduce new products or to introduce these products on schedule could have an adverse effect on our business, financial condition and results of operations. f ect our results of operations. A f ailure b We depend upon a limited number of suppliers and manufacturers for our products, and certain components nu i n ou r prod b er of su ppli ers. a sole or li u cts m ay b le from e avai i ted lab y a limited numbe r of Our products are generally either manuf actured and assembl ed f or us b manuf acturers or assembl ed b us f rom supplies we obt ain f rom a limited numbe r of suppliers. Critical components required to manufacture our products, whether by outside manufacturers or directly by us, may be available from a sole or limited number of component suppliers. We generally do not have long-term arrangements with any of our impair our abi lity manuf acturers or suppliers. The loss of a sole or ke y manuf acturer or supplier could materially to delive r products to our customers in a timely manner and would adve rsely af f ect our sales and operating results. Our business would be harmed if any of our manufacturers or suppliers could not meet our quality and performance specifications and quantity and delivery requirements. a sole manuf acturer, b y y 23 T b y . m m e d i stri u te ou r prod u cts i n h ly c om peti ti ve m ark ets and ou r sales m ay su ffer as a resu lt. We operate in highly competitive and rapidly changing markets that contain competitive products available from nationally and internationally recognized companies. Many of these competitors have significantly greater financial, technical and human resources than us and are well established. In addition, some companies have developed or may deve lop technologies or products that could compete with the products we manuf acture and distribut e or that would render our products obsolete or noncompetitive. In addition, our competitors may achieve patent protection, regulatory approva l, or product commercializ ation that would limit our abi lity to compete with them. These and other competitive pressures could have a material adve rse ef f ect on our bus iness. i sru pti ons i n serv i ce or d am age to ou r th i rd - party prov d ers’ d ata centers cou ld ad ve rsely affect ou r b u si ness. We rely on third-parties who provide access to data centers. Our information technologies and systems are vulnerable to damage or interruption from various causes, including (i) acts of God and other natural disasters, war and acts of terrorism and (ii) power losses, computer systems failures, internet and telecommunications or data network failures, operator error, losses of and corruption of data and similar events. We conduct business continuity planning according and work with our third-party providers to protect against fires, floods, other natural disasters and general business interruptions to mitigate the adve rse ef f ects of a disruption, relocation or change in operating envi ronment at the data centers we utilize. In addition, the occurrence of any of these events could result in interruptions, delays or cessations in servi ce to our customers. A ny of these eve nts could impair or prohibi t our abi lity to provi de our servi ces, reduce the attractiveness of our services to current or potential customers and adversely impact our financial condition and results of operations. In addition, despite the implementation of security measures, our infrastructure, data centers, or systems that we interface with, including the Internet and related systems, may be vulnerable to physical break-ins, hackers, improper employe e or contractor access, computer vi ruses, programming errors, denial-of -servi ce attacks or other attacks b third-parties seeki ng to disrupt operations or misappropriate inf ormation or similar phys ical or electronic br eaches of security . A ny of these can cause sys tem f ailure, including network, sof tware or hardware f ailure, which can result in service disruptions. As a result, we may be required to expend significant capital and other resources to protect against security br eaches and hacke rs or to allevi ate probl ems caused b uch br eaches. y s y If our products fail to perform properly due to errors or similar problems, our business could suffer. Complex sof tware, such as our Radion sof tware, may contain def ects or errors, some of which may remain undetected for a period of time. It is possible that such errors may be found after the introduction of new software or enhancements to existing software. We continually introduce new solutions and enhancements to our solutions, and, despite testing by us, it is possible that errors may occur in our software. If we detect any errors before we introduce a solution, we might have to delay deployment for an extended period of time while we address the problem. If we do not discover f ect our new or current solutions or enhancements until af ter they are deploye d, we would need sof tware errors that af to provide enhancements to correct such errors. Errors in our software could result in: • • • • • • • • harm to our reputation; lost sales; delays in commercial releases; product liabi lity c laims; delays in or loss of marke t acceptance of our solutions; license terminations or renegotiations; unexpected expenses and dive rsion of resources to remedy e rrors; and priva cy a nd security vul nerabi lities. Furthermore, our customers might use our sof tware together with products f rom other companies or those that they have developed internally. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, dive rt the attention of our technical personnel f rom our solution deve lopment ef f orts; impact our reputation and cause significant customer relations problems. We cannot be certain of the future effectiveness of our internal controls over financial reporting or the impact of th e sam e on ou r operati ons or th e m ark et pri ce for ou r com m on stock P ursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our A nnual Report on Form 10-K our assessment of the effectiveness of our internal controls over financial reporting. We have dedicated a significant amount of time and resources to ensure compliance with this legislation for the year ended December 31, 24 W b i g h D i . 2016 and will continue to do so for future fiscal periods. Although we believe that we currently have adequate internal control procedures in place, we cannot be certain that future material changes to our internal controls over financial reporting will be effective. If we cannot adequately maintain the effectiveness of our internal controls over financial reporting, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and the market price of our common stock. An inability to meet the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 could adversely affect investor confidence and, as a result, our stock price. We are required to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Although we implemented procedures to comply with the requirements of Section 404, there is no assurance that we will continue to meet the requirements. Failure to meet the ongoing requirements of Section 404, our inability to comply with Section 404’s requirements, and the costs of ongoing compliance could have a material adverse effect on investor confidence and our stock price. Our future prospects depend on our ability to retain current key employees and attract additional qualified personnel. Our success depends in large part on the continued service of our executive officers and other key employees. We may not be able to retain the services of our executive officers and other key employees. The loss of executive officers or other ke y pe rsonnel could have a material adv erse ef f ect on us. In addition, in order to support our continued growth, we will be required to effectively recruit, develop and retain additional qualified personnel. If we are unable to attract and retain additional necessary personnel, it could delay or hinder our plans f or growth. Competition f or such personnel is intense, and there can be no assurance that we will be able to successfully attract, assimilate or retain sufficiently qualified personnel. The failure to retain and attract necessary personnel could have a material adverse effect on our business, financial condition and results of operations. Our international operations expose us to various risks, any number of which could harm our business. Our revenue from sales outside of the United States represented approximately 9% of our revenue for 2016. We are sub j ect to the risks inherent in conducting bu siness across national bounda ries, any one of which could adve rsely impact our business. In addition to currency fluctuations, these risks include, among other things: economic downturns; changes in or interpretations of local law, gove rnmental policy or regulation; restrictions on the transf er of f unds into or out of the country va ryi ng tax sys tems; and gove rnment protectionism. One or more of the f oregoing f actors could impair our current or f uture operations and, as a result, harm our ove rall bus iness. h e m ark et pri ce of ou r com m on stock h as b een, and m ay conti nu e to b e, vol ati le w i ch cou ld red u ce th e m ark et pri ce of ou r com m on stock The publ icly traded shares of our common stock have experienced, and may experience in the future, significant price and volume fluctuations. This marke t vol atility could reduce the marke t price of our common stock without regard to our operating performance. In addition, the trading price of our common stock could change significantly in response to actual or anticipated variations in our quarterly operating results, announcements by us or our competitors, factors f ecting the medical imaging industry generally , changes in national or regional economic conditions, changes in af securities analys ts’ estimates f or us or our competitors’ or industry ’ s f uture perf ormance or general marke t conditions, making it more difficult for shares of our common stock to be sold at a favorable price or at all. The marke t price of general marke t price declines or marke t vol atility in the f uture or f uture our common stock could also be reduced b declines or vol atility i n the prices of stocks f or companies in our industry y A substantial number of shares of our common stock are eligible for future sale, and the sale of shares of common stock into the market, or the perception that such sales may occur, may depress our stock price. Sales of subs tantial additional shares of our common stock in the publ ic marke t, or the perception that these sales may occur, may significantly lower the market price of our common stock. We are unable to estimate the amount, timing or nature of future sales of shares of our common stock. We have previously issued a substantial number of shares of common stock, which are eligible for resale under Rule 144 of the Securities Act of 1933, as amended, or the Securities Act, and may become freely tradable. We have also registered shares that are issuable upon the exercise of options and warrants. If holders of options or warrants choose to exercise their securities and sell shares of common stock issued upon the exercise in the publ ic marke t, or if holders of currently restricted common stock choose to sell such shares of common stock in the public market under Rule 144 or otherwise, or attempt to publicly sell such shares all at once or in a short time period, the preva iling marke t price f or our common stock m ay de cline. 25 ; T h . . Future issuances of shares of our common stock may cause significant dilution of equity interests of existing h old ers of com d ecrease th e m ark et pri ce of sh ares of ou r com m on stock m on stock and We have previously issued options that are exercisable into a significant number of shares of our common stock. Should existing holders of options exercise their securities into shares of our common stock, it may cause significant dilution of equity interests of existing holders of our common stock and reduce the market price of shares of our common stock si ons i n ou r corporate ch arter and Prov acquire us, discourage a takeover and adversely affect existing stockholders. i n D elaw are law cou ld make it more difficult for a third party to be issued in one or more series, the terms of which may Our certificate of incorporation authorizes the Board of Directors to issue up to 1,000,000 shares of preferred stock. The pref erred stock may be determined at the time of issuance by our Board of Directors, without further action by stockholders, and may include, among other things, voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, lthough there are currently no shares of pref erred conve rsion and redemption rights, and sinki ng f und provi sions. A stock outstanding, f uture holders of pref erred stock may have rights superior to our common stock and such rights could also be used to restrict our abi lity t o merge with, or sell our assets to a third party We are also sub us f rom engaging in a “ date such person acquired that status unless appropriate board or stockholder approvals are obtained. These provi sions could deter unsolicited take ove rs or delay or preve nt changes in our control or management, including transactions in which stockhol ders might otherwise receive a premium f or their shares ove r the then current marke t price. These provi sions may also limit the abi lity of stockhol ders to approve transactions that they may deem to be in their be st interests. j ect to the provisions of Section 203 of the Delaware G eneral Corporation L aw, which could preve nt bus iness combi nation” with a 15% or greater stockhol der” f or a period of three ye ars f rom the I tem 1 . U nresolve d S taff C om m ents. Not applicable Item 2. Properti es. The Company’s executive offices are leased pursuant to a five-year lease (the “Lease”) that commenced on December 15, 2006, with renewals in January, 2012, and August 2016 consisting of approximately 11,000 square feet of office space located at 98 Spit Brook Road, Suite 100 in Nashua, New Hampshire (the “Premises”). The August 2016 Lease renewal provides for an annual base rent of $184,518 for the period from March 2017 to February 2020. Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses and obtain insurance f or the P remises. The Company leases a facility consisting of approximately 24,350 square feet of office, manufacturing and warehousing space located at 101 Nicholson Lane, San Jose, CA. The operating lease commenced September 2012 with a current annual payment of $295,140 through September 2017, with all amounts payable in equal monthly installments. In September 2016, the Company extended this lease for the period from October 2017 to March 2020 with annual payments of $540,588 from October 2017 to September 2018, $558,120 from October 2018 to September 2019 and $286,368 for the period from October 2019 to March 2020, with all amounts payable in equal monthly installments. Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses and obt ain insurance f or the f acility In addition to the foregoing leases relating to its principal properties, the Company also has a lease for an additional facility in Nashua, New Hampshire used for product repairs, manufacturing and warehousing. If the Company is required to seek additional or replacement facilities, it believes there are adequate facilities available at commercially r easonabl e rates. I tem 3 L egal Proceed i ngs . may be a party to va rious legal proceedings and claims arising out of the ordinary course of its bu siness. The Company Although the final results of all such matters and claims cannot be predicted with certainty, the Company currently be lieve s that there are no current proceedings or claims pending against it of which the ultimate resolution would have a material adverse effect on its financial condition or results of operations. However, should we fail to prevail in any legal matter or should seve ral legal matters be resolve d against us in the same reporting period, such matters could have a material adverse effect on our operating results and cash flows for that particular period. In all cases, at each 26 . . i . B . . reporting period, the Company eva luates whether or not a potential loss amount or a potential range of loss is proba bl e and reasonably estimable under ASC 450, Contingencies. Legal costs are expensed as incurred. I tem 4 i ne S afety D i sclosu res. Not applicable. I tem 5 . PA I Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Eq ecu ri ti es. i ty S The Company’s common stock is traded on the NASDAQ Capital Market under the symbol “ICAD”. The following table sets forth the range of high and low sale prices for each quarterly period during 2016 and 2015. Fiscal y ear ended D ecemb er 31, 2016 First Q uarter Second Q uarter Third Q uarter Fourth Q uarter Fiscal y ear ended D ecemb er 31, 2015 First Q uarter Second Q uarter Third Q uarter Fourth Q uarter H igh L ow $ 5. 24 6. 23 6. 49 5. 49 $ 06.3 4. 60 4. 51 2. 82 $ 11. 14 10. 86 4. 69 5. 41 $ 16.7 3. 22 2. 95 2. 96 As of February 21, 2017, there were 280 holders of record of the Company’s common stock. In addition, the Company believes that there are in excess of 3,700 holders of its common stock whose shares are held in “street name”. to date, and the Company does not expect to The Company has not paid any cash divi dends on its common stock pay cash divi dends in the f oreseeabl e f uture. Future divi dend policy will depend on the Company ’ s earnings, capital requirements, financial condition, and other factors considered relevant by the Company’s Board of Directors. There are no non-statutory r estrictions on the Company ’ s present abi lity t o pay di vi dends. See Item 12 of this Form 10-K for certain information with respect to the Company’s equity compensation plans in effect at December 31, 2016. Issuer’s Purchases of Equity Securities. For the maj ority of restricted stock units granted, the numbe r of shares issued on the date that the restricted stock units vest is net of the minimum statutory tax withholding requirements that we pay in cash to the appropriate taxing authorities on be half of our employe es. The Company had the f ollowing repurchases of securities in the quarter ended December 31, 2016: Month of purchase October 1 - October 31, 2016 November 1 - November 30, 2016 December 1 - December 31, 2016 Total Average price paid per share Total number of shares purchased (1) 13,016 $ 3.77 110 $ 3.70 - $ - 3.77 $ 13,126 Total number of shares purchased as part of publicly announced plans or programs $ - $ - $ - $ - Maximum dollar value of shares that may yet be purchaed under the plans or programs $ - $ - $ - $ - (1) Represents shares of common stock surrendered by employees to the Company to pay employee withholding taxes due upon the vesting of restricted stock. These transactions are exempt under Section (4)(a)(2) of the Securities Act. 27 . M R T I u Item 6. S elected F i nanci al D ata. The following selected consolidated financial data is not necessarily indicative of the results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K (amounts in thousands). S elected S tatem ent of O perati ons D ata Y ear End ed D ecem b er 3 Total Rev enue G ross margin G ross margin % Total operating expenses I ncome ( loss) f rom operations Other ( expense) income, net N et loss N et income ( loss) per share Basic iluted eighted av erage shares outstanding cisaB iluted S elected B alance S h eet D ata Cash and cash eq uiv alents Total current assets Total assets Total current liab ilities L ong term def erred rev enue N otes and lease pay ab le, long term Stock holders' eq uity $ $ $ $ $ 26,338 18,518 70. 3% 28,488 ( 9,970) ( 53) ( 10,099) 41,554 29,350 70. 6% 59,429 ( 30,079) ( 2,352) ( 32,447) 43,924 31,227 71. 1% 30,412 815 ( 1,671) ( 1,009) 33,067 23,085 69. 8% 24,861 ( 1,776) ( 5,706) ( 7,608) 28,275 20,031 70. 8% 25,443 ( 5,412) ( 3,919) ( 9,374) $ $ $ $ $ $ ( 0. 63) $ ( 2. 07) $ ( 0. 07) $ ( 0. 70) $ ( 0. 87) $ ( 0. 63) $ ( 2. 07) $ ( 0. 07) $ ( 0. 70) $ ( 0. 87) 239,51 15,932 686,51 15,686 690,41 14,096 10,842 10,842 10,796 10,796 A s of D ecem b er 3 $ $ $ $ $ 8,585 19,933 38,651 12,855 668 - 25,038 15,280 27,767 48,640 14,279 1,079 86 32,746 32,220 44,616 93,770 22,049 1,525 6,622 62,779 11,880 22,043 58,916 22,452 1,726 12,005 21,377 13,948 21,533 59,993 14,639 1,502 14,846 27,665 $ $ $ $ $ I tem 7 . M anage m ent’ s D R esu lts of O perati ons. i scu ssi on and A nalys i s of F i nanci al C ond i ti on and R esu lts of O perati ons ve rv i ew iCAD, Inc. is an industry-leading provider of advanced image analysis, workflow solutions and radiation therapy for the early identification and treatment of cancer. The Company reports in two segments –Cancer Detection (“Detection”) and Cancer Therapy (“Therapy”). The Company has grown primarily through acquisitions to become a broad player in the oncology market. In the Detection segment, the Company’s solutions include advanced image analysis and workflow solutions that enabl e healthcare prof essionals to be tter serve patients b yi ng pathologies and pinpointing the most preva lent cancers earlier, a comprehensive range of high-performance, upgradeable Computer-Aided Detection (CAD) systems and workflow solutions for mammography, Magnetic Resonance Imaging (MRI) and Computed Tomography (CT). identif y The Company intends to continue the extension of its superior image analys is and clinical decision support solutions for mammography, MRI and CT imaging. iCAD believes that advances in digital imaging techniques should bolster its efforts to develop additional commercially viable CAD/advanced image analysis and workflow products. 28 O 2 0 1 6 2 0 1 5 2 0 1 4 2 0 1 3 2 0 1 2 D W D 1 , 2 0 1 6 2 0 1 5 2 0 1 4 2 0 1 3 2 0 1 2 1 , In the Therapy segment the Company offers an isotope-free cancer treatment platform technology. The Xoft Electronic Brachytherapy System (“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 reve nue f or the sale of consumabl es and related accessories which will continue to drive growth in this segment. In May 2015 the Company announced that one of the regional Medicare Administrative Contractors instructed physicians to report CPT code (17999) rather than the established CPT code (0182T) for electronic brachytherapy for treatment of NMSC. This announcement resulted in a significant disruption in the Therapy segment as a result of the reimbur sement uncertainty . f actors, the Company f ederal and state gove rnmental authorities, such as M cove rage policies adopted A s the Company has noted in its risk edicaid, as well as priva te paye rs, which of ten y f ollow the cove rage policies of these publ ic programs. Such policies may af f ect which products customers purchase and the prices customers are willing to pay f or those products in a particular j urisdiction. The change in CP T codes f or the Company’s electronic brachytherapy treatment of NMSC had a negative impact on the Company’s revenues for the fiscal years ended December 31, 2015 and December 31, 2016 ’ s bu siness can be af edicare and M f ected b y In connection with the preparation of the financial statements for the second quarter ended June 30, 2015, the Company eva luated the Therapy reporting unit f or bot h long-live d asset and goodwill impairment. A s a result of this assessment, the Company recorded material impairment charges in the Therapy reporting unit (see Note h and Note i to the condensed consolidated financial statements for additional discussion). On April 29, 2015, pursuant to the terms of the Asset Purchase Agreement with VuComp, the Company purchased VuComp’s M-Vu Breast Density product for $1,700,000 in cash. In January 2016, the Company acquired the VuCOMP cancer detection portfolio, including the M-Vu® computer aided detection (CAD) technology platform. On December 16, 2016 the Company agreed to sell certain intellectual property relating to the VersaVue Software and the DynaCAD product and related assets to Invivo for $3,200,000 in cash with a holdback reserve of $350,000. On January 30, 2017, the Company closed this transaction. The Company’s headquarters are located in Nashua, New Hampshire, with manufacturing facilities in Nashua, New H ampshire and, an operations, research, deve lopment, manuf acturing and warehousing f acility in San J ose, Calif ornia. C ri ti cal A ccou nti ng Poli ci es The Company’s discussion and analysis of its financial condition, results of operations, and cash flows are based on its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates f ect the reported amounts of assets, liabi lities, reve nue and expenses, and related disclosure and j udgments that af of contingent assets and liabi lities. On an on-going ba sis, the Company eva luates these estimates, including those related to reve nue recognition, allowance f or doubt f ul accounts, inve ntory va luation and obs olescence, intangibl e assets, goodwill, warrants, income taxes, contingencies and litigation. A dditionally , the Company uses assumptions and estimates in calculations to determine stock- ba sed compensation and the va lue of warrants. The Company ba ses its estimates on historical experience and on va rious other assumptions that it be lieve s to be reasonabl e under the circumstances, the results of which f orm the ba sis f or maki ng j udgments about the carryi ng va lues of assets and liabi lities that are not readily apparent f rom other sources. A ctual results may dif f er f rom these estimates under dif f erent assumptions or conditions. The Company ’ s critical accounting policies include: Inventory; llowance f or doubt f ul accounts; - Reve nue recognition; - - - Valuation of long-lived and intangible assets; - - - G oodwill; Stock ba Income taxes. sed compensation; and 29 b A R eve nu e R ecogn i ti on The Company recogniz es reve nue primarily f rom the sale of products and f rom the sale of servi ces and supplies. Revenue is recognized when delivery has occurred, persuasive evidence of an arrangement exists, fees are fixed or determinabl e and collectabi lity of the related receiva bl e is proba bl e. For product reve nue, delive ry has occurred upon shipment provi ded title and risk of loss have passed to the customer. Servi ces and supplies reve nue are considered to be delive red as the servi ces are perf ormed or ove r the estimated lif e of the supply a greement. The Company recognizes revenue from the sale of its digital, film-based CAD and cancer therapy products and services in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”) and ASC Update No. 2009- 14, “Certain Arrangements That Contain Software Elements” (“ASU 2009-14”) and ASC 985-605, “Software” (“ASC 985-605”). Revenue from the sale of certain CAD products is recognized in accordance with ASC 840 “Leases” (“ASC 840”). For multiple element arrangements, revenue is allocated to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price to b e used f or allocating rev enue to deliv erab les as follows: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of the selling price (“BESP”). VSOE generally exists only when the deliverable is sold separately and is the price actually charged for that deliverable. The process for determining BESP for deliverables without VSOE or TPE considers multiple factors including relative selling prices; competitive prices in the marketplace, and management judgment; however, these may vary depending upon the unique facts and circumstances related to each deliverable. The Company uses customer purchase orders that are sub ’ s terms and conditions or, in the case of an Original Equipment Manufacturer (“OEM”) are governed by distribution agreements. In accordance with the Company’s distribution agreements, the OEM does not have a right of return, and title and risk of loss passes to the OEM upon shipment. The Company generally ships Free On Board shipping point and uses shipping documents and third-party proof of delivery to verify delivery and transfer of title. In addition, the Company assesses whether collection is proba bl e b considering a numbe r of f actors, including past transaction history with the customer and the y creditworthiness of the customer, as obt ained f rom third party c redit ref erences. j ect to the Company If the terms of the sale include customer acceptance provisions and compliance with those provisions cannot be demonstrated, all reve nue is def erred and not recogniz ed until such acceptance occurs. The Company considers all releva nt f acts and circumstances in determining when to recogniz e reve nue, including contractual obl igations to the customer, the customer’ s post-delive ry a cceptance provi sions, if any , and the installation process. The Company has determined that iCAD’s digital and film based sales generally follow the guidance of FASB ASC Topic 605 “Revenue Recognition” (“ASC 605”) as the software has been considered essential to the functionality of the product per the guidance of ASU 2009-14. Typically, the responsibility for the installation process lies with the OEM partner. On occasion, when iCAD is responsible for product installation, the installation element is considered a separate unit of accounting because the delivered product has stand-alone value to the customer. In these instances, the Company allocates revenue to the deliverables based on the framework established within ASU 2009-13. Therefore, the installation and training revenue is recognized as the services are performed according to the BESP of the element. Revenue from the digital and film based equipment, when there is installation, is recognized based on the relative selling price allocation of the BESP, when delivered. Revenue from certain CAD products is recognized in accordance with ASC 985-605. Sales of this product include training, and the Company has established VSOE for this element. Product revenue is determined based on the residual va lue in the arrangement and is recogniz ed when delive red. Reve nue f or training is def erred and recogniz ed when the training has be en completed. The Company recogniz es post contract customer support reve nue together with the initial licensing f ee f or certain MRI products in accordance with ASC 985-605-25-71. Sales of the Company ’ s Therapy segment products typi cally include a controller, accessories, source agreements and services. The Company allocates revenue to the deliverables in the arrangement based on the BESP in accordance with ASU 2009-13. Product revenue is generally recognized when the product has been delivered and service and source rev enue is typi cally recogniz ed ove r the lif e of the servi ce and source agreement. The Company includes the f ollowing in servi ce and supplies reve nue: the sale of phys ics and management servi ces, the lease of electronic brachytherapy equipment, development fees, supplies and the right to use the Company’s AxxentHub software. P hys ics and management servi ces reve nue and deve lopment f ees are considered to be delive red as the servi ces are perf ormed or ove r the estimated lif e of the agreement. The Company typi cally bi lls items monthly ove r the lif e of the agreement except for development fees, which are generally billed in advance or over a 12 month period and the fee f or treatment supplies which is generally bi lled in adva nce. 30 The Company def ers reve nue f rom the sale of certain servi ce contracts and recogniz es the related reve nue on a straight-line basis in accordance with ASC Topic 605-20, “Services”. The Company provides for estimated warranty costs on original product warranties at the time of sale. llow ance for D ou b tfu l A ccou nts The Company’s policy is to maintain allowances for estimated losses from the inability of its customers to make required payments. Credit limits are established through a process of reviewing the financial results, stability and payment history of each customer. Where appropriate, the Company obtains credit rating reports and financial statements of customers when determining or modif ’ s senior management rev iews accounts receiv ab le on a periodic b asis to determine if any receiv ab les may potentially b e uncollectib le. The Company includes any accounts receiv ab le b alances that it determines may lik ely b e uncollectib le, along with a general reserv e f or estimated prob ab le losses b ased on historical experience, in its ov erall allowance f or doub tf ul accounts. A n amount would b e written of f against the allowance after all attempts to collect the receivable had failed. Based on the information available to the Company, it believes the allowance for doubtful accounts as of December 31, 2016 is adequate. y ing credit limits. The Company I nve ntory Inventory is valued at the lower of cost or market value, with cost determined by the first-in, first-out method. The Company regularly reviews inventory quantities on hand and records a provision for excess and/or obsolete inventory primarily ba sed upon historical usage of its inve ntory a s well as other f actors. L ong ve d A ssets In accordance with FASB ASC Topic 360, “Property, Plant and Equipment”, (“ASC 360”), the Company assesses long-live d assets f or impairment if eve nts and circumstances indicate it is more like ly than not that the f air v alue of the asset group is less than the carryi ng va lue of the asset group. ASC 360-10-35 uses “events and circumstances” criteria to determine when, if at all, an asset (or asset group) is evaluated for recoverability. Thus, there is no set interval or frequency for recoverability evaluation. In accordance with ASC 360-10-35-21 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 phys ical 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). • • • The Company did not have any triggering events which would require an evaluation for recoverability, and accordingly did not consider any assets to be impaired in 2016. As a result of external factors and general uncertainty related to reimbursement for the treatment of NMSC, the Company evaluated the long-lived assets of the Therapy segment and reviewed them for impairment in 2015. The Company determined the “ roup” to b e the assets of the Therapy segment, which the Company considered to b e the lowest level for which the identifiable cash flows were largely independent of the cash flows of other assets and liabilities. A sset G In accordance with ASC 360-10-35-17, if the carrying amount of an asset or asset group (in use or under development) is eva luated and f ound not to be f ully recove rabl e ( the carryi ng 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 assets (or asset group’s) fair value. In connection with the preparation of the financial statements for the second quarter ended June 30, 2015, the Company completed its analysis pursuant to ASC 360-10-35-17 and determined that the carrying value of the Asset Group was approximately $36.8 million, which exceeded the undiscounted cash flows by approximately $2.8 million. Accordingly the Company completed the Step 2 analysis to determine the fair value of the Asset Group. The Company recorded long-lived asset impairment charges of approximately $13.4 million in the second quarter ended June 30, 2015 and as a result the long lived assets in the Asset Group were recorded at their current fair values. 31 A L i 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 reasonabl e, dif f erent assumptions could change the estimated f air va lues and, theref ore 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 adve rsely impact the assumptions used in the f air va lue estimates and ultimately r esult in f uture impairment charges. Intangible assets subject to amortization consist primarily of patents, technology intangibles, trade names, customer relationships and distribution agreements purchased in the Company’s previous acquisitions. These assets are amortized on a straight-line basis or the pattern of economic benefit over their estimated useful lives of 5 to 10 years. G ood i ll In accordance with FASB ASC Topic 350-20, “Intangibles - Goodwill and Other”, (“ASC 350-20”), the Company tests goodwill f or impairment on an annual ba sis and be tween annual tests if ev ents and circumstances indicate it is more like ly t han not that the f air va lue of the Company i s less than the carryi ng va lue of the Company Factors the Company c onsiders important, which could trigger an impairment of such asset, include the f ollowing: • • • • • 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 marke t capitaliz ation be low net book va lue. The Company’s Chief Operating Decision Maker (“CODM”) is the Chief Executive Officer (“CEO”). The Company determined that it has two reporting units and two reportabl e segments ba sed on the inf ormation that is provi ded to the CODM. The two segments and reporting units are Cancer Detection (“Detection”) and Cancer Therapy (“Therapy”). Each reportable segment generates revenue from the sale of medical equipment and related services and/or sale of supplies. Upon initial adoption, goodwill was allocated to the reporting units based on the relative fair value of the reporting units. The Company would record an impairment charge if such an assessment were to indicate that the f air va lue of a reporting unit was less than the carrying value. When the Company evaluates potential impairments outside of its 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 marke t multiples, to determine the f air va lue of its 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 yi eld dif f erent conclusions that would result in an impairment charge to income in the period that such change or determination was made. A s a result of external f actors and general uncertainty related to reimbur sement f or non-melanoma ski n cancer and in conj unction with the long-live d asset impairment testing, the Company perf ormed an impairment assessment of the Therapy reporting unit as of June 30, 2015. As a result the Company recorded a goodwill impairment charge of $14.0 million during the quarter ended June 30, 2015. The implied f air v alue of the Therapy reporting unit was determined in the same manner as the manner in which the amount of goodwill recogniz ed in a b usiness comb ination is determined. The excess of the f air v alue of the reporting unit over the amounts assigned to its assets and liabilities is the implied amount of goodwill. The Company identified the intangib le assets that were v alued during this process, including technology , customer relationships, trade-names, and f orce. The allocation process was perf ormed only f or purposes of testing goodwill f or impairment. the Company ’ s work The Company determined the f air va lue of the Therapy reporting unit ba sed on the present va lue of estimated f uture cash flows, discounted at an appropriate risk adjusted rate. This approach was selected as it measures the income producing assets, primarily technology and customer relationships. This method estimates the f air va lue ba sed upon the ability to generate future cash flows, which is particularly applicable when future profit margins and growth are expected to vary significantly from historical operating results. The Company uses internal forecasts to estimate future cash flows and includes an estimate of long-term future growth rates ba sed on the most recent vi ews of the long-term f orecast f or the reporting unit. A ccordingly , actual results can 32 w . differ from those assumed in the forecasts. The discount rate of approximately 17% is derived from a capital asset pricing model and analyzing published rates for industries relevant to the reporting unit to estimate the cost of equity financing. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective bus inesses and in the internally de ve loped f orecasts. Other significant assumptions include terminal value margin rates, future capital expenditures, and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to the application of these assumptions to this analys is, the income approach provi des a reasonabl e estimate of the f air va lue of the Therapy r eporting unit. The Step 2 test resulted in an approximate fair value of goodwill of $5.7 million which resulted in a goodwill impairment loss of $14.0 million for the quarter ended June 30, 2015.. The Company performed the annual impairment assessment at October 1, 2016 and compared the fair value of each of reporting unit to its carrying value as of this date. Fair value was approximately 816% of the carrying value for the Detection reporting unit and 126% of the carrying value of the Therapy reporting unit. The carrying values of the reporting units were determined based on an allocation of our assets and liabilities through specific allocation of certain assets and liabi lities, to the reporting units and an apportionment of the remaining net assets ba sed on the relative siz e of the reporting units’ reve nues and operating expenses compared to the Company as a whole. The determination of reporting units also requires management judgment. The Company determined the f air va lues f or each reporting unit using a weighting of the income approach and the marke t approach. For purposes of the income approach, f air va lue is determined ba sed on the present va lue 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 f orecast f or each segment. A ccordingly , actual results can dif f er f rom those assumed in our f orecasts. The discount rate of approximately 15% is derived from a capital asset pricing model and 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 bus inesses and in our internally deve loped f orecasts. traded companies with similar operating characteristics and industries. A In the market approach, the Company uses a valuation technique in which values are derived based on market prices of publ icly marke t approach allows f or comparison to actual market transactions and multiples. It can be somewhat limited in its application because the population of potential comparabl e pub licly- traded companies can be limited due to dif f ering characteristics of the comparative b usiness and ours, as well as the f act that marke t data may not be ava ilabl e f or divi sions 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 f erent or irreleva nt with respect to our bus iness. dif The Company corrobor ated the total f air va lues of the reporting units using a mark et capitaliz ation approach; howeve r, this approach cannot be used to determine the f air va lue of each reporting unit va lue. The bl end of the income approach and market approach is more closely aligned to our business profile, 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. Equally important, 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 assesses each va luation methodology ba sed upon the releva nce and ava ilabi lity of the data at the time the va luation is perf ormed and weight the methodologies appropriately S tock B ased C om pensati on The Company maintains stock- ba sed incentive plans, under which it provi des stock incentive s to employe es, directors and contractors. The Company grants to employe es, directors and contractors, options to purchase common stock at an exercise price equal to the market value of the stock at the date of grant. The Company may grant restricted stock to employe es and directors. The underlyi ng shares of the restricted stock grant are not issued until the shares ve st, and compensation expense is based on the stock price of the shares at the time of grant. The Company follows ASC 718, “Compensation – Stock Compensation”, (“ASC 718”), for all stock-based compensation. The Company uses the Black-Scholes option pricing model to value stock options which requires extensive use of accounting judgment and financial estimates, including estimates of the expected term participants will retain their ve sted stock options be f ore exercising them, the estimated vol atility of its common stock price ove r the expected term, and the number of options that will be forfeited prior to the completion of their vesting requirements. Fair value of 33 . - restricted stock is determined ba sed on the stock price of the underlyi ng option on the date of the grant. A pplication of alternative assumptions could produce significantly different estimates of the fair value of stock-based compensation and consequently, the related amounts recognized in the Consolidated Statements of Operations. I ncom e T axes The Company follows the liability method under ASC 740, “Income Taxes” (“ASC 740”). The primary objectives of accounting for taxes under ASC 740 are to (a) recognize the amount of tax payable for the current year and (b) recognize the amount of deferred tax liability or asset for the future tax consequences of events that have been reflected in the Company’s financial statements or tax returns. The Company has provided a full valuation allowance against its deferred tax assets at December 31, 2016 and 2015 as it is more likely than not that the deferred tax asset will not be realized. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10 also provides guidance on de-recognition, classification, interest and penalties, disclosure and transition. In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date and the Company revaluates these items quarterly, with any adj ustments to preliminary estimates be ing recorded to goodwill, prov ided that the Company is within the measurement period (which may be up to one year from the acquisition date) and continues to collect information in order to determine their estimated values. Subsequent to the measurement period or final determination of the tax allowance’ s or contingency ’ s estimated va lue, changes to these uncertain tax positions and tax related va luation allowances may a f f ect the provi sion f or income taxes presented in the Company ’ s statement of operations. Year Ended December 31, 2016 compared to Year Ended December 31, 2015 Revenue. Revenue for the year ended December 31, 2016 was $26.3 million compared with revenue of $41.6 million for the year ended December 31, 2015, a decrease of $15.2 million or 36.6%. Therapy revenue decreased $13.1 million and Detection revenue decreased $2.1 million. The table below presents the components of revenue for 2016 and 2015 (in thousands): F or th e y ear end ed D ecem b er 3 h ang e $ 286,8 8,451 331,71 $ 11,226 8,017 19,243 $ ( 2,544) 434 ( 2,110) C h ang e ( 22. 7) % 5. 4 % ( 11. 0) % D etection rev enue eunever tcudorP Serv ice and supplies rev enue latotbuS Therapy rev enue eunever tcudorP Serv ice and supplies rev enue latotbuS 987,1 7,416 502,9 2,972 19,339 22,311 ( 1,183) ( 11,923) ( 13,106) ( 39. 8) % ( 61. 7) % ( 58. 7) % eunever latoT $ 833,62 $ 41,554 $ ( 15,216) ( 36. 6) % Detection revenues decreased 11.0 % or $2.1 million from $19.2 million for the year ended December 31, 2015 to $17.1 million for the year ended December 31, 2016. Detection product revenue decreased by $2.5 million and Detection service revenue increased $0.4 million. The decrease in Detection product revenue is primarily due to a $0.4 million decrease in digital CAD systems and a $2.1 million decrease in MRI products. The decrease in digital CAD and MRI products are driven by decreases in demand primarily from our OEM customers. Detection service and supplies revenue increased $0.4 million primarily due to increases in our installed base for Powerlook AMP. Therapy revenue decreased 58.7% or $13.1 million to $9.2 million for the year ended December 31, 2016 from $22.3 million in the year ended December 31, 2015. The decrease in Therapy revenue was driven by a decrease in Therapy product revenue of $1.2 million and a decrease in Therapy service and supplies revenue of $11.9 million. 34 2 0 1 6 2 0 1 5 C % 1 , The decrease in Therapy product and service revenue for the year ended December 31, 2016 is primarily due to the negative impact of customer reaction to the uncertainty of reimbursement rates for NSMC in the United States. Product revenue from the sale of our Axxent eBx systems can vary significantly due to an increase or decrease in the number of units sold which can cause a significant fluctuation in product revenue in the period. Gross Profit. Gross profit was $18.5 million for the year ended December 31, 2016 compared to $29.4 million for the year ended December 31, 2015, a decrease of $10.8 million, Therapy gross profit decreased $9.9 million from $13.3 million in the year ended December 31, 2015 to $3.4 million in the year ended December 31, 2016. Detection gross profit decreased $0.9 million from $16.0 million in the year ended December 31, 2015 to $15.1 million in the year ended December 31, 2016. The decrease in Therapy gross profit was due primarily to the decrease in Therapy revenue. Detection gross profit decreased due primarily to the decrease in Detection product sales, which have higher gross profits than Detection service revenues. Gross profit percent was 70.3% for the year ended December 31, 2016 compared to 70.6% for the year ended December 31, 2015. Included in cost of revenue for the year ended December 31, 2016 is a credit of $491,000 related to a refund of the Medical Device Excise Tax (“MDET”). Gross profit will fluctuate due to the costs related to manufacturing, amortization and the impact of product mix in each segment. Cost of revenue and gross profit for 2016 and 2015 were as follows (in thousands): stcudorP seilppus dna ecivreS noitaicerped dna noitazitromA Total cost of rev enue ross prof it ross prof it % tiforp ssorg noitceteD Therapy gross prof it ross prof it F or th e y ear end ed D ecem b er 3 $ 819 317,5 981,1 7,820 $ 031,3 753,7 717,1 402,21 $ h ang e )212,2( )446,1( )825( )483,4( C h ang e )%7.07( )%3.22( )%8.03( )%9.53( $ 815,81 $ 29,350 $ )238,01( )%9.63( 70. 3% 70. 6% ( 0. 3%) F or th e y ear end ed D ecem b er 3 $ $ 311,51 3,405 815,81 $ $ $ h ang e ( 906) )629,9( )238,01( $ C h ang e ( 5. 7%) )%5.47( )%9.63( 16,019 133,31 29,350 Operating Expenses: Operating expenses for 2016 and 2015 are as follows (in thousands): Operating expenses: tnempoleved tcudorp dna gnireenignE M ark eting and sales G eneral and administrativ e A mortiz ation and depreciation G oodwill and long-liv ed asset impairment Total operating expenses F or th e y ear end ed D ecem b er 3 h ang e C h ang e $ $ $ 815,9 10,179 7,675 1,116 - 884,82 9,163 404,21 887,8 136,1 344,72 59,429 553 ( 2,225) )311,1( ( 515) )344,72( )149,03( %9.3 ( 17. 9%) )%7.21( ( 31. 6%) - )%1.25( $ $ $ 35 2 0 1 6 2 0 1 5 C % G G 1 , 2 0 1 6 2 0 1 5 C % G 1 , 2 0 1 6 2 0 1 5 C % 1 , Engineering and Product Development. Engineering and product development costs for the year ended December 31, 2016 increased by $0.3 million or 3.9%, from $9.2 million in 2015 to $9.5 million in 2016. Therapy engineering and product development costs decreased by approximately $0.3 million and Detection engineering and product development costs increased by $0.6 million. The decrease in the Therapy segment is due primarily to a decrease in personnel expenses. The increase in the Detection segment is due primarily to an increase in personnel expenses of $0.8 million offset by a decrease in clinical trial expenses of $0.2 million. The Company continues to invest in ongoing clinical trials, and research expenses in support of new products and reimbur sement codes. Marketing and Sales. Marketing and sales expense for the year ended December 31, 2016 decreased by $2.2 million or 17.9%, from $12.4 million in 2015 to $10.2 million in 2016. Therapy marketing and sales expenses decreased approximately $2.1 million and Detection marketing and sales expenses decreased $0.1 million. The decrease in Therapy m ark eting and sales expense was due primarily t o a decrease in personnel expenses and commissions. General and Administrative. General and administrative expenses for the year ended December 31, 2015 decreased by $1.1 million or 12.7%, from $8.8 million in 2015 to $7.7 million in 2016. The decrease in general and administrative expenses was due primarily to decreases in personnel costs of $0.5 million, bad debt expense of $0.2 million and a gain on litigation settlement in 2016 of $0.2 million and other costs of approximately $0.2 million. Amortization and Depreciation. Amortization and depreciation decreased by $0.5 million from $1.6 million to $1.1 million. The primary decrease is due to revi sed va lues of assets due to an impairment of intangibl e assets of the Therapy reporting unit in June 2015 which was offset by an increase in amortization due to the acquisition of VuComp assets in January 2016. Goodwill and long-lived asset impairment. In connection with the preparation of the financial statements for the second quarter ended June 30, 2015, the Company evaluated the Therapy reporting unit for both long-lived asset and goodwill impairment and recorded an impairment charge of $14.0 million related to goodwill and an impairment charge of $13.4 million related to long-lived assets for a total of $27.4 million. There was no impairment charge in 2016. Other Income and Expense (in thousands) F or th e y ear end ed D ecem b er 3 esnepxe tseretnI L oss f rom extinguishment of deb t I nterest income $ )36( - 10 ( 53) $ $ )056( )327,1( 12 ( 2,352) $ h ang e 785 327,1 )11( 992,2 $ h ang e % %)3.09( %)0.001( %)4.25( %)7.79( I ncome tax expense $ 76 $ 61 06 % 0.573 Interest Expense. The Company recorded $63,000 of interest expense in 2016 as compared with $650,000 of interest expense during the year ended December 31, 2015. The reduction in interest expense is due primarily to the reduction in interest related to the Deerfield facility agreement that was terminated on March 31, 2015. Loss from extinguishment of debt. The loss of $1.7 million for the year ended December 31, 2015 represents the loss associated with the payoff of the Deerfield facility agreement, which was terminated on March 31, 2015. The Company paid $11.25 million which represented the entire obligation. The loss on extinguishment represents the unamortiz ed discount on the Facility agreement, and the write-of f of the def erred debt costs. The Facility A greement was to mature on December 29, 2016 and was able to be repaid at the Company’s option without penalty or premium. Interest income. Interest income of $10,000 and $21,000 for the years ended December 31, 2016, and 2015, respectively, reflects income earned from our money market accounts. Tax benefit (expense). The Company recorded tax expense of $76,000 and $16,000 for the years ended December 31, 2016, and 2015, respectively. For the year ended December 31, 2015, the Company recorded a net tax expense of $16,000. This resulted from a tax benefit due primarily to the reversal of a deferred tax liability of approximately $79,000 of tax expense of approximately $95,000. The def erred tax liabi lity was the result of tax amortiz abl e goodwill that was recognized due to the impairment of goodwill. Tax expense in 2016 and 2015 relates primarily to state non-income and f ranchise ba sed taxes. f set b y 36 2 0 1 6 2 0 1 5 C C 1 , Year Ended December 31, 2015 compared to Year Ended December 31, 2014 Revenue. Revenue for the year ended December 31, 2015 was $41.6 million compared with revenue of $43.9 million for the year ended December 31, 2014, a decrease of $2.4 million or 5.4%. Therapy revenue decreased $3.0 million and Detection revenue increased $0.6 million. The table below presents the components of revenue for 2015 and 2014 (in thousands): F or th e y ear end ed D ecem b er 3 h ang e $ 11,226 8,017 19,243 $ 10,082 8,522 18,604 $ 1,144 ( 505) 639 C h ang e 11. 3 % ( 5. 9) % 3. 4 % D etection rev enue P roduct rev enue Serv ice and supplies rev enue Sub total Therapy rev enue P roduct rev enue Serv ice and supplies rev enue Sub total 2,972 19,339 22,311 8,601 16,719 25,320 ( 5,629) 2,620 ( 3,009) ( 65. 4) % 15. 7 % ( 11. 9) % Total rev enue $ 41,554 $ 43,924 $ ( 2,370) ( 5. 4) % Detection revenues increased by $0.6 million from $18.6 million for the year ended December 31, 2014 to $19.2 million for the year ended December 31, 2015. Detection product revenue increased by $1.1 million and Detection service revenue decreased $0.5 million. The increase in Detection product revenue is primarily due to a $0.7 million increase in digital CAD systems and a $0.7 million increase in MRI products, offset by a $0.3 million decrease in film based products. The increase in digital CAD and MRI products are driven by increases in demand primarily from our OEM customers. The decline in revenue from film-based products and accessories was the result of the decreasing market for film based products as most customers have transitioned to digital technologies. Detection service and supplies revenue decreased $0. 5 million primarily due to the decline in customers with analog and digital serv ice contracts. Therapy revenue decreased 11.9% or $3.0 million to $22.3 million for the year ended December 31, 2015 from $25.3 million in the year ended December 31, 2014. The decrease in Therapy revenue was driven by a decrease in Therapy product revenue of $5.6 million offset by an increase in Therapy service and supplies revenue of $2.6 million. The decrease in Therapy product revenue for the year ended December 31, 2015 is primarily due to the negative impact of customer reaction to the uncertainty of reimbursement rates for NSMC in the United States. Product revenue from the sale of our Axxent eBx systems can vary significantly due to an increase or decrease in the number of units sold which can cause a significant fluctuation in product revenue in the period. The increase in Therapy service and supplies revenue of $2.6 million for the year ended December 31, 2015 is due primarily to the impact of the acquisition of the assets of Radion and DermEbx, which contributed $7.8 million of revenue from the acquisition date through December 31, 2014. Therapy service revenue in the first six months of 2015 was approximately $13.4 million as compared to $4.6 million in the first six months of 2014. The Company acquired DermEbx and Radion in July 2014, and the growth in revenue from the acquisition is reflected in the first six months of 2015. Therapy service revenue in the last six months of 2015 was $5.9 million as compared to $12.2 million for the last six months of 2014. The decrease in Therapy service and supplies revenue in 2015 is due primarily to a decrease in the services related to electronic brachytherapy the treatment of NMSC as a result of the reimbursement uncertainty for this procedure in the United States. Gross Profit. Gross profit was $29.4 million for the year ended December 31, 2015 compared to $31.2 million for the year ended December 31, 2014, a decrease of $1.9 million, Therapy gross profit decreased $2.6 million from $16.0 million in the year ended December 31, 2014 to $13.3 million in the year ended December 31, 2015. Detection gross profit increased $0.7 million from $15.3 million in the year ended December 31, 2014 to $16.0 million in the year ended December 31, 2015. The decrease in Therapy gross profit was due primarily to the decrease in Therapy revenue. Detection gross profit increased due primarily to the increase in Detection product sales, which have higher gross profits than Detection service revenues. 37 2 0 1 5 2 0 1 4 C % 1 , Gross profit percent was 70.6% for the year ended December 31, 2015 compared to 71.1% for the year ended December 31, 2014. Gross profit percent decreased slightly by 0.5%, due primarily to the decrease in Therapy product margins. Gross profit will fluctuate due to the costs related to manufacturing, amortization and the impact of product mix in each segment. Cost of revenue and gross profit for 2015 and 2014 were as follows (in thousands): stcudorP Serv ice and supplies A mortiz ation and depreciation Total cost of rev enue G ross prof it G ross prof it % tiforp ssorg noitceteD Therapy gross prof it G ross prof it F or th e y ear end ed D ecem b er 3 h ang e C $ 031,3 7,357 1,717 402,21 $ 219,4 000,6 587,1 12,697 $ )287,1( 753,1 )86( )394( h ang e )%3.63( %6.22 )%8.3( )%9.3( $ 053,92 $ 722,13 $ ( 1,877) ( 6. 0%) 70. 6% 71. 1% ( 0. 5%) F or th e y ear end ed D ecem b er 3 h ang e C $ $ $ 910,61 133,31 053,92 672,51 15,951 722,13 $ $ $ 743 )026,2( ( 1,877) h ang e 4. 9% )%4.61( ( 6. 0%) Operating Expenses: Operating expenses for 2015 and 2014 are as follows (in thousands): Operating expenses: tnempoleved tcudorp dna gnireenignE M ark eting and sales G eneral and administrativ e A mortiz ation and depreciation G oodwill and long-liv ed asset impairment Total operating expenses F or th e ye ar end ed D ecem b er 3 h ang e C h ang e $ $ $ 361,9 12,404 8,788 1,631 27,443 924,95 951,8 864,21 440,8 147,1 - 30,412 400,1 ( 64) 744 ( 110) 344,72 710,92 %3.21 ( 0. 5%) 9. 2% ( 6. 3%) - %4.59 $ $ $ Engineering and Product Development. Engineering and product development costs for the year ended December 31, 2015 increased by $1.0 million or 12.3%, from $8.2 million in 2014 to $9.2 million in 2015. Therapy engineering and product development costs increased by approximately $0.6 million and Detection increased by $0.4 million. Ongoing clinical trial, consulting and research expenses in the Therapy segment increased by approximately $0.4 million, and personnel expenses increased approximately $0.2 million.. The primary increase in the Detection segment is clinical trial expenses of approximately $0.7 million offset by decreases in legal and other expenses of approximately $0.3 million. The Company continues to inve st in research and deve lopment to deve lop clinical evi dence f or the Therapy segment and ongoing development to support tomosynthesis in the Detection segment. Marketing and Sales. Marketing and sales expense for the year ended December 31, 2015 decreased by $64,000 or 0.5%, from $12.5 million in 2014 to $12.4 million in 2015. Therapy marketing and sales expenses decreased approximately $0.3 million offset by an increase of $0.2 million in the Detection segment. The decrease in Therapy marketing and sales expense was due primarily to a decrease in personnel expenses. The increase in the Detection segment is primarily due to increases in personnel expense. General and Administrative. General and administrative expenses for the year ended December 31, 2015 increased by $0.7 million or 9.2%, from $8.0 million in 2014 to $8.8 million in 2015. The increase in general and administrative expenses was primarily due to increases in stock c ompensation costs, insurance costs and ba d debt expense. Amortization and Depreciation. Amortization and depreciation decreased by $0.1 million from $1.7 million to $1.6 38 2 0 1 5 2 0 1 4 C % 1 , 2 0 1 5 2 0 1 4 C % 1 , 2 0 1 5 2 0 1 4 C % 1 , million. In June 2015, the Company impaired intangible assets of the Therapy reporting unit and recorded amortization expense ba sed on the revi sed va lues of the assets; as a result amortiz ation and depreciation f or the intangibl es decreased. Goodwill and long-lived asset impairment. In connection with the preparation of the financial statements for the second quarter ended June 30, 2015, the Company evaluated the Therapy reporting unit for both long-lived asset and goodwill impairment and recorded an impairment charge of $14.0 million related to goodwill and an impairment charge of $13.4 million related to long-lived assets for a total of $27.4 million. Other Income and Expense (in thousands) F or th e ye ar end ed D ecem b er 3 esnepxe tseretnI G ain ( loss) f rom change in f air v alue of warrant liab ili L oss f rom extinguishment of deb t I nterest income $ $ )056( - ( 1,723) 21 ( 2,352) $ $ h ang e 1,990 )538,1( )028( )61( )186( $ h ang e % ( 75. 4) % %)0.001( % 8.09 %)2.34( % 8.04 ( 2,640) 538,1 )309( 73 ( 1,671) I ncome tax expense $ 16 $ 351 )731( %)5.98( Interest Expense The Company recorded $0.7 million of interest expense in 2015 as compared with $2.6 million of interest expense during the year ended December 31, 2014. The reduction in interest expense is due primarily to the reduction in interest related to the Deerfield facility agreement that was terminated on March 31, 2015. Gain from change in fair value of warrants The gain from the change in the fair value of the warrant in 2014 was due primarily to the decrease in the Company’s stock price when the fair value of the warrant was calculated in April 2014. In April 2014, Deerfield exercised the warrants and paid the Company $1.6 million. Loss from extinguishment of debt. The loss of $1.7 million for the year ended December 31, 2015 represents the loss associated with the payoff of the Deerfield facility agreement, which was terminated on March 31, 2015. The Company paid $11.25 million which represented the entire obligation. The loss on extinguishment represents the f of the def erred debt costs. The Facility A greement unamortiz ed discount on the Facility agreement, and the write-of was to mature on December 29, 2016 and was able to be repaid at the Company’s option without penalty or premium. The loss of $0.9 million from the extinguishment of debt for the year ended December 31, 2014 represents the loss associated with the payoff of the Deerfield revenue purchase agreement, which was terminated in April 2014. Interest income. Interest income of $21,000 and $37,000 for the years ended December 31, 2015, and 2014, respectively, reflects income earned from our money market accounts. Tax benefit (expense). The Company recorded tax expense of $16,000 as compared to $153,000 for the years ended December 31, 2015, and 2014, respectively. For the year ended December 31, 2015, the Company recorded a tax benefit due primarily to a def erred tax liabi lity of approximately $79,000, of tax expense of approximately $95,000. The def erred tax liabi lity was the result of tax amortiz abl e goodwill that was recogniz ed due to the impairment of goodwill. Tax expense in 2015 and 2014 relates primarily to state non-income and franchise based taxes. f set b y S eg ent A nalys i s The Company operates in and reports results for two segments: Cancer Detection and Cancer Therapy. Segment operating income (loss) includes Cost of Sales, Engineering and Product Development and Marketing and Sales and depreciation and amortization for the respective segment. Adjusted EBITDA is a Non-GAAP measure and excludes Stock Compensation, Depreciation and Amortization expense in the department of the respective segment. The Company does not allocate G eneral and A dministrative and depreciation and amortiz ation expense included in General and Administrative expenses, as well as Other Income and Expense to a segment, and accordingly those are included as reconciling items to the L oss be f ore income tax. These non-G be inconsistent with be used in conj unction with our results reported similar measures presented b according to U.S. GAAP. Any financial measure other than those prepared in accordance with U.S. GAAP should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with U.S. . Management considers these non-GAAP financial measures to be an important indicator of the Company’s operational strength and perf ormance of its bus iness and a good measure of its historical operating trends, in particular the extent to which ongoing operations impact the Company’s overall financial performance. A summary of Segment other companies and should only metrics may y 39 m A A P G A A P 2 0 1 5 2 0 1 4 C C 1 , revenues, segment operating income (loss) and segment adjusted EBITDA for the fiscal years ended December 31, 2016, 2015, and 2014 are below (in thousands): Y ear Ended D ecemb er 31, 2016 2015 2014 $ $ 331,71 502,9 833,62 $ $ 311,51 504,3 815,81 $ $ 496,5 ( 7,752) ( 2,058) $ $ 19,243 113,22 41,554 $ $ 16,019 133,31 29,350 $ 332,7 ( 28,405) ( 21,172) $ $ $ 18,604 023,52 43,924 $ $ 15,276 159,51 31,227 $ $ 132,7 1,868 9,099 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ ( 7,912) ( 63) - 10 - ( 10,023) 5,694 493 223 696 - 7,106 ( 7,752) 518 970 252 - - ( 6,012) )709,8( ( 650) - 21 )327,1( )134,23( 332,7 430 220 532 281 795,8 ( 28,405) 465 1,142 1,213 504 344,72 2,263 ( 8,284) ( 2,640) 538,1 37 ( 903) ( 856) 132,7 352 188 515 - 682,8 1,868 178 844 1,739 - - 926,4 $ $ $ S eg m ent rev enu es: noitceteD yparehT euneveR latoT S eg m ent g ross profi t: noitceteD yparehT tiforp ssorg tnemgeS S eg m ent operati ng i ncom e ( loss) noitceteD Therapy Segment operating income ( loss) G eneral, administrativ e, depreciation and amortiz ation expense I nterest expense G ain ( loss) on f air v alue of warrant Other income L oss on deb t extinguishment L oss b ef ore income tax S eg m ent ad u sted EB D etection segment operating income compensation Stock D epreciation A mortiz ation Restructuring D etection adj usted EBI TD segment operating income ( loss) compensation Therapy Stock D epreciation A mortiz ation Restructuring G oodwill and long-liv ed asset impairment Therapy adj usted EBI TD 40 : j I T D A : A A Detection gross profit decreased to approximately $15.1 million or 88% of revenue for the year ended December 31, 2016 from $16.0 million or 83% of revenue for the year ended December 31, 2015, which is the result of changes in both revenue and product mix. Detection segment operating income for the year ended December 31, 2016 decreased by $1.5 million to $5.7 million from $7.2 million for the year ended December 31, 2015. The decrease in segment operating income for the year ended December 31, 2016 as compared to the year ended December 31, 2015 was due primarily to the decrease in revenue for the year ended December 31, 2016 as compared to the year ended December 31, 2015. Detection operating expenses increased by $0.6 million to $9.4 million for the year ended December 31, 2016 as compared to $8.8 million for the year ended December 31, 2015, reflecting additional investments in research and deve lopment, primarily t o support new product deve lopment. Detection gross profit increased to approximately $16.0 million or 83% of revenue for the year ended December 31, 2015 from $15.3 million or 82% of revenue for the year ended December 31, 2014. Detection segment operating income remained flat at $7.2 million for the years ended December 31, 2015 and 2014. Although revenue increased, Detection operating expenses increased by $0.8 million to $8.8 million for the year ended December 31, 2015 as compared to $8.0 million for the year ended December 31, 2014, reflecting additional investments in research and deve lopment, primarily f or reader studies related to the deve lopment of new products. Therapy gross profit decreased by approximately $9.9 million to $3.4 million or 37% of revenue for the year ended December 31, 2016 from approximately $13.3 million or 60% of revenue which reflects the decline in revenue from $22.3 million to $9.2 million for the same periods. The decline in gross profit percent is due primarily to the fixed manufacturing expenses in cost of sales. Therapy operating expenses for the year ended December 31, 2016 were approximately $11.2 million as compared to $14.2 million for the year ended December 31, 2015. The decrease in operating expenses is due primarily to the cost reduction efforts initiated in 2015 due to reimbursement uncertainty. Therapy segment operating loss improved to a loss of $7.8 million for the year ended December 31, 2016 from a loss of $28.4 million for the period ended December 31, 2015. The operating loss of $28.4 million for the year ended December 31, 2015 is due primarily to the impairment loss of $27.4 million. Therapy gross profit decreased to $13.3 million or 60% of revenue for the year ended December 31, 2015 from approximately $15.9 million or 63% of revenue for the year ended December 31, 2014. The decrease in gross profit for the year ended December 31, 2015 as compared to the year ended December 31, 2014 is due primarily to the decrease in revenue. Therapy segment operating loss increased to $28.4 million for the year ended December 31, 2015 from income of $1.9 million for the period ended December 31, 2014. The operating loss of $28.4 million for the year December 31, 2015 is due primarily to the impairment loss of $27.4 million. Therapy operating expenses were $41.7 million for the year ended December 31, 2015 as compared to $14.1 million for the period ended December 31, 2014. i ty an d C api tal R esou rces The Company believes that its cash and cash equivalents balance of $8.6 million as of December 31, 2016, and projected cash balances are sufficient to sustain operations through at least the next 12 months. 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. The Company had working capital of $7.1 million at December 31, 2016. The ratio of current assets to current liabilities at December 31, 2016 and 2015 was 1.55 and 1.94, respectively. The decrease in working capital is due primarily to the decrease in cash due to operating losses in the current year. In April 2015, the Company paid $11.25 million to repay borrowings under the Deerfield facility agreement in full. Net cash used for operating activities for the year ended December 31, 2016 was $5.5 million as compared $1.9 million for 2015. The increase in cash used for operating activities during the year ended December 31, 2016 was due primarily to the net loss in 2016, less the non-cash adjustments. The net change in operating assets and liabilities for 2016 was approximately $5,000 as compared to cash due to changes in operating assets and liabilities of approximately $5.1 million in 2015. We expect that changes in operating assets and liabilities will continue to be a significant driver of changes in cash used in or provi ded b rations. y ope The net cash used for investing activities for the year ended December 31, 2016 was $0.4 million. The cash used for investing activities in 2016 was due primarily to purchases of fixed assets. Net cash used for financing activities for the year ended December 31, 2016 was $0.9 million, which was due primarily to cash repayments of lease obligations. In January 2017, the Company closed the Asset Purchase agreement for $3.2 million with Invivo and received $2.9 million in cash, which was net of a $350,000 holdback in escrow. 41 L i q u i d The following table summarizes as of December 31, 2016, for the periods presented, the Company’s future estimated cash payments under existing contractual obligations, and the financing obligations as noted below (in thousands). C ontractu al O li g ati ons Pay m ents d u e b peri od T otal L ess th an 1 y ear y ears y ears y ears Operating L ease Ob ligations $ 2,237 $ 579 $ 1,484 $ 174 $ - Capital L ease Ob ligations 86 $ 86 - - - Roy alty Ob ligations 1,025 1,025 - - - Other Commitments T otal C ontractu al O b li g ati ons L ease Obl igations: 333 333 - - - - $ 1 3 2 1 $ $ $ $ As of December 31, 2016, the Company had three lease obligations related to its facilities. The Company’s executive offices are leased pursuant to a five-year lease (the “Lease”) that commenced on December 15, 2006, with renewals in January, 2012, and August 2016 consisting of approximately 11,000 square feet of office space located at 98 Spit Brook Road, Suite 100 in Nashua, New Hampshire (the “Premises”). The August 2016 Lease renewal provides for an annual base rent of $184,518 for the period from March 2017 to February 2020. Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses and obtain insurance f or the P remises. The Company leases a facility consisting of approximately 24,350 square feet of office, manufacturing and warehousing space located at 101 Nicholson Lane, San Jose, CA. The operating lease commenced September 2012 with a current annual payment of $295,140 through September 2017, with all amounts payable in equal monthly installments. In September 2016, the Company extended this lease for the period from October 2017 to March 2020 with annual payments of $540,588 from October 2017 to September 2018, $558,120 from October 2018 to September 2019 and $286,368 for the period from October 2019 to March 2020, with all amounts payable in equal monthly installments. Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses and obt ain insurance f or the f acility In addition to the foregoing leases relating to its principal properties, the Company also has a lease for an additional facility in Nashua, New Hampshire used for product repairs, manufacturing and warehousing. Roya lty O bl igations: As a result of the acquisition of Xoft, the Company recorded a royalty obligation pursuant to a settlement agreement entered into between Xoft and Hologic, in August 2007. Xoft received a nonexclusive, irrevocable, perpetual, worldwide license, including the right to subl icense certain H ologic patents, and a non-compete cove nant as well as an agreement not to seek further damages with respect to the alleged patent violations. In return the Company has a remaining obligation to pay a minimum annual royalty payment of $250,000 payable through 2016. In addition to the minimum annual roya lty paym ents, the litigation settlement agreement with H ologic also provi ded f or paym ent of royalties based upon a specified percentage of future net sales on any products that practice the licensed rights. The estimated f air va lue of the patent license and non-compete cove nant is $100,000 and is be ing amortiz ed ove r the estimated remaining useful life of approximately four years. In addition, a liability has been recorded within accrued expenses and accounts payable for minimum royalty obligations totaling $0.4 million. In December, 2011, the Company settled patent litigation with Zeiss. The Company determined that this settlement should be recorded as a measurement period adj ustment and accordingly recorded the present va lue of the litigation to the opening balance sheet of Xoft. The present value of the liability is approximately $0.5 million as of December 31, 2016. The Company has a remaining obligation to pay $0.5 million in June 2017. Notes Payable: In December, 2011, the Company entered into several agreements pursuant to which Deerfield agreed to provide $15 42 . b 1 - 3 3 - 5 5 + , 6 8 1 , 0 2 3 , 4 8 4 7 4 y million of debt. During October 2014, the Company elected to prepay the first principal payment of $3.75 million which was originally due on the third anniversary of the date of the facility agreement in December 2014. The Company paid the remaining outstanding obligation of $11.25 million on March 31, 2015. Capital L ease Obl igations: In connection with the acquisition of DermEbx and Radion, the Company assumed two separate equipment lease obligations with payments totaling approximately $2.6 million thru May, 2017. The leases were determined to be capital leases and accordingly the equipment was capitalized and a liability of $2.5 million was recorded. As of December 31, 2016, the outstanding liability for the acquired equipment leases was approximately $0.1 million. Other Commitments: Other Commitments include non-cancelabl e purchase orders with three ke y suppliers executed in the normal course of bus iness. Effect of N ew A ccou nti ng P ronou ncem ents In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , or ASU 2014-09, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. Since then, the FASB has also issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principals versus Agent Considerations and ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, which further elaborate on the original ASU No. 2014-09. The core principle of these updates is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgments and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In July 2015, the FASB approved a one-year deferral of the effective date to January 1, 2018, with early adoption to be permitted as of the original effective date of January 1, 2017. Once this standard becomes effective, companies may use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We have performed an initial assessment of ASU 2014-09, and expect that our revenue recognition will not be materially impacted by this new guidance. We are currently calculating the impact of all expected changes from this guidance, and expect to have these calculations complete during the second half of fiscal 2017. After completing these calculations, we will then determine the transition method to be applied upon adoption. In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements, however the adoption of the standard is expected to increase bot h assets and liabi lities f or leases that would previ ously have be en of f -b alance sheet operating leases. In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This update was issued as part of a simplification effort for the accounting of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, increases the amount of employe e’ s shares repurchased f or tax withholding purposes without triggering liabi lity accounting, an accounting policy election to account for forfeitures as they occur, and clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the statement of cash flows. The amendment is effective for annual periods beginning after December 15, 2016, and interim periods thereafter. Early adoption is permitted. The Company expects the adoption of ASU 2016-09 to impact net operating losses, however the Company currently ha s a f ull va luation allowance against the net operating losses. In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230)”, a consensus of the FASB’s Emerging Issues Task Force. This update is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The update requires cash payments for debt prepayment or debt extinguishment costs to be classified as cash outflows for financing activities. It also requires cash payments made soon after an 43 acquisition’s consummation date (approximately three months or less) to be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liabi lity . P aym ents made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities. The amendment is effective for annual periods beginning after December 15, 2017, and interim periods thereafter. Early adoption is permitted. The Company does not expect the adoption of this amendment will have a material impact on our consolidated financial statements. 7 . ve and u anti tati I tem We believe we are not subject to material foreign currency exchange rate fluctuations, as most of our sales and expenses are domestic and therefore are denominated in the U.S. dollar. We do not hold derivative securities and have not entered into contracts embe dded with deriva tive instruments, such as f oreign currency and interest rate swaps, options, f orwards, f utures, collars, and warrants, either to hedge existing risks or f or speculative purposes. i sclosu res ab ou t M ark et R u ali tati ve D i sk Q 8 . I tem See Financial Statements and Schedule attached hereto. i nanci al S tatem ents and u pplem entary D S ata. 9 . I tem Not Applicable. h ange s i n and D i sagr eem ents w i th A ccou ntants on A ccou nti ng an d F i nanci al D i sclosu re. I tem 9 . C ontrols and Proced u res. ( a) Eval u ati on of D i sclosu re C ontrols and Proced u res. The Company , under the supervi sion and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) were effective as of December 31, 2016. control sys tem, no matter how well conceive d and operated, can provi de only reasonabl e, not abs olute, 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 sys tems, no ev aluation of controls can provi de abs olute 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- f ective control sys tem, misstatements due to error or f raud may occur and not be detected. The Company conducts ef periodic eva luations to enhance, where necessary i ts procedures and controls. ) M anage m ent’ s A nnu al R eport on I nternal C ontrol O ve r F i nanci al R eporti ng The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, is responsible for the preparation and integrity of the Company’s Consolidated Financial Statements, establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) for the Company and all related information appearing in this Annual Report on Form 10-K. ll internal control sys tems, no matter how well designed, have inherent limitations. Theref ore, eve n those sys tems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. A j ect to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may de teriorate. lso, proj ections of any ev aluation of ef f ective ness to f uture periods are sub Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on its assessment, our Chief Executive Officer and our Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 2016. ( c) C h ange s i n I nternal C ontrol O ve r F i nanci al R eporti ng The Company’s principal executive officer and principal financial officer conducted an evaluation of the Company’s 44 A Q . F C A A ( b . A . internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) to determine whether any changes in internal control over financial reporting occurred during the quarter ended December 31, 2016, that have materially affected or which are reasonably likely to materially affect internal control over financial reporting. Based on that eva luation there has be en no such change during such period. I tem 9 . th er I nform ati on. Not applicable Item 10. Directors, Executive Officers and Corporate Governance. PA I The following information includes information each director and executive officer has given us about his or her age, all positions he or she holds, his or her principal occupation and business experience for the past five years, and the names of other publ icly- held companies of which he or she currently serve s as a director or has serve d as a director during the past five years. In addition to the information presented below regarding each director’s specific experience, qualifications, attributes and skills that led our Board to the conclusion that he or she should serve as a director, we also be lieve that all of our directors have a reputation f or integrity , honesty and adherence to high ethical standards. They each hav e demonstrated bus iness acumen and an abi lity to exercise sound j udgment, as well as a commitment of service to iCAD and our Board. There are no family relationships among any of the directors or executive officers of iCAD. N am e ge Posi ti on w i th i Director/Officer i nce Dr. Lawrence Howard Rachel Brem, MD Anthony Ecock Robert Goodman, MD Steven Rappaport Andy Sassine Somu Subramaniam Elliot Sussman, MD Kenneth Ferry Richard Christopher Stacey Stevens 64 58 55 76 68 53 63 65 63 47 48 Chairman of the Board, and Director Director Director Director Director Director Director Director Chief Executive Officer, and Director Executive Vice President, Chief Financial Officer, Treasurer and Secretary Executive Vice President of arke ting and Strategy 2006 2004 2008 2014 2006 2015 2010 2002 2006 2016 2006 The Company’s Certificate of Incorporation provides for the annual election of all of its directors. The Board elects officers on an annual basis and our officers generally serve until their successors are duly elected and qualified. Upon the recommendation of the Company’s Nominating and Corporate Governance Committee, the Board of Directors fixed the size of the Company’s Board at nine directors. Dr. Lawrence Howard was appointed Chairman of the Board in 2007 and has been a director of the Company since November 2006. Dr. Howard has been, since March 1997, a general partner of Hudson Ventures, L.P. (formerly known as Hudson Partners, L.P.), a limited partnership that is the general partner of Hudson Venture Partners, L.P. (“HVP”), a limited partnership that is qualified as a small business investment company. Since March 1997, Dr. Howard has also be en a managing membe r of H udson M that provi des management services to HVP. Since November 2000, Dr. Howard has been a General Partner of Hudson Venture Partners II, and a limited partner of Hudson Venture II, L.P. We believe Dr. Howard’s qualifications to serve on our Board of Directors include his financial expertise and his understanding of our products and market. L C, a limited liabi lity company anagement A ssociates L Dr. Rachel Brem is currently the Professor and Vice Chairman in the Department of Radiology at The George Washington University Medical Center and Associate Director of the George Washington Cancer Institute. Dr. Brem has been at the George Washington University since 2000. From 1991 to 1999 Dr. Brem was at the Johns Hopkins Medical Institution where she introduced image guided minimally invasive surgery and previously was the Director of 45 B O R T I I A C A D S M Breast Imaging. Dr. Brem is a nationally and internationally recognized expert in new technologies for the improved diagnosis of breast cancer and has published over 80 manuscripts. We believe Dr. Brem’s qualifications to serve on our Board of Directors include her expertise in the medical field specifically the diagnosis of breast cancer as well as her understanding of our products and marke t. Anthony Ecock is a General Partner with the private equity investment firm of Welsh, Carson, Anderson & Stowe (“WCAS”), which he joined in 2007. He has over 25 years of experience in the healthcare field with eight years in senior management positions at leading healthcare technology companies. At WCAS, Mr. Ecock leads the Resources Group, a team responsible for helping its 30 portfolio companies identify and implement initiatives to increase growth, earnings and cash flow. Before joining WCAS, he served as Vice President and General Manager of GE Healthcare’s Enterprise Sales organization from 2003 to 2007. From 1999 to 2003, he served as Senior Vice President and Global General Manager of Hewlett Packard’s, then Agilent’s and finally Philips’ Patient Monitoring divisions. Mr. Ecock spent his early career at the consulting firm of Bain & Company, where he was a Partner in the healthcare and technology practices and Program Director for Consultant Training. We believe Mr. Ecock’s qualifications to serve on our Board of Directors include his financial expertise and his years of experience in the healthcare and technology markets. Dr. Robert Goodman is a radiation oncologist who ov ersees all aspects of care at J ersey City Radiation Oncology . Dr. Goodman has served with Jersey City Radiation Oncology since 2001. Prior to joining Jersey City Radiation Oncology, from 1998-2011, Dr. Goodman served as the chair of Radiation Oncology at St. Barnabas Medical Center. From 1977 to 1990, Dr. Goodman served as the Pancoast Professor and Chair of the Department of Radiation Oncology at the University of Pennsylvania. Dr. Goodman also has served as Acting Executive Director of the Hospital of the University of Pennsylvania. He has published extensively in the oncology literature in highly respected peer-reviewed journals and has co-authored a textbook on breast cancer. We believe Dr. Goodman’s qualifications to serve on our Board of Directors include his extensive clinical background and his business leadership experience. Steven Rappaport has been a partner of RZ Capital, LLC since July 2002, a private investment firm that also provides administrative services for a limited number of clients. From March 1995 to July 2002, Mr. Rappaport was Director, President and Principal of Loanet, Inc., an online real-time accounting service used by brokers and institutions to support domestic and international securities borrowing and lending activities. Loanet, Inc. was acquired by SunGard Data Systems in May 2001. From March 1992 to December 1994, Mr. Rappaport was Executive Vice President of Metallurg, Inc. (“Metallurg”), a producer and seller of high quality specialty metals and alloys, and President of Metallurg’s subsidiary, Shieldalloy Corporation. He served as Director of Metallurg from 1985 to 1998. From March 1987 to March 1992, Mr. Rappaport was Director, Executive Vice President and Secretary of Telerate, Inc. (“Telerate”), an electronic distributor of financial information. Telerate was acquired by Dow Jones over a number of years commencing in 1985 and culminating in January 1990, when it became a wholly-owned subsidiary. Mr. Rappaport practiced corporate and tax law at the New York law firm of Hartman & Craven from August 1974 to March 1987. He became a partner in the firm in 1979. Mr. Rappaport is currently serving as an independent director of a number of open and closed end American Stock Exchange funds of which Credit Suisse serves as the investment adviser and a number of open and closed end mutual funds of which Aberdeen Investment Trust serves as the adviser. In addition, Mr. Rappaport serves as a director of several privately owned businesses and a few not for profit organizations. We believe Mr. Rappaport’s qualifications to serve on our Board of Directors include his extensive financial and legal expertise combined with his experience as an executive officer, partner and director. Andy Sassine has served on the board of directors of three private companies: Gemphire Therapeutics, Inc., an early- stage cardiovascular drug company formed by a licensing agreement with Pfizer Inc., Freedom Meditech, Inc., a medical device company focused on the development and commercialization of first-to-market non-invasive ophthalmic medical devices that can screen for diabetes up to six years prior to the onset of the disease; and ComHear Inc., a digital r. Sassine previ ously serve d on the audio sof tware and devi ce company , where he is also the chairman of the boa rd. M board of Acorn Energy, Inc. Mr. Sassine has served on the Fidelity Investments Board of Directors since February 25, 2013. Mr. Sassine served in various positions at Fidelity Investments from 1999 to 2012, including, most recently as Portfolio Manager. Between 2004 and 2011, he managed the Fidelity Small Cap Stock Fund, the Fidelity International Small Cap Opportunities Fund and the Fidelity Advisor International Small Cap Opportunities Fund. Mr. Sassine joined Fidelity as a high yield research analyst covering the Telecommunications, Satellite, Technology, Defense and Aerospace, and Restaurant Industries and in 2001, joined the international group as a research analyst covering small and mid-cap international stocks. Prior to joining Fidelity, he served as a vice president in the Acquisition Finance Group at Fleet National Bank. Mr. Sassine has been a member of the Henry B. Tippie College of Business, University of Iowa Board of Advisors since 2009 and served on the Board of Trustees at the Clarke Schools for Hearing and Speech between 2009 and 2014. Mr. Sassine earned a Bachelor of Arts degree at the University of Iowa in 1987 and an MBA from the Wharton School at the University of Pennsylvania in 1993. We believe Mr. Sassine’s extensive know ledge and experience as a f und manager and boa rd membe r of other companies of a similar siz e to our company qualifies him to serve as a member of our Board of Directors. 46 Somu Subramaniam is currently a Managing Partner and co-founder of New Science Ventures, a New York-based venture capital firm that invests in both early and late stage companies, using novel scientific approaches to address significant unmet needs and create order of magnitude improvements in performance. Mr. Subramaniam serves on several Boards of companies managed in New Science Venture’s portfolio, including Achronix Semiconductor Corporation, RF Arrays, Inc., Lightwire, Inc., Silicon Storage Technology, Inc., MagSil Corporation, Trellis BioScience, Inc., and BioScale, Inc. Prior to starting New Science Ventures in 2004, Mr. Subramaniam was a Director at McKinsey & Co. and at various times led their Strategy Practice, Technology Practice and Healthcare Practice. While at McKinsey, he advi sed leading multinational companies in the pharmaceuticals, medical devi ces, bi otechnology , photonics, software and semiconductor industries. He was also a member of McKinsey’s Investment Committee. We believe Mr. Subramaniam’s qualifications to serve on our Board include his extensive financial and legal expertise combined with his experience as an executive officer, partner and director. Dr. Elliot Sussman is currently a Chairman of The Villages Health and Professor of Medicine at the University of South Florida College of Medicine. From 1993 to 2010, Dr. Sussman served as President and Chief Executive Officer of Lehigh Valley Health Network. Dr. Sussman served as a Fellow in General Medicine and a Robert Wood Johnson Clinical Scholar at the University of Pennsylvania, and trained as a resident at the Hospital of the University of Pennsylvania. Dr. Sussman is a director and the Chairperson of the compensation committee of the Board of Directors of Universal Health Realty Income Trust, a public company involved in real estate investment trust primarily engaged in investing in healthcare and human service-related facilities. We believe Dr. Sussman’s qualifications to serve on our Board include his experience as a Chief Executive Officer of a leading healthcare network, combined with his medical ba ckgr ound and his understanding of our products and marke t. anager f or the G loba l P atient M onitoring b usiness f or P hilips M Kenneth Ferry has served as the Company’s Chief Executive Officer since May 2006. He has over 25 years of experience in the healthcare technology field, with more than 10 years’ experience in senior management positions. Prior to joining the Company, from October 2003 to May 2006, Mr. Ferry was Senior Vice President and General edical Sys tems, a leader in the medical imaging and patient monitoring systems business. In this role he was responsible for Research & Development, Marketing, Business Development, Supply Chain and Manufacturing, Quality and Regulatory, Finance and Human Resources. From September 2001 to October 2003, Mr. Ferry served as a Senior Vice President in the North America Field Organization of Philips Medical Systems. From 1983 to 2001, Mr. Ferry served in a number of management positions with H ewlett P acka rd Company , a globa l provi der of products, technologies, sof tware solutions and servi ces to individual consumers and businesses and Agilent Technologies, Inc., a provider of core bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries. We believe Mr. Ferry’s qualifications to serve on our Board of Directors include his global executive leadership skills and significant experience as an executive in the healthcare industry. Richard Christopher is the Company’s Executive Vice President and Chief Financial Officer. Previously, Mr. Christopher served as Chief Financial and Operating Officer of Caliber Imaging & Diagnostics, Inc., a medical arch technologies company that designs, deve lops and marke ts microscopes and other proprietary sof tware. From M 2014 to October 2015, Mr. Christopher served as Chief Financial Officer of Caliber Imaging & Diagnostics, Inc. From December 2000 to April 2013, Mr. Christopher worked for DUSA Pharmaceuticals, Inc., a vertically integrated specialty dermatology company. During his time at DUSA Pharmaceuticals, Inc., Mr. Christopher served as Vice President, Financial Planning and Business Analysis, Vice President, Finance and Chief Financial Officer and Director of Financial Planning and Business Analysis. Mr. Christopher graduated from Suffolk University with a Masters of Science Degree in Accounting and from Bentley College with a Bachelors of Science Degree in Finance. Stacey Stevens is now the Company’s Executive Vice President, Marketing and Strategy. Ms. Stevens previously served as the Company’s Senior Vice President of Marketing and Strategy from June 2006 to February 2016. Prior to joining iCAD, Ms. Stevens’ experience included a variety of sales, business development, and marketing management positions with Philips Medical Systems, Agilent Technologies, Inc. and Hewlett Packard’s Healthcare Solutions Group (which was acquired in 2001 by Philips Medical Systems). From February 2005 until joining the Company she was Vice President, Marketing Planning at Philips Medical Systems, where she was responsible for the leadership of all global marketing planning functions for Philips’ Healthcare Business. From 2003 to January 2005, she was Vice President of Marketing for the Cardiac and Monitoring Systems Business Unit of Philips where she was responsible f or all marke ting and certain direct sales activi ties f or the A merica’ s Field Operation. P rior to that, M s. Steve ns held several key marketing management positions in the Ultrasound Business Unit of Hewlett-Packard/Agilent and Philips Medical Systems. Ms. Stevens earned a Bachelor of Arts Degree in Political Science from the University of New Hampshire, and an MBA from Boston University’s Graduate School of Management. 47 M i t C om i ttee and A i t C om i ttee F i nanci al Expert Our Board of Directors maintains an Audit Committee which is composed of Mr. Rappaport (Chair), Mr. Ecock and Dr. Sussman. Our Board has determined that each member of the Audit Committee meets the definition of an “Independent Director” under applicable NASDAQ Marketplace Rules. In addition, the Board has determined that each member of the Audit Committee meets the independence requirements of applicable SEC rules and that Mr. Rappaport qualifies as an “audit committee financial expert” under applicable SEC rules. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires certain of our officers and our directors, and persons who own more than 10 percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater than 10 percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of copies of such forms received by us, we believe that during the year ended December 31, 2016; all filing requirements applicable to all of our officers, directors, and greater than 10% beneficial stockholders were timely c omplied with. C od e of Eth i cs We have developed and adopted a comprehensive Code of Business Conduct and Ethics to cover all of our employees. Copies of the Code of Business Conduct and Ethics can be obtained, without charge, upon written request, addressed to: iCAD, Inc. 98 Spit Brook Road, Suite 100 Nashua, NH 03062 ttention: Corporate Secretary I tem 1 . Execu ti ve C om pensati on. The Company will furnish to the Securities and Exchange Commission a definitive proxy statement not later than 120 days after the end of the fiscal year ended December 31, 2016. The response to this item will be contained in our proxy statement for our 2016 annual meeting of stockholders under the captions “Executive Compensation,” “Compensation of Directors,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report,” and is incorporated herein b ef erence. y r Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder M atters. The response to this item will be contained in our proxy statement for our 2017 annual meeting of stockholders in part under the caption “Stock Ownership of Certain Beneficial Owners and Management” and in part below. Eq i ty C om pensati on Plans The following table provides certain information with respect to all of our equity compensation plans in effect as of December 31, 2016. 48 A u d m u d m A 1 u P lan Category N umb er of securities to b e issued upon exercise of outstanding options, warrants and rights eighted-av erage exercise price of outstanding options, warrants and rights N umb er of securities remaining av ailab le f or issuance under compensation plans eq uity ( excluding securities ref lected in column ( a) compensation plans security Eq uity approv ed b holders: 1,425,348 compensation plans Eq uity not approv ed b holders ( 1) security 0 latoT 843,524,1 50.5$ 00.0$ 50.5$ 694,284,1 -0- 694,284,1 (1) Represents the aggregate number of shares of common stock issuable upon exercise of individual arrangements with non-plan option holders. See Note 6 of Notes to our consolidated financial statements for a description of our Stock Option and Stock Incentive Plans and certain information regarding the terms of the non-plan options. I tem 1 . Certain Relationships and Related Transactions, and Director Independence. The response to this item is contained in our proxy statement for our 2017 annual meeting of stockholders under the captions “Certain Relationships and Related Transactions,” “Corporate Governance Matters — Director Independence” and “ Compensation Committee Report, and is incorporated herein b ef erence. y r I tem 1 . Pri nci pal A ccou nti ng F ees and S erv i ces. The response to this item is contained in our proxy statement for our 2017 annual meeting of stockholders under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm,” and is incorporated herein y r ef erence. I tem 1 . Exhibits, Financial Statement Schedules. PA I a) The following documents are filed as part of this Annual Report on Form 10-K: i. ii. iii. 2(a) Financial Statements - See Index on page XX. Financial Statement Schedule - See Index on page XX. All other schedules for which provi sion is made in the applicabl e accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicabl e and, theref ore, have be en omitted. Exhibits - the following documents are filed as exhibits to this Annual Report on Form 10-K: Plan and Agreement of Merger dated February 15, 2002, by and among the Registrant, ISSI Acquisition Corp. and Intelligent Systems Software, Inc., Maha Sallam, Kevin Woods and W. Kip Speyer. [incorporated by reference to Annex A of the Company’s proxy statement/prospectus dated May 24, 2002 contained in the Registrant’s Registration Statement on Form S-4, File No. 333-86454]. 2(b) Amended and Restated Plan and Agreement of Merger dated as of December 15, 2003 among the Registrant, Qualia Computing, Inc., Qualia Acquisition Corp., Steven K. Rogers, Thomas E. Shoup and James Corbett [incorporated by reference to Exhibit 2(a) to the Registrant’s Current Report on Form 8-K for the event dated December 31, 2003]. 49 3 4 b R T V 5 : W ) y : y 2(c) 2(d) 2(e) 2(f) 2(g) 3 (a) 3(b) Asset Purchase Agreement as of dated June 20, 2008 between the Registrant and 3TP LLC dba CAD Sciences [incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K for the event dated July 18, 2008]. ** Agreement and Plan of Merger dated December 15, 2010 by and among the Registrant, XAC, Inc., Xoft, Inc. and Jeffrey Bird as representative of the Xoft, Inc.’s stockholders [incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K for the event dated December 30, 2010]. ** Asset Purchase Agreement by and between iCAD, Inc. and Radion, Inc., dated as of July 15, 2014. [incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K for the event dated July 15, 2014]. ** Asset Purchase Agreement by and between iCAD, Inc. and DermEbx, a series of Radion Capital Partners, LLC, dated as of July 15, 2014. [incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K for the event dated July 15, 2014]. ** Asset Purchase Agreement by and between iCAD, Inc. and Invivo Corporation. [incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K for the event dated December 22, 2016]. ** Certificate of Incorporation of the Registrant as amended through June 16, 2015 [incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 6, 2015]. Amended and Restated By-laws of the Registrant [incorporated by reference to Exhibit 3 (b) to the Registrant’s Report on Form 10-K for the year ended December 31, 2007]. 4.1(a) Form of Warrant issued on January 9, 2012 [incorporated by reference to Exhibit 4.1 of the Registrant’s report on Form 8-K filed with the SEC on January 3, 2012]. 4.2(b) Form of B Warrant issued on January 9, 2012 [incorporated by reference to Exhibit 4.2 of the Registrant’s report on Form 8-K filed with the SEC on January 3, 2012]. 4.3(c) Registration Rights Agreement, dated as of December 29, 2011 [incorporated by reference to Exhibit 4.3 of the Registrant’s report on Form 8-K filed with the SEC on January 3, 2012]. 10(a) 2002 Stock Option Plan [incorporated by reference to Annex F to the Registrant’s Registration Statement on Form S-4 (File No. 333-86454)].* 10(b) 2004 Stock Incentive Plan [incorporated by reference to Exhibit B to the Registrant’s definitive proxy statement on Schedule 14A filed with the SEC on May 28, 2004].* 10(c) Form of Option Agreement under the Registrant’s 2002 Stock Option Plan [incorporated by reference to Exhibit 10.2 to the Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2004].* 10(d) Form of Option Agreement under the Registrant’s 2004 Stock Incentive Plan [incorporated by reference to Exhibit 10.3 to the Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2004].* 10(e) 2005 Stock Incentive Plan [incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K filed with the SEC on June 28, 2005].* 10(f) Form of Option Agreement under the Registrant’s 2005 Stock Incentive Plan [incorporated by reference to Exhibit 10.2 to the Registrant’s report on Form 8-K filed with the SEC on June 28, 2005].* 50 10(g) 10(h) 10(i) 2016 Stock Incentive Plan [incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2016]. Form of Indemnification Agreement with each of the Registrant’s directors and officers [incorporated by reference to Exhibit 10.6 of Registrant’s Quarterly report on Form 10-Q for the quarter ended June 30, 2006]. Form of Indemnification Agreement with each of the Registrant’s directors and officers [incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly report on Form 10-Q for the quarter ended September 30, 2014]. 10(ji) Lease Agreement dated December 6, 2006 between the Registrant and Gregory D. Stoyle and John J. Flatley, Trustees of the 1993 Flatley Family Trust, of Nashua, NH [incorporated by reference to Exhibit 10(mm) to the Registrant’s Report on Form 10-K for the year ended December 31, 2006]. 10(kj) 2007 Stock Incentive Plan, as amended [incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A filed with the SEC on June 16, 2009]. * 10(l) Form of Option Agreement under the Registrant’s 2007 Stock Incentive Plan. [incorporated by reference to Exhibit 10(vv) to the Registrant’s Report on Form 10-K for the year ended December 31, 2009]* 10(m) Form of Restricted Stock Agreement under the Registrant’s 2007 Stock Incentive Plan. [incorporated by reference to Exhibit 10(vv) to the Registrant’s Report on Form 10-K for the year ended December 31, 2009].* 10(n) Employment Agreement entered into as of September 25, 2012 between the Registrant and Kenneth Ferry [incorporated by reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed with the SEC on September 26, 2012] * 10(o) Employment Agreement entered into as of June 1, 2008 between the Registrant and Stacey Steve ns [incorporated by reference to Exhibit 10.8 of the Registrant’s report on Form 10-Q filed with the SEC on August 8, 2008]. * 10(p) Employment Agreement dated as of June 1, 2008 between the Registrant and J onathan G o [incorporated by reference to Exhibit 10.9 of the Registrant’s report on Form 10-Q filed with the SEC on August 8, 2008]. * 10(q) Employment Agreement dated April 26, 2011 between the Registrant and Kevin C. Burns [incorporated by reference to Exhibit 10.2 of the Registrant’s report on Form 8-K filed with the SEC on April 27, 2011]. 10(r) Option Agreement dated April 26, 2011 between the Registrant and Kevin C. Burns [incorporated by reference to Exhibit 10.3 of the Registrant’s report on Form 8-K filed with the SEC on April 27, 2011].* 10(s) 10(t) Facility Agreement including form of Promissory note, dated as of December 29, 2011, by and among the Company, Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited [incorporated by reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed with the SEC on January 3, 2012]. Form of Security Agreement by and among the Company, Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited [incorporated by reference to Exhibit 10.2 of the Registrant’s report on Form 8-K filed with the SEC on January 3, 2012]. 51 10(u) Form of Security Agreement by and among Xoft, Inc., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited [incorporated by reference to Exhibit 10.3 of the Registrant’s report on Form 8-K filed with the SEC on January 3, 2012]. 10(v) Revenue Purchase Agreement, dated as of December 29, 2011, by and among the Company, Deerfield Private Design Fund II, L.P., Deerfield Special Situations Fund, L.P. and Horizon Sante TTNP SARL [incorporated by reference to Exhibit 10.4 of the Registrant’s report on Form 8-K filed with the SEC on January 3, 2012]. 10(w) Revenue Purchase Termination and Amendment of Facility Agreement, dated as of April 28, 2014, by and among the Company, Deerfield Private Design Fund II, L.P., Deerfield Special Situations Fund, L.P. and Horizon Sante TTNP SARL [incorporated by reference to Exhibit 10.1 of the Registrant’s report on Form 10-Q filed with the SEC on May 14, 2014]. 10(x) Settlement Agreement, dated as of December 22, 2011, by and among the Company, Carl Zeiss Meditec, AG and Carl Zeiss Meditec,Inc. [incorporated by reference to Exhibit 10(y) to the Registrant’ s Report on Form 10-K f or the ye ar ended December 31, 2012] 10(y) Amendment No. 1 to the Employment Agreement dated April 26, 2011 between the Registrant and Kevin C. Burns [incorporated by reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed with the SEC on November 25, 2013].* 10(z) Amendment No. 2 to the Employment Agreement dated April 26, 2011 between the Registrant and Kevin C. Burns [incorporated by reference to the Registrant’s report on Form 8-K filed with the SEC on February 11, 2015].* 10(aa) Change in Control Bonus Agreement dated October 29, 2015 between the Registrant and Ken Ferry [incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 4, 2015].* 10(bb) Change in Control Bonus Agreement dated October 29, 2015 between the Registrant and Kevin Burns [incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 4, 2015].* 10(cc) Change in Control Bonus Agreement dated October 29, 2015 between the Registrant and Stacey Stevens [incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 4, 2015].* 10(dd) 10(ee) 10(ff) 10(gg) Asset Purchase Agreement dated December 16, 2016 between the Registrant and Invivo Corporation [incorporated by reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed with the SEC on December 22, 2016]. Employment Agreement dated November 4, 2016 between the Registrant and Richard Christopher [incorporated by reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed with the SEC on November 10, 2016]. First Amendment to Lease dated September 19, 2016 between the Registrant and The Irvine Company [incorporated by reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed with the SEC on September 21, 2016]. Employment Agreement dated December 22, 2016 between the Registrant and Kenneth Ferry [incorporated by reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed with the SEC on December 28, 2016]. 52 10(hh) Amendment No. 1 to Employment Agreement dated as of June 1, 2008 between the Registrant and Stacey M. Stevens [incorporated by reference to Exhibit 10.2 of the Registrant’s report on Form 8-K filed with the SEC on December 28, 2016]. 21 Subsidiaries 23.1 Consent of BDO USA, LLP, Independent Registered Public Accounting Firm. 31.1 31.2 32.1 32.2 101 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. The following materials formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of December 31, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the twelve months ended December 31, 2016 and 2015 and 2014, (iii) Consolidated Statements of Cash Flows for the twelve months ended December 31, 2016 and 2015 and 2014, and (iv) Notes to Consolidated Financial Statements. * Denotes a management compensation plan or arrangement. ** The Registrant has omitted certain schedules and exhibits pursuant to Item 601(b)(2) of Regulation S-K and shall furnish supplementally to the SEC copies any of the omitted schedules and exhibits upon request by the SEC. (b) Exhibits - See (a) iii above. (c) Financial Statement Schedule - See (a) ii above. Item 16. None m ary 53 S u m . R ES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its be half b y t he undersigned, thereunto duly a uthoriz ed. iCAD, INC. Date: March , 2017 By: / s/ Kenneth Ferry Kenneth Ferry Chief Executive Officer, Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on be half of the registrant and in the capacities and on the dates indicated. Signature Title Date / s/ L awrence H oward Dr. Lawrence Howard / s/ Kenneth Ferry Kenneth Ferry / s/ Richard Christopher Richard Christopher /s/ Rachel Brem Rachel Brem, M.D. /s/ Anthony Ecock Anthony Ecock / s/ Robe rt G oodman Robert Goodman, M.D. / s/ Steve n Rappaport Steve n Rappaport / s/ A ndy Sassine A ndy S assine / s/ Somu Subr amaniam Somu Subr amaniam /s/ Elliot Sussman Elliot Sussman, M.D. Chairman of the Board, Director March, 2017 March, 2017 March, 2017 March, 2017 March, 2017 March, 2017 March, 2017 March, 2017 March, 2017 March, 2017 Chief Executive Officer Director (Principal Executive Officer) Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Director Director Director Director Director Director Director 54 S I G N A T U D EX T C T ED F S T EM EN Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets As of December 31, 2016 and 2015 Consolidated Statements of Operations For the years ended December 31, 2016, 2015 and 2014 Consolidated Statements of Stockholders’ Equity For the years ended December 31, 2016, 2015 and 2014 Consolidated Statements of Cash Flows For the years ended December 31, 2016, 2015 and 2014 P age F2 F3 F4 F5 F6 Notes to Consolidated Financial Statements F7-F41 F-1 I N O O N S O L I D A I N A N C I A L T A T S R EPO O I D EPEN D EN R EG T ER ED PU A F To the Board of Directors and Stockholders of iCAD, Inc., Nashua, New Hampshire We have audited the accompanying consolidated balance sheets of iCAD, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements ba sed on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. A ccordingly , we express no such opinion. A n audit also includes examining, on a test ba sis, evi dence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provi de a reasonabl e ba sis f or our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of iCAD, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. /s/ BDO USA, LLP Boston, Massachusetts March, 2017 F-2 R T F N T I S B L I C C C O U N T I N G I R M iCAD, INC. AND SUBSIDIARIES C onsoli d ated B alance S h eets A ssets Current assets: stnelaviuqe hsac dna hsaC Trade accounts receiv ab le, net of allowance f or doub tf ul 5102 ni 632$ dna 6102 ni 271$ fo stnuocca ten , yrotnevnI stessa tnerruc rehto dna sesnepxe diaperP elas rof dleh stessA stessa tnerruc latoT and eq uipment: P roperty tnempiuqE stnemevorpmi dlohesaeL serutxif dna erutinruF M stessa gnitekra noitazitroma dna noitaicerped detalumucca sseL ytreporp teN tnempiuqe dna Other assets: Other assets I ntangib le assets, net of accumulated amortiz ation 5102 ni 698,01$ dna 6102 ni 815,7$ fo lliwdooG stessa rehto latoT stessa latoT iab ilities and Stock holders' Eq uity Current liab ilities: elbayap stnuoccA sesnepxe deurccA noitrop mret-trohs ,elbayap esael latipaC eunever derrefeD L elas rof dleh seitilibai seitilibail tnerruc latoT seitilibail mret-gnol rehtO noitrop mret-gnol ,eunever derrefeD noitrop mret-gnol ,stsoc tnemeltteS noitrop mret-gnol - esael latipaC D ef erred tax seitilibail latoT Commitments and contingencies ( N ote 9) : , $ . 01 par v alue: authoriz ed 1,000,000 shares; , $ . 01 par v alue: authoriz ed 30,000,000 Stock holders' eq uity P ref erred stock .deussi enon Common stock shares; issued 16,260,663 in 2016 and 15,923,349 in 2015; 5102 ni 815,737,51 dna 6102 ni 238,470,61 gnidnatstuo latipac ni-diap lanoitiddA ticifed detalumuccA yrusaerT ytiuqe 'sredlohkcots latoT 5102 dna 6102 ni serahs 138,581 ,tsoc ta kcots D ecem b er 3 D ecem b er 3 ( in thousands except shares and per share data) $ 585,8 $ 082,51 $ $ 981,5 727,3 821,1 403,1 339,91 081,7 26 503 673 7,923 835,6 583,1 53 381,3 790,41 333,71 156,83 775,1 889,4 68 273,5 238 558,21 38 866 - - 7 316,31 $ $ 884,7 513,4 486 - 767,72 940,7 26 592 673 7,782 574,5 703,2 49 472,4 891,41 665,81 046,84 1,593 022,4 969 794,7 - 972,41 92 970,1 421 86 - 498,51 - - 361 998,312 )906,781( )514,1( 830,52 951 215,112 )015,771( )514,1( 647,23 ytiuqe 'sredlohkcots dna seitilibail latoT $ 156,83 $ 046,84 See accompany ing notes to consolidated financial statements. F-3 2 0 1 6 2 0 1 5 L 1 , 1 , iCAD, INC. AND SUBSIDIARIES C onsoli d ated S tatem ents of O perati ons Rev enue: stcudorP seilppus dna ecivreS eunever latoT Cost of Rev enue: stcudorP seilppus dna ecivreS noitaicerped dna noitazitromA eunever fo tsoc latoT tiforp ssor selas dna gnitekra Operating expenses: tnempoleved tcudorp dna gnireenignE M evitartsinimda dna lareneG noitaicerped dna noitazitromA tnemriapmi tessa devil-gnol dna lliwdooG sesnepxe gnitarepo latoT snoitarepo morf )ssol( emocnI Other ( expense) income: esnepxe tseretnI ytilibail tnarraw fo eulav riaf ni egnahc morf niaG tbed fo tnemhsiugnitxe morf ssoL emocni tseretnI ten ,esnepxe rehtO esnepxe xat emocni erofeb ssoL esnepxe xat emocnI ssol evisneherpmoc dna ssol teN N et loss per share: cisaB D detuli eighted av erage numb er of shares used in computing loss per share: cisaB D detuli See accompanying notes to consolidated financial statements. F or th e Y ears End ed D ecem b er 3 ( in thousands except per share data) $ $ 174,01 768,51 833,62 $ 14,198 27,356 41,554 819 317,5 981,1 028,7 815,81 815,9 971,01 576,7 611,1 - 884,82 )079,9( )36( - - 01 )35( 3,130 7,357 1,717 12,204 29,350 9,163 12,404 8,788 1,631 27,443 59,429 ( 30,079) ( 650) - ( 1,723) 21 ( 2,352) )320,01( ( 32,431) 67 16 18,683 25,241 43,924 4,912 6,000 1,785 12,697 31,227 8,159 12,468 8,044 1,741 - 30,412 815 ( 2,640) 1,835 ( 903) 37 ( 1,671) ( 856) 153 $ $ $ )990,01( $ ( 32,447) $ ( 1,009) $)36.0( $)36.0( $)70.2( $)70.2( )70.0( )70.0( 239,51 239,51 686,51 686,51 690,41 690,41 F-4 1 , 2 0 1 6 2 0 1 5 2 0 1 4 G W iCAD, INC. AND SUBSIDIARIES C onsoli d ated S tatem ents of S tock h old ers’ Eq i ty (in thousands except shares) C om m on S tock b er of h ares I ssu ed 11,084,119 Par V alu e 111 i ti onal i n Pai C api tal 166,735 A ccu lated D efi ci t ( 144,054) T reasu ry S tock ( 1,415) tock Eq h old ers' i ty 21,377 ( 111) 3,726 8,556 708 28,214 1,318 ( 1,009) 62,779 ( 87) 366 2,135 ( 32,447) Balance at D ecemb er 31, 2013 I ssuance of common stock relativ e to v esting of restricted stock , net of 9,904 shares f orf eited f or tax ob ligations 75,530 I ssuance of common stock f or warrants exercised 450,000 I ssuance of stock f or acq uisitions 1,200,000 I ssuance of common stock pursuant to stock option plans Sale of common stock Stock -b ased compensation N et loss 162,528 2,760,000 - - 1 4 12 1 28 - - ( 112) 3,722 8,544 707 28,186 1,318 - - - - - - - ( 1,009) - - - - - - - Balance at D ecemb er 31, 2014 15,732,177 $ 157 $ 209,100 $ ( 145,063) $ ( 1,415) $ I ssuance of common stock relativ e to v esting of restricted stock , net of 13,058 shares f orf eited f or tax ob ligations I ssuance of common stock pursuant to stock option plans Stock -b ased compensation N et loss 111,700 79,472 - - 1 1 - - ( 88) 365 2,135 - - - - ( 32,447) - - - - Balance at D ecemb er 31, 2015 15,923,349 $ 159 $ 211,512 $ ( 177,510) $ ( 1,415) $ 32,746 I ssuance of common stock relativ e to v esting of restricted stock , net of 27,299 shares f orf eited f or tax ob ligations I ssuance of common stock pursuant to stock option plans Stock -b ased compensation N et loss 261,731 75,583 - - 3 1 - - ( 117) 197 2,307 - - - - ( 10,099) - - - - Balance at D ecemb er 31, 2016 16,260,663 $ 163 $ 213,899 $ ( 187,609) $ ( 1,415) $ See accompanying notes to consolidated financial statements. ( 114) 198 2,307 ( 10,099) 25,038 F-5 u A d d N u m d - m u S S u iCAD, INC. AND SUBSIDIARIES C onsoli d ated S tatem ents of C ash F low s F or th e Y ears End ed D ecem b er 3 ( in thousands) $ ( 10,099) $ ( 32,447) $ ( 1,009) Cash f low f rom operating activ ities: N et loss A dj ustments to reconcile net loss to net cash prov ided b ( used f or) operating activ ities: A mortiz ation D epreciation Bad deb t prov ision Stock -b ased compensation expense A mortiz ation of deb t discount and deb t costs G ain f rom acq uisition settlement G oodwill and long-liv ed asset impairment I nterest on settlement ob ligations D ef erred tax liab ility L oss ( gain) f rom change in f air v alue of warrant liab ility L oss on disposal of assets L oss on extinguishment of deb t Changes in operating assets and liab ilities, net of acq uisition: A ccounts receiv ab le I nv entory P repaid and other assets A ccounts pay ab le A ccrued expenses D ef erred rev enue Total adj ustments N et cash ( used f or) prov ided b operating activ ities and other Cash f low f rom inv esting activ ities: A dditions to patents, technology A dditions to property A cq uisition of V uComp M A cq uisition of V uComp M A cq uisition of Radion I nc, and D ermEb x N et cash used f or inv esting activ ities and eq uipment -V u CA -V u Breast D ensity Cash f low f rom f inancing activ ities: I ssuance of common stock Stock option exercises arrant exercise f or cash, net Taxes paid related to restricted stock issuance P rincipal pay ments of capital lease ob ligations P rincipal repay ment of deb t f inancing, net N et cash ( used f or) prov ided b f inancing activ ities I ncrease ( decrease) in cash and eq uiv alents Cash and eq uiv alents, b eginning of y ear Cash and eq uiv alents, end of y ear Supplemental disclosure of cash f low inf ormation: diap tseretnI diap sexaT N on-cash items f rom inv esting and f inancing activ ities: Settlement of warrant liab ility with purchase of common stock I ssuance of common stock xbEmreD dna cnI ,noidaR fo related to acq uisition See accompanying notes to consolidated financial statements. $ $ $ $ $ F-6 983 1,322 177 2,307 ( 23) ( 249) - 82 7 - 10 - 2,201 596 ( 504) ( 16) 309 ( 2,581) 4,621 ( 5,478) ( 12) ( 337) ( 6) - - ( 355) - 198 - ( 114) ( 946) - ( 862) ( 6,695) 15,280 8,585 07 76 - - $ $ $ 1,768 1,580 383 2,135 341 - 27,443 146 - - 125 1,723 1,772 ( 1,987) ( 197) ( 557) ( 2,060) ( 2,068) 30,547 ( 1,900) ( 40) ( 932) - ( 1,700) - ( 2,672) - 366 - ( 87) ( 1,397) ( 11,250) ( 12,368) ( 16,940) 32,220 15,280 558 128 - - $ $ $ 2,270 1,256 167 1,318 1,246 - - 602 - ( 1,835) - 903 ( 840) ( 323) 11 150 296 ( 612) 4,213 3,204 ( 50) ( 1,214) - - ( 3,482) ( 4,746) 28,214 708 1,575 ( 110) ( 655) ( 7,850) 21,882 20,340 11,880 32,220 1,637 157 2,151 8,556 1 , 2 0 1 6 2 0 1 5 2 0 1 4 y y D W y  iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies ( a) N atu re of O perati ons and U se of Esti m ates iCAD, Inc. and subsidiaries (the “Company” or “iCAD”) is a provider of advanced image analysis, workflow solutions and radiation therapy for the early identification and treatment of cancer. The Company has grown primarily through acquisitions to become a broad player in the oncology market. Its solutions include advanced image analysis and workflow solutions that enable healthcare professionals to b etter serv e patients b y ing pathologies and pinpointing the most prev alent cancers earlier, a comprehensive range of high-performance, upgradeable Computer-Aided Detection (CAD) systems and workflow solutions for mammography, MRI and CT, and the Xoft System which is an isotope-free cancer treatment platform technology. CAD is reimbursable in the U.S. under federal and most third-party insurance programs. y identif The Company intends to continue the extension of its image analys is and clinical decision support solutions for mammography, MRI and CT imaging. iCAD believes that advances in digital imaging techniques should bolster its efforts to develop additional commercially viable CAD/advanced image analysis and workflow products. The Company ’ s management be lieve s that early detection in combi nation with earlier targeted interve ntion will provi de patients and care provi ders with the be st tools ava ilabl e to achieve be tter clinical outcomes resulting in a marke t demand that will drive top line growth. The Company’s headquarters are located in Nashua, New Hampshire, with manufacturing and contract manufacturing facilities in New Hampshire and Massachusetts, and an operations, research, development, manuf acturing and warehousing f acility i n San J ose, Calif ornia. The Company operates in two segments: Cancer Detection (“Detection”) and Cancer Therapy (“Therapy”). The Detection segment consists of advanced image analysis and workflow products, and the Therapy segment consists of radiation therapy products. The Company sells its products throughout the world through its direct sales organization as well as through various OEM partners, distributors and resellers. See Note 8 for segment, maj or customer and geographical inf ormation. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of reve nue and expenses during the reporting period. A ctual results could differ from those estimates. It is reasonably possible that changes may occur in the near term that would af f ect management’ s estimates with respect to assets and liabi lities. ) Pri nci ples of C onsoli d ati on The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Xoft, Inc. and Xoft Solutions, LLC. All material inter-company transactions and balances have be en eliminated in consolidation. ( c) C ash and cash eq val ents The Company defines cash and cash equivalents as all bank accounts, money market funds, deposits and other money marke t instruments with original maturities of 90 days or less, which are unrestricted as to withdrawal. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed f ederally insured limits. The Company has neve r experienced any losses related to these ba lances. Insurance coverage is $250,000 per depositor at each financial institution, and the Company’s non-interest bearing cash balances exceed federally insured limits. Interest-bearing amounts on deposit in excess of federally insured limits at December 31, 2016 approximated $7.8 million. ) F i nanci al i nstru m ents Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and notes F-7 ( b u i ( d iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Summary of Significant Accounting Policies (continued) ) F i nanci al i nstru m ents (continued) payable. Due to their short term nature and market rates of interest, the carrying amounts of the financial instruments approximated fair value as of December 31, 2016 and 2015. ( e) A ccou nts R ecei vab le and A llow ance for D ou b tfu l A ccou nts A ccounts receiv abl e are customer ob ligations due under normal trade terms. Credit limits are estab lished through a process of reviewing the financial history and stability of each customer. The Company performs continuing credit evaluations of its customers’ financial condition and generally does not require collateral. The Company ’ s policy is to maintain allowances f or estimated losses f rom the inabi lity of its customers to make required payments. The Company’s senior management reviews accounts receivable on a periodic ba sis to determine if any receiva bl es may potentially be uncollectibl e. The Company includes any accounts receiva bl e ba lances that it determines may like ly be uncollectibl e, along with a general reserve f or estimated proba bl e losses ba sed on historical experience, in its ove rall allowance f or doubt f ul accounts. A n amount would be written off against the allowance after all attempts to collect the receivable had failed. Based on the information available, the Company believes the allowance for doubtful accounts as of December 31, 2016 and 2015 is adequate. $ The following table summarizes the allowance for doubtful accounts for the three years ended December 31, Balance at b eginning of period 2016 (in thousands): A dditions charged to costs and expenses snoitcudeR Balance at b eginning of period doirep fo dne ta ecnalaB A dditions charged to costs and expenses snoitcudeR $ $ $ $ $ $ $ $ $ $ $ 203 383 ( 350) 203 236 383 ( 350) 236 236 177 )142( 236 271 177 )142( 271 73 167 ( 37) 73 203 167 ( 37) 203 doirep fo dne ta ecnalaB ( f) I nve ntory Inventory is valued at the lower of cost or market value, with cost determined by the first-in, first-out method. The Company regularly reviews inventory quantities on hand and records an allowance for excess and/or obs olete inve ntory primarily t December 31, 2016 and 2015, inventories consisted of the following (in thousands): ba sed upon the estimated usage of its inve ntory as well as other f actors. A A s of D ecem b er 3 Raw materials W ork in process Finished G oods Raw materials I nv entory W ork in process Finished G oods I nv entory $ $ b er 3 $ $ $ $ 2,503 A s of D ecem 75 1,149 2,503 3,727 75 1,149 3,727 $ $ 009,2 451 162,1 009,2 513,4 451 162,1 513,4 F-8 Eq uipment L easehold improv ements Furniture and f ixtures Eq uipment M ark eting assets L easehold improv ements Furniture and f ixtures M ark eting assets Estimated lif e 3-5 y ears Estimated lif e 3-5 y ears 3-5 y ears 3-5 y ears 3-5 y ears 3-5 y ears 3-5 y ears 3-5 y ears ( d 2 0 1 6 2 0 1 5 2 0 1 4 2 0 1 6 2 0 1 5 1 , 2 0 1 6 2 0 1 5 2 0 1 4 2 0 1 6 2 0 1 5 1 , Balance at b eginning of period $ 236 $ 203 $ 73 A dditions charged to costs and expenses snoitcudeR 177 )142( 383 ( 350) 167 ( 37) doirep fo dne ta ecnalaB $ 271 $ 236 $ 203 A s of D ecem b er 3 Raw materials W ork in process Finished G oods $ $ 2,503 75 1,149 3,727 009,2 451 162,1 513,4 I nv entory iCAD, INC. AND SUBSIDIARIES $ Notes to Consolidated Financial Statements (continued) $ (1) Summary of Significant Accounting Policies (continued) Property an d Eq i pm ent Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets or the remaining lease term, if shorter, for leasehold improvements (see below). Estimated lif e Eq uipment L easehold improv ements Furniture and f ixtures M ark eting assets 3-5 y ears 3-5 y ears 3-5 y ears 3-5 y ears ) L ong L ve d A ssets In accordance with FASB ASC Topic 360, “Property, Plant and Equipment”, (“ASC 360”), the Company assesses long-live d assets f or impairment if eve nts and circumstances indicate it is more like ly than not that the f air va lue of the asset group is less than the carryi ng va lue of the asset group. ASC 360-10-35 uses “events and circumstances” criteria to determine when, if at all, an asset (or asset group) is evaluated for recoverability. Thus, there is no set interval or frequency for recoverability evaluation. In accordance with ASC 360-10-35-21, 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 f or recove rabi lity . • • • • • 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 phys ical 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 proj ection or f orecast that demonstrates continuing losses associated with the use of a long-live d asset (asset group). A s a result of external f actors and general uncertainty related to reimbur sement f or the treatment of non- eva luated the long-live d assets of the Therapy segment and rev iewed melanoma ski n cancer, the Company them f or potential impairment. The Company determined the “ roup” to be the assets of the Therapy segment, which the Company considered to be the lowest level for which the identifiable cash flows were largely independent of the cash flows of other assets and liabilities. A sset G In accordance with ASC 360-10-35-17, 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 asset’s (or asset group’s) fair value. In connection with the preparation of the financial statements for the second quarter ended June 30, 2015, the Company completed its analysis pursuant to ASC 360-10-35-17 and determined that the carrying value of the Asset Group was approximately $36.8 million, which exceeded the undiscounted cash flows by approximately $2.8 million. Accordingly the Company completed the Step 2 analysis to determine the fair value of the asset group. The Company recorded long-lived asset impairment charges of approximately $13.4 million in the second quarter ended June 30, 2015 and as a result the long lived assets in the Asset Group were recorded at their current f air va lues. The Company did not record any impairment charges f or the ye ar ended December 31, 2016. F-9 ( g ) u ( h i 2 0 1 6 2 0 1 5 2 0 1 4 2 0 1 6 2 0 1 5 1 , iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Summary of Significant Accounting Policies (continued) ) L ong L ve d A ssets (continued) A considerable amount of judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of the Asset Group. While the Company believes the judgments f erent assumptions could change the estimated f air va lues, and, theref ore and assumptions are reasonabl e, dif 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 f air va lue estimates and ultimately r esult in f uture impairment charges. Intangible assets subject to amortization consist primarily of patents, technology, customer relationships and trade names purchased in the Company’s previous acquisitions. These assets, which include assets from the acquisition of the assets of VuComp, DermEbx and Radion and the acquisition of Xoft, Inc., are amortized on a straight-line basis consistent with the pattern of economic benefit over their estimated useful lives of 5 to 15 years. A summary of intangible assets for 2016 and 2015 are as follows (in thousands): ross Carry ing A mount sesnecil dna stnetaP ygolonhceT spihsnoitaler remotsuC emanedarT Total amortiz ab le intangib le assets A ccumulated A mortiz ation P atents and licenses Technology Customer relationships emanedarT Total accumulated amortiz ation 2016 2015 $ 385 765,9 292 952 10,701 $ 579 14,075 268 248 15,170 eighted av erage usef ul lif e 5 y ears 10 y ears 7 y ears 10 y ears $ 477 $ 451 6,754 9,996 28 201 842 952 10,896 7,518 Total amortiz ab le intangib le assets, net $ 3,183 $ 4,274 Amortization expense related to intangible assets was approximately $983,000, $1,768,000 and $2,270,000 for the years ended December 31, 2016, 2015, and 2014, respectively. Estimated remaining amortization of the Company’s intangible assets is as follows (in thousands): m ated Esti am orti z ati on expense $ 475 115 994 073 113 918 3,183 $ F or th e y ears end ed b er 3 D ecem 7102 8102 9102 0202 1202 Thereaf ter F-10 ( h i G W 1 : iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Summary of Significant Accounting Policies (continued) ) G ood i ll In accordance with FASB Accounting Standards Codification (“ASC”) Topic 350-20, “Intangibles - Goodwill and Other”, (“ASC 350-20”), the Company tests goodwill for impairment on an annual basis and between annual tests if eve nts and circumstances indicate it is more like ly than not that the f air va lue of the reporting unit is less than the carryi ng va lue of the reporting unit. Factors the Company considers important, which could trigger an impairment of such asset, include the f ollowing: • • • • • 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 marke t capitaliz ation be low net book va lue. The Company would record an impairment charge if such an assessment were to indicate that the f air va lue 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 va luation models, such as comparative transactions and marke t multiples, to determine the f air va lue of reporting units. The Company makes assumptions about future cash flows, future operating plans, discount rates, comparabl e companies, marke t multiples, purchase price premiums and other f actors 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. A s a result of external f actors and general uncertainty related to reimbur sement f or non-melanoma ski n cancer perf ormed an impairment and in conj unction with the long-liv ed asset impairment testing, the Company assessment of the Therapy reporting unit as of June 30, 2015. As a result the Company recorded a goodwill impairment charge of $14.0 million during the quarter ended June 30, 2015. The implied f air va lue of the Therapy reporting unit was determined in the same manner as the manner in which the amount of goodwill recogniz ed in a bus iness combi nation is determined. The excess of the f air va lue of the reporting unit ove r the amounts assigned to its assets and liabi lities is the implied amount of goodwill. The Company identified the intangible assets that were valued during this process, including technology , customer relationships and trade-names. The allocation process was perf ormed only f or purposes of testing goodwill f or impairment. The Company determined the f air va lue of the Therapy reporting unit ba sed on the present va lue of estimated future cash flows, discounted at an appropriate risk adjusted rate. This approach was selected as it measures the income producing assets, primarily technology and customer relationships. This method estimates the f air value based upon the ability to generate future cash flows, which is particularly applicable when future profit margins and growth are expected to vary significantly from historical operating results. The Company uses internal forecasts to estimate future cash flows and includes an estimate of long-term future growth rates ba sed on the most recent vi ews of the long-term f orecast f or the reporting unit. A ccordingly , actual results can differ from those assumed in the forecasts. The discount rate of approximately 17% is derive d f rom a capital asset pricing model and analy ing publ ished rates f or industries releva nt to the reporting unit to estimate the cost of equity financing. The Company uses discount rates that are commensurate with the risks and uncertainty i nherent in the respective bus inesses and in the internally de ve loped f orecasts. Other significant assumptions include terminal value margin rates, future capital expenditures, and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to the application of these assumptions to this analys is, the income approach provi des a reasonabl e estimate of the f air va lue of the Therapy r eporting unit. F-11 ( i w z iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Summary of Significant Accounting Policies (continued) ) G ood i ll (continued) The Step 2 test resulted in an approximate fair value of goodwill of $5.7 million which resulted in a goodwill impairment loss of $14.0 million for the quarter ended June 30, 2015. The Company performed an annual impairment assessment at October 1, 2016 and compared the fair value of each reporting unit to its carrying value as of this date. Fair value was approximately 816% of carrying value for the Detection reporting unit and 126% of carrying value for the Therapy reporting unit. The carrying va lues of the reporting units were determined ba sed on an allocation of our assets and liabi lities through specific allocation of certain assets and liabilities to the reporting units and an apportionment of the remaining net assets ba sed on the relative siz e of the reporting units’ reve nues and operating expenses compared to the Company as a whole. The determination of reporting units also requires management judgment. The Company determined the f air va lues f or each reporting unit using a weighting of the income approach and the marke t approach. For purposes of the income approach, f air va lue is determined ba sed on the present value of estimated future cash flows, discounted at an appropriate risk adjusted rate. The Company used internal forecasts to estimate future cash flows and includes an estimate of long-term future growth rates ba sed on the most recent vi ews of the long-term f orecast f or each segment. A ccordingly , actual results can differ from those assumed in the forecasts. The discount rate of approximately 15% is derived from a capital asset pricing model and analy ing publ ished rates f or industries releva nt to the reporting units to estimate the cost of equity financing. The Company uses discount rates that are commensurate with the risks and uncertainty i nherent in the respective bus inesses and in the internally de ve loped f orecasts. traded companies with similar operating characteristics and industries. A In the market approach, the Company uses a valuation technique in which values are derived based on marke t prices of publ icly marke t approach allows for comparison to actual market transactions and multiples. It can be somewhat limited in its application be cause the population of potential comparabl e publ icly- traded companies can be limited due to f ering characteristics of the comparative bus iness and ours, as well as marke t data may not be ava ilabl e f or dif 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 corrobor ated the total f air va lues of the reporting units using a marke t capitaliz ation approach; howeve r, this approach cannot be used to determine the f air va lue of each reporting unit va lue. The bl end 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 bl ended approach, reasonabl y like ly scenarios and associated sensitivi ties can be deve loped f or alternative future states that may not be reflected in an observable market price. The Company will assess each va luation methodology ba sed upon the releva nce and ava ilabi lity of the data at the time the va luation is perf ormed and weight the methodologies appropriately In April 2015, the Company acquired VuComp’s M-Vu® Breast Density product for $1.7 million. The product has been integrated into the Company’s Powerlook AMP system, which is a component of the Detection reporting unit. The Company determined that the acquisition was a business combination and accordingly recorded goodwill of $0.8 million. In January 2016, the Company completed the acquisition of VuComp’s M-Vu CAD and other assets for $6,000. The customers, related technology and clinical data acquired are being used for the Company’s Cancer Detection products and the Company recorded goodwill of $293,000 to the Detection segment. In December, 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation. The Company will sell and convey to Buyer all right, title and interest to certain intellectual property relating to the VersaVue Software and the DynaCAD product and related assets. As a result of the agreement, the Company determined that it had assets held for sale as of December 31, 2016 and the sale constituted the sale of a business. As of December 31, 2016, the Company allocated $394,000 of goodwill to assets held for F-12 z . ( i w iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Summary of Significant Accounting Policies (continued) ) G ood i ll (continued) sale. The allocation was based on the fair value of the assets sold relative to the fair value of the Detection reporting unit as of the date of the agreement. A rollforward of goodwill activity by reportable segment is as follows (in thousands): A ccumulated G oodwill A ccumulated impairment D etection $ - - Therapy $ - - Total $ 47,937 ( 26,828) Fair v alue allocation 7,663 13,446 - A cq uisition of D ermEb x and Radion Balance at D ecemb er 31, 2014 - 7,663 6,154 19,600 6,154 27,263 A cq uisition measurement period adj ustments A cq uisition of V uComp tnemriapmI Balance at D ecemb er 31, 2015 A cq uisition of V uComp Sale of M RI assets Balance at D ecemb er 31, 2016 800 - 8,463 116 - )189,31( 5,735 116 800 )189,31( 14,198 293 ( 394) $ 8,362 - - $ 5,735 293 ( 394) $ 14,097 A ccumulated G oodwill Fair v alue allocation A ccumulated impairment Balance at D ecemb er 31, 2016 699 7,663 - $ 8,362 6,270 13,446 ( 13,981) $ 5,735 54,906 - ( 40,809) $ 14,097 ) R eve nu e R ecogn i ti on The Company recogniz es reve nue primarily f rom the sale of products, servi ces and supplies. Reve nue is recognized when delivery has occurred, persuasive evidence of an arrangement exists, fees are fixed or determinabl e and collectabi lity of the related receiva bl e is proba bl e. For product reve nue, delive ry has occurred upon shipment provi ded title and risk of loss have passed to the customer. Servi ces and supplies reve nue are considered to be delive red as the servi ces are perf ormed or ove r the estimated lif e of the supply agreement. The Company recognizes revenue from the sale of its digital, film-based CAD and cancer therapy products and services in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009- 13”) and ASC Update No. 2009-14, “Certain Arrangements That Contain Software Elements” (“ASU 2009- 14”) and ASC 985-605, “Software” (“ASC 985-605”). Revenue from the sale of certain CAD products is recognized in accordance with ASC 840 “Leases” (“ASC 840”). For multiple element arrangements, revenue is allocated to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”). VSOE generally exists only when the deliverable is sold separately and is the price actually charged for that deliverable. The process for determining BESP for deliverables without VSOE or TPE considers multiple factors including relative selling prices; competitive prices in the F-13 ( j ( i w - iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Summary of Significant Accounting Policies (continued) ) R eve nu e R ecogn i ti on (continued) marketplace, and management judgment, however, these may vary depending upon the unique facts and circumstances related to each delive rabl e. The Company uses customer purchase orders that are sub ’ s terms and conditions or, in the case of an Original Equipment Manufacturer (“OEM”) are governed by distribution agreements. In accordance with the Company’s distribution agreements, the OEM does not have a right of return, and title and risk of loss passes to the OEM upon shipment. The Company generally ships Free On Board shipping point and uses shipping documents and third-party proof of delivery to verify delivery and transfer of title. In addition, the Company assesses whether collection is proba bl e b considering a numbe r of f actors, including y past transaction history with the customer and the creditworthiness of the customer, as obt ained f rom third party c redit ref erences. j ect to the Company If the terms of the sale include customer acceptance provisions and compliance with those provisions cannot b e demonstrated, all rev enue is def erred and not recogniz ed until such acceptance occurs. The Company considers all relev ant f acts and circumstances in determining when to recogniz e rev enue, including contractual ob ligations to the customer, the customer’ s post-deliv ery acceptance prov isions, if any , and the installation process. The Company has determined that iCAD’s digital and film based sales generally follow the guidance of FASB ASC Topic 605 “Revenue Recognition” (“ASC 605”) as the software has been considered essential to the functionality of the product per the guidance of ASU 2009-14. Typically, the responsibility for the installation process lies with the OEM partner. On occasion, when iCAD is responsible for product installation, the installation element is considered a separate unit of accounting be cause the delive red product has stand-alone value to the customer. In these instances, the Company allocates the revenue to the deliverables based on the framework established within ASU 2009-13. Therefore, the installation and training revenue is recognized as the services are performed according to the BESP of the element. Revenue from the digital and film based equipment when there is installation, is recognized based on the relative selling price allocation of the BESP, when delive red. Revenue from certain CAD products is recognized in accordance with ASC 985-605. Sales of this product include training, and the Company has established VSOE for this element. Product revenue is determined ba sed on the residual va lue in the arrangement and is recogniz ed when delive red. Reve nue f or training is def erred and recogniz ed when the training has be en completed. The Company recogniz es post contract customer support reve nue together with the initial licensing f ee f or certain MRI products in accordance with 985-605-25-71. Sales of the Company ’ s Therapy segment products typi cally include a controller, accessories, source agreements and servi ces. The Company allocates reve nue to the delive rabl es in the arrangement ba sed on the BESP in accordance with ASU 2009-13. Product revenue is generally recognized when the product has b een delive red and servi ce and/ or supplies reve nue is typi cally recogniz ed ove r the lif e of the servi ce and/ or supplies agreement. The Company includes in servi ce and supplies reve nue the f ollowing: the sale of physics and management services, the lease of electronic brachytherapy equipment, development fees, ’ s A xxentH ub sof tware. P hys ics and management servi ces reve nue supplies and the right to use the Company and deve lopment f ees are considered to be delive red as the servi ces are perf ormed or ove r the estimated lif e of the agreement. The Company typi cally bi lls items monthly ove r the lif e of the agreement except f or development fees, which are generally billed in advance or over a 12 month period and the fee for treatment supplies which is generally bi lled in adva nce. The Company def ers reve nue f rom the sale of certain servi ce contracts and recogniz es the related reve nue on a straight-line basis in accordance with ASC Topic 605-20, “Services” . The Company provi des f or estimated warranty c osts on original product warranties at the time of sale. F-14 ( j iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Summary of Significant Accounting Policies (continued) ) C ost of R eve nu e Cost of reve nue consists of the costs of products purchased f or resale, cost relating to servi ce including costs of service contracts to maintain equipment after the warranty period, inbound freight and duty, manufacturing, warehousing, material move ment, inspection, scrap, rework, depreciation and in-house product warranty repairs, amortization of acquired technology and medical device tax. Included in cost of revenue for the twelve months ended December 31, 2016 is a credit of $491,000 related to a refund of the Medical Device Excise Tax (“MDET”). The MDET refund of $491,000 for the year ended December 31, 2016 related to refunds of the MDET for the periods from April 2013 to December 2015. The MDET refund was not material to any pr ior period or the current period; accordingly , prior periods have not be en restated. ( l) W arranty C osts The Company provi des f or the estimated cost of standard product warranty against def ects in material and workm anship ba sed on historical warranty trends, including the cost of product returns during the warranty period. Warranty provisions and claims for the years ended December 31, 2016, 2015 and 2014, were as follows (in thousands): Beginning accrual b alance arranty prov ision Usage Ending accrual b alance $ $ $ 2016 19 47 ( 55) 11 2015 14 54 ( 49) 19 2014 25 58 ( 69) 14 $ $ $ The warranty accrual above includes long-term warranty obligations of $0, $2,000 and $5,000 for the years ended December 31, 2016, 2015 and 2014 respectively. ) Eng i neeri ng an d Prod u ct D eve lopm ent C osts Engineering and product development costs relate to research and development efforts including Company sponsored clinical trials which are expensed as incurred. ( n) A ve rti si ng C osts The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2016, 2015 and 2014 was approximately $955,000, $950,000 and $882,000 respectively. ( o) N et L oss per C om m on S h are The Company follows FASB ASC 260-10, “Earnings per Share”, which requires the presentation of both ba sic and diluted earnings per share on the f ace of the statements of operations. The Company ’ s ba sic net loss per share is computed b the weighted ave rage numbe r of shares of common stock y outstanding f or the period and, if there are dilutive securities, diluted income per share is computed b including common stock equivalents which includes shares issuable upon the exercise of stock options, net of shares assumed to have be en purchased with the proceeds, using the treasury s tock m ethod. divi ding net loss b y y F-15 ( k ( m d W iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Summary of Significant Accounting Policies (continued) ( o) N et L oss per C om m on S h are (continued) summary of the Company ’ s calculation of net loss per share is as f ollows ( in thousands, except per share amounts): N et loss av ailab le to common shareholders $ ( 10,099) $ ( 32,447) $ ( 1,009) N et loss av ailab le to common shareholders Basic shares used in the calculation of earnings per share $ ( 10,099) 15,932 $ ( 32,447) 15,686 $ ( 1,009) 14,096 Basic shares used in the calculation of earnings per share Ef Ef f ect of dilutiv e securities: options Stock f ect of dilutiv e securities: Restricted stock Stock options Restricted stock iluted shares used in the calculation of earnings per share iluted shares used in the calculation of earnings per share N et loss per share : N et loss per share : Basic iluted Basic iluted 15,932 - - - - 15,932 15,932 15,686 - - - - 15,686 15,686 14,096 - - - - 14,096 14,096 $ $ $ $ ( 0. 63) ( 0. 63) ( 0. 63) ( 0. 63) $ $ $ $ ( 2. 07) ( 2. 07) ( 2. 07) ( 2. 07) $ $ $ $ ( 0. 07) ( 0. 07) ( 0. 07) ( 0. 07) The f ollowing tabl e summariz es the numbe r of shares of common stock f or securities, warrants and restricted stock that were not included in the calculation of diluted net loss per share be cause such shares are antidilutive : Common stock options Restricted Stock Common stock options Restricted Stock 1,425,348 511,398 1,425,348 511,398 1,571,998 516,396 1,571,998 516,396 1,417,887 309,317 1,417,887 309,317 j ect Restricted common stock can be issued to directors, executive s or employe es of the Company and are sub to time-ba sed ve sting. These potential shares were excluded f rom the computation of ba sic loss per share as these shares are not considered outstanding until ve sted. ( p) I ncom e T axes The Company follows the liability method under ASC Topic 740, “Income Taxes”, (“ASC 740”). The primary objectives of accounting for taxes under ASC 740 are to (a) recognize the amount of tax payable for the current year and (b) recognize the amount of deferred tax liability or asset for the future tax consequences of events that have been reflected in the Company’s financial statements or tax returns. The Company has provided a full valuation allowance against its deferred tax assets at December 31, 2016 and 2015, as it is more likely than not that the deferred tax asset will not be realized. Any subsequent changes in the valuation allowance will be recorded through operations in the provision (benefit) for income taxes. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10 also provides guidance on de-recognition, classification, interest and penalties, disclosure and transition. ) S tock B ased C om pensati on The Company maintains stock- ba sed incentive plans, under which it provi des stock incentive s to employe es, directors and contractors. The Company may grant to employe es, directors and contractors, options to purchase common stock at an exercise price equal to the market value of the stock at the date of grant. The F-16 A ( q - 2 0 1 6 2 0 1 5 2 0 1 4 D D 2 0 1 6 2 0 1 5 2 0 1 4 1 , 9 3 6 , 7 4 6 2 , 0 8 8 , 3 9 4 1 , 7 2 7 , 2 0 4 2 0 1 6 2 0 1 5 2 0 1 4 D D 2 0 1 6 2 0 1 5 2 0 1 4 1 , 9 3 6 , 7 4 6 2 , 0 8 8 , 3 9 4 1 , 7 2 7 , 2 0 4 iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Summary of Significant Accounting Policies (continued) ) S tock B ased C om pensati on (continued) Company may grant restricted stock to employe es and directors. The underlyi ng shares of the restricted stock grant are not issued until the shares ve st, and compensation expense is ba sed on the stock price of the shares at the time of grant. The Company follows FASB ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”), for all stock-based compensation. Under this application, the Company is required to record compensation expense ove r the ve sting period f or all awards granted. The Company uses the Black-Scholes option pricing model to value stock options which requires extensive use of accounting judgment and financial estimates, including estimates of the expected term participants will retain their ve sted stock options be f ore exercising them, the estimated vol atility of its common stock price ove r the expected term, the risk f ree rate, expected divi dend yi eld, and the numbe r of options that will be forfeited prior to the completion of their vesting requirements. The f air v alue of restricted stock is determined b ased on the stock price of the underly ing option on the date of the grant. The Company granted performance based restricted stock during 2016 based on achievement of certain revenue targets. Compensation cost for performance based restricted stock requires significant judgment regarding prob ab ility of the perf ormance ob j ectiv es and compensation cost is re-measured at ev ery reporting period. As a result compensation cost could vary significantly during the performance measurement period. Application of alternative assumptions could produce significantly different estimates of the fair value of stock-based compensation and consequently, the related amounts recognized in the Consolidated Statements of Operations. ( r) F ai r V alu e M easu rem ents The Company follows the provisions of FASB ASC Topic 820, “Fair Value Measurement and Disclosures” (“ASC 820”). This topic defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 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 liabi lity transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 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 obs erva bl e and the last unobs erva bl e, that may be used to measure f air va lue which are the f ollowing: in an orderly  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 obs erva bl e or can be corrobor ated b of the assets or liabi lities. erva bl e marke t data f or subs tantially t he f ull term y obs  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 marke t accounts. ’ s assets that are measured at f air va lue on a recurring ba sis relate to the Company ’ s money The money market funds are included in cash and cash equivalents in the accompanying balance sheet, and are considered a level 1 investment as they are valued at quoted market prices in active markets. F-17 ( q - iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Summary of Significant Accounting Policies (continued) ( r) F ai r V alu e M easu rem ents (continued) The f ollowing tabl e sets f orth Company within the f air va lue hierarchy ’ s assets which are measured at f air va lue on a recurring ba sis b y leve l F ai r v alu e m easu rem ents u si ng : ( L ev el 1 ' s) as of D ecem L ev el 2 b er 3 , 2 L ev el 3 T otal A ssets M oney mark et accounts $ 6,622 $ - $ - $ 6,622 Total A ssets $ 6,622 $ - $ - $ 6,622 F ai r v alu e m easu rem ents u si ng : ( L ev el 1 ' s) as of D ecem L ev el 2 b er 3 , 2 L ev el 3 T otal A ssets M oney mark et accounts $ 13,577 $ - $ - $ 13,577 Total A ssets $ 13,577 $ - $ - $ 13,577 Items Measured at Fair Value on a Nonrecurring Basis Certain assets, including long-liv ed assets and goodwill, are measured at f air va lue on a nonrecurring ba sis. These assets are recognized at fair value when they are deemed to be impaired. In 2015 the Company recorded a $27.4 million impairment consisting of $14.0 million related to goodwill and $13.4 million related to long- lived assets as discussed in Note (h) and Note (i) and re-measured long-lived assets and goodwill of the Therapy reporting unit at f air va lue as of the impairment date as noted in the f ollowing tabl e. The f air va lues of long-lived assets and goodwill were measured using Level 3 inputs. ( s) R ecently I ssu ed A ccou nti ng S tand ard s In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. Since then, the FASB has also issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principals versus Agent Considerations and ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, which further elaborate on the original ASU No. 2014-09. The core principle of these updates is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgments and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In July 2015, the FASB approved a one-year deferral of the effective date to January 1, 2018, with early adoption to be permitted as of the original effective date of January 1, 2017. Once this standard becomes effective, companies may use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We have performed an initial assessment of ASU 2014-09, and expect that our revenue recognition will not be materially impacted by this new guidance. We are currently calculating the impact of all expected changes from this guidance, and expect to have these calculations complete during the second half of fiscal 2017. After completing these calculations, we will then determine the transition method to b e applied upon adoption. In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with F-18 . 0 0 0 1 0 1 5 0 0 0 1 0 1 6 iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Summary of Significant Accounting Policies (continued) ( s) R ecently I ssu ed A ccou nti ng S tand ard s (continued) classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements, however the adoption of the standard is expected to increase bot h assets and liabi lities f or leases that would previ ously have be en of f -ba lance sheet operating leases. In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This update was issued as part of a simplification effort for the accounting of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabi lities, increases the amount of employe e’ s shares repurchased f or tax withholding purposes without triggering liabi lity accounting, an accounting policy election to account f or f orf eitures as they occur, and clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the statement of cash flows. The amendment is effective for annual periods beginning after December 15, 2016, and interim periods thereafter. Early adoption is permitted. The Company expects the adoption of ASU 2016-09 to impact net operating losses, however the Company currently has a full va luation allowance against the net operating losses. In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230)”, a consensus of the FASB’s Emerging Issues Task Force. This update is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The update requires cash payments for debt prepayment or debt extinguishment costs to be classified as cash outflows for financing activities. It also requires cash payments made soon after an acquisition’s consummation date (approximately three months or less) to be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities. The amendment is effective for annual periods beginning after December 15, 2017, and interim periods thereafter. Early adoption is permitted. The Company does not expect the adoption of this amendment will have a material impact on our consolidated financial statements. (2) Acquisitions Acquisition of VuComp Cancer detection portfolio On January 13, 2016, the Company completed the acquisition of the VuCOMP cancer detection portfolio, including the M-Vu computer aided detection (CAD) technology platform. The acquisition includes an extensive library of related clinical data, VuCOMP’s key personnel and the customer base that existed at closing of the transaction. The acquisition of the key personnel and clinical data is expected to contribute to the ongoing development of the Company’s CAD technology which will be used for future cancer detection research and patents. A s the Company considered this to be a bus iness combi nation, the assets were va lued in accordance with ASC Topic 805, “Business Combinations” (“ASC 805”). As noted below, the Company acquired VuComp’s M-Vu Breast Density product in April 2015. In connection with the diligence of the January 2016 acquisition, VuComp disclosed that it had previously entered into a license agreement pursuant to which it issued an irrevoc abl e, roya lty- f ree worldwide license to a third party . On December 24, 2015, iCAD notified VuComp of a claim under the April 2015 asset purchase agreement based on the disclosure of the third party license agreement, which iCAD believed constituted a breach of VuComp’s representation as to its exclusive ownership of its intellectual property at the time of the April 2015 transaction. In connection with the purchase of the VuComp cancer detection portfolio, the Company provi ded a release of the af orementioned claim. The Company determined that this claim was a component of the purchase price. The Company determined the va lue of litigation settlement as the excess of the f air value of the business acquired over the cash consideration paid. As a result the Company recorded a gain on F-19 iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (2) Acquisitions (continued) litigation settlement of $249,000 in the first quarter of 2016, which is a component of the purchase price as noted be low: A mount ( 000' s) hsaC A cq uisition litigation settlement P urchase price 6 $ 249 $ 255 The amount allocated to the acquired assets was estimated primarily through the use of discounted cash flow valuation techniques. Appraisal assumptions utilized under this method include a forecast of estimated future net cash flows, as well as discounting the future net cash flows to their present value. The following is a summary of the allocation of the total purchase price ba sed on the estimated f air va lues as of the date of the acquisition and the amortizable life: A mount ( 000' s) Estimated amortiz ab le lif e Current assets tnempiuqe dna ytreporP stessa elbignatni elbaifitnedI lliwdooG seitilibail tnerruC seitilibail mret-gnoL P urchase price $ 84 56 996 392 )082( )606( $ 255 3 Y ears 1-10 Y ears The assets obtained in the acquisition of VuComp’s M-Vu Cancer detection portfolio (including the M-Vu breast density product) and the anticipated future revenues are included in the Detection segment and, accordingly , the goodwill resulting f rom the purchase price allocation is included in goodwill of the Detection segment. The Company has tax basis in the goodwill that resulted from the VuComp acquisition of $293,000 which is amortized over a 15 year period. Included in revenue of the Detection segment for the year ended December 31, 2016 is approximately $0.2 million as a result of this acquisition. Pro forma results of operations have not be en presented be cause the ef f ect of the bus iness combi nation was not material to our consolidated financial results. Acquisition of VuComp M-Vu Breast Density Assets: On April 29, 2015, pursuant to the terms of the Asset Purchase Agreement with VuComp, the Company purchased VuComp’s M-Vu Breast Density asset for $1,700,000 in cash. The Company considered the acquisition to be an acquisition of a business as the Company acquired the Breast Density product and certain customer liabilities which were considered to be an integrated set of activities at acquisition. Under the terms of the agreement, the Company acquired the breast density intellectual property product, which has been integrated with the Company’s PowerLook Advanced Mammography Platform (AMP). PowerLook AMP is a modular solution designed to provi de adva nced tools f or br east disease detection and analys is, including CAD for tomosynthesis. As the Company considered this to be a business combination, the assets were valued in accordance with ASC Topic 805, “Business Combinations” (“ASC 805”). The amount allocated to the acquired assets was estimated primarily through the use of discounted cash flow valuation techniques. Appraisal assumptions utilized under this method include a forecast of estimated future net cash flows, as well as discounting the future net cash flows to their present value. The acquired technology F-20 iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (2) Acquisitions (continued) is be ing amortiz ed ove r the estimated usef ul lif e of approximately eight ye ars and nine months f rom the closing of the transaction. The f ollowing is a summary of the allocation of the total purchase price ba sed on the estimated fair values as of the date of the acquisition and the amortizable life (in thousands): D ev eloped Technology lliwdooG ecirp esahcruP Estimated A mortiz ab le if e 8 y ears 9 months A mount $ 900 008 $ 007,1 The assets obtained in the acquisition of VuComp’s M-Vu Breast Density product and the anticipated future revenues are included in the Detection segment and, accordingly, the goodwill resulting from the purchase price allocation is included in goodwill of the Detection segment. The goodwill is deductible for income tax purposes. A ssets and L i ab i li ti es H eld for S ale 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 in January 2017 less a holdback reserve of $350,000 for a net of approximately $2.9 million. In accordance with ASC 360-10-35-43, the Company determined that it had assets held for sale as of December 31, 2016. The Company performed an evaluation to determine if the sale constituted discontinued operations and concluded that the sale did not represent a maj or strategic shif t, and accordingly it is not presented as discontinued operations. In addition the Company determined the sale constituted the sale of a business in accordance with ASC 805. In connection with the transaction, the Company allocated $394,000 of goodwill to assets held for sale. The allocation was based on the fair value of the assets sold relative to the fair value of the Detection reporting unit as of the date of the agreement, based on the guidance from ASC 350-20-40-3. Assets and liabilities held for sale at December 31, 2016 are as follows (in thousands): A ssets H eld f or Sale A ccounts Receiv ab le yrotnevnI I ntangib le assets llocated G oodwill latoT iab ilities H eld f or Sale D ef erred Rev enue latoT $ 98 2 810 394 403,1 $ $ 832 238 The Company expects to record an approximate gain of $2.5 million as of the closing date. F-21 ( 3 ) L A L iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) i nanci ng A rrange m ents In December, 2011, the Company entered into several agreements with entities affiliated with Deerfield Management, a healthcare investment fund (“Deerfield”), pursuant to which Deerfield agreed to provide $15 million in funding to the Company. The agreements consisted of a Facility Agreement (the “Facility Agreement”), a Revenue Purchase Agreement (the “Revenue Purchase Agreement”) and the issuance of warrants to purchase up to 550,000 shares of the Company’s common stock at an exercise price of $3.50 (the “Warrants”). On April 30, 2014, the Company agreed to pay Deerfield $4.1 million to terminate the Revenue Purchase A greement, which eliminated the abi lity to extend the last debt paym ent f or an additional ye ar and eliminated the payment obligation for 2017 under the Revenue Purchase Agreement. The Company recorded a loss of $0.9 million in connection with termination of the Revenue Purchase Agreement. In addition, Deerfield exercised their Warrants, for an aggregate purchase price of $1,575,000, and the Company issued 450,000 shares of common stock to Deerfield, pursuant to the terms of the Warrants. The Warrants to purchase an additional 100,000 shares of common stock were cancelled, since these Warrants were exercisable only in the eve nt the Company e xtended the last debt paym ent f or an additional ye ar. On March 31, 2015, the Company repaid in full the aggregate amount outstanding under the Deerfield Facility Agreement. The Facility Agreement was to mature on December 29, 2016 and was able to be repaid prior to the maturity date at the Company ’ s option without penalty or premium. The Company used cash on hand to pay the $11.25 million outstanding principal amount due under the Facility Agreement and approximately $162,000 in accrued and unpaid interest on such principal amount. The Company recorded a loss on the extinguishment of debt of approximately $1.7 million at the termination date in the quarter ended March 31, 2015. The f ollowing amounts are included in interest expense in our consolidated statement of operations f or the years ended December 31, 2016 and 2015 (in thousands): Cash interest expense N on-cash amortiz ation of deb t discount A mortiz ation of deb t costs A mortiz ation of settlement ob ligations I nterest expense capital lease Capital lease - f air v alue amortiz ation Total interest expense D ecemb er 31, 2016 $ - - - 82 70 ( 89) 63 $ D ecemb er 31, 2015 163 $ 254 13 146 220 ( 146) 650 $ Cash interest expense represents the amount of interest paid in cash under the agreements, which represents the interest of 5.75% on the Facility Agreement that was terminated in March 2015. Non-cash amortization is the amortiz ation of the discount on the Facility A greement. The amortiz ation of debt costs represents the costs incurred with the financing, which is primarily the facility fee and the finder’s fee which had been capitalized and was expensed using the effective interest method. The facility fee and finders fee were written off with the termination of the Facility A greement and were included in the loss on extinguishment of debt . The amortiz ation of the settlement ob ligations represent the interest associated with the settlement agreements f or both Zeiss and Hologic, Inc.(“Hologic”), see Note 9(f) to our Consolidated Financial Statements. F-22 ( 4 ) F iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) A ccru ed Expenses Accrued expenses consist of the following at December 31 (in thousands): 2016 2015 $ $ and related expenses A ccrued salary A ccrued accounts pay ab le A ccrued prof essional f ees A ccrued short term settlement costs Other accrued expenses D ef erred rent (6) Stockholders’ Equity ( a) S tock O pti ons 1,878 2,269 316 474 48 3 4,988 1,765 1,518 425 418 52 42 4,220 $ $ The Company has five stock option or stock incentive plans, which are described as follows: The 2002 Stock Option Plan (the “2002 Plan”). ’ s common stock The 2002 Plan was adopted by the Company’s stockholders in June 2002. The 2002 Plan provides for the granting of non-qualifying and incentive stock options to employees and other persons to purchase up to an aggregate of 100,000 shares of the Company . The purchase price of each share f or which an option is granted is determined by the Board of Directors or the Committee appointed by the Board of Directors provided that the purchase price of each share for which an incentive option is granted cannot ’ s common stock on the date of grant, except f or options be less than the f air marke t va lue of the Company granted to 10% stockholders for whom the exercise price cannot be less than 110% of the market price. Incentive options granted to date under the 2002 Plan vest 100% over periods extending from six months to five years from the date of grant and expire no later than ten years after the date of grant, except for 10% holders whose options expire not later than five years after the date of grant. Non-qualifying options granted under the 2002 Plan are generally exercisable over a ten year period, vesting 1/3 each on the first, second, and third anniversaries of the date of grant. At December 31, 2016, there are no further options available for grant under the 2002 Plan. The 2004 Stock Incentive Plan (the “2004 Plan”). ’ s common stock The 2004 Plan was adopted by the Company’s stockholders in June 2004. The 2004 Plan provides for the grant of any or all of the following types of awards: (a) stock options, (b) restricted stock, (c) deferred stock and (d) other stock-based awards. The 2004 Plan provides for the granting of non-qualifying and incentive stock options to employees and other persons to purchase up to an aggregate of 200,000 shares of the Company . The purchase price of each share f or which an option is granted is determined by the Board of Directors or the Committee appointed by the Board of Directors provided that the purchase price of each share f or which an option is granted cannot be less than the f air marke t va lue of the Company ’ s common stock on the date of grant, except for incentive options granted to 10% stockholders for whom the exercise price cannot be less than 110% of the market price. Incentive options granted under the 2004 Plan generally vest 100% over periods extending from the date of grant to five years from the date of grant and expire not later than ten years after the date of grant, except for 10% holders whose options expire not later than five years after the date of grant. Non-qualifying options granted under the 2004 Plan are generally exercisable over a ten year period, vesting 1/3 each on the first, second, and third anniversaries of the date of grant. At December 31, 2016, there are no further shares available for grant under the 2004 Plan. F-23 ( 5 ) iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (6) Stockholders’ Equity (continued) ( a) S tock O pti ons (continued) The 2005 Stock Incentive Plan (the “2005 Plan”). ’ s common stock The 2005 Plan was adopted by the Company’s stockholders in June 2005. The 2005 Plan provides for the grant of any or all of the following types of awards: (a) stock options, (b) restricted stock, (c) deferred stock and (d) other stock-based awards. The 2005 Plan provides for the granting of non-qualifying and incentive stock options to employees and other persons to purchase up to an aggregate of 120,000 shares of the Company . The purchase price of each share f or which an option is granted is determined by the Board of Directors or the Committee appointed by the Board of Directors provided that the purchase price of each share f or which an option is granted cannot be less than the f air marke t va lue of the Company ’ s common stock on the date of grant, except for incentive options granted to 10% stockholders for whom the exercise price cannot be less than 110% of the market price. Incentive options granted under the 2005 Plan generally vest 100% over periods extending from the date of grant to three years from the date of grant and expire not later than five years after the date of grant, except for 10% stockholders whose options expire not later than five years after the date of grant. Non-qualifying options granted under the 2005 Plan are generally exercisable over a ten year period, vesting 1/3 each on the first, second, and third anniversaries of the date of grant. At December 31, 2016, there are no further options available for grant under the 2005 Plan. The 2007 Stock Incentive Plan (the “2007 Plan”). The 2007 Plan was adopted by the Company’s stockholders in July 2007 and amended in June 2009. The 2007 Plan provides for the grant of any or all of the following types of awards: (a) stock options, (b) restricted stock, (c) deferred stock and (d) other stock-based awards. Awards may be granted singly, in combination, or in tandem. Subject to anti-dilution adjustments as provided in the 2007 Plan, (i) the 2007 Plan provides for a total of 1,050,000 shares of the Company ’ s common stock to be ava ilabl e f or distribut ion pursuant to the 2007 Plan, and (ii) the maximum number of shares of the Company’s common stock with respect to which stock options, restricted stock, def erred stock, or other stock- ba sed awards may be granted to any participant under the 2007 Plan during any calendar year or part of a year may not exceed 160,000 shares. The 2007 Plan provides that it will be administered by the Company’s Board of Directors (“Board”) or a committee of two or more members of the Board appointed by the Board. The administrator will generally have the authority to administer the 2007 Plan, determine participants who will be granted awards under the 2007 Plan, the size and types of awards, the terms and conditions of awards and the form and content of the award agreements representing awards. Awards under the 2007 Plan may be granted to employees, directors, consultants and advi sors of the Company and its subs idiaries. H oweve r, only employe es of the Company and its subs idiaries will be eligibl e to receive options that are designated as incentive stock opt ions. With respect to options granted under the 2007 Plan, the exercise price must be at least 100% (110% in the case of an incentive stock option granted to a 10% stockholder) of the fair market value of the common stock subject to the award, determined as of the date of grant. Restricted stock awards are shares of common stock that are awarded subject to the satisfaction of the terms and conditions established by the administrator. In general, awards that do not require exercise may be made in exchange for such lawful consideration, including services, as determined by the administrator. At December 31, 2016, there were 57,260 shares available for issuance under the 2007 Plan. The 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan was adopted by the Company’s stockholders in May 2012 and amended in May 2014. The 2012 Plan, as amended, provides for the grant of any or all of the following types of awards: (a) stock options, (b) restricted stock, (c) deferred stock and (d) other stock-based awards. Awards may be granted singly, in combination, or in tandem. Subject to anti-dilution adjustments as provided in the amended 2012 Plan, (i) the amended 2012 Plan provides for a total of 1,600,000 shares of the Company’s common stock to be available for distribution pursuant to the amended 2012 Plan, and (ii) the maximum number of shares of the Company’s common stock with respect to which stock options, restricted stock, def erred stock, or other stock- ba sed awards may be granted to any participant under the amended 2012 Plan during any calendar year or part of a year may not exceed 250,000 shares. F-24 iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (6) Stockholders’ Equity (continued) ( a) S tock O pti ons (continued) The 2012 Plan provides that it will be administered by the Company’s Board of Directors (“Board”) or a committee of two or more members of the Board appointed by the Board. The administrator will generally have the authority to administer the 2012 Plan, determine participants who will be granted awards under the 2012 Plan, the size and types of awards, the terms and conditions of awards and the form and content of the award agreements representing awards. Awards under the 2012 Plan may be granted to employees, directors, consultants and advi sors of the Company and its subs idiaries. H oweve r, only employe es of the Company and its subs idiaries will be eligibl e to receive options that are designated as incentive stock opt ions. With respect to options granted under the 2012 Plan, the exercise price must be at least 100% (110% in the case of an incentive stock option granted to a 10% stockholder) of the fair market value of the common stock j ect to the award, determined as of the date of grant. Restricted stock awards are shares of common stock sub that are awarded sub the administrator. j ect to the satisf action of the terms and conditions establ ished b In general, awards that do not require exercise may be made in exchange for such lawful consideration, including services, as determined by the administrator. At December 31, 2016, there were 155,964 shares available for issuance under the 2012 Plan. y The 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan was adopted by the Company’s stockholders in May 2016. The 2016 Plan provides for the grant of any or all of the following types of awards: (a) non-qualified stock options and incentive stock options, (b) stock appreciation rights, (c) restricted stock awards and restricted stock units, (d) unrestricted stock awards, (e) cash-based awards, (f) performance share awards and (g) dividend equivalent rights. Subject to anti-dilution adjustments as provided in the 2016 Plan, (i) the 2016 Plan provides for a total of 1,700,000 shares of the Company’s common stock to be available for distribution pursuant to the 2016 Plan, and (ii) the maximum number of shares of the Company’s common stock with respect to which stock options or stock appreciation rights may be granted to any one individual under the 2016 Plan during any one calendar year period may not exceed 1,000,000 shares. No more than 1,000,000 shares of common stock may be issued in the f orm of incentiv e stock options and no more than 50,000 shares of stock may be issued pursuant to awards to non-employe e directors. The 2016 Plan provides that it will be administered by the Company’s Compensation Committee. The Compensation Committee has the authority to administer the 2016 Plan, determine participants, from among the individuals eligible for awards, who will be granted awards under the 2016 Plan, make any combination of awards to participants and determine the specific terms and conditions of awards subject to the 2016 Plan. Awards under the 2016 Plan may be granted to full or part-time officers, employees, non-employee directors and other key persons (including consultants) of the Company and its subsidiaries. With respect to stock options granted under the 2016 Plan, the exercise price will be determined by the Compensation Committee but may not be less than 100% of the fair market value of the common stock sub j ect to the award, determined as of the date of grant. Regarding incentive stock options, including that the aggregate grant date f air marke t va lue of the shares of stock with respect to which incentive stock options granted under the 2016 Plan and any other plan of the Company or its parent and subsidiary corporations become exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. To the extent that any incentive stock option exceeds this limit, it shall constitute a non-qualified stock option. Restricted stock awards are shares of common stock j ect to the satisf action of the terms and conditions established by the Compensation Committee. In general, awards that do not require exercise may the Compensation Committee. At December 31, 2016, there were 1,269,722 shares available for issuance under the 2016 Plan. be made in exchange f or such lawf ul consideration, including servi ces, as determined b that are awarded sub y F-25 iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (6) Stockholders’ Equity (continued) ( a) S tock O pti ons (continued) summary of stock opt ion activi ty f or all stock opt ion plans is as f ollows: N umb er of Shares v erage eighted A Exercise P rice eighted A v erage Remaining Contractual Term Outstanding, J anuary 1, 2014 ranted Exercised Forf eited Outstanding, D ecemb er 31, 2014 ranted Exercised Forf eited Outstanding, D ecemb er 31, 2015 ranted Exercised Forf eited Outstanding, D ecemb er 31, 2016 Exercisab le at D ecemb er 31, 2014 Exercisab le at D ecemb er 31, 2015 Exercisab le at D ecemb er 31, 2016 1,334,955 281,043 ( 162,528) ( 35,583) 1,417,887 363,239 ( 79,472) ( 129,656) 1,571,998 127,500 ( 75,583) ( 198,567) 1,425,348 955,210 1,087,725 1,054,211 $4. 75 $8. 08 $4. 36 $13. 62 $4. 34 $6. 58 $4. 60 $7. 38 $5. 05 $5. 46 $2. 62 $6. 19 $5. 05 $4. 43 $4. 33 $4. 71 6. 1 y ears 5. 2 y ears Available for future grants at December 31, 2016 from all plans: 1,482,947 The Company follows (amounts in thousands): ’ s stock- ba sed compensation expense, including options and restricted stock y category is as Y ears End ed D ecem b er 3 eunever fo tsoC Engineering and product dev elopment selas dna gnitekra G eneral and administrativ e expense 6 $ 329 776 1,295 $ 2 41 $ 223 956 1,239 $ 2 31 $ 165 353 787 $ 1 As of December 31, 2016, there was $3.8 million of total unrecognized compensation costs related to unve sted options and restricted stock That cost is expected to be recogniz ed ove r a weighted ave rage period of 1.1 ye ars. F-26 A b . G G G W W 2 0 1 6 2 0 1 5 2 0 1 4 M , 3 0 7 , 1 3 5 , 3 1 8 1 , iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (6) Stockholders’ Equity (continued) ( a) S tock O pti ons (continued) Options granted under the stock incentive plans were valued utilizing the Black-Scholes model using the f ollowing assumptions and had the f ollowing f air va lues: Y ears End ed D ecem b er 3 etar tseretni eerf-ksir egarev dleiy dnedivid detcepxE efil detcepxE ytilitalov detcepxE eighted av erage exercise price eulav riaf egareva dethgie %89.0 enoN sraey 5.3 %79.0 enoN sraey 5.3 %58.0 enoN sraey 5.3 %3.57 ot %5.86 %4.96 ot %2.46%2.57 ot %5.06 $5. 46 66.2$ $6. 58 71.3$ $8. 09 48.3$ The Company’s 2016, 2015 and 2014, average expected volatility and average expected life is based on the average of the Company’s historical information. The risk-free rate is based on the rate of U.S. Treasury zero- coupon issues with a remaining term equal to the expected life of option grants. The Company has paid no divi dends on its common stock i n the past and does not anticipate payi ng any di vi dends in the f uture. Intrinsic values of options (in thousands) and the closing market price used to determine the intrinsic values are as f ollows: gnidnatstuO elbasicrexE desicrexE Y ears End ed D ecem b er 3 904 $ 904 102 019,1 $ 016,1 713 343,6 $ 426,4 180,1 13/21 ta ecirp kcots 42.3 $ 71.5 $ 71.9 $ ) R estri cted S tock 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. The Company granted a total of 162,500 shares of performance based restricted stock during 2016 with performance measured on meeting a revenue target based on growth for fiscal year 2017 and vesting in three equal installments with the first installment vesting upon measurement of the goal. In addition, a maximum of 108,333 additional shares are available to be earned ba sed on exceeding the reve nue goal. A ssumptions used to determine the va lue of perf ormance ba sed grants of restricted stock include the probability of achievement of the specified revenue targets. Compensation cost for performance based restricted stock requires significant judgment regarding probability of achieving the perf ormance ob j ective s and compensation cost is re-measured at eve ry reporting period. A s a result compensation cost could vary significantly during the performance measurement period. A summary of restricted stock activity for all equity incentive plans is as follows: Beginning outstanding b alance detnarG detseV detiefroF Ending outstanding b alance Y ears End ed D ecem b er 3 516,396 877,543 )030,982( )647,16( 309,317 666,253 )857,421( )928,02( 216,250 005,081 )434,58( )999,1( F-27 ( b 2 0 1 6 2 0 1 5 2 0 1 4 A W W 1 , 2 0 1 6 2 0 1 5 2 0 1 4 1 , 2 0 1 6 2 0 1 5 2 0 1 4 5 1 1 , 3 9 8 5 1 6 , 3 9 6 3 0 9 , 3 1 7 1 , iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (6) Stockholders’ Equity (continued) ) R estri cted S tock (continued) Intrinsic values of restricted stock (in thousands) and the closing market price used to determine the intrinsic va lues are as f ollows: Y ears End ed D ecem b er 3 gnidnatstuO detseV 756,1 $ 639 076,2 $ 546 638,2 $ 387 13/21 ta ecirp kcots 42.3 $ 71.5 $ 71.9 $ I ncom e T axes The components of income tax expense for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands): 2016 2015 2014 b enef it) Current prov ision ( laredeF etatS D ef erred prov ision: Federal State - $ 96 69 $ - $ 59 59 $ $ $ 6 $ 1 $ 7 $ $ $ $ ( 65) )41( ( 79) ( 44) 118 74 65 14 79 Total $ 76 $ 61 $ 153 summary of the dif f erences be tween the Company ’ s ef f ectiv e income tax rate and the Federal statutory income tax rate for the years ended December 31, 2016, 2015 and 2014 is as follows: yrotutats laredeF etar State income taxes, net of f ederal b enef it N et state impact of def erred rate change esnepxe noitasnepmoc kcotS lliwdoog no noitazitroma xaT tnarraw no ssoL fid tnenamrep rehtO Change in v aluation allowance stiderc xaT fE xat emocni evitcef secneref 2016 2015 %0.43 2. 8% 0. 2% )%2.3( )%1.0( %0.0 )%4.0( ( 37. 3%) %2.3 )%8.0( %0.43 2. 5% ( 0. 1%) )%7.01( %2.0 %0.0 )%1.0( ( 26. 6%) %9.0 %1.0 2014 %0.43 5. 5% 13. 0% )%6.9( )%0.9( %6.17 )%1.1( ( 222. 6%) %8.001 )%4.71( Deferred tax assets and liabilities are recognized for the expected future tax consequences of net operating loss carryforwards, tax credit carryforwards and temporary differences between the financial statement carryi ng amounts and the income tax ba sis of assets and liabi lities. A va luation allowance is applied against any net def erred tax asset if , ba sed on the ava ilabl e evi dence, it is more like ly than not that the def erred tax assets will not be realiz ed. F-28 ( 7 ) A ( b 2 0 1 6 2 0 1 5 2 0 1 4 1 , : iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) I ncom e T axes (continued) Deferred income taxes reflect the impact of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The Company has f ully reserv ed the net def erred tax assets, as it is more lik ely than not that the def erred tax assets will not b e utilized. Deferred tax assets (liabilities) are composed of the following at December 31 (in thousands): 2016 2015 I nv entory yrotnevnI ( Section 263A sevreser sevreser elbavieceR slaurcca rehtO eunever derrefeD A ccumulated depreciation/ amortiz ation snoitpo kcotS ygolonhcet depoleveD stiderc xaT LON yrrac drawrof N et def erred tax assets ecnawolla noitaulaV G oodwill tax amortiz ation $ $ 418 501 56 434 512 477 855,2 495,3 090,3 568,04 51,821 )128,15( ( 7) ( 7) 588 106 159 591 367 417 2,529 3,554 2,765 36,706 47,782 ( 47,782) D ef erred tax liab ility $ $ - The increase in net def erred tax assets and corresponding va luation allowance is primarily attribut abl e to f erences in amortiz ation additional net operating losses, additional research and deve lopment credits, and dif periods on the Company’s intangible assets. The Company completed an asset acquisition in January 2016 which resulted in $293,307 of goodwill. For book purposes, the goodwill was classified as an indefinite lived asset and tested f or impairment each ye ar. For tax, the Company is allowed amortiz ation expense ove r a 15 year life. Due to the indefinite life of the asset for book purposes, the Company could not assume there would be a deferred tax asset available to offset the liability in future years. This created a tax expense in 2016 equal to the tax effected amount of tax amortization, or $6,844 in 2016. As of December 31, 2016, the Company has net operating loss carryforwards totaling approximately $111.7 million expiring between 2019 and 2036. A portion of the total net operating loss carryforwards amounting to approximately $35.3 million relate to the acquisition of Xoft, Inc. As of December 31, 2016, the Company has provi ded a va luation allowance f or its net operating loss carry f orwards due to the uncertainty of the Company’s ability to generate sufficient taxable income in future years to obtain the benefit from the utilization of the net operating loss carryforwards. In the event of a deemed change in control, an annual limitation imposed on the utiliz ation of the net operating losses may result in the expiration of all or a portion of the net operating loss carry f orwards. There were no net operating losses utiliz ed f or the ye ars ended December 31, 2016 or 2015. The Company currently has approximately $13.8 million (including approximately $9.5 million that relate to Xoft, Inc.) in net operating losses that are subject to limitations, of which approximately $2.0 million (including approximately $473,000 that relates to Xoft, Inc.) can be used annually through 2035. The Company has available tax credit carryforwards (adjusted to reflect provisions of the Tax Reform Act of 1986) to offset future income tax liabilities totaling approximately $3.1 million. The tax credits related to X of t have be en f ully reserve d f or and as a result no def erred tax asset has be en recorded. The credits expire in various years through 2036. ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position tak en or expected to b e tak en in a tax return and also prov ides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. F-29 ( 7 ) ) iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) I ncom e T axes (continued) As of December 31, 2016 and 2015, the Company had no unrecognized tax benefits and no adjustments to liabilities or operations were required under ASC 740-10. The Company’s practice is to recognize interest and penalty expenses related to uncertain tax positions in income tax expense, which was z ero f or the ye ars ended December 31, 2016, 2015 and 2014. The Company files United States federal and various state income f ederal tax returns. G enerally , the Company and state taxing authorities. The Company completed an examination by the Internal Revenue Service with respect to the 2008 tax year in January 2011, which resulted in no changes to the tax return originally filed. The Company i s not under examination b ny ot her f ederal or state j urisdiction f or any t ax ye ar. ’ s three preceding tax ye ars remain sub j ect to examination b y a y The Company does not anticipate that it is reasonably possible that unrecognized tax benefits as of December 31, 2016 will significantly change within the next 12 months. (8) Segment Reporting, Geographical Information and Major Customers ( a) S eg ent R eporti ng In accordance with FASB Topic ASC 280, “Segments”, 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 perf ormance. The Company’s CODM is the Chief Executive Officer (“CEO”). 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: Cancer Detection and Cancer Therapy. The Detection segment consists of our advanced image analysis and workflow products, and the Therapy segment consists of our radiation therapy (“Axxent”) products, and related services. The primary factors used by our CODM to allocate resources are based on revenues, gross profit, operating income or loss, and earnings or loss before interest, taxes, depreciation, amortization, and other specific and non-recurring items (“Adjusted EBITDA”) of each segment. Included in segment operating income are stock compensation, amortiz ation of technology a nd depreciation expense. There are no intersegment reve nues. We do not track our assets by operating segment and our CODM does not use asset information by segment to allocate resources or make operating decisions. F-30 m ( 7 ) iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (8) Segment Reporting, Geographical Information and Major Customers (continued) ( a) S eg ent R eporti ng (continued) Segment revenues, gross profit, segment operating income or loss, and a reconciliation of segment operating income or loss to G loss be f ore income tax is as f ollows ( in thousands, including prior periods which have been presented for consistency): Y ear Ended D ecemb er 31, 2015 2014 2016 S eg m ent rev enu es: noitceteD yparehT euneveR latoT S eg m ent g ross profi t: noitceteD yparehT tiforp ssorg tnemgeS S eg m ent operati ng i ncom e ( loss) noitceteD Therapy Segment operating income ( loss) G eneral, administrativ e, depreciation and amortiz ation expense I nterest expense G ain ( loss) on f air v alue of warrant Other income L oss on deb t extinguishment L oss b ef ore income tax $ $ 331,71 502,9 833,62 $ $ 311,51 504,3 815,81 $ $ 496,5 ( 7,752) ( 2,058) $ $ 19,243 113,22 41,554 $ $ 16,019 133,31 29,350 $ 332,7 ( 28,405) ( 21,172) $ $ $ 18,604 023,52 43,924 $ $ 15,276 159,51 31,227 $ $ 132,7 1,868 9,099 $ $ $ ( 7,912) ( 63) - 10 - ( 10,023) )709,8( ( 650) - 21 )327,1( )134,23( $ $ $ ( 8,284) ( 2,640) 538,1 37 ( 903) ( 856) Segment depreciation and amortization included in segment operating income (loss) is as follows (in thousands): D etection depreciation and amortiz ation noitaicerpeD A mortiz ation Therapy depreciation and amortiz ation D epreciation A mortiz ation $ 322 696 $ 022 532 $ 881 515 $ 970 252 $ 241,1 1,213 $ 448 1,739 F-31 A A P m : iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (8) Segment Reporting, Geographical Information and Major Customers (continued) ) G eogr aph i c I nform ati on The Company ’ s sales are made to customers, distribut ors and dealers of mammography , electronic brachytherapy equipment and other medical equipment, and to foreign distributors of mammography and electronic brachytherapy equipment. Export sales to a single country did not exceed 10% of total revenue in any year. Total export sales were approximately $2.3 million or 9% of total revenue in 2016, $2.3 million or 6% of total revenue in 2015 and $1.8 million or 4% of total revenue in 2014. As of December 31, 2016 and 2015, the Company had outstanding receivables of $0.3 million and $0.5 million, respectively, from distributors and customers of its products who are located outside of the U.S. ( c) M aj or C u stom ers The Company had one major customer, GE Healthcare, with revenues of approximately $3.9 million in 2016, $4.1 million in 2015, and $4.1 million in 2014 or 15%, 10%, and 9% of total revenue, respectively. Cancer detection products are also sold through OEM partners, including GE Healthcare, Fuji Medical Systems, Siemens Medical, Vital Images and Invivo. For the year ended December 31, 2016, these five OEM partners composed approximately 47% of Detection revenues and 30% of revenue overall. OEM partners composed 53% of Detection revenues and 25% of revenue overall for the year ended December 31, 2015 and 53% of Detection revenues and 22% of revenue overall for the year ended December 31, 2014. OEM partners represented $1.5 million or 28% of outstanding receivables as of December 31, 2016, with GE Healthcare accounting for $1.3 million or 23% of this amount. The two largest Cancer Therapy customers composed $0.6 million or 12% of outstanding receivables as of December 31, 2016. These six customers in total represented $2.1 million or 40% of outstanding receivables as of December 31, 2016. C om i tm ents and C onti nge nci es ( a) L ease O li gat i ons As of December 31, 2016, the Company had three lease obligations related to its facilities. The Company’s executive offices are leased pursuant to a five-year lease (the “Lease”) that commenced on December 15, 2006, with renewals in January, 2012 and August 2016 consisting of approximately 11,000 square feet of office space located at 98 Spit Brook Road, Suite 100 in Nashua, New Hampshire (the “Premises”). The August 2016 Lease renewal provides for an annual base rent of $184,518 for the period from March 2017 to February 2020. Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses and obt ain insurance f or the P remises. The Company leases a f acility in San J ose Calif ornia under a non-cancelabl e operating lease which commenced in September, 2012. The facility has approximately 24,250 square feet of office, manufacturing and warehousing space. The operating lease commenced September 2012 with a current annual payment of $295,140 through September 2017, with all amounts payable in equal monthly installments. In September 2016, the Company extended this lease for the period from October 2017 to March 2020 with annual payments of $540,588 from October 2017 to September 2018, $558,120 from October 2018 to September 2019 and $286,368 for the period from October 2019 to March 2020, with all amounts payable in equal monthly installments. Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses and obt ain insurance f or the f acility In addition to the foregoing leases relating to its principal properties, the Company also has a lease for an additional facility in Nashua, New Hampshire used for product repairs, manufacturing and warehousing. Rent expense for all leases for the years ended December 31, 2016, 2015 and 2014 was $745,000, $663,000 and $643,000, respectively. F-32 ( b ( 9 ) m b . iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) C om i tm ents and C onti nge nci es (continued) ( a) L ease O li gat i ons (continued) Future minimum rental payments due under these agreements as of December 31, 2016 are as follows (in thousands): Fiscal Y ear 7102 8102 9102 0202 latoT Operating L eases $ 975 837 647 471 732,2 $ (b) C api tal lease ob li gat i ons In connection with the acquisition of the assets of DermEbx and Radion in 2014, the Company assumed two separate equipment lease obligations with payments totaling approximately $2.6 million through May, 2017. The leases were determined to be capital leases and accordingly the equipment was capitalized and a liability of $2.5 million was recorded. As of December 31, 2016, the outstanding liability for the acquired equipment leases was approximately $0.1 m illion. Future minimum lease payments under all outstanding capital leases are as follows (in thousands): Fiscal Y ear 7102 sub total minimum lease ob ligation tseretni ssel ten ,latoT noitrop tnerruc ssel noitrop mret gnoL Capital L eases $ 98 89 )3( 68 )68( $ - Related Party Lease: . A dditionally , M ’ s common stock Kamal G ogineni is an employe e of one of the Company ’ s subs idiaries and a shareholder of the r. G ogineni is a shareholder of Radion Capital P artners Company (“RCP”). RCP was the lessor under a lease between RCP and DermEbx (the “Lease”). In connection with the Company’s acquisition of assets of Radion and DermEbx that closed in July 2014, one of the assets and obligations that the Company acquired was the Lease. Pursuant to the Lease, the a total of $0.1 million and the liabi lity is included in the minimum lease Company is obl igated to pay payments above, with remaining annual payments of $76,000 in 2017. ( c) O th er C om i tm ents The Company has non-cancelabl e purchase orders with three ke y suppliers executed in the normal course of business that total approximately $0.3 million. In connection with our employee savings plans, our matching contribution for 2016 was approximately $0.4 million in cash. Our matching contribution for 2017 is estimated to be approximately $0.5 m illion in cash. F-33 m ( 9 ) m b iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) C om i tm ents and C onti nge nci es (continued) ) Em ploy ent A gr eem ents The Company has entered into employm ent agreements with certain ke y executive s. The employm ent agreements provi de f or minimum annual salaries and perf ormance-ba sed annual bonus compensation as defined in their respective agreements. In addition, the employment agreements provide that if employment is terminated without cause, the executive will receive an amount equal to their respective base salary then in ef r. Ferry , a period of two ye ars f rom the date of termination, f or M s. Steve ns, a period of eighteen months f rom the date of termination, in each case, plus the pro rata portion of any annual bonu s earned in any employm ent ye ar through the date of termination. f ect f or the greater of the remainder of the original term of employm ent or, f or M r. Christopher and M ( e) F orei gn T ax C lai 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 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 2017. The Company believes that it is not liable for the re-assessment against CADx Medical and continues to def end this position. A s the Company be lieve s that a proba bi lity of a loss is remote, no accrual was recorded as of December 31, 2016. ( f) R oyal ty O li gat i ons In connection with prior litigation, the Company received a nonexclusive, irrevocable, perpetual, worldwide license, including the right to subl icense certain H ologic patents, and a non-compete cove nant as well as an agreement not to seek further damages with respect to the alleged patent violations. In return the Company had a remaining obligation to pay a minimum annual royalty payment of $250,000 payable through 2016. In addition to the minimum annual royalty payments, the litigation settlement agreement with Hologic also provides for payment of royalties if such royalties exceed the minimum payment based upon a specified percentage of f uture net sales on any products that practice the licensed rights. The estimated f air va lue of the patent license and non-compete cove nant is $100,000 and is be ing amortiz ed ove r the estimated remaining useful life of approximately four years. In addition, a liability has been recorded within accrued expenses and accounts payable for future payment and for minimum royalty obligations totaling $0.4 million. During December, 2011, the Company settled litigation with Zeiss and as of December 31, 2016, has a remaining obligation to pay $0.5 million in June 2017. The present value of the liability is estimated at approximately $0.4 million as of December 31, 2016. L i ti gat i on be a party to va rious legal proceedings and claims arising out of the ordinary course of The Company may its business. Although the final results of all such matters and claims cannot be predicted with certainty, the Company currently be lieve s that there are no current proceedings or claims pending against it of which the ultimate resolution would have a material adverse effect on its financial condition or results of operations. H oweve r, should we f ail to preva il in any legal matter or should seve ral legal matters be resolve d against us in the same reporting period, such matters could have a material adve rse ef f ect on our operating results and cash flows for that particular period. 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. L egal costs are expensed as incurred. F-34 ( d m m b ( g ) ( 9 ) m iCAD, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (10) Quarterly Financial Data (in thousands, except per share data, and unaudited) First q uarter Second q uarter Third q uarter Fourth q uarter N et sales G ross profi t $ 6,038 7,369 6,003 6,928 $ 4,186 5,702 4,101 4,529 N et loss $ $ $ $ ( 2,533) ( 1,575) ( 2,675) ( 3,316) I ncom e ( loss) per sh are ( $0. 16) ( $0. 10) ( $0. 17) ( $0. 20) First q uarter Second q uarter Third q uarter Fourth q uarter $ 13,220 11,143 9,582 7,609 $ 9,362 7,878 6,821 5,289 $ $ $ $ ( 1,857) ( 27,786) ( 402) ( 2,402) ( $0. 12) ( $1. 77) ( $0. 03) ( $0. 15) ) - includes goodwill and long-liv ed asset impairment of $27. 4 million h ted ei av erag e nu b er of sh ares ou tstand i ng 15,826 15,904 15,957 16,214 15,605 15,679 15,725 15,733 F-35 W g m 2 0 1 6 2 0 1 5 * ( * EXHIBIT 21 Subsidiaries of iCAD, Inc. N ame J urisdiction of I ncorporation/ Organiz ation X of t, I nc. X of t Solutions, L L C D elaware D elaware F-36 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23.1 We hereby consent to the incorporation by reference into the Registration Statements of iCAD, Inc. and subsidiaries on Forms S-8, (No. 333-201874, 333-187660, 33-72534, No. 333-99973, No. 333-119509, No. 333-139023, No. 333- 144671 No. 333-161959 and No. 333-211656), and on Forms S-3, (No. 333-169716, 333-176777 and 333-178952), of our report dated March xx, 2017, relating to the consolidated financial statements of iCAD, Inc. and subsidiaries as of December 31, 2016, which appears in this Annual Report on Form10-K. Boston, Massachusetts March, 2017 /s/ BDO USA, LLP F-37 EX 3 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Kenneth Ferry, certify that: 1. iCAD, Inc.; I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2016 of 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material f act necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period cove red b his report; y t 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of , and f or, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervi sion, to ensure that material inf ormation relating to the registrant, including its consolidated subs idiaries, is made know n to us b others within those entities, particularly during the period in which this report is be ing prepared; y (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and f ective ness of the disclosure controls and procedures, as of the end presented in this report our conclusions about the ef of the period cove red b his report ba sed on such eva luation; and; y t (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March, 2017 / s/ Kenneth Ferry Kenneth Ferry Chief Executive Officer F-38 H I B I T 1 . 1 EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Richard Christopher, certify that: 1. iCAD, Inc.; I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2016 of 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material f act necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period cove red b his report; y t 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of , and f or, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervi sion, to ensure that material inf ormation relating to the registrant, including its consolidated subs idiaries, is made know n to us b others within those entities, particularly during the period in which this report is be ing prepared; y (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and f ective ness of the disclosure controls and procedures, as of the end presented in this report our conclusions about the ef of the period cove red b his report ba sed on such eva luation; and; y t (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March, 2017 / s/ Richard Christopher Richard Christopher Chief Financial Officer, and Treasurer F-39 EXHIBIT 32.1 iCAD, Inc. C ER PU T 18 U.S.C. SECTION 1350, T PU A SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 O PT ED In connection with the Annual Report of iCAD, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2016 (the “Report”), I, Kenneth Ferry, the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company . Date: March, 2017 / s/ Kenneth Ferry Kenneth Ferry Chief Executive Officer F-40 T I F I C A T I O N R S U A N T O A S D R S U A N T O EXHIBIT 32.2 iCAD, Inc. C ER PU T 18 U.S.C. SECTION 1350, T PU A SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 O PT ED In connection with the Annual Report of iCAD, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2016 (the “Report”), I, Richard Christopher, the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company . Date: March, 2017 / s/ Richard Christopher Richard Christopher Chief Financial Officer and Treasurer F-41 T I F I C A T I O N R S U A N T O A S D R S U A N T O Focus on Growing Opportunities in Cancer Treatment 2016 also brought increased awareness of our Xoft® Electronic Brachytherapy (eBx®) System® in the treatment of nonmelanoma skin cancer (NMSC) and early-stage breast cancer. This technology platform, with the ability to target radiation therapy directly to a tumor site, is supported by a growing body of clinical data, consistently demonstrating eBx to be as safe and effective as a traditional radiation treatment for appropriate selected patients. With a growing incidence rate of NMSC and our ability to treat lesions in a painless, non-invasive manner, we believe that our skin eBx system represents a significant market opportunity for us. In 2016, our revenues in skin eBx were negatively impacted by the disruption initially caused in 2015 related to the uncertainty of reimbursement codes and payment rates for the treatment of NMSC. In January 2016, new skin-specific level III reimbursement codes for skin eBx were established in the U.S. As 2016 progressed, dermatologists became aware of the new reimbursement levels, and we experienced growth in new sites and procedure volumes which continued into the first half of 2017. Supporting this growth, we have completed targeted investments to improve our onboarding process for new customers and selectively added marketing resources to support dermatologists in attracting new patients to their practice. As part of our long-term strategy to secure national reimbursement for our skin cancer treatment, we continued to make strategic investments in clinical trials. In 2016, we completed one such key study, which compared patients treated with electronic brachytherapy to those with similar lesions treated with Mohs surgery. This important and encouraging data, published in a peer-reviewed medical journal, indicated that the Xoft skin eBx system delivered a cancer recurrence rate similar to Mohs surgery at 3 years of patient follow-up. Dear Shareholder: In 2016, we made significant progress in advancing our key product lines and enhancing our market presence. This led to the strengthening of our competitive position, and presents us with expanded and new opportunities for revenue growth in the years ahead. On both the cancer detection and therapy sides of our business, our team is moving forward with key initiatives in clinical research, product and pipeline development and new market development, all aimed at building commercial opportunities around the world. Delivering Leading-Edge Technology in Cancer Detection We continued to deliver innovative software and launched a revolutionary new workflow and cancer detection solution built on artificial intelligence and deep learning, which enhances 3D tomosynthesis breast exams. Our PowerLook® Tomo Detection software was CE marked in Europe in April 2016, and we received PMA approval from the FDA in March of 2017. This is the first product of its kind in the breast health market, and we are extremely excited about its potential. While delivering considerable advantages to patients and clinicians, Powerlook Tomo Detection is a proven- effective technology and presents us with a major new substantial opportunity for global growth. Our cancer detection software now has a platform of over 5,000 existing installed customers. This large installed base positions us well to rapidly leverage the advantages of our tomosynthesis cancer detection software, a landmark workflow tool with the potential to transform breast cancer detection capabilities for radiologists. The installation of our PowerLook software in existing 3D tomosynthesis platforms and potential conversion of 2D platforms represents a significant market opportunity for iCAD of over $250 million, as well as ongoing software maintenance fees. In addition to our direct sales efforts, the PowerLook Tomo Detection software is being offered to customers through a partnership with the GE Healthcare. Together, we are marketing the PowerLook Tomo Detection software to both current and potential new customers. Strong initial interest in the product reflects the need for interpretive tools to support radiologists in reading data-intensive exams in an accurate and efficient manner. iCAD’s U.S. clinical reader study demonstrated that radiologists could improve throughput by reducing their average reading time by approximately 30% without compromising detection accuracy Board of Directors Dr. Lawrence Howard (2) Chairman of the Board, General Partner, Hudson Ventures, LP Ken Ferry Chief Executive Officer, iCAD, Inc. Rachel Brem, M.D.(2), (3) Director of Breast Imaging and Intervention Center Professor & Vice Chair, Department of Radiology The George Washington University Medical Center Anthony F. Ecock (1), (3) Managing Director, The Carlyle Group Steven Rappaport (1) Partner, RZ Capital, LLC Somu Subramaniam (2), (3) Managing Partner and Co-founder of New Science Ventures Robert Goodman, M.D. University of Pennsylvania School of Medicine Elliot Sussman, M.D. (1), (2) Chairman of The Villages Health and Professor of Medicine at the University of South Florida College of Medicine Andrew H. Sassine Director Executive Officers Ken Ferry Chief Executive Officer Richard Christopher Executive Vice President, Chief Financial Officer Stacey Stevens Executive Vice President, Chief Strategy and Commercial Officer (1) Audit Committee Member (2) Compensation Committee Member (3) Nominating & Corporate Governance Committee Member Global Headquarters 98 Spit Brook Road, Suite 100 Nashua, NH 03062 USA +1 866 280 2239 toll free +1 603 882 5200 phone +1 603 218 6658 fax www.icadmed.com Offices 101 Nicholson Lane San Jose, CA 95134 USA +1 866 280 2239 toll free +1 408 493 1500 phone +1 408 493 1501 fax www.xoftinc.com Stock Information NASDAQ Ticker Symbol: ICAD Investor Relations LifeSci Advisors Bob Yedid, 646-597-6989 Bob@lifesciadvisors.com Public Relations ARPR, LLC Erin Bocherer erin@arpr.com +1 855 300 8209 ext 120 phone Sales sales@icadmed.com +1 866 280 2239 toll free +1 603 882 5200 phone Service and Support support@icadmed.com +1 866 280 2239 toll free +1 603 882 5200 phone Transfer Agent Continental Stock Transfer & Trust Company 1 State Street, 30th Floor New York, NY 10004-1561 Independent Auditors BDO USA, LLP Boston, MA Legal Counsel Blank Rome, LLP New York, NY 1 iCAD | 2016 Annual Report Ken Ferry Chief Executive Officer © 2017, iCAD Inc. All rights reserved. iCAD, the PowerLook logos, Xoft, the Xoft logo, Axxent, Electronic Brachytherapy System and eBx are registered trademarks of iCAD, Inc. Reproduction of any of the material contained herein in any format or media without the express written permission of iCAD, Inc. is prohibited. 2016 Annual Report

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