2018 Annual ReportPioneering innovative cancer detection and therapy solutions Dear Stockholder,
2018 was a pivotal year for iCAD, highlighted by
key achievements in both our Cancer Detection and
Cancer Therapy businesses. Importantly, we have a
new leadership team in place that has the Company
well-positioned to continue making significant strides
throughout 2019 and beyond. I was honored to step
into the Chief Executive Officer role in November of
2018. Having spent 30 years in the medical technology
industry, I can tell you with great confidence that iCAD’s
unique artificial intelligence (AI) technology has the
potential to significantly transform both cancer detection
and the assessment of at-risk patients. Our team is firmly
focused on unlocking the significant inherent value that
exists in iCAD’s core technologies.
Significant Progress in Cancer Detection Driven by
iCAD’s Innovative Technology – ProFound AI™
Our Cancer Detection business was bolstered
in December 2018 by the U.S. Food and Drug
Administration (FDA) clearance of our ProFound AI™
system for digital breast tomosynthesis (DBT). The
FDA clearance was based on positive clinical results
from a large reader study that was performed with 24
radiologists who read 260 tomosynthesis cases both
with and without iCAD’s ProFound AI solution.
Built on the latest deep-learning and artificial intelligence
technology, ProFound AI is clinically proven to improve
breast cancer detection rates and reduce unnecessary
patient recall rates. In addition to improving clinical
performance related to breast cancer detection and
false positive rates, study results showed that ProFound
AI can reduce radiologists’ reading time by more than
50 percent on average. An increase in reading time
has been a significant challenge for radiologists when
moving from 2D to 3D mammography.
Our technology is trained to detect malignant soft-tissue
densities and calcifications. It also provides radiologists
with scoring information representing the likelihood
that a detection or case is malignant based on the large
dataset of clinical images used to train the algorithm.
ProFound AI is currently available for use with leading
DBT systems in the U.S., Canada and Europe.
Our ProFound AI product has quickly begun to establish
itself in the marketplace. The demand continues to grow
as anticipated for this revolutionary product offering, and
importantly, customer feedback continues to be highly
positive. We are very pleased with the initial progress
and success our sales team has achieved since the FDA
clearance of ProFound AI late last year.
Michael Klein, Executive Chairman and CEO
Moving Beyond Cancer Detection
We have begun to accelerate our efforts around
our initiatives in breast cancer risk assessment and
prediction. These important initiatives reflect our
planned movement beyond the detection of cancer
under what is currently an age-based screening model
and are indicative of our future effort to move into
the exciting realm of being able to predict cancers
even before they emerge and are detected. This is a
quantum leap beyond the detection of cancer today.
The foundation of this capability is our exclusive risk
prediction license agreement with researchers at The
Karolinska Institute in Stockholm, Sweden.
The goal of this agreement is to go beyond the ability to
predict lifetime breast cancer risk or even a 5 to 10-year
risk. We believe it will be possible to accurately predict
the development of breast cancers within the coming 12
to 24 months, often the interval between normal age-
based screening regimens. There is no other product
on the market today that combines this level of image
analysis and individual predictive risk characteristics.
Favorable Trends Bode Well for the
Future of Cancer Therapy
One of the core focus areas for our new management
team was to improve the performance of the Company’s
Cancer Therapy segment. We believe that a strong
global market interest in general IORT applications,
including prostate, brain and rectal treatments, can be
drivers for that growth. We believe that these additional
applicators in brain and rectal can take us beyond our
current offerings in breast, gynecology and skin and
we see them as important extensions of our product
platform. In addition, we believe there is an opportunity
Board of Directors
Michael Klein
Executive Chairman and CEO
Dr. Rakesh Patel (1), (2), (3)
Chief Executive Officer, Precision Cancer Specialists
Medical Group
Andrew H. Sassine (1), (2), (3)
Chief Financial Officer, Arcturus Therapeutics
Susan Wood, Ph.D. (1), (2), (3)
Chief Executive Officer, VIDA Diagnostics
Executive Officers
Michael Klein
Executive Chairman and CEO
Stacey Stevens
President
R. Scott Areglado
Chief Financial Officer
Jonathan Go
Chief Technology Officer
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating & Corporate Governance Committee Member
© 2019, 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.
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Stock Information
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ICAD
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including precisely targeted strategic additions
throughout the Company. This includes investments
in our commercial infrastructure, marketing, business
development, and medical affairs.
Another example of our investment in human capital
is the formation of a medical advisory board. This
impressive group of individuals includes high profile
key opinion leaders from prestigious sites, both within
and outside the United States. All medical advisory
board members serve in unique leadership positions,
particularly in the areas of mammography, cancer risk
and prediction. These individuals will serve as essential
advisors to the Company as we continue to innovate and
move into new frontiers of breast cancer detection with
our 2D and 3D software for breast tomosynthesis.
Accordingly, we continue to invest in the development
of our future technologies and products, as well.
Importantly, we have a strategic imperative to continue
innovating and developing our AI technology with the
goal of remaining ahead of other competitors that may
enter the market.
Thank You to All of our Stakeholders
In summary, I would like to thank all of iCAD’s stock-
holders, customers and employees for their continued
support. Under new leadership, the Company has
executed a successful turnaround, with both of our
businesses, Cancer Detection and Cancer Therapy,
growing well. While we have more work ahead to
maximize the inherent value in our company, we have
built a solid foundation for success, both now and
in the future. I look forward to reporting our future
achievements to you over the coming months.
Sincerely,
Michael Klein
Executive Chairman and Chief Executive Officer
to extend our current platform into a large incremental
new market, which is the use of Xoft radiation therapy
during the course of a robotic surgical prostatectomy;
thereby delivering the same concept as in breast cancer
surgery where radiation therapy would be delivered in
real time, in a non-shielded room, during surgery, and
done so in minutes versus days or weeks of traditional
radiation treatment.
In July, 2019, Medicare proposed a bundled payment
model for radiation oncology (the “Model”) that
will financially incentivize physicians to choose the
most clinically appropriate treatment modality, while
preserving and enhancing patient access to quality
care. Xoft IORT electronic brachytherapy breast cancer
treatment is included in the Model and offers the high
value, quality care that the Model seeks to incentivize.
This new system would establish a single payment for
the physician and a single site-neutral payment for the
facility (outpatient hospital or freestanding center) for all
treatment modalities including Xoft eBx IORT, external
beam, IMRT, and proton beam, to name a few. As
currently proposed, all providers and patients in
Model-selected metro areas will be required to
participate in the Model. The program is proposed
to begin January 1 or April 1, 2020 and will continue
through December 31, 2024. Final details on this
proposal will be published in November of 2019.
We believe that Xoft is a core technology that is
significantly extensible to other clinical application, and
we plan to launch rectal, brain and prostate applications
over the next twelve to eighteen months. These
initiatives position Xoft as a core technology provider
with a range of treatment capabilities that are scalable
and we are investing to achieve the upside that we
believe these opportunities represent.
iCAD is Well-Capitalized and Investing in its Future
Growth
In support of our growth objectives, we have undertaken
multiple financial transactions over the last 12 months
or so to strengthen our balance sheet. In December
2018, we completed a $7.0 million private placement of
unsecured subordinated convertible debentures. In June
2019, we completed an underwritten registered public
offering of approximately 1.9 million shares for net cash
proceeds of $9.4 million.
With this enhanced cash position, we have made
important investments in human capital and are
executing on a variety of initiatives aimed at increasing
market awareness and enhancing access to our novel
technologies. As part of the investment in human capital,
we have now completed an organizational restructuring,
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, 2018
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 a smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ____
Non-accelerated filer ____
(do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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, 2018 was $42,671,764. Shares of voting stock held by each officer and director and by each person who, as
of June 30, 2018, may be deemed to have beneficially owned more than 10% of the outstanding voting stock have been excluded. This
determination of affiliate status for purposes of this calculation is not necessarily a conclusive determination of affiliate status for any
other purpose.
As of March 25, 2019, the registrant had 17,235,267 shares of Common Stock outstanding.
Documents Incorporated by Reference: Certain portions of the registrant’s definitive Proxy Statement for its 2019 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.
Accelerated filer ____
Smaller reporting company X
Emerging growth company ____
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:
Certain information included in this annual report on Form 10-K that are not historical facts contain forward looking
statements that involve a number of known and unknown risks, uncertainties and other factors that could cause
the actual results, performance or achievements of the Company to be materially different from any future results,
performance or achievement expressed or implied by such forward looking statements. These risks and uncertainties
include, but are not limited to, the Company’s ability to defend itself in litigation matters, to achieve business and
strategic objectives, the risks of uncertainty of patent protection, the impact of supply and manufacturing constraints
or difficulties, uncertainty of future sales levels, protection of patents and other proprietary rights, the impact of
supply and manufacturing constraints or difficulties, product market acceptance, possible technological obsolescence
of products, increased competition, litigation and/or government regulation, changes in Medicare reimbursement
policies, risks relating to our existing and future debt obligations, competitive factors, the effects of a decline in the
economy or markets served by the Company 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 forward-
looking 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.
Item 1.
Business.
General
PART I
iCAD, Inc. is a global medical technology company providing innovative cancer detection and therapy solutions.
The Company reports in two operating segments: Cancer Detection and Cancer Therapy. Originally incorporated in
Delaware in 1984 as Howtek, Inc, the Company changed its name in 2002 to iCAD, Inc. The Company’s headquarters
are located in Nashua, New Hampshire.
iCAD continues to evolve from a business focused on image analysis for the early detection of cancers to a broader
player in the oncology market. The Company’s strategy is to provide customers with a broad portfolio of innovative
oncology solutions that address the two primary stages of the cancer care cycle, namely detection and treatment. The
Company believes that its products can enable early detection and earlier targeted intervention, which could result in
market demand and drive adoption of iCAD’s solutions.
Cancer Detection Segment
Background and Overview
Approximately 40 million mammograms were performed in the United States in 2017. 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. Observational errors are responsible for more than half of
cancers missed, and computer aided detection (“CAD”), has been proven to reduce the risk of observational errors in
mammography. Mammography CAD uses sophisticated algorithms to analyze image data and mark suspicious areas in
the image that may indicate cancer. CAD assists radiologists’ review by identifying areas that warrant a second look or
possibly contain a significant abnormality. Although CAD has potential applications for many types of cancer detection
and diagnosis, as a medical imaging tool it has demonstrated the most success as an adjunct to mammography.
Digital breast tomosynthesis (“DBT”) is rapidly replacing full-field digital mammography in screening due to its
clinical value in cancer detection, but it also presents significant workflow challenges to radiologists who face the
additional workload and time required to accurately read the extensive amounts of data contained in DBT cases.
Further, as incidence rates of cancer continue to rise, it is becoming increasingly important to find cancer sooner,
optimize radiology workflow and reduce unnecessary recalls resulting from false positives. CAD has the potential to
address many of these challenges.
The Company offers a variety of CAD and breast density assessment solutions for use with mammography, breast
tomosynthesis, and CT imaging, at both the detection and diagnosis stages of the cancer care cycle. These products
have the potential to help radiologists better detect cancer and improve workflow efficiency. The Company completed
development of a tomosynthesis CAD and workflow tool in 2015 and launched the product in the European market in
April 2016, HealthCanada in June 2016 and in the United States after FDA clearance in April 2017. The Company also
1
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 received FDA
clearance in December 2018. The Company believes that the CAD and breast density assessment solutions for breast
tomosynthesis may represent a significant growth opportunity, given the large number of installation opportunities for
CAD and breast density assessment solutions. 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. As of 2018, the U.S.
alone had approximately 8,704 certified facilities providing mammography screening, which contained approximately
20,073 accredited full field digital mammography (“FFDM”) and tomosynthesis mammography units. The majority
of these centers are using 2D digital mammography FFDM systems and we believe approximately 36% of the units
are digital breast tomosynthesis units.
The Company believes that there is also growth opportunity for mammography CAD in international markets, both
from the analog to digital conversion and as more countries adopt the practice of radiologists using CAD, rather
than having two radiologists read each case. Furthermore, most Western European countries have or are planning to
implement mammography screening programs, which is likely to increase the number of mammograms performed
in those countries. Although sales of the Company’s CAD solutions for two-dimensional mammography have been
historically lower in Europe than in the U.S., the Company believes that its CAD solutions for use with three-
dimensional tomosynthesis may be adopted with a higher attachment rate, due to workflow improvements and reading
time reduction offered by the solutions.
Cancer Detection Products
iCAD develops and markets a comprehensive range of high-performance Artificial Intelligence cancer detection and
workflow solutions for digital mammography systems worldwide. iCAD’s PowerLook Mammo Detection (also known
as SecondLook Digital) is based on sophisticated patented algorithms that analyze the data, automatically identifying
and marking suspicious regions in 2D full field digital mammography images. The solution provides the radiologist
with a “second look” which helps the radiologist detect actionable 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 of mammography
images are incorporated into these algorithms enabling the product to distinguish between characteristics of cancerous
and normal tissue. This should result in earlier detection of hard-to-find cancers, improved workflow for radiologists,
and higher quality patient care.
PowerLook.
PowerLook analyzes two-dimensional full-field digital mammography images and automatically identifies and marks
suspicious masses and micro-calcifications. This provides a radiologist with a “second look” that detects potentially
actionable missed cancers earlier than screening mammography alone. PowerLook uses sophisticated, patented
algorithms together with image processing, pattern recognition and artificial intelligence techniques. These algorithms
incorporate data from thousands of mammography images, enabling the product to distinguish between characteristics
of cancerous and normal tissue. This enables earlier detection of hard-to-find cancers, improved workflow for
radiologists, and higher quality patient care.
PowerLook is offered through the PowerLook Breast Health Solutions platform (the “PowerLook Platform”), which is
the first product suite of its kind to integrate cancer detection and breast density assessment software. The assessment
software, or PowerLook Density Assessment, aids radiologists by standardizing their approach to breast density
assessment and categorization. PowerLook Density Assessment provides an automated, consistent and standardized
reporting tool, which is particularly important in states that mandate reporting a breast density score to patients as
part of their annual mammogram. The latest version of the PowerLook software platform received FDA clearance in
August 2018.
PowerLook also includes a server platform, which receives patient studies from the imaging modality, performs
analysis and sends the results to picture archive and communication systems (“PACS”) and/or review workstations. As
workflow and efficiency are critical in digital imaging environments, PowerLook comes with a powerful and flexible
DICOM connectivity solution, which enables universal compatibility with leading PACS and review workstations.
iCAD has worked with its OEM partners to ensure optimal integration into the graphical user interface of their PACS
and review workstations. The algorithms in the product have also been optimized for each digital imaging provider
based upon characteristics of their unique detectors. All of these features reduce the need for separate CAD servers
and result in lower hardware and service costs for the end-customer.
The Company expects additional modules to be released and integrated into the PowerLook platform in the future, and
anticipates that all future breast imaging offerings will be built upon the PowerLook platform.
2
Breast Tomosynthesis
Digital Breast Tomosynthesis (“DBT”) was introduced in the United States in 2010 by Hologic, Inc., followed by
GE Healthcare which 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 improved tissue visualization and detection and results in lower
recall rates for patients. Tomosynthesis improves the sensitivity and specificity of cancer diagnosis when compared to
mammography. Clinical studies indicate that digital breast tomosynthesis improves the ability to distinguish malignant
from benign tumors and can detect early signs of cancer hidden by overlapping tissues. This helps reduce the overall
number of biopsies performed 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%.
Artificial intelligence 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 cancer detection and workflow solution for DBT to aid radiologists in their review of
DBT as a means of improving lesion detection and reducing the time to read the large tomosynthesis 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 and the Company received FDA Approval in March
of 2017.
In early 2018, the Company received CE mark for its multi-vendor, artificial intelligence DBT cancer detection and
workflow solution, ProFound AI. The product also received clearance for clinical use in Canada in mid-2018. ProFound
AI is a deep learning algorithm that is specifically designed to detect malignant soft-tissue densities and calcifications
in DBT exams by analyzing all of the DBT data. Also in early 2018, the Company completed a large multi-reader,
multi-case crossover design clinical reader study, which concluded that ProFound AI increases radiologist clinical
performance by improving radiologist sensitivity by an average of 8%, improving radiologist specificity by an average
of 6.9% and reducing recalls in non-cancer cases by average of 7.2%. The reader study also showed that the product
can reduce DBT reading times by an average of 52.7%. Based on these reader study results, ProFound AI received
clearance for use in the US by the FDA in December 2018.
The Company will continue to focus on advancing the performance of its ProFound AI for DBT solution through
training on larger datasets as well as expanding support to other DBT manufactures. The Company is also developing
a ProFound AI solution for 2D mammography images for the European market where 2D mammography remains the
primary procedure for breast cancer screening. The ProFound AI 2D product is expected to be available in the spring
of 2019.
ProFound AI
ProFound AI is a deep learning algorithm specifically designed to detect malignant soft-tissue densities and calcifications
in digital breast tomosynthesis (“DBT”). In early 2018, the Company completed a large multi-reader, multi-case
crossover design clinical reader study, which found that ProFound AI increased radiologist clinical performance by
improving radiologist sensitivity by an average of 8%, improved radiologist specificity by an average of 6.9% and
reduced recalls in non-cancer cases by an average of 7.2%. The reader study also showed that ProFound AI reduced
DBT reading times by an average of 52.7%.
Based on these reader study results, ProFound AI received FDA clearance for use in December 2018. The product
received a CE mark in March 2018, and also received clearance for clinical use in Canada in mid-2018. The Company
already has an OEM relationship with GE Healthcare’s mammography systems, and expects to use ProFound AI to
expand its OEM partnerships with other mammography system providers.
The Company plans to focus on advancing the performance of ProFound AI by training on larger datasets and
expanding support to additional DBT manufacturers. The Company is also developing a ProFound AI solution for
two-dimensional mammography images. This solution is targeted at the European market, where two-dimensional
mammography remains the primary procedure for breast cancer screening, and is expected to be available in the spring
of 2019.
In February 2019, iCAD announced its intention to work with researchers from Sweden’s Karolinska Institute to
develop and commercialize an innovative, AI-based breast cancer risk assessment model designed to identify
a woman’s risk of developing an interval cancer which are cancers detected or present within 12 months after a
mammographic screening in which findings are considered normal. The model is driven primarily by data from
existing mammography images.
3
VeraLook
VeraLook is an FDA-cleared CAD solution designed to support detection of colonic polyps in conjunction with CT
colonography (“CTC”). The product is distributed with advanced visualization reading workstations manufactured
by Vital Images (a Toshiba Medical System Group company) and Philips Healthcare. It is a natural extension of the
Company’s core competencies in image analysis and image processing.
Field testing of the product was initiated in 2008. Results of the Company’s multi-reader clinical study demonstrated
that the use of VeraLook improved reader sensitivity by 5.5% for patients with both small and large polyps, and
reduced specificity of readers by 2.5%. The clinical relevance of VeraLook was improved reader performance while
maintaining high reader specificity.
VeraLook received FDA clearance in 2010, and market authorization by the National Medical Products Administration
in China in 2014.
Computed Tomography Applications and Colonic Polyp Detection
CT Colonography (“CT”) is a well-established and widely used imaging technology that is used to image cross-
sectional “slices” of various 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 volume of data generated. The Company
believes that the challenges in CT imaging present it with opportunities to provide automated image analysis 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. Computer Aided Detection (“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 adjunct to CTC.
Cancer Therapy Segment
Background and Overview
Radiation therapy is the medical use of ionizing radiation, generally as part of cancer treatment to control or kill
malignant cells. Radiation therapy may be curative in a number of types of cancer if the cancer cells are localized
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 deliver the highest radiation dose possible directly to the tumor to kill the cancer cells while minimizing radiation
exposure to healthy tissue surrounding the tumor in order to limit complications and side effects. Global incidence
rates of new cancer cases are rising, primarily due to aging populations and changing lifestyle habits. However,
survival rates are also improving as a result of earlier detection and enhanced treatment options.
The three main types of radiation therapy are external beam radiation therapy (“EBRT”), brachytherapy, or sealed
source radiation therapy, and systemic radioisotope therapy or unsealed source radiotherapy. EBRT involves a radiation
source positioned outside the body, while brachytherapy uses sealed radioactive sources placed precisely inside the
body in the treatment area, and systemic radioisotopes are given by infusion or oral ingestion. Brachytherapy uses
temporary or permanent placement of radioactive sources.
Conventional EBRT typically involves multiple treatments of a tumor in up to 50 radiation sessions. Brachytherapy
offers the benefit of reduced radiation exposure to healthy tissues further away from the radiation source. In addition,
if the patient moves or if there is any tumor movement within the body during treatment, the radiation source retains
its correct position in relation to the tumor. Thus, brachytherapy offers an advantage over EBRT in its ability to better
direct high doses of radiation to the size and shape of the cancerous area while sparing healthy tissue and organs.
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 utilizes a miniaturized high dose rate X-ray source to apply radiation directly to the cancerous site.
4
Cancer Therapy
Products
The Xoft® 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. The Xoft System utilizes a miniaturized high dose rate, low energy
X-ray source to apply radiation directly to the cancerous site. The goal is to direct the radiation dose to the size and
shape of the cancerous area while sparing healthy tissue and organs.
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 gynecological and other non-breast
IORT clinical indications.
The Xoft System delivers clinical dose rates similar to traditional radioactive systems. However, because of the
electronic nature of the Xoft technology, the dose fall-off is faster. This lowers the radiation exposure outside of
the targeted area, and eliminates the need for a shield treatment environment such as that required with traditional
isotope based radiation therapy. Because the Xoft System is relatively small in size, it can easily be transported for
use in virtually any clinical setting (including the operating room where IORT is delivered) under radiation oncology
supervision. Current customers of the Xoft System include university research and community hospitals, cancer
care clinics, veterinary facilities, and dermatology offices that have established strategic partnerships with radiation
oncology service providers for supervised treatment delivery.
The Xoft System is FDA-cleared, CE marked and licensed in a growing number of countries for the treatment of cancer
anywhere in the body, including early-stage breast cancer, non-melanoma skin cancers (“NMSC”), and gynecological
cancers. In August 2018, the Xoft System received regulatory consent from India’s Atomic Energy Regulatory
Board (“AERB”), making the Company’s full suite of electronic brachytherapy products available to clinicians and
patients across India. In 2017, the Company’s balloon applicators were cleared by China’s National Medical Products
Administration for the treatment of early-stage breast cancer. With NMPA authorization, the complete suite of Xoft
System products is now available to clinicians and patients in China. In addition to the Chinese market, the company
continues to build positive momentum and has regulatory authorization in key geographies such as Spain, Australia,
and Switzerland.
The Company continues to make enhancements to the Xoft System controller, including upgrades to the software
interface and the high voltage connection. In 2016, the Company unveiled the Streamlined Module for Advanced
Radiation Therapy (“SMART”) platform for the Xoft System, which uses the Axxent Hub cloud-based oncology
collaboration software solution. The SMART platform is an adaptive, patient-centric solution to improve workflow
efficiency, flexibility, safety and security of a skin eBx program. This comprehensive platform provides all members of
the care team with a collaborative environment in which to manage patient workflow, and is Wi-Fi enabled, eliminating
challenges related to exchanging current, accurate patient data among providers.
The Company offers FDA-cleared applicators for the utilization of the Xoft System, including breast applicators for
IORT and Accelerated Partial Breast Irradiation (“APBI”) in the treatment of breast cancer, vaginal applicators for
the treatment of endometrial cancer, cervical applicators for the treatment of cervical cancer, and skin applicators
for the treatment of non-melanoma skin cancers. The flexible 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
Xoft System includes a 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
under an annual contract and is customized to individual customer volume and usage requirements.
The primary applications of the Xoft System involve localized breast cancer treatment using a ten to fifteen-minute
breast IORT protocol and the treatment of NMSC. However, the Xoft System can also be used to treat a wide and
growing array of additional cancers, including gynecological and other non-breast IORT clinical indications. The
Company believes 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.
Of the approximately 300,000 women who are diagnosed with breast cancer every year in the U.S., the majority, about
5
180,000 (60%), are diagnosed with early stage breast cancer. Of those with early stage breast cancers, over 100,000
(about 60%) are 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 brachytherapy. IORT aims to simplify radiation treatment
for early-stage breast cancer patients by delivering one precise dose of radiation directly to the lumpectomy cavity
in a single, safe and effective procedure. The Xoft System may also be used for APBI, which can be delivered twice
daily for five days.
There are approximately 3.5 million cases of NMSC diagnosed annually in the U.S. Of those cases, approximately
20%-30% have specific diagnoses and lesion characteristics that make such patients potential candidates for electronic
brachytherapy treatment. The Xoft System is a viable alternative treatment option for 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. Recent clinical data published from 2015 to 2017 demonstrates
promising local control and supports eBx as a convenient, effective, nonsurgical treatment option offering minimal
toxicity and excellent cosmesis for eligible NMSC patients. On January 4, 2018, the Company adopted a plan to
discontinue offering radiation therapy professional services to practices that provide the Company’s electronic
brachytherapy solution for the treatment of NMSC under the subscription service model within the Therapy Segment.
As a result, the Company ceased offering the subscription service model to customers. The Company will continue
to offer its capital sales model for both skin cancer treatment and IORT, which provides a brachytherapy system and
related source and service agreements The discontinuance of the subscription service model reduced radiation therapy
professional services delivery costs, decreased cash burn, and re-focused the Company on the higher margin capital
product and service offerings
There are approximately 50,000 new cases of endometrial cancer each year in the U.S. and nearly 300,000 new cases
worldwide. In 2017, the first-ever European analysis of electronic brachytherapy using the Xoft System for endometrial
and cervical cancer treatment was presented at the European Society for Radiotherapy and Oncology (“ESTRO”)
annual meeting. Researchers from Miguel Servet University Hospital in Zaragoza, Spain presented promising study
results demonstrating excellent outcomes in acute toxicity in 29 endometrial or cervical cancer patients treated with
the Xoft System from September 2015 to September 2016. Additional research showed that compared to an iridium
isotope, the Xoft System delivered a lower dose of radiation to surrounding healthy organs at risk, such as the bladder
and rectum.
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, the Company believes that
IORT for prostate, pelvic, gastrointestinal, abdominal, spinal, and soft tissue sarcoma applications remains a potential
market given the minimal shielding requirements associated with this treatment modality. Based on these additional
clinical applications and the potential to scale the Xoft System in the future to address other indications for use, the
Company believes the Xoft System offers unique flexibility and opportunities for growth.
Studies
In 2016, Melinda Epstein, PhD, et al. of Hoag Memorial Hospital Presbyterian in Newport Beach, CA published two
clinical papers on their experience with the Xoft System for the treatment of early-stage breast cancer with IORT. In
June 2016, 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 2016, 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.
In 2017, researchers from Hoag Memorial Hospital Presbyterian published another clinical paper in the Annals of
Surgical Oncology on their experience with the Xoft System in treating 204 early-stage breast cancers in a prospective,
X-ray IORT trial from June 2010 to September 2013. With a median follow-up of 50 months, results indicated there
have been seven ipsilateral breast tumor events (IBTE), no regional or distant recurrences, and no breast cancer-related
deaths. Kaplan-Meier analysis projects that 2.9% of patients will recur locally at 4 years. The site’s low complication
and recurrence rates support the cautious use and continued study of IORT in selected women with low-risk breast
cancer. The Hoag Memorial Hospital Presbyterian IORT series is currently the largest single-facility IORT series with
the Xoft System in the United States.
Also, in 2017, the Company announced results of a landmark study that showed the benefits of IORT compared to
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external beam radiation therapy (EBRT) in the treatment of early-stage breast cancer. The analysis demonstrated that
IORT could result in direct cost savings for the U.S. healthcare system of more than $630 million over the lifetime of
patients diagnosed annually with early-stage breast cancer, as well as significantly benefit patient health by minimizing
radiation exposure and offering a better quality of life. The results of the study were published in November 2017 in
the peer-reviewed Cost Effectiveness and Resource Allocation and determined IORT to be the preferred method of
treatment.
As the Company continues to focus on broadening global awareness and patient access to IORT, 2017 also brought
meaningful progress in the area of international research. Physicians from Taiwan published a clinical paper in
November 2017 in the peer-reviewed PLOS One journal. The multi-center study examined patient selection and the
oncologic safety of IORT with the Xoft System for the management of early-stage breast cancer. From 2013-2015, 26
hospitals in Taiwan performed a total of 261 IORT procedures. With a mean follow-up of 15.6 months, locoregional
recurrence was observed in 0.8% of patients. The study concluded that preliminary results of IORT in Taiwan showed
it is well accepted by patients and clinicians.
In 2018, several additional key pieces of clinical evidence supporting IORT with the Xoft System were published.
With a mean follow-up of 55 months, outcomes published in The American Journal of Surgery showed that breast
cancer recurrence rates of patients who were treated with IORT using the Xoft System and complied with adjuvant
medical therapy were comparable to those seen in the cornerstone TARGIT-A study, which evaluated IORT using
different technology. The study reviewed results of 184 patients with breast cancer from November 2011 to January
2016 completing Institutional Review Board (IRB)-approved IORT protocol. The recurrence rate for the 184 total
IORT patients was 5.4 percent at a mean follow-up of 55 months; however, the recurrence rate was significantly lower
– 2 percent – for the patients who complied with adjuvant medical therapy. The difference in recurrence rates between
the group complying with versus declining adjuvant medical therapy was statistically significant. To date, this study
presents the most long-term research of IORT using the Xoft System published in a peer-reviewed journal.
Further in 2018, a long-term study of 1,000 tumors performed at Hoag Memorial Hospital Presbyterian and in the
Annals of Surgical Oncology showed that IORT is a clinically effective, faster and easier alternative to whole breast
radiation therapy following breast-conserving surgery for selected low-risk patients at a median follow-up of 36
months. To date, this study presents analysis of the largest series of early-stage breast cancers treated with IORT using
the Xoft System published in a peer-reviewed journal.
Preliminary results of the Company’s ExBRT clinical trial continue to demonstrate that IORT using the Xoft System
is safe with excellent local control and cosmesis, and low morbidity. Analysis of the international, multi-center trial
was unveiled during an oral presentation at the 60th American Society for Radiation Oncology (ASTRO) annual
meeting at the Henry B. Gonzalez Convention Center in San Antonio, Texas. In the presentation, A.M. Nisar Syed,
MD, Principal Study Investigator, and Medical Director, Radiation Oncology & Endocurietherapy, MemorialCare
Cancer Institute, Long Beach Memorial Medical Center, and Professor of Radiation Oncology, UCI Medical Center
and Harbor-UCLA School of Medicine, detailed clinical techniques and outcomes of IORT using the Xoft System at
the time of breast conserving surgery with findings based upon ASTRO suitability criteria. The trial enrolled 1,201
patients between May 2012 and July 2018 at 28 international and United States-based institutions. With a median
follow up of two years, less than one percent of patients had cancer regrowth (ipsilateral recurrence) or developed new
primary cancers in the other breast. Treatment was well tolerated with grade 3, 4 and 5 adverse events occurring in
only 37 patients. Mean treatment time was 10.5 minutes.
Since 2016, electronic brachytherapy for the treatment of NMSC has been reimbursed under a skin-specific Category
III CPT code. Reimbursement for the treatment delivery is provided through the Category III CPT code, 0394T, which
covers high dose rate electronic brachytherapy, skin surface application, per fraction, and includes basic dosimetry,
when performed. There are additional Category I CPT codes reportable with the service as determined by physician
orders, medical necessity, and documentation. Coverage policies and payment values associated with CPT code 0394T
are determined by the regional U.S. Medicare Administrative Contractors. There are several Medicare Administrative
Contractors that have published rates for the 0394T code and others that reimburse on a case-by-case basis.
In 2017, the Company announced that results of a matched-pair cohort study of 369 early-stage NMSC patients treated
with the Xoft System or Mohs micrographic surgery showed that rates of recurrence of cancer were virtually identical
at a mean follow-up of 3.4 years. Mohs micrographic surgery is accepted as the most effective technique for removing
basal cell carcinoma and squamous cell carcinoma. The study results were published online in the peer-reviewed
Journal of Contemporary Brachytherapy.
The Company supports breast IORT through its ongoing ExBRT Clinical Trial, a post-market clinical trial that enables
facilities interested in treating early stage breast cancer patients with the Xoft System to participate in a common clinical
protocol and follow enrolled patients for up to ten years. The ExBRT study is led by brachytherapy and breast care
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physicians, including breast surgeons, radiation oncologists, pathologists, and medical physicists from leading U.S. breast
cancer care institutions. In February 2018, the study completed enrollment of 1,200 patients at 27 centers in the U.S. and
Europe. Clinical results from the ExBRT study are expected to be presented at key medical conferences during 2019.
Major Customers and Regional Markets
Region
2018
2017
2016
Percent of Export sales
Europe
Taiwan
Canada
China
Other
Total
51%
22%
7%
0%
20%
100%
68%
11%
5%
9%
7%
100%
36%
19%
15%
21%
8%
100%
Total Export sales
$3,255
$3,931
$2,323
Significant export sales in Europe are as follows:
Region
2018
2017
2016
Percent of Export sales
France
Spain
Germany
Bulgaria
United Kingdom
36%
8%
3%
1%
0%
41%
9%
7%
2%
2%
15%
7
%
3
%
3%
3%
OEM partners generated approximately 47% of detection revenue and 31% of revenue overall. GE Healthcare was the
largest single customer with approximately $6.1 million in 2018, $7.1 million in 2017, and $3.9 million in 2016, or
24%, 25%, and 15% of total revenues, respectively.
Sales and Marketing
Cancer Detection
In the U.S., iCAD sells its mammography products through a direct regional sales force and through the Company’s
OEM partners, which include GE Healthcare, Fuji Medical Systems, and Siemens Medical Systems. In Europe, iCAD
has also developed reseller relationships with regional distributors, which we plan to expand.
The VeraLook CTC CAD product is distributed by Vital Images and Philips Healthcare, which integrate the Company’s
solutions with their products in the U.S.
As part of its sales and marketing efforts, iCAD engages in a variety of public relations and local outreach programs
with numerous customers. We continue to cultivate relationships with industry leaders in breast cancer solutions,
including at trade shows where the future of medical image analysis solutions is discussed.
Cancer Treatment
iCAD markets the Xoft System in the United States and select countries worldwide through its wholly-owned
subsidiary, Xoft, Inc. (“Xoft”). In the United States, Xoft utilizes a direct sales force. Xoft has established partnerships
in Australia, Bulgaria, Canada, China, Hong Kong, Macau, Egypt, Saudi Arabia, India, Italy, Mexico, Portugal,
Russia, South Korea, Spain, Sweden, Switzerland, The Netherlands, Luxemburg, Taiwan, Turkey, United Kingdom
and Ireland, and is actively exploring market entry in South and Central America.
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A comprehensive medical education program is a key part to the Company’s eBx market development strategy. Xoft
actively participates in key industry scientific conferences and independent venues in the United States and Europe
where we provide professional education programs and product demonstrations relating to eBx. The goal of these
programs and demonstrations is to broaden physician awareness of the Xoft System and eBx technology.
Competition
The Company 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 developed or may develop technologies or products that could compete with the
products the Company manufactures and distributes or that would render our products obsolete or noncompetitive.
Moreover, competitors may achieve patent protection, regulatory approval, or product commercialization before we
do, which would limit our ability to compete with them. These and other competitive pressures could have a material
adverse effect on the Company’s business.
Cancer Detection
The Company currently faces direct competition in its cancer detection and breast density assessment businesses
from Hologic (Marlborough, MA), Volpara (Rochester, NY), ScreenPoint Medical (Nijmegen, Netherlands, and
Densitas (Halifax, NS, Canada). The Company believes that its market leadership in mammography CAD and density
assessment and strong relationships with its strategic partners will provide it with a competitive advantage in the
mammography CAD and density assessment market.
The Company’s VeraLook product faces competition from the traditional imaging CT equipment manufacturers and
emerging CAD companies. Siemens Medical (Tarrytown, NY), GE Healthcare (Chicago, IL), and Philips Medical
Systems (Andover, MA) currently offer polyp detection products outside the U.S., and Siemens Medical received
FDA clearance for CTC CAD in 2014. The Company expects that CT manufacturers will offer a colonic polyp
detection solution as an advanced feature of their image management and display products typically sold with their CT
equipment, but current regulatory requirements for the sector present a significant barrier to entry and the Company
believes that its market leadership in mammography CAD provides it with a competitive advantage within the CTC
community.
Cancer Treatment
The Company’s eBx products face competition in breast IORT primarily from Carl Zeiss Meditec (“Zeiss”) (Dublin,
CA), which has an established base of breast IORT installations in Europe. Zeiss manufactures and sells eBx products
for the delivery of IORT, for both breast and additional anatomical areas, including the spine, gastrointestinal tract,
skin, and endometrial cancers. IntraOp Medical (Sunnyvale, CA) is another competitor in the high dose rate (“HDR”)
radiation therapy market.
The expansion of the Company’s gynecological product portfolio and new IORT applications beyond breast IORT
have increased the competitive dynamic of the Company’s business. Larger and more diversified radiation therapy
companies offer a wide variety of clinical solutions for HDR brachytherapy, including Varian Medical Systems
(Milpitas, CA) and Elekta (Stockholm, Sweden). These companies offer broad product portfolios, which include a full
range of HDR brachytherapy afterloaders and applicators, traditional radiation therapy solutions, treatment planning
solutions, and workflow management capabilities.
The Company’s NMSC products face competition from other mobile non-surgical treatment options (such as Sensus
Healthcare’s (Boca Raton, FL) Surface Radiation Therapy (“SRT”) system and Elekta’s Esteya system), surgical
treatment options and traditional radiation therapy.
Manufacturing and Professional Services
The Company manufactures and assembles its CAD products. When a product sale is made to an end-customer by
one of the Company’s OEM partners, it is usually installed at the customer site by the OEM partner or the Company.
When iCAD makes a product sale directly to the end customer, the product is generally installed by iCAD personnel
at the customer site.
iCAD’s professional services staff provides comprehensive product support on a pre-sales and post-sales basis. Product
support includes pre-sale product demonstrations, product installations, applications training, and technical support.
The Company’s support center is a single point of contact for the end-customer, and provides remote diagnostics,
9
troubleshooting, training, and service dispatch. Service repair efforts are generally performed at the customer site by
third party service organizations or in the Company’s repair depot by the Company’s repair technicians.
Xoft’s portable Xoft System is manufactured and assembled by contract manufacturers. Xoft’s miniaturized eBx
X-ray source is manufactured by the Company at its San Jose, CA facility. Once the product has shipped, it is typically
installed by Xoft personnel at the customer site.
Xoft’s professional services staff provides comprehensive product support, physics support, radiation therapists and
billing support on a pre-sales and post-sales basis. Field service staff is involved in product installation, maintenance,
training and service repair. Customer service staff provides pre-sale product demonstrations, customer support,
troubleshooting, service dispatch and call center management.
Government Regulation
The Company’s software and hardware systems and related accessories are regulated as medical devices in all of the
jurisdictions where it operates, and its customers are subject to applicable mammography provider quality standards. In
the US, the Company must comply with the medical device regulations as amended under the US Food Drug and Cosmetic
Act. The Act governs, among other things, quality standards for product development, testing, labeling, storage, pre-
market clearance or approval, advertising and promotion, sales and distribution, and post-market surveillance of safety.
Medical device regulators in other jurisdictions require various levels of clearance, approval, certification, licensure
and/or consent before regulated medical devices can be lawfully commercialized in those jurisdictions. Increasingly,
medical device manufacturers are adopting globally harmonized quality standards for medical devices as developed
by the International Organization for Standardization (“ISO”), and risk management standards for medical devices.
Manufacturers of software as a medical device (“SaMD”) are further subject to specific security standards. There is no
guarantee that future products or modifications of current products will meet relevant requirements such as these for
lawful commercialization of our products in the jurisdictions where the Company operates.
The US FDA’s Quality System Regulations require that the Company’s operations follow extensive design, testing,
control, documentation and other quality assurance procedures throughout the product lifecycle. The Company is
subject to FDA regulations covering labeling and adverse event reporting as well as FDA’s general prohibition against
promoting products for unapproved or “off-label” uses.
The Company’s manufacturing processes, facilities, and personnel located both within and outside the US are subject
to periodic inspections by the US FDA and corresponding state health and safety agencies. The Company must also
comply with similar requirements, including site inspections by regulators from other jurisdictions where it operates.
Failure to comply fully with applicable regulations could cause regulators to take some enforcement action. In the US,
for example, enforcement could include delayed marketing clearance or approval, receipt of an FDA 483 deficiency
notification at the conclusion of a facility inspection, Warning Letters, product seizures, import/export refusal, civil
monetary penalties, injunctions, and criminal prosecution.
The U.S. government regulates the transfer of information, commodities, technology and software considered to
be strategically important to the United States in the interest of national security, economic and/or foreign policy
concerns. A complicated network of federal agencies and inter-related regulations govern exports, and are collectively
referred to as “Export Controls.” In brief, these regulate the shipment or transfer, by whatever means, of controlled
items, software, technology, or services out of the United States.
The Company is also subject to a variety of federal and state regulations in the US and the regulations in other
jurisdictions which broadly relate to our interactions with healthcare practitioners, government officials, purchasing
decision makers, and other stakeholders across healthcare systems. These regulations include among others, the
following:
anti-kickback, false claims, and physician self-referral statutes;
•
• US state laws and regulation regarding fee splitting and other relationships between healthcare providers
and non-professional entities, such as companies that provide management and reimbursement support
services;
• Anti-bribery laws, such as the US Foreign Corrupt Practices Act, (“FCPA”), the UK Anti-Bribery Act;
the Canadian Corruption of Foreign Public Officials Act (“CFPOA”), and guidances promulgated by
respected multi-national groups, such as the United Nations Convention Against Corruption, and the
Organization for Economic Cooperation and Development (“OECD”) Convention on Combatting
Bribery of Foreign Public Officials in International Business Transactions;
laws regulating the privacy and security of health data, protected health information and personally
identifiable information. These include the US Health Insurance Portability and Accountability Act
•
10
•
of 1996, (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act,
(“HITECH”), the General Data Protection Regulation (“GDPR”) in the EU, and the Personal Information
Protection and Electronic Documents Act (“PIPEDA”) in Canada; and
healthcare reform laws in the US, such as the Affordable Care Act (“ACA”) and the 21st Century Cures
Act include new regulatory mandates and other measures designed to reduce the rate of medical inflation.
These include, among other things, stringent new reporting requirements of financial relationships
between device manufacturers and physicians and teaching hospitals.
These laws and regulations are extremely complex and, in some cases, still evolving. If our operations are found to
violate any of the foreign, federal, state or local laws and regulations which govern our activities, we may be subject
to litigation, government enforcement actions, and applicable penalties associated with the violation, potentially
including civil and criminal penalties, damages, fines, exclusion from participation in certain payer programs or
curtailment of our operations. Compliance obligations under these various laws are oftentimes detailed and onerous,
further contributing to the risk that we could be found to be out of compliance with particular requirements. The risk of
being found in violation of these laws and regulations is further increased by the fact that many of them have not been
fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations.
The FDA, Centers for Medicare & Medicaid Services (CMS), the Department of Health and Human Services, Office of
Inspector General (HHS-OIG), the Department of Justice, states’ attorneys general and other governmental authorities
actively enforce the laws and regulations discussed above.
In the United States, medical device companies have been the target of numerous government prosecutions and
investigations alleging violations of law, including claims asserting impermissible off-label promotion of medical
devices, payments intended to influence the referral of federal or state healthcare business, and submission of false
claims for government reimbursement. While we make every effort to comply with applicable laws, we cannot rule
out the possibility that the government or other third parties could interpret these laws differently and challenge our
practices under one or more of these laws. The likelihood of allegations of non-compliance is increased by the fact
that under certain federal and state laws applicable to our business, individuals, known as relators, may bring an action
alleging violations of such laws, and potentially be awarded a share of any damages or penalties ultimately awarded
to the applicable government body.
Any action against us alleging a violation of these laws or regulations, even if we successfully defend against it, could
cause us to incur significant legal expenses and divert our management’s time and attention from the operation of our
business.
In addition, the laws and regulations impacting or affecting our business may change significantly in the future. Any
new laws or regulations may adversely affect our business. A review of our business by courts or regulatory authorities
may result in a determination that could adversely affect our operations. Also, the regulatory environment applicable
to our business may change in a way that restricts or adversely impacts our operations.
We are subject to numerous laws governing safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially hazardous substances, among others, both at
the US federal and state levels, and similar laws in other jurisdictions. We may be required to incur significant costs to
comply with these laws and regulations in the future, and complying with these laws may result in a material adverse
effect upon our business, 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. As noted above, These
regulations, including the requirements for approvals, and the time required for regulatory review vary by country.
Obtaining and maintaining foreign regulatory approvals is an expensive and time-consuming process. We cannot be
certain that we will be able to obtain the necessary regulatory approvals timely or at all in any foreign country in which
we plan to market our products.
Federal, state, and foreign regulations regarding the manufacture and sale of medical devices and management services
and software are subject to future change. We cannot predict what impact, if any, such changes might have on our
business.
Reimbursement in the US
The federal and state governments of the United States establish guidelines and pay reimbursements to hospitals, free-
standing clinics (Independent diagnostic treatment facilities (“IDTFs”)), and medical professionals for diagnostic
examinations and therapeutic procedures under the federal Medicare program and the joint federal/state Medicaid program.
11
The federal government reviews and adjusts coverage policies and reimbursement levels periodically and also
considers various Medicare and other healthcare reform proposals that could significantly affect both private and
public reimbursement for healthcare services in hospitals and free-standing clinics. State government reimbursement
for services is determined pursuant to each state’s Medicaid plan, which is established by state law and regulations,
subject to requirements of federal law and regulations.
Third-Party Reimbursement
Because we expect to receive payment for our products directly from our customers, we do not anticipate relying directly
on payment for any of our products from third-party payers, such as Medicare, Medicaid, commercial health insurers
and managed care companies. However, our business will be affected by coverage and payment policies adopted by
federal and state governmental authorities, such as Medicare and Medicaid, as well as private payers, which often
follow the coverage policies of these public programs. Such policies may affect which products customers purchase
and the prices they are willing to pay for those products in a particular jurisdiction. For example, our business will be
indirectly impacted by the ability of a hospital or medical facility to obtain coverage and third-party reimbursement for
procedures performed using our products. These third-party payers may deny coverage if they determine that a device
used in a procedure was not medically necessary, was not used in accordance with cost-effective treatment methods,
as determined by the third-party payer, was not used in a manner supported by medical professional society treatment
guidelines or third-party reviews of the published, peer reviewed literature, or was used for an unapproved indication.
They may also pay an inadequate amount for the procedure which could cause healthcare providers to use a lower cost
competitor’s device or perform a medical procedure without our device.
Reimbursement decisions by particular third-party payers depend upon a number of factors, including each third-party
payer’s determination that use of a product is:
•
•
•
•
a covered benefit under its health plan;
appropriate and medically necessary for the specific indication;
cost effective; and
neither experimental nor investigational (i.e., that its use is supported by relevant evidence in the
peer reviewed literature.)
Many third-party payers use coverage decisions and payment amounts determined by the Centers for Medicare and
Medicaid Services, or CMS, which administers the U.S. Medicare program, as guidelines in setting their coverage
and reimbursement policies. Medicare periodically reviews its reimbursement practices for various products. As a
result, there is no certainty as to the future Medicare reimbursement rate for our products. In addition, those third-
party payers that do not follow the CMS guidelines may adopt different coverage and reimbursement policies for our
current and future products. It is possible that some third-party payers will not offer any coverage for our current or
future products.
Furthermore, the healthcare industry in the United States is increasingly focused on cost containment as government
and private insurers seek to control healthcare costs by imposing lower payment 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.
Reimbursement in other jurisdictions
Typically, coverage and payment for healthcare products and services in other jurisdictions is determined through a
public tender process that takes into consideration the results of a cost-effectiveness or value analysis conducted by
a federal government-level technology assessment group, and through reference to coverage and payment policies
established for the same or similar product/service in comparable jurisdictions.
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 for our products and procedures, and the reimbursement
policies of patients’ medical expenses set by government healthcare programs, private insurers or other healthcare
payers.
The provisions of the Affordable Care Act went into effect in 2012 and in subsequent years. We are continuing to
evaluate the law’s 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. However, it is uncertain
at this point what negative unintended consequences these provisions aimed at improving quality and decreasing
costs might have on patient access to new technologies. Other elements of this legislation, including comparative
12
effectiveness research, payment system reforms (including shared savings pilots) and other provisions, could
meaningfully change the way healthcare is delivered and paid for in the US, and may materially impact numerous
aspects of our business, including the demand for and availability of our products, the reimbursement available for
our products from governmental and third-party payers, and reduced medical procedure volumes. We are evaluating
the effect that Trump Administration changes to the Affordable Care Act may have on our business. We cannot predict
whether the ACA will be repealed, replaced, or modified or how such repeal, replacement or modification may be
timed or structured. As a result, we cannot quantify or predict the effect of such repeal, replacement, or modification
might have on our business and results of operations. However, any changes that lower reimbursement for our products
or reduce medical procedure volumes could adversely affect our business and results of operations.
Intellectual Property
The Company primarily relies on a combination of patents, trade secrets and copyright law, third-party and employee
confidentiality agreements, and other protective measures to protect its intellectual property rights pertaining to its
products and technologies.
The Company has certain patents material to its ongoing programs that expire between 2020 and 2029. These patents
help the Company maintain a proprietary position in its markets. Additionally, the Company has a number 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 cancer detection and digitizer technologies
and products, including cancer detection solutions 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 from Cytyc/Hologic which relates to balloon applicators for breast
brachytherapy, and a non-exclusive license from Zeiss which relates to brachytherapy. The Company believes it has all
the necessary licenses from third parties for software and other technologies in its products; however, it cannot assure
that current or future patent applications will issue with the full scope of the claims sought, if at all, or whether any
patents issued will be challenged or invalidated.
Sources and Availability of Materials
The Company depends upon a limited number of suppliers and manufacturers for its products, and certain components
in its products may be available from a sole or limited number of suppliers. The Company’s products are generally
either manufactured and assembled by a sole manufacturer or a limited number of manufacturers or assembled by
it from supplies it obtains from a limited number of suppliers. Critical components required to manufacture these
products, whether by outside manufacturers or directly, may be available from a sole or limited number of component
suppliers. The Company generally does not have long-term arrangements with any of its manufacturers or suppliers.
Engineering and Product Development
The Company incurred $9.6 million, $9.6 million, and $10.3 million of research and development expense including
depreciation and amortization, during the years ended December 31, 2018, 2017 and 2016, respectively. Research
and development expenses are primarily attributed to personnel, consulting, subcontract, licensing and data collection
expenses relating to the Company’s new product development and clinical testing.
Employees
As of December 31, 2018, the Company had 97 employees, of whom 95 are full time employees, with 31 involved in
sales and marketing, 19 in research and development, 35 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 considers our relations with employees to be good.
Foreign Regulations
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 approvals is an expensive and time-consuming process. The Company cannot be certain that we will be
able to obtain the necessary regulatory approvals timely or at all in any foreign country in which we plan to market
its CAD products and the Xoft system, and if we fail to receive and maintain such approvals, our ability to generate
revenue may be significantly diminished.
13
Available Information
The Company files annual, quarterly and current reports, proxy or stockholder information statements and other
information with the Securities and Exchange Commission (SEC). You may read and copy any materials that we file
with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet site that contains reports, proxy and information statements, certain and other information
that we may file electronically with the SEC (http://www.sec.gov). We also make available for download free of
charge through our website our Annual Report on Form 10-K, our quarterly reports on Form 10-Q and current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we have filed it electronically with, or furnished it to, the SEC. We maintain
our corporate website at http://www.icadmed.com. Our website and the information contained therein or connected
thereto are not incorporated into this Annual Report on Form 10-K.
Item 1A.
Risk Factors.
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could
materially adversely affect our operations. The following highlights some of the factors that have affected, and/or in
the future could affect, our operations.
We have incurred significant losses from inception through 2018 and there can be no assurance that we will be
able to achieve and sustain future profitability.
We have incurred significant losses since our inception. We incurred a net loss of $9.0 million in 2018 and have an
accumulated deficit of $210.8 million at December 31, 2018. We may not be able to achieve profitability.
We rely on intellectual property and proprietary rights to maintain our competitive position and may not be
able to protect these rights.
We rely heavily on proprietary technology that we protect primarily through licensing arrangements, patents, trade
secrets, proprietary know-how and non-disclosure agreements. There can be no assurance that any pending or future
patent applications will be granted or that any current or future patents, regardless of whether we are an owner or
a licensee of the patent, will not be challenged, rendered unenforceable, invalidated, or circumvented or that the
rights will provide a competitive advantage to us. There can also be no assurance that our trade secrets or non-
disclosure agreements will provide meaningful protection of our proprietary information. Further, we cannot assure
you that others will not independently develop similar technologies or duplicate any technology developed by us or
that our technology will not infringe upon patents or other rights owned by others. Unauthorized third parties may
infringe our intellectual property rights, or copy or reverse engineer portions of our technology. 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. The Company has certain patents material to its
ongoing programs that expire between 2020 and 2029. In the absence of significant patent protection, we may be
vulnerable to competitors who attempt to copy our products, processes or technology.
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 infringement claims against us. Any 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, if any of our intellectual property and proprietary rights
are deemed to violate the proprietary rights of others, we may be prevented from using those intellectual property
or proprietary rights, which could prevent us from being able to sell our products. Litigation could also result in a
judgment or monetary damages being levied 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 involved in legal proceedings, claims and government inspections or
investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of our
business or otherwise. Legal proceedings are often lengthy, taking place over a period of years 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 choose to settle legal proceedings and claims, regardless of their actual merit.
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A legal proceeding finally resolved against us, 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. If our existing insurance does not cover the amount or types of damages awarded, or if other
resolutions or actions taken as a result of the legal proceeding were to restrain our ability to market 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
publicity and damage to our reputation, which could adversely impact our business.
An unfavorable resolution of the Yeda Litigation could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
In December 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation (“Invivo”).
On September 5, 2018, a third-party, Yeda Research and Development Company Ltd., filed a complaint (the “Yeda
Litigation”) against the Company and Invivo in the United States District Court for the Southern District of New
York, captioned Yeda Research and Development Company Ltd. v. iCAD, Inc. and Invivo Corporation, Case No.
1:18-cv-08089-GBD, asserting various claims against the Company and Invivo. We cannot predict the outcome of
the Yeda Litigation or the amount of time and expense that will be required to resolve the lawsuit. If such litigation
were to be determined adversely to our interests, or if we were forced to settle such matter for a significant amount,
such resolution or settlement could have a material adverse effect on our business, results of operations and financial
condition.
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 liability insurance for the medical device industry generally is expensive. Future product liability claims could
be costly to defend and/or costly to resolve and could harm our reputation and business.
Sales and market acceptance of our products is dependent upon the coverage and reimbursement decisions
made by third-party payers, including carve-out radiology benefits managers. The failure of third-party payers
to provide appropriate levels of coverage and reimbursement, and/or meeting prior authorization and other
requirements for approval to use our products and treatments facilitated by our products could harm our
business and prospects.
Sales and market acceptance of our medical products and the treatments facilitated by our products in the United States
and other countries is dependent upon the coverage decisions and reimbursement policies established by government
healthcare programs and private health insurers. Market acceptance of our products and treatments has and will
continue to depend upon our customers’ ability to obtain an appropriate level of coverage for, and reimbursement from
third-party payers for, these products and treatments. In the U.S., the Centers for Medicare and Medicaid Services
(“CMS”) establishes coverage and reimbursement policies for healthcare providers treating Medicare and Medicaid
beneficiaries. Under current CMS policies, varying reimbursement levels have been established for our products
and treatments. Coverage policies for Medicare patients may vary by regional Medicare carriers in the absence of a
national coverage determination and reimbursement rates for treatments varies based on the geographic price index,
the site of service, and other factors. Coverage and reimbursement policies and rates applicable to patients with
private insurance are dependent upon individual private payer 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 affected by coverage
and reimbursement policies adopted by foreign governments and, to a lesser extent, private insurance carriers. We
cannot provide assurance that government or private third-party payers will continue to reimburse our products or
services, nor can we provide assurance that the payment rates will be adequate. If providers and physicians are unable
to obtain adequate reimbursement for our products or services, this could have a material adverse effect on our business
and operations. In addition, in the event that the current methodology for calculating payment for these products or
services changes, this could have a material adverse effect on our business and business operations.
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
solutions for use with MRI and CT and the market growth of electronic brachytherapy. This growth may not
occur or may occur too slowly to benefit us.
Our future business is substantially dependent on the continued growth in the market for electronic brachytherapy, full
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 market for these products may not continue to
develop or may develop at a slower rate than we anticipate due to a variety of factors, including, general economic
15
conditions, delays in hospital spending for capital equipment, the significant costs 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
customer could seriously hurt our business.
A limited number of major customers have in the past and may continue in the future to account for a significant
portion of our revenue. Our principal sales distribution channel for our digital products is through our OEM partners.
In 2018 our OEM partners accounted for 31% of our total revenue in 2018, with one major customer, GE Healthcare
accounting for 24% of our revenue. In addition, in 2018, five customers accounted for 33% of our total revenue, which
includes both OEM partners and direct customers. The loss of our relationships with principal customers or a decline
in sales to principal customers could materially adversely affect our business and operating results.
The markets for our newly developed products and treatments and newly introduced enhancements to our
existing products and treatments may not develop as expected.
The successful commercialization of our newly developed products and treatments and newly introduced enhancements
to our existing products and treatments are subject to numerous risks, both known and unknown, including:
•
•
•
•
•
•
•
uncertainty of the development of a market for such product or treatment;
trends relating to, or the introduction or existence of, competing products, technologies or alternative
treatments or therapies that may be more effective, safer or easier to use than our products, technologies,
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, breast surgeons and radiation oncologists and treatment centers and US and
international medical professional societies;
the availability and extent of data demonstrating the clinical efficacy of our products or treatments;
competition, including the presence of competing products sold by companies with longer operating histories,
more recognizable names and more established distribution networks; and
other technological developments.
Often, the development of a significant market for a product or treatment will depend upon the establishment of
appropriate reimbursement for use of the product or treatment. Moreover, even if addressed, such reimbursement
levels frequently are not established until after a product or treatment is developed and commercially introduced,
which can delay the successful commercialization of a product or treatment.
If we are unable to successfully commercialize and create a significant market for our newly developed products and
treatments and newly introduced enhancements to our existing products and treatments, our business and prospects
could be harmed.
If goodwill and/or other intangible assets that we have recorded in connection with our acquisitions become
impaired, we could have to take significant charges against earnings.
In connection with the accounting for our acquisitions, we have recorded a significant amount of goodwill and other
intangible assets. We have recorded multiple impairments in the past: $26.8 million in September 2011, $14.0 million
in June 2015, $4.7 million in September 2017 and $2.0 million in December 2017. Under current accounting, we
must assess, at least annually and potentially more frequently, whether the value of our goodwill of $8.4 million at
December 31, 2018 and our other intangible assets have been impaired. Any reduction or impairment of the value of
goodwill or other intangible assets will result in a charge against earnings which could materially adversely affect our
reported results of operations in future periods.
The healthcare industry is highly regulated, and government authorities may determine that we have failed to
comply with applicable laws, rules or regulations.
Both in the US and in other jurisdictions, the healthcare industry is subject to extensive and complex federal, state and
local laws, rules and regulations, compliance with which imposes substantial costs on us. Such laws and regulations
include those that are directed at payment for services and the conduct of operations, preventing fraud and abuse, and
prohibiting general business 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
16
specific services and relationships may not be clear. Further, healthcare laws differ from jurisdiction to jurisdiction
and it is difficult to ensure our business complies with evolving laws in all jurisdictions. In addition, we believe that
our business will continue to be subject to increasing regulation, the scope and effect of which we cannot predict.
Legislatures and governmental 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 services, and our
ability to market new services, or could create unexpected liabilities for us.
We may in the future become the subject of regulatory or other investigations or proceedings, and our interpretations
of applicable laws, rules and regulations may be challenged. For example, regulatory authorities or other parties
may assert that our arrangements with the physician practices to which we lease equipment and provide 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 forfeiture of amounts collected in violation 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.
We may incur substantial costs defending our interpretations of US federal and state government regulations,
and if we lose, the government could force us to restructure our operations and subject us to fines, monetary
penalties and possibly exclude us from participation in US government-sponsored health care programs such
as Medicare and Medicaid.
Our operations, including our arrangements with healthcare providers, are subject to extensive US federal and state
government 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 physicians and professional
corporations.
We believe we are in substantial compliance with these laws, rules and regulations based upon what we believe are
reasonable and defensible interpretations of these laws, rules and regulations. However, US federal and state laws are
broadly worded and may be interpreted or applied by prosecutorial, regulatory or judicial authorities in ways that we
cannot predict. Accordingly, our arrangements and business practices may be the subject of government scrutiny or be
found to violate applicable laws. If US federal or state government officials challenge our operations or arrangements
with third parties that we have structured based upon our interpretation of these laws, rules and regulations, such
challenge could potentially disrupt our business operations and we may incur substantial defense costs, even if we
successfully defend our interpretation of these laws, rules and regulations. In addition, if the government successfully
challenges our interpretation of the applicability of these laws, rules and regulations as they relate to our operations
and arrangements with third parties, it may have a material adverse effect on our business, financial condition and
results of operations.
In the event regulatory action were to limit or prohibit us from carrying on our business as we presently conduct it or
from expanding our operations into certain jurisdictions, we may need to make structural, operational and organizational
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. Any restructuring would also negatively impact our operations because our management’s
time and attention would be diverted from running our business in the ordinary course.
Compliance with the many laws and regulations governing the healthcare industry could restrict our sales and
marketing practices, and exclusion from such programs as a result of a violation of these laws could have a
material adverse effect on our business.
Once our products are sold, we must comply with various U.S. federal and state laws, rules and regulations pertaining
to healthcare fraud and abuse, including false claims laws, anti-kickback laws and physician self-referral laws, rules
and regulations. Violations of the fraud and abuse laws are punishable by criminal and civil sanctions, including, in
some instances, exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid,
Veterans Administration health programs, workers’ compensation programs and TRICARE. Compliance with these
laws could restrict our sales and marketing practices, and exclusion from such programs as a result of a violation of
these laws could have a material adverse effect on our business.
17
US Anti-Kickback Statutes
The federal health care program Anti-Kickback Statute prohibits persons from knowingly or willfully soliciting,
receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce:
•
•
the referral of an individual for a service or product for which payment may be made by Medicare,
Medicaid or other government-sponsored healthcare program; or
purchasing, ordering, arranging for, or recommending the ordering of, any service or product for which
payment may be made by a government-sponsored healthcare program.
The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside
of 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 Anti-Kickback Statute can also give rise to False Claims Act lawsuits, civil monetary penalties and
possible exclusion from Medicare and Medicaid and other federal healthcare programs. In addition to the Federal
Anti-Kickback Statute, many states have their own anti-kickback laws. Often, these laws closely follow the language
of the federal 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 payment made by a government health care program but also with
respect to other payers, including commercial insurance companies. Additionally, we could be subject to private
actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions which, among other
things, allege that our practices or relationships violate the Anti-Kickback Statute.
Government officials have focused recent kickback enforcement efforts on, among other things, the sales and marketing
activities of healthcare companies, including medical device manufacturers, and recently have brought cases against
individuals or entities with personnel who allegedly offered unlawful inducements to potential or existing customers
in an attempt to procure their business. This trend is expected to continue. Settlements of these cases by healthcare
companies have involved significant fines and/or penalties and in some instances criminal plea or deferred prosecution
agreements.
With respect to the federal Anti-Kickback Statute, Congress and the HHS-OIG have established a large number of
statutory exceptions and regulatory safe harbors. An arrangement that fits squarely into an exception or safe harbor
is immune from prosecution under the Anti-Kickback Statute. We train and educate employees and marketing
representatives on the Anti-Kickback Statute and their obligations thereunder, and we endeavor to comply with the
applicable safe harbors. However, some of our arrangements, like many other common and non-abusive arrangements,
may implicate (or potentially implicate) The Anti-Kickback Statute are not covered by a safe harbor, but nevertheless
do not implicate any of the Statute’s principal policy objectives and, as such, likely do not pose a material risk of
program abuse or warrant the imposition of sanctions. However, we cannot offer assurances that, with respect to
any arrangements that do not squarely meet an exception or safe harbor, we will not have to defend against alleged
violations of the Anti-kickback Statute. Allegations of Violations of the Anti-Kickback Statute also may be brought
under the federal Civil Monetary Penalty Law, which requires a lower burden of proof than other fraud and abuse laws,
including the Anti-Kickback 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
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
provision of such services, including clinical laboratory services, radiology and other imaging services and certain
other diagnostic services. These laws and regulations also prohibit such entities from billing for services provided in
violation of the laws and regulations.
This federal ban on physician self-referrals, commonly known as the “Stark Law,” prohibits, subject to certain
exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain “designated health
services” if the physician or an immediate family member of the physician has any financial relationship with the
entity. The Stark Law also prohibits the entity receiving the referral from billing for any good or service furnished
pursuant to an unlawful referral, and any person collecting any amounts in connection with an unlawful referral is
18
obligated to refund these amounts. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition
may be fined up to $100,000 for each such arrangement or scheme. The penalties for violating the Stark Law also
include civil monetary penalties of up to $15,000 per service, could result in denial of payment, disgorgements of
reimbursement received under a non-compliant agreement, and possible exclusion from Medicare, Medicaid or other
federal healthcare programs. In addition to the Stark Law, many states have their own self-referral laws. Often, these
laws closely follow the language of the federal law, although they do not always have the same scope, exceptions, safe
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
referring patients to that provider even if the referral itself is not prohibited.
We have financial relationships with physicians in the form of equipment leases and services arrangements. Our
financial relationships with referring physicians and their immediate family members must comply with the Stark Law
by meeting an applicable exception. We attempt to structure our relationships to meet an exception to the Stark Law,
but the regulations implementing the exceptions are detailed and complex, and we cannot provide assurance that every
relationship complies fully with the Stark Law. Unlike the Anti-Kickback Statute, failure to meet an exception under
the Stark Law results in a violation of the Stark Law, even if such violation is technical in nature.
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 jurisdictions, new interpretations of laws in our existing jurisdictions,
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.
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.
False Claims Laws
The federal False Claims Act, or FCA, prohibits any person from knowingly presenting, or causing to be presented, a
false claim or knowingly making, or causing to made, a false statement to obtain payment from the federal government.
The qui tam or “whistleblower” 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 false claim laws analogous to the False Claims Act. Many of
these state laws apply where a claim is submitted to any third-party payer and not merely a federal healthcare program.
Additionally, if we violate the Anti-Kickback Statute or Stark Law, or if we improperly bill for our services, or retain
overpayments longer than 60 days after identification, or fail to act with reasonable diligence to investigate credible
information regarding potential overpayments, we may be found to violate the federal civil False Claims Act.
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 individual, known as a “relator” or, more commonly, as a “whistleblower,” 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
manufacturers, to defend false claim actions, pay damages and penalties or be excluded from Medicare, Medicaid or
other federal or state healthcare programs as a result of investigations arising out of such actions.
Increased Regulatory Scrutiny of Relationships with Healthcare Providers
Certain state governments and the federal government have enacted legislation, including the Physician Payments
Sunshine Act provisions under the Federal Patient Protection and Affordable Care Act, aimed at increasing transparency
of our interactions with healthcare providers. As a result, we are required by law to disclose payments, gifts, and other
transfers of value to certain healthcare providers in certain states and to the federal government. Any failure to comply
with these legal and regulatory requirements could result in a range of fines, penalties, and/or sanctions, and could
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affect our business. In addition, we have devoted and will continue to devote substantial time and financial resources
to develop and implement enhanced structure, policies, systems and processes to comply with these enhanced legal
and regulatory requirements, which may also impact our business.
Healthcare reform legislation in the United States may adversely affect our business and/or results of operations.
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 thru 2017. That
postponement has been extended again for 2018 and 2019. We are unable to predict whether the postponement will
be continued beyond 2019. 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 payment advisory board, and pilot programs
to evaluate alternative payment 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 coverage and reimbursement may be enacted in the future or what effect such
legislation or regulation would have on our business. Any cost containment measures or other health care system
reforms that are adopted could have a material and adverse effect on our ability to commercialize our existing and
future products successfully. We cannot predict whether the ACA will be repealed, replaced, or modified or how such
repeal, replacement or modification may be timed or structured. As a result, we cannot quantify or predict the effect of
such repeal, replacement, or modification might have on our business and results of operations. However, any changes
that lower reimbursement for our products or reduce medical procedure volumes could adversely affect our business
and results of operations.
Healthcare industry consolidation could impose pressure on our prices, reduce potential customer base and
reduce demands for our systems.
Many hospitals and imaging centers have consolidated to create larger healthcare enterprises with greater market and
purchasing power. If this consolidation trend continues, it could reduce the size of our potential customer base and
give the resulting enterprises greater bargaining or purchasing power, which may lead to erosion of the prices for our
systems or decreased margins for our systems. In addition, when hospitals and imaging centers combine, they often
consolidate infrastructure, and consolidation of our customers could result in fewer overall customers.
Our products and manufacturing facilities are subject to extensive regulation with potentially significant costs
for compliance.
Our CAD systems 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 manufacturing 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 failure to fully comply with applicable regulations could result in the issuance of warning letters, non-approvals,
suspensions of existing approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions,
injunctions, and criminal prosecution. Moreover, unanticipated changes in existing regulatory requirements or adoption
of new requirements could increase our 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 subject to extensive regulatory approvals.
Obtaining and maintaining foreign regulatory approvals is an expensive and time-consuming process. We cannot be
certain that we will be able to obtain the necessary regulatory approvals timely or at all in any foreign country in which
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.
We may not be able to obtain regulatory approval for any of the other products that we may consider developing.
We have received FDA approvals for our currently offered products. Before we are able to commercialize any new
product, we must obtain regulatory approvals for each indicated use for that product. The process for satisfying these
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.
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Our products may be recalled even after we have received FDA or other governmental 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 press us to implement a product recall, 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 could materially and adversely affect our reputation with customers and our financial condition and
results of operations.
We are subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data
protection, and other matters. We may be subject to criminal or civil sanctions if we fail to comply with privacy
and security regulations regarding the use and disclosure of sensitive personally identifiable information.
Numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality,
security, availability and integrity of 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 information in ways that are subject to many of these laws and regulations. We are also subject to laws and
regulations in foreign countries covering data privacy and other protection of health and employee information that
may be more onerous than corresponding U.S. laws, including in particular the laws of Europe.
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. In
the ordinary course of our business, we collect and store sensitive data, including personally identifiable information
received from of our customers. The secure processing, maintenance and transmission of this information is critical
to our operations. Despite our security measures and business controls, our information technology and infrastructure
may be vulnerable to attacks by hackers, breached due to employee error, malfeasance or other disruptions or subject
to the inadvertent or intentional unauthorized release of information. Any such occurrence could compromise our
networks and the information stored thereon could be accessed, publicly disclosed, lost or stolen. Any such access,
disclosure or other loss of information by us or our subcontractors could (1) result in legal claims or proceedings,
liability under laws that protect the privacy of personal information and regulatory penalties, (2) disrupt our operations
and the services we provide to our customers and (3) damage our reputation, any of which could adversely affect our
profitability, revenue and competitive position.
Federal and state consumer laws are being applied increasingly by the Federal Trade Commission and state attorneys
general to regulate the collection, use and disclosure of personal or patient health information, 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 by courts
and government agencies, creating complex compliance issues for 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 information, we could be subject to criminal or civil sanctions.
Security breaches and other disruptions could compromise our information and expose us to liability, which
would cause our business and reputation to suffer and could subject us to substantial liabilities.
If our security measures are breached or fail and unauthorized access is obtained to a customer’s data, our service may
be perceived as insecure, the attractiveness of our services to current or potential customers may be reduced, and we
may incur significant liabilities.
Our services involve the storage and transmission of customers’ proprietary information and patient information,
including health, financial, payment and other personal or confidential information. We rely on proprietary and
commercially available systems, software, tools and monitoring, as well as other processes, to provide security for
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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.
However, there can be no assurance that we will not be subject to cybersecurity incidents that bypass our security
measures, impact the integrity, availability or privacy of personally identifiable information or other data subject
to privacy laws or disrupt our information systems, devices or business, including our ability to deliver services
to our customers. As a result, cybersecurity, physical security and the continued development and enhancement of
our controls, processes and practices designed to protect our enterprise, information systems and data from attack,
damage or unauthorized access remain a priority for us. As cyber threats continue to evolve, we may be required to
expend significant additional resources to continue to modify or enhance our protective measures or to investigate
and remediate any cybersecurity vulnerabilities. The occurrence of any of these events could result in (i) harm to
customers; (ii) business interruptions and delays; (iii) the loss, misappropriation, corruption or unauthorized access
of data; (iv) litigation, including potential class action litigation, and potential liability under privacy, security and
consumer protection laws or other applicable laws; (v) reputational damage and (vi) federal and state governmental
inquiries, any of which could have a material, adverse effect on our financial position and results of operations and
harm our business reputation.
Data protection laws in the U.S., Europe and around the world may restrict our activities and increase our costs.
Various statutes and rules in the U.S., Europe and around the world regulate privacy and data protection which may
affect our collection, use, storage, and transfer of information both abroad and in the United States. New laws and
regulations are being enacted, so that this area remains in a state of flux. Monitoring and complying with these laws
requires substantial financial resources. Failure to comply with these laws may result in, among other things, civil and
criminal liability, negative publicity, restrictions on further use of data, and/or liability under contractual warranties.
In addition, changes in these laws (including newly released interpretations of these laws by courts and regulatory
bodies) may limit our data access, use and disclosure, and may require increased expenditures by us.
The European Union’s General Data Protection Regulation (“GDPR”), took effect in May 2018 and requires us to
meet new and more stringent requirements regarding the handling of personal data about EU residents. Failure to meet
the GDPR requirements could result in penalties of up to 4% of worldwide revenue.
Our effective tax rate may fluctuate and we may incur obligations in tax jurisdictions in excess of amounts that
have been accrued.
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 future effective tax rate, however, may be lower or higher than prior years due to numerous factors,
including a change in our geographic earnings mix, changes in the measurement of our deferred taxes, and recently
enacted and future tax law changes in jurisdictions in which we operate. We are also subject to ongoing tax audits in
various jurisdictions, and tax authorities may disagree with certain positions we have taken 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.
Changes in interpretation or application of Generally Accepted Accounting Principles may adversely affect our
operating results.
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 bodies. 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
different accounting principles, including ones regarding revenue recognition, than we have applied in past periods.
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
become more volatile as a result.
Our acquisitions may not result in the benefits and revenue growth we expect.
We integrate companies that we acquire including the operations, services, products and personnel of each company
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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 successfully manage our integration of these companies and continue to improve our operational systems, internal
procedures, working capital management, and financial and operational controls. If we fail in any of these areas, our
business could be adversely affected.
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 revenue 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 by us or our competitors, the pricing of
our products, changes in customers’ budgets, competitive conditions and the possible deferral of revenue under our
revenue recognition policies.
The markets for many of our products are subject to changing technology.
Our business depends on our ability to adapt to evolving 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 may suffer. Because the healthcare information technology market
is constantly evolving, our existing technology may become obsolete and fail to meet the requirements of current and
potential customers. Our success will depend, in part, on our ability to continue to enhance our existing technology
solutions and services, develop new technology that addresses the increasingly sophisticated and varied needs of our
customers, and respond to technological advances 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 be successful in developing, using, marketing, selling, or maintaining new technologies effectively or adapting
our proprietary 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 achieve market acceptance. Moreover, competitors may develop competitive products that
could adversely affect our results of operations. Our failure 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.
We depend upon a limited number of suppliers and manufacturers for our products, and certain components
in our products may be available from a sole or limited number of suppliers.
Our products are generally either manufactured and assembled for us by a sole manufacturer, by a limited number of
manufacturers or assembled by us from supplies we obtain from a limited number 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
manufacturers or suppliers. The loss of a sole or key manufacturer or supplier could materially impair our ability
to deliver products to our customers in a timely manner and would adversely affect 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.
We distribute our products in highly competitive markets and our sales may suffer as a result.
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
develop technologies or products that could compete with the products we manufacture and distribute or that would
render our products obsolete or noncompetitive. Our competitors may achieve patent protection, regulatory approval,
or product commercialization that would limit our ability to compete with them. These and other competitive pressures
could have a material adverse effect on our business.
Disruptions in service or damage to our third-party providers’ data centers could adversely affect our business.
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
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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 and work
with our third-party providers to protect against fires, floods, other natural disasters and general business interruptions
to mitigate the adverse effects of a disruption, relocation or change in operating environment at the data centers
we utilize. In addition, the occurrence of any of these events could result in interruptions, delays or cessations in
service to our customers. Any of these events could impair or prohibit our ability to provide our services, 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
employee or contractor access, computer viruses, programming errors, denial-of-service attacks or other attacks by
third-parties seeking to disrupt operations or misappropriate information or similar physical or electronic breaches of
security. Any of these can cause system failure, including network, software or hardware failure, which can result in
service disruptions. As a result, we may be required to expend significant capital and other resources to protect against
security breaches and hackers or to alleviate problems caused by such breaches.
If our products fail to perform properly due to errors or similar problems, our business could suffer.
Despite testing, complex software; may contain defects or errors. Addressing software errors may delay development
of our solutions, and if discovered after deployment, may require the expenditure of substantial time and resources to
correct. Errors in our software could result in:
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harm to our reputation;
lost sales;
delays in commercial releases;
product liability claims;
delays in or loss of market acceptance of our solutions;
license terminations or renegotiations;
unexpected expenses and diversion of resources to remedy errors; and
privacy and security vulnerabilities.
Furthermore, our customers might use our software together with products from 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, divert the attention of our technical personnel from our solution development efforts; 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 the same on our operations or the market price for our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), we are required to include in our Annual
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, 2018 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 our internal controls over financial reporting
will continue to 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 could adversely affect investor confidence and, as a result,
our stock price.
We are required to comply with the requirements of Section 404. Although we have 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
24
not be able to retain the services of our executive officers and other key employees. The loss of executive officers or
other key personnel could have a material adverse effect 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 for growth. Competition for 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 13% of our revenue for 2018. We are
subject to the risks inherent in conducting business across national boundaries, any one of which could adversely
impact our business. In addition to currency fluctuations, these risks include, among other things: economic downturns;
changes in or interpretations of local law, governmental policy or regulation; changes in healthcare practice patterns;
restrictions on the transfer of funds into or out of the country; varying tax systems; and government protectionism.
One or more of the foregoing factors could impair our current or future operations and, as a result, harm our overall
business.
The market price of our common stock has been, and may continue to be volatile, which could reduce the
market price of our common stock.
The publicly traded shares of our common stock have experienced, and may experience in the future, significant price
and volume fluctuations. This market volatility could reduce the market 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
affecting the medical imaging industry generally, changes in national or regional economic conditions, changes in
securities analysts’ estimates for us or our competitors’ or industry’s future performance or general market conditions,
making it more difficult for shares of our common stock to be sold at a favorable price or at all. The market price of
our common stock could also be reduced by general market price declines or market volatility in the future or future
declines or volatility in the prices of stocks for companies in our industry.
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 substantial additional shares of our common stock in the public market, 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, and the conversion of debentures. If holders of options, or warrants or debentures choose to
exercise or convert their securities and sell shares of common stock issued upon the such exercise or conversion in the
public market, 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 prevailing market price for our common stock may decline
Future issuances of shares of our common stock may cause significant dilution of equity interests of existing
holders of common stock and decrease the market price of shares of our common stock.
We have previously issued options and debentures that are exercisable or convertible into a significant number of
shares of our common stock. Should existing holders of options or debentures exercise or convert 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.
Provisions in our corporate charter and in Delaware law could make it more difficult for a third party to
acquire us, discourage a takeover and adversely affect existing stockholders.
Our certificate of incorporation authorizes the Board of Directors to issue up to 1,000,000 shares of preferred stock.
The preferred stock may be issued in one or more series, the terms of which 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,
conversion and redemption rights, and sinking fund provisions. Although there are currently no shares of preferred
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stock outstanding, future holders of preferred stock may have rights superior to our common stock and such rights
could also be used to restrict our ability to merge with, or sell our assets to a third party.
We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which could prevent
us from engaging in a “business combination” with a 15% or greater stockholder” for a period of three years from the
date such person acquired that status unless appropriate board or stockholder approvals are obtained.
These provisions could deter unsolicited takeovers or delay or prevent changes in our control or management, including
transactions in which stockholders might otherwise receive a premium for their shares over the then current market
price. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in
their best interests.
Changes in credit markets or to our credit rating could impact our ability to obtain financing for business
operations or result in increased borrowing costs and interest expense.
Our credit ratings reflect each credit rating agency’s opinion of our financial strength, operating performance and
ability to meet our debt obligations at the time such opinion is issued. We utilize the short- and long-term debt
markets to obtain capital from time to time. Adverse changes in our credit ratings may result in increased borrowing
costs for future long-term debt or short-term borrowing facilities and may limit financing options, including access
to the unsecured borrowing market. Such changes may also breach restrictive covenants under current or future debt
facilities or instruments, which could reduce our operating flexibility. Macroeconomic conditions, such as continued
or increased volatility or disruption in the credit markets, may adversely affect our ability to refinance existing debt or
obtain additional financing for working capital, capital expenditures or fund new acquisitions.
Our existing and future debt obligations could impair our liquidity and financial condition, and our lenders
could foreclose on our assets in the event we are unable to meet our debt obligations.
In connection with our Loan and Security Agreement entered into on August 7, 2017, as amended, Silicon Valley Bank
agreed to provide $13 million in financing to the Company, with Silicon Valley Bank making revolving loans to the
Company in the principal amount of up to $4 million and providing a term loan facility up to $9 million to be drawn
in two tranches. The Loan Agreement:
• requires us to dedicate a substantial portion of our cash flow to payments on our debt obligations, which
reduces the availability of our cash flow to fund working capital, capital expenditures and other corporate
requirements;
• imposes restrictions on our ability to incur indebtedness, other than permitted indebtedness, and could
impede us from obtaining additional financing in the future for working capital, capital expenditures,
mergers, acquisitions and general corporate purposes;
• imposes restrictions on us with respect to the use of our available cash, including in connection with future
acquisitions;
• requires us to maintain net revenues ranging from $11.4 million to $14.5 million for each calendar quarter
ended until December 31, 2019. Failure to maintain these revenues could result in acceleration of the
indebtedness under the Loan Agreement;
• requires us to achieve adjusted EBITDA ranging from negative $3.5 million to negative $2.0 million for
each calendar quarter until December 31, 2019. Failure to achieve the adjusted EBITDA amount could
result in acceleration of the indebtedness under the Loan Agreement;
• requires us to agree by a certain date with Silicon Valley Bank regarding minimum revenue levels for
the 2020 calendar year. Failure to agree will result in acceleration of the indebtedness under the Loan
Agreement;
• requires us to provide by a certain date certain financial information in connection with revenue for the
2019 and 2020 calendar years. Failure to agree will result in acceleration of the indebtedness under the
Loan Agreement to April 30 of the applicable following year; and;
On December 20, 2018, the Company entered into a Securities Purchase Agreement, pursuant to which it issued
unsecured subordinated convertible debentures (the “Debentures”) to certain institutional and accredited investors
of the Company, in an aggregate principal amount of approximately $6.5 million. Subject to certain qualifications,
the Debentures restrict our ability to incur indebtedness, place liens on our assets, repay indebtedness other than the
Debentures or pay dividends.
The Loan Agreement and the Debentures:
• could impair our liquidity;
• could make it more difficult for us to satisfy our other obligations;
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• make us more vulnerable in the event of a downturn in our business prospects and could limit our flexibility
to plan for, or react to, changes in our licensing markets;
• could result in a prepayment or make-whole premium if we elected to prepay the indebtedness under the
Loan Agreement or Debentures prior to their maturity date; and
• could place us at a competitive disadvantage when compared to our competitors who have less debt.
We have pledged substantially all of our assets (other than intellectual property) to secure our obligations under the Loan
Agreement. If we were to fail in the future to make any required payment under the Loan Agreement or fail to comply
with the financial and operating covenants contained in the therein, in some cases subject to applicable cure periods, we
would be in default regarding the Loan Agreement. Such default would enable the lenders under the Loan Agreement
to foreclose on the assets securing such debt and could significantly diminish the market value and marketability of our
common stock and could result in the acceleration of the payment obligations under our indebtedness.
In the event that we were to fail in the future to make any required payment under the Debentures or fail to comply
with certain covenants contained in the Debentures, in some cases subject to applicable cure periods, we would be
in default regarding the Debentures. Such default would entitle the holders of the Debentures to payment of the
outstanding principal amount, all unpaid interest and certain additional amounts. This could significantly diminish the
market value and marketability of our common stock.
Item 1B.
Unresolved Staff Comments.
Not applicable
Item 2.
Properties.
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, referred to as the “August 2016 Lease Renewal”, 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 for the Premises.
The Company leases a facility consisting of approximately 24,350 square feet of office, manufacturing and warehousing
space located at 101 Nicholson Lane, in San Jose, CA. This lease commenced September 2012 and provided for an
annual payment of $295,140 through September 2017 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 obtain insurance for the facility.
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 reasonable rates.
Item 3.
Legal Proceedings.
In December 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation. In accordance
with the agreement, the Company sold to Invivo all right, title and interest to certain intellectual property relating to
the Company’s VersaVue Software and DynaCAD product and related assets for $3.2 million. The Company closed
the transaction on January 30, 2017 less a holdback reserve of $350,000 for a net of approximately $2.9 million.
On September 5, 2018, third-party Yeda Research and Development Company Ltd., referred to in this Section as
Yeda, filed a complaint against the Company and Invivo in the United States District Court for the Southern District
of New York, captioned Yeda Research and Development Company Ltd. v. iCAD, Inc. and Invivo Corporation, Case
No. 1:18-cv-08083-GBD, related to the Company’s sale of the VersaVue software and DynaCAD product under
the Agreement. In the Complaint, Yeda asserts claims for: (i) copyright infringement and misappropriation of trade
secrets against both the Company and Invivo; (ii) breach of contract against the Company only; and (iii) tortious
interference with existing business relationships and unjust enrichment against Invivo only. The Company and Invivo
filed Motions to Dismiss the Complaint on December 21, 2018. On January 18, 2019, Yeda filed Oppositions to the
Motions to Dismiss. The Company and Invivo submitted responses to the Opposition to the Motion to Dismiss on
27
February 8, 2019. The Court held oral argument on the Motions to Dismiss on March 27, 2019. The Company is
awaiting a decision from the Court. To the extent that the Complaint is not dismissed in its entirety, the Company will
vigorously defend against the claims asserted by Yeda. The amount of the loss, if any, cannot be reasonably estimated
at this time. Any amounts owed by the Company in connection with its indemnification obligations to Invivo related
to this action may reduce the $350,000 holdback under the Asset Purchase Agreement.
The Company may be a party to various legal proceedings and claims arising out of the ordinary course of its business.
Although the final results of all such matters and claims cannot be predicted with certainty, the Company currently
believes that there are no current proceedings or claims pending against it 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 several legal matters be resolved 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
reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable
and reasonably estimable under ASC 450, Contingencies. Legal costs are expensed as incurred.
Item 4.
Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
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 2018 and 2017.
Fiscal year ended
December 31, 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal year ended
December 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 4.10
4.06
3.65
4.68
$ 5.11
6.07
4.67
4.89
Low
$ 2.93
2.98
2.80
2.42
$ 3.19
3.95
3.13
3.29
As of March 11, 2019, there were 211 holders of record of the Company’s common stock. In addition, the Company
believes that there are in excess of 3,300 holders of its common stock whose shares are held in “street name”.
The Company has not paid any cash dividends on its common stock to date, and the Company does not expect to
pay cash dividends in the foreseeable future. Future dividend policy will depend on the Company’s earnings, capital
requirements, financial condition, and other factors considered relevant by the Company’s Board of Directors. The
Company’s Loan and Security Agreement with Silicon Valley Bank and its unsecured convertible debentures issued
in December 2018 each restrict the Company’s present ability to pay dividends.
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, 2018.
28
Issuer’s Purchases of Equity Securities. For the majority of restricted stock units granted to employees under the
applicable stock incentive plan, the number 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 behalf
of our employees. The Company had the following repurchases of securities in the quarter ended December 31, 2018:
Month of purchase
October 1 - October 31, 2018
November 1 - November 30, 2018
December 1 - December 31, 2018
Total
Total number of
shares purchased
(1)
Average price
paid per share
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
6,761 $ 3.08
99 $ 2.88
7,377 $ 3.95
3.53
$
14,237
$ - $ -
$ - $ -
$ - $ -
$ - $ -
(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.
Recent Sales of Unregistered Securities. In December 2018, the Company issued unsecured subordinated convertible
debentures with an aggregate principal amount of approximately $7.0 million in a private placement. See “Liquidity
and Capital Resources” in Item 7 of this Form 10-K for certain information with respect to these securities.
Item 6.
Selected Financial Data.
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).
Selected Statement of Operations Data
Year Ended December 31,
Total Revenue
Gross margin
Gross margin %
Total operating expenses
Income (loss) from operations
Other (expense) income, net
Net loss
Net income (loss) per share
Basic
Diluted
Weighted average shares outstanding
cisaB
Diluted
Selected Balance Sheet Data
Cash and cash equivalents
Total current assets
Total assets
Total current liabilities
Long term deferred revenue
Notes and lease payable, long term
Convertible debentures payable to non-related
parties, at fair value
Convertible debentures payable to related
parties, at fair value
Stockholders' equity
$
$
$
$
$
2018
25,621
19,430
75.8%
27,560
(8,130)
(845)
(9,017)
2017
28,102
18,176
64.7%
32,344
(14,168)
(106)
(14,256)
2016
26,338
18,518
70.3%
28,488
(9,970)
(53)
(10,099)
2015
41,554
29,350
70.6%
59,429
(30,079)
(2,352)
(32,447)
2014
43,924
31,227
71.1%
30,412
815
(1,671)
(1,009)
$
$
$
$
$
$
$
(0.54)
(0.54)
$
$
(0.87)
(0.87)
$
$
(0.63)
(0.63)
$
$
(2.07)
(2.07)
$
$
(0.07)
(0.07)
586,61
16,685
343,61
16,343
239,51
15,932
15,686
15,686
14,096
14,096
$
2018
12,185
21,220
31,737
13,245
331
4,265
$
$
As of December 31,
2017
9,387
21,209
32,131
12,070
506
5,146
2016
8,585
19,933
38,651
12,855
668
-
$
2015
15,280
27,767
48,640
14,279
1,079
86
$
2014
32,220
44,616
93,770
22,049
1,525
6,622
6,300
-
-
-
-
$
670
6,896
-
14,276
$
$
-
25,038
-
32,746
$
-
62,779
$
29
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Overview
iCAD, Inc. is a 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”).
In the Detection segment, the Company’s solutions include advanced image analysis and workflow solutions that
enable healthcare professionals to better serve patients by identifying pathologies and pinpointing the most prevalent
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).
The Company intends to continue the extension of its image analysis 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.
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 revenue for the sale of consumables and related accessories which will continue to drive
growth in this segment.
On January 4, 2018, the Company adopted a plan to discontinue offering radiation therapy professional services
to practices that provide the Company’s electronic brachytherapy solution for the treatment of NMSC under the
subscription service model within the Therapy Segment. As a result, the Company will no longer offer the subscription
service model to customers. The Company will continue to offer its capital sales model for both skin cancer treatment
and IORT, which provides a brachytherapy system and related source and service agreements. The discontinuance of
the subscription service model reduced radiation therapy professional services delivery costs, decreased our cash burn,
and re-focused the Company on the higher margin capital product and service offerings.
Based on the decision to discontinue offering radiation therapy professional services within the Cancer Therapy
Segment, the Company revised its forecasts related to the Therapy segment, which we deemed to be a triggering
event. As a result, the Company recorded a goodwill and long-lived asset impairment charge of approximately $2.0
million for the period ended December 31, 2017 (see Note h and Note i to the consolidated financial statements for
additional discussion).
In connection with the preparation of the financial statements for the third quarter ended September 30, 2017, the
Company evaluated the Therapy reporting unit for both long-lived asset and goodwill impairment. As a result of this
assessment, the Company recorded a material impairment charge in the Therapy reporting unit (see Note h and Note i
to the consolidated financial statements for additional discussion).
On January 30, 2017, the Company completed the sale of 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 amount of $350,000.
The Company is currently involved in litigation with a third-party relating to this transaction, as further described in
“Item 3 - Legal Proceedings.”
The Company’s headquarters are located in Nashua, New Hampshire, with manufacturing facilities in Nashua, New
Hampshire and, an operations, research, development, manufacturing and warehousing facility in San Jose, California.
Critical Accounting Policies
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
and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates these estimates, including those related
to revenue recognition, allowance for doubtful accounts, inventory valuation and obsolescence, intangible assets,
goodwill, income taxes, contingencies and litigation. Additionally, the Company uses assumptions and estimates in
30
calculations to determine stock-based compensation and the fair value of convertible notes. The Company bases
its estimates on historical experience and on various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
The Company’s critical accounting policies include:
Inventory;
- Revenue recognition;
- Allowance for doubtful accounts;
-
- Valuation of long-lived and intangible assets;
- Goodwill;
-
-
Stock based compensation; and
Income taxes; and
Revenue Recognition
Revenue Recognition upon the adoption of ASC 606
On January 1, 2018, the Company adopted FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue
from Contracts with Customers” and all the related amendments (“Topic 606”) using the modified retrospective
method for all contracts not completed as of the date of adoption. The Company recognized the cumulative effect of
initially applying the new standard as an adjustment to the opening balance of retained earnings at the adoption date.
The comparative information has not been restated and continues to be reported under the accounting standards in
effect for those periods. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606,
while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting
under Topic 605.
The Company recognizes revenue primarily from the sale of products and from the sale of services and supplies.
Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services. The amount
of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange
for these goods or services and excludes any sales incentives or taxes collected from customers which are subsequently
remitted to government authorities. To achieve this core principle, the Company applies the following five steps:
1) Identify the contract(s) with a customer - A contract with a customer exists when (i) the Company
enters into an enforceable contract with a customer that defines each party’s rights regarding the goods
or services to be transferred and identifies the payment terms related to those goods or services, (ii) the
contract has commercial substance and, (iii) the Company determines that collection of substantially all
consideration for goods or services that are transferred is probable based on the customer’s intent and
ability to pay the promised consideration.
2) Identify the performance obligations in the contract - Performance obligations promised in a contract
are identified based on the goods or services that will be transferred to the customer that are both capable
of being distinct, whereby the customer can benefit from the good or service either on its own or together
with other resources that are readily available from third parties or from the Company, and are distinct in
the context of the contract, whereby the transfer of the goods or services is separately identifiable from
other promises in the contract. To the extent a contract includes multiple promised goods or services, the
Company must apply judgment to determine whether promised goods or services are capable of being
distinct and distinct in the context of the contract. If these criteria are not met the promised goods or
services are accounted for as a combined performance obligation. If options to purchase additional goods
or services are included in customer contracts, the Company evaluates the option in order to determine
if the Company’s arrangement include promises that may represent a material right and needs to be
accounted for as a performance obligation in the contract with the customer.
3) Determine the transaction price - The transaction price is determined based on the consideration to
which the Company will be entitled in exchange for transferring goods or services to the customer. To
the extent the transaction price includes variable consideration; the Company estimates the amount of
variable consideration that should be included in the transaction price utilizing either the expected value
method or the most likely amount method depending on the nature of the variable consideration. Variable
consideration is included in the transaction price if, in the Company’s judgment, it is probable that a
significant future reversal of cumulative revenue under the contract will not occur.
31
4) Allocate the transaction price to the performance obligations in the contract - If the contract contains
a single performance obligation, the entire transaction price is allocated to the single performance
obligation. Contracts that contain multiple performance obligations require an allocation of the
transaction price to each performance obligation based on a relative standalone selling price (SSP) basis
unless the transaction price is variable and meets the criteria to be allocated entirely to a performance
obligation or to a distinct good or service that forms part of a single performance obligation.
5) Recognize revenue when (or as) the Company satisfies a performance obligation - The Company
satisfies performance obligations either over time or at a point in time as discussed in further detail
below. Revenue is recognized at the time the related performance obligation is satisfied by transferring
a promised good or service to a customer.
The Company recognizes revenue from its contracts with customers primarily from the sale of products
and from the sale of services and supplies. Revenue is recognized when control of the promised goods
or services is transferred to a customer, in an amount that reflects the consideration to which we expect
to be entitled in exchange for those goods or services. For product revenue, control has transferred upon
shipment provided title and risk of loss have passed to the customer. Services and supplies are considered
to be transferred as the services are performed or over the term of the service or supply agreement.
The Company enters into contracts that can include various combinations of products and services, which are generally
capable of being distinct and accounted for as separate performance obligations. Determining whether products and
services are considered distinct performance obligations that should be accounted for separately versus together may
require significant judgment. For arrangements with multiple performance obligations, the Company allocates revenue
to each performance obligation based on its relative standalone selling price. The Company generally determines
standalone selling prices based on the prices charged to customers when each of the products and services are sold
separately. If the standalone selling price of a product or service is not observable through past transactions, the
Company estimates the standalone selling price taking into account available information such as market conditions
and internally approved pricing guidelines related to the performance obligations.
The Company’s hardware is generally highly dependent on, and interrelated with, the underlying software and the
software is considered essential to the functionality of the product. In these cases, the hardware and software license
are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership
is transferred to the customer. Components of certain fixed fee service contracts are accounted for as a lease in
accordance with ASC 840, “Leases” (“ASC 840”). Taxes assessed by a governmental authority that are both imposed
on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer,
are excluded from revenue. Shipping and handling costs associated with outbound freight after control of a product
has transferred to a customer are accounted for as fulfillment costs and are included in cost of revenue.
The Company also recognizes an asset for the incremental costs of obtaining a contract with a customer if we expect
the benefit of those costs to be longer than one year, in accordance with ASC Topic 340-40, “Other Assets and
Deferred Costs: Contracts with Customers.” The Company has determined that certain commissions programs meet
the requirements to be capitalized.
Revenue Recognition prior to the adoption of ASC 606
Prior to the adoption of Topic 606, revenue was recognized when delivery occurred, persuasive evidence of an
arrangement existed, fees were fixed or determinable and collectability of the related receivable was probable, in
accordance with Topic 605. For product revenue, delivery was considered to occur upon shipment provided title and
risk of loss had passed to the customer. Services and supplies revenue was considered to be delivered as the services
were performed or over the estimated life of the supply agreement.
The Company recognized revenue from the sale of its digital, film-based CAD and cancer therapy products and services
in accordance with ASC Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”), 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 was recognized in accordance with ASC
840 “Leases” (“ASC 840”). For multiple element arrangements, revenue was allocated to all deliverables based on
their relative selling prices. In such circumstances, a hierarchy was 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 existed
only when the deliverable was sold separately and was the price actually charged for that deliverable. The process for
determining BESP for deliverables without VSOE or TPE considered multiple factors depending upon the unique facts
32
and circumstances related to each deliverable including relative selling prices, competitive prices in the marketplace and
management judgment.
The Company uses customer purchase orders that are subject to the Company’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 assessed whether
collection was probable by considering a number of factors, including past transaction history with the customer and
the creditworthiness of the customer, as obtained from third party credit references.
If the terms of the sale included customer acceptance provisions and compliance with those provisions could not be
demonstrated, all revenue was deferred and not recognized until such acceptance occurred. The Company considered
all relevant facts and circumstances in determining when to recognize revenue, including contractual obligations to the
customer, the customer’s post-delivery acceptance provisions, if any, and the installation process.
The Company had 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 was considered
a separate unit of accounting because the delivered product has stand-alone value to the customer.
Revenue from certain CAD products was recognized in accordance with ASC 985-605. Sales of this product includes
training, and the Company had established VSOE for this element. Product revenue was determined based on
the residual value in the arrangement and was recognized when delivered. Revenue for training was deferred and
recognized when the training had been completed.
Sales of the Company’s Therapy segment products typically include a controller, accessories, source agreements and
services. The Company allocated revenue to the deliverables in the arrangement based on the BESP in accordance
with ASU 2009-13. Product revenue was generally recognized when the product had been delivered and service and
source revenue was typically recognized over the life of the service and source agreements. The Company includes
the following in service and supplies revenue: the sale of physics and management services, the lease of electronic
brachytherapy equipment, development fees, supplies and the right to use the Company’s AxxentHub software.
Physics and management services revenue and development fees were considered to be delivered as the services are
performed or over the estimated life of the agreement. The Company typically bills items monthly over the life of the
agreement except for development fees, which are generally billed in advance or over a 12 month period and the fee
for treatment supplies which is generally billed in advance.
The Company deferred revenue from the sale of certain service contracts and recognized the related revenue on a
straight-line basis in accordance with ASC Topic 605-20, “Services”. The Company provided for estimated warranty
costs on original product warranties at the time of sale.
See Note 1 for details of the Company’s adoption of Topic 606 and accounting policies related to revenue recognition.
Allowance for Doubtful Accounts
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 modifying credit limits. The Company’s senior management reviews
accounts receivable on a periodic basis to determine if any receivables may potentially be uncollectible. The Company
includes any accounts receivable balances that it determines may likely be uncollectible, along with a general reserve
for estimated probable losses based on historical experience, in its overall allowance for doubtful accounts. An
amount would be written off 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, 2018 is
adequate.
Inventory
Inventory is valued at the lower of cost or net realizable value, with cost determined by the first-in, first-out method.
The Company regularly reviews inventory quantities on hand and records a provision for excess and/or obsolete
inventory primarily based upon historical usage of its inventory as well as other factors.
33
Goodwill
In accordance with FASB 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 events and circumstances indicate it is
more likely than not that the fair value of the Company is less than the carrying value of the Company.
Factors the Company considers important, which could trigger an impairment of such asset, include the following:
•
•
•
•
•
significant underperformance relative to historical or projected future operating results;
significant changes in the manner or use of the assets or the strategy for the Company’s overall
business;
significant negative industry or economic trends;
significant decline in the Company’s stock price for a sustained period; and
a decline in the Company’s market capitalization below net book value.
The Company’s Chief Operating Decision Maker (“CODM”) is the Chief Executive Officer (“CEO”). The Company
determined that it has two reporting units and two reportable segments based on the information that is provided 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 records an impairment charge if such an assessment were to indicate that the fair value 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 market multiples, to determine the fair value 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 yield different conclusions that would result in an impairment charge to income in the period that
such change or determination was made.
The Company determines the fair value of reporting units based on the present value 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 fair 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.
Fair values for the reporting units are based on a weighting of the income approach and the market approach. For
purposes of the income approach, fair value is determined based on the present value of estimated future cash flows,
discounted at an appropriate risk adjusted rate. The Company uses internal forecasts to estimate future cash flows and
includes estimates of long-term future growth rates based on our most recent views of the long-term forecast for each
segment. Accordingly, actual results can differ from those assumed in our forecasts. Discount rates are derived from a
capital asset pricing model and by analyzing published rates for industries relevant to our reporting units to estimate
the cost of equity financing. The Company uses discount rates that are commensurate with the risks and uncertainty
inherent in the respective businesses and in our internally developed forecasts.
In the market approach, the Company uses a valuation technique in which values are derived based on market prices
of publicly traded companies with similar operating characteristics and industries. A market approach allows for
comparison to actual market transactions and multiples. It can be somewhat limited in its application because the
population of potential comparable publicly-traded companies can be limited due to differing characteristics of the
comparative business and ours, as well as the fact that market data may not be available for divisions within larger
conglomerates or non-public subsidiaries that could otherwise qualify as comparable, and the specific circumstances
surrounding a market transaction (e.g., synergies between the parties, terms and conditions of the transaction, etc.)
may be different or irrelevant with respect to our business.
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 analysis, the income approach provides a reasonable estimate of the fair value
of the reporting units.
The Company corroborates the total fair values of the reporting units using a market capitalization approach; however,
this approach cannot be used to determine the fair value of each reporting unit value. The blend of the income approach
34
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 valuation methodology based upon the relevance and availability of the data at the
time the valuation is performed and weights the methodologies appropriately.
In January 2018, the Company adopted a plan to discontinue offering radiation therapy professional services to practices
that provide the Company’s electronic brachytherapy solution for the treatment of NMSC under the subscription
service model within the Therapy Segment. As result, the Company will no longer offer the subscription service
model to customers. Based on the decision to discontinue offering radiation therapy professional within the Therapy
Segment, the Company revised its forecasts related to the Therapy segment, which we deemed to be a triggering event.
The Company elected to early adopt ASU 2017-04, “Intangibles – Goodwill and Other: Simplifying the Test for
Goodwill Impairment” (“ASU 2017-04”) during the year ended December 31, 2017, which affected the impairment
tests performed during that period. ASU 2017-04 specifies that goodwill impairment is the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. In accordance with ASU
2017-04, the fair value of the Therapy reporting unit as of the fourth quarter of 2017 was $0.1 million and the carrying
value was $2.1 million. The deficiency exceeded the carrying value of goodwill and the balance of $1.7 million was
recorded as an impairment charge in the fourth quarter ended December 31, 2017.
As a result of the underperformance of the Therapy reporting unit as compared to expected future results, the Company
determined there was a triggering event in the third quarter of 2017. As a result, the Company completed an interim
impairment assessment. The interim test resulted in the fair value of the Therapy reporting unit being less than the
carrying value of the reporting unit. The fair value of the Therapy reporting unit was $3.5 million and the carrying
value was $7.5 million. The deficiency of $4.0 million was recorded as an impairment charge in the third quarter
ended September 30, 2017. The Company did not identify a triggering event within the Detection reporting unit and
accordingly did not perform an interim test.
The Company performed the annual impairment assessment at October 1, 2018 and compared the fair value of each
of reporting unit to its carrying value as of this date. Fair value of the Detection reporting unit exceeded the carrying
value by approximately 648%. Goodwill for the Therapy reporting unit was fully impaired as of December 31, 2017.
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 liabilities, to the reporting units and an apportionment of the remaining net
assets based on the relative size of the reporting units’ revenues and operating expenses compared to the Company as
a whole. The determination of reporting units also requires management judgment.
Long Lived Assets
In accordance with FASB ASC Topic 360, “Property, Plant and Equipment”, (“ASC 360”), the Company assesses
long-lived assets for impairment if events and circumstances indicate it is more likely than not that the fair value of
the asset group is less than the carrying value of the asset group.
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 physical condition;
• A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived
asset (asset group), including an adverse action or assessment by a regulator;
• An accumulation of costs significantly in excess of the amount originally expected for the acquisition or
construction of a long-lived asset (asset group);
• A current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection
or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group).
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 assets (or asset group’s) fair value.
35
The Company completed an interim goodwill impairment assessment for the Therapy reporting unit in the third quarter
of 2017 and noted that there was an impairment of goodwill. As a result, the Company determined this was a triggering
event to review long-lived assets for impairment. Accordingly, the Company completed an analysis pursuant to ASC
360-10-35-17 and determined that the carrying value of the asset group exceeded the undiscounted cash flows, and
that long-lived assets were impaired. The Company recorded long-lived asset impairment charges of approximately
$0.7 million in the third quarter ended September 30, 2017 based on the deficiency between the book value of the
assets and the fair value as determined in the analysis. The Company has determined the “Asset Group” 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. The Company also completed a goodwill
assessment in the fourth quarter of 2017, and in connection with that assessment, the Company completed an analysis
pursuant to ASC 360-10-35-17 and determined that the undiscounted cash flows exceeded the carrying value of the
asset group and that long-lived assets were not impaired.
The Company did not record any impairment charges for the year ended December 31, 2018.
A considerable amount of judgment and assumptions are required in performing the impairment tests, principally in
determining the fair value of the Asset Group and the reporting unit. While the Company believes the judgments and
assumptions are reasonable, different assumptions could change the estimated fair values and, therefore additional
impairment charges could be required. Significant negative industry or economic trends, disruptions to the Company’s
business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant
changes or planned changes in use of the assets may adversely impact the assumptions used in the fair value estimates
and ultimately result in future impairment charges.
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.
Stock-Based Compensation
The Company maintains stock-based incentive plans, under which it provides stock incentives to employees, directors
and contractors. The Company grants to employees, 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 employees and directors. The underlying shares of the restricted stock grant are not issued until the shares vest,
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 granted
performance based restricted stock during 2017 based on achievement of certain revenue targets. Compensation
cost for performance based restricted stock requires significant judgment regarding probability of the performance
objectives and compensation cost is re-measured at every reporting period. As a result compensation cost could vary
significantly during the performance measurement period.
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
vested stock options before exercising them, the estimated volatility of its common stock price over the expected term,
and the number of options that will be forfeited prior to the completion of their vesting requirements. Fair value of
restricted stock is determined based on the stock price of the underlying option on the date of the grant. 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.
Income Taxes
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, 2018 and 2017 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.
36
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 adjustments to preliminary estimates being recorded to goodwill, provided 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 value, changes to these uncertain tax positions and tax related valuation
allowances may affect the provision for income taxes presented in the Company’s statement of operations.
Year Ended December 31, 2018 compared to Year Ended December 31, 2017
Revenue. Revenue for the year ended December 31, 2018 was $25.6 million compared with revenue of $28.1 million
for the year ended December 31, 2017, a decrease of $2.5 million or 8.8%. Therapy revenue decreased $1.0 million
and Detection revenue decreased $1.4 million.
The table below presents the components of revenue for 2018 and 2017 (in thousands):
Detection revenues decreased 7.9% or $1.4 million from $18.3 million for the year ended December 31, 2017 to $16.9
million for the year ended December 31, 2018. Detection product revenue decreased by $0.9 million and Detection
service revenue decreased $0.6 million. The $0.8 million decrease in Detection product revenue is due primarily
to a $1.1 million decrease in OEM system sales offset by a $0.3 million increase in direct product sales. Detection
service and supplies revenue decreased $0.6 million which is due primarily to the conversion and upgrade cycle from
Secondlook digital to Tomo and 3D CAD.
Therapy revenue decreased 10.6% or $1.0 million to $8.8 million for the year ended December 31, 2018 from $9.8
million in the year ended December 31, 2017. The decrease in Therapy revenue was due to a decrease in Therapy
service and supplies revenue of $1.5 million offset by an increase in Therapy product revenue of $0.4 million.
The increase in Therapy product revenue for the year ended December 31, 2018 is due primarily to an increase in
controller sales in 2018. The decrease in Therapy service revenue is due to the decision to exit the Skin subscription
business in January 2018.
Gross Profit. Gross profit was $19.4 million for the year ended December 31, 2018 compared to $18.2 million for the
year ended December 31, 2017, an increase of $1.3 million. Therapy gross profit increased $2.7 million from $2.0
million in the year ended December 31, 2017 to $4.7 million in the year ended December 31, 2018. Detection gross
profit decreased $1.5 million from $16.2 million in the year ended December 31, 2017 to $14.7 million in the year
ended December 31, 2018. Detection gross profit decreased due primarily to the decrease in Detection sales.
Therapy gross profit increased due to the exit of the Skin subscription business which had an increased cost associated
with the service delivery model that provided electronic brachytherapy solutions for the treatment of NMSC to
Dermatology practices. In addition, the Company recorded an inventory reserve in cost of revenue for the year ended
December 31, 2017 of approximately $1.0 million which is composed of $0.5 million in product and $0.5 million in
service. In January 2018, the Company announced that the services to provide electronic brachytherapy solutions for
the treatment of NMSC to Dermatology practices would be discontinued.
Gross profit percent was 75.8% for the year ended December 31, 2018 compared to 64.7% for the year ended December
31, 2017. Cost of revenue for the year ended December 31, 2017 includes the inventory reserve of $1.0 million, as
37
For the year ended December 31, 2018 2017 Change % ChangeDetection revenue Product revenue $ 10,783 $ 11,649 $ (866) (7.4)% Service and supplies revenue 6,081 6,661 (580) (8.7)% Subtotal 16,864 18,310 (1,446) (7.9)%Therapy revenue Product revenue 2,328 1,905 423 22.2% Service and supplies revenue 6,429 7,887 (1,458) (18.5)% Subtotal 8,757 9,792 (1,035) (10.6)%Total revenue $ 25,621 $ 28,102 $ (2,481) (8.8)% noted above. 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 2018 and 2017 were as follows (in thousands):
stcudorP
seilppus dna ecivreS
Amortization and depreciation
Total cost of revenue
Gross profit
Gross profit %
tiforp ssorg noitceteD
Therapy gross profit
Gross profit
For the year ended December 31,
2018
2017
$
161,2
726,3
403
6,191
$
2,660
922,6
730,1
629,9
Change % Change
(18.8%)
$
)%8.14(
)%1.16(
)%6.73(
(499)
)206,2(
)436(
)537,3(
$
19,430
$
671,81
$
452,1
6.9%
75.8%
64.7%
11.2%
For the year ended December 31,
2018
2017
$
$
907,41
4,721
034,91
$
$
Change % Change
(9.3%)
$
141.1%
6.9%
(1,509)
367,2
1,254
$
16,218
859,1
18,176
Operating Expenses:
Operating expenses for 2018 and 2017 are as follows (in thousands):
Operating expenses:
tnempoleved tcudorp dna gnireenignE
Marketing and sales
General and administrative
Amortization and depreciation
Gain on sale of MRI assets
Goodwill and long-lived asset impairment
Total operating expenses
For the year ended December 31,
2018
2017
Change % Change
$
$
$
544,9
8,693
9,117
305
-
-
065,72
723,9
305,01
7,877
254
)805,2(
396,6
443,23
811
(1,810)
1,240
)741(
2,508
)396,6(
)487,4(
%3.1
(17.2%)
15.7%
)%5.23(
-
-
)%8.41(
$
$
$
Engineering and Product Development. Engineering and product development costs for the year ended December
31, 2018 increased by $0.1 million or 1.3%, from $9.3 million in 2017 to $9.4 million in 2018. Therapy engineering
and product development costs decreased by approximately $1.0 million and Detection engineering and product
development costs increased by $1.1 million. The decrease in the Therapy segment is due primarily to a decrease in
consulting costs and personnel expenses. The increase in Detection research and development expense is due to an
increase in clinical expenses, consulting costs and personnel expenses.
Marketing and Sales. Marketing and sales expense for the year ended December 31, 2018 decreased by $1.8 million
or 17.2%, from $10.5 million in 2017 to $8.7 million in 2018. Therapy marketing and sales expenses decreased
approximately $2.2 million offset by an increase in Detection marketing and sales expenses of $0.4 million. The
increase in Detection marketing and sales expense is due to an increase in personnel costs. The decrease in Therapy
marketing and sales expense was due primarily to a decrease in personnel expenses, consulting costs, trade show
expenses and stock compensation expense.
General and Administrative. General and administrative expenses for the year ended December 31, 2018 increased by
$1.2 million or 15.7%, from $7.9 million in 2017 to $9.1 million in 2018. The increase in general and administrative
expenses was due primarily to increases in severance costs, legal costs and bad debt expenses.
Amortization and Depreciation. Amortization and depreciation decreased by $0.2 million from $0.5 million to $0.3
million. The decrease is due primarily to the impairment of intangible assets and reductions due to assets that have
become fully depreciated.
Gain from sale of MRI assets. The Company entered into an Asset Purchase Agreement with Invivo Corporation to
sell certain MRI assets in December 2016 and the transaction closed on January 30, 2017. As a result, the Company
38
recorded a gain on sale from MRI assets of $2.5 million in the first quarter of 2017.
Goodwill and long-lived asset impairment. The Company recorded an impairment charge of $4.7 million in the third
quarter of 2017 and a goodwill and long-lived asset impairment charge of $2.0 million in the fourth quarter of 2017
for a total of $6.7 million in 2017. There were no impairment charges during fiscal year 2018.
Other Income and Expense (in thousands)
For the year ended December 31,
esnepxe tseretnI
emocni tseretnI
Financing costs
2018
$
2017
$
)421(
81
-
)601(
$
)405(
011
(451)
(845)
$
$
)083(
29
)154(
)937(
Change Change %
% 5.603
% 1.115
-
697.2 %
Income tax (benefit) expense
$
42
$
)81(
06
%)3.333(
Interest Expense. The Company recorded $504,000 of interest expense in 2018 as compared with $124,000 of interest
expense during the year ended December 31, 2017. In August 2017, the Company closed a debt facility with Silicon
Valley Bank and as a result, interest expense has increased.
Interest income. Interest income of $110,000 and $18,000 for the years ended December 31, 2018, and 2017,
respectively, reflects income earned from our money market accounts.
Financing costs. The Company recorded $451,000 of expenses in 2018 in connection with the subordinated convertible
debt closed by the Company in December 2018.
Tax benefit (expense). The Company had tax expense of $42,000 for the year ended December 31, 2018 as compared to
a tax benefit of $18,000 for the year ended December 31, 2017. Tax expense for the year ended December 31, 2018 is
due primarily to state non-income and franchise based taxes. The tax benefit for the year ended December 31, 2017 is
the result of applying for New Hampshire research and development credits, offset by state non-income and franchise
based taxes.
Year Ended December 31, 2017 compared to Year Ended December 31, 2016
Revenue. Revenue for the year ended December 31, 2017 was $28.1 million compared with revenue of $26.3 million
for the year ended December 31, 2016, an increase of $1.8 million or 6.7%. Therapy revenue increased $1.2 million
and Detection revenue increased $0.6 million.
The table below presents the components of revenue for 2017 and 2016 (in thousands):
For the year ended December 31,
2017
2016
Change
% Change
$
946,11
6,661
013,81
$
8,682
8,451
17,133
$
2,967
(1,790)
1,177
34.2 %
(21.2)%
6.9 %
Detection revenue
eunever tcudorP
Service and supplies revenue
latotbuS
Therapy revenue
eunever tcudorP
Service and supplies revenue
latotbuS
509,1
7,887
297,9
1,789
7,416
9,205
116
471
587
6.5 %
6.4 %
6.4 %
eunever latoT
$
201,82
$
26,338
$
1,764
6.7 %
Detection revenues increased 6.9% or $1.2 million from $17.1 million for the year ended December 31, 2016 to $18.3
million for the year ended December 31, 2017. Detection product revenue increased by $3.0 million and Detection
service revenue decreased $1.8 million. The increase in Detection product revenue is primarily due to a $4.1 million
39
increase in digital CAD systems offset by a $1.0 million decrease in MRI products. The increase in digital CAD
products is driven by increases in demand primarily from our OEM customers. In January 2017, we completed the
sale of our MRI assets to Invivo. As a result MRI product revenue decreased $1.0 million and MRI service revenue
decreased $0.9 million. Detection service and supplies revenue decreased $1.8 million due to decreases in MRI service
revenue of $0.9 million and a decrease in digital service revenue of approximately $0.9 million. The decrease in digital
service revenue is due primarily to the conversion and upgrade cycle from Secondlook digital to Tomo CAD.
Therapy revenue increased 6.4% or $0.6 million to $9.8 million for the year ended December 31, 2017 from $9.2
million in the year ended December 31, 2016. The increase in Therapy revenue was driven by an increase in Therapy
product revenue of $0.1 million and an increase in Therapy service and supplies revenue of $0.5 million.
The increase in Therapy product and service revenue for the year ended December 31, 2017 is due primarily to an
increase in international controller sales in 2017. The Company believes that the international market can continue to
be a growth area for controller sales.
Gross Profit. Gross profit was $18.2 million for the year ended December 31, 2017 compared to $18.5 million for the
year ended December 31, 2016, a decrease of $0.3 million, Therapy gross profit decreased $1.4 million from $3.4
million in the year ended December 31, 2016 to $2.0 million in the year ended December 31, 2017. Detection gross
profit increased $1.1 million from $15.1 million in the year ended December 31, 2016 to $16.2 million in the year
ended December 31, 2017. Detection gross profit increased due primarily to the increase in Detection product sales,
which have higher gross profits than Detection service revenues.
Therapy gross profit decreased due to the increased cost associated with the service delivery model that provided
electronic brachytherapy solutions for the treatment of NMSC to Dermatology practices. In addition, the Company
recorded an inventory reserve in cost of revenue for the year ended December 31, 2017 of approximately $1.0 million
which is composed of $0.5 million in product and $0.5 million in service. In January 2018, the Company announced
that the services to provide electronic brachytherapy solutions for the treatment of NMSC to Dermatology practices
would be discontinued. We believe that gross margins should improve in 2018 as a result of this decision.
Gross profit percent was 64.7% for the year ended December 31, 2017 compared to 70.3% for the year ended
December 31, 2016. Cost of revenue for the year ended December 31, 2017 includes the inventory reserve of $1.0
million, as noted above. Cost of revenue for the year ended December 31, 2016 includes a credit of $0.5 million
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 2017
and 2016 were as follows (in thousands):
stcudorP
seilppus dna ecivreS
Amortization and depreciation
Total cost of revenue
Gross profit
Gross profit %
tiforp ssorg noitceteD
tiforp ssorg yparehT
Gross profit
For the year ended December 31,
2017
$
066,2
922,6
1,037
9,926
2016
$
819
317,5
981,1
028,7
Change % Change
189.8%
$
%0.9
)%8.21(
%9.62
247,1
615
)251(
601,2
$
671,81
$
18,518
$
)243(
)%8.1(
64.7%
70.3%
(5.6%)
For the year ended December 31,
2017
2016
$
$
812,61
859,1
671,81
$
$
Change % Change
7.3%
$
)%5.24(
)%8.1(
1,105
)744,1(
)243(
$
15,113
504,3
18,518
40
Operating Expenses:
Operating expenses for 2017 and 2016 are as follows (in thousands):
Operating expenses:
Engineering and product development
selas dna gnitekraM
General and administrative
Amortization and depreciation
Gain on sale of MRI assets
Goodwill and long-lived asset impairment
Total operating expenses
For the year ended December 31,
2017
2016
Change % Change
$
$
$
9,327
305,01
7,877
452
(2,508)
6,693
32,344
9,518
971,01
576,7
611,1
-
-
28,488
)191(
324
202
(664)
)805,2(
396,6
3,856
)%0.2(
3.2%
2.6%
(59.5%)
-
-
13.5%
$
$
$
Engineering and Product Development. Engineering and product development costs for the year ended December
31, 2017 decreased by $0.2 million or 2.0%, from $9.5 million in 2016 to $9.3 million in 2017. Therapy engineering
and product development costs decreased by approximately $0.4 million and Detection engineering and product
development costs increased by $0.2 million. The decrease in the Therapy segment is due primarily to a decrease in
personnel expenses, consulting costs and clinical trial expenses. The increase in Detection research and development
expense is due to an increase in personnel expenses, primarily stock compensation.
Marketing and Sales. Marketing and sales expense for the year ended December 31, 2017 increased by $0.3 million
or 3.2%, from $10.2 million in 2016 to $10.5 million in 2017. Therapy marketing and sales expenses decreased
approximately $0.3 million and Detection marketing and sales expenses increased $0.6 million. The increase in
Detection marketing and sales expense is due to an increase in commissions and stock compensation expense. The
decrease in Therapy marketing and sales expense was due primarily to a decrease in personnel expenses.
General and Administrative. General and administrative expenses for the year ended December 31, 2017 increased by
$0.2 million or 2.6%, from $7.7 million in 2016 to $7.9 million in 2017. The increase in general and administrative
expenses was due primarily to increases in stock compensation expense, rent and consulting offset by a decrease in
personnel expenses.
Amortization and Depreciation. Amortization and depreciation decreased by $0.6 million from $1.1 million to $0.5
million. The decrease is due primarily to the impairment of intangible assets and reductions due to assets that have
become fully depreciated.
Gain from sale of MRI assets. The Company entered into an Asset Purchase Agreement with Invivo Corporation to
sell certain MRI assets in December 2016 and the transaction closed on January 30, 2017. As a result, the Company
recorded a gain on sale from MRI assets of $2.5 million in the first quarter of 2017.
Goodwill and long-lived asset impairment. The Company recorded an impairment charge of $4.7 million in the third
quarter of 2017 and an impairment charge of $2.0 million in the fourth quarter of 2017 for a total of $6.7 million in
2017. There were no impairment charges during fiscal year 2016.
Other Income and Expense (in thousands)
For the year ended December 31,
esnepxe tseretnI
Interest income
2017
$
2016
$
$
$
)421(
18
(106)
Change Change %
% 8.69
% 0.08
100.0 %
)16(
8
(53)
$
)36(
01
)35(
Income tax (benefit) expense
$
(18)
$
67
)49(
%)7.321(
Interest Expense. The Company recorded $124,000 of interest expense in 2017 as compared with $63,000 of interest
expense during the year ended December 31, 2016. In August 2017, the Company closed a debt facility with Silicon
Valley Bank and as a result, interest expense has increased.
Interest income. Interest income of $18,000 and $10,000 for the years ended December 31, 2017, and 2016, respectively,
reflects income earned from our money market accounts.
41
Tax benefit (expense). The Company had a tax benefit of $18,000 for the year ended December 31, 2017 as compared
to tax expense of $76,000 for the year ended December 31, 2016. The tax benefit for the year ended December 31,
2017 is the result of applying for New Hampshire research and development credits, offset by state non-income and
franchise based taxes. Tax expense for the year ended December 31, 2016 is due primarily to state non-income and
franchise based taxes.
Segment Analysis
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, Marketing and Sales, and
depreciation and amortization for the respective segment. A summary of Segment revenues, segment gross profit and
segment operating income (loss) for the fiscal years ended December 31, 2018, 2017, and 2016 are below (in thousands):
Year Ended December 31,
2017
2016
2018
Segment revenues:
noitceteD
yparehT
euneveR latoT
Segment gross profit:
noitceteD
yparehT
tiforp ssorg tnemgeS
Segment operating income (loss):
noitceteD
Therapy
Segment operating income (loss)
General, administrative, depreciation and
amortization expense
Interest expense
Financing costs
Gain on sale of MRI assets
Other income
Loss on debt extinguishment
Loss before income tax
$
$
468,61
757,8
126,52
$
$
907,41
127,4
034,91
$
$
214,3
(2,373)
1,039
$
$
18,310
297,9
28,102
$
$
16,218
859,1
18,176
$
104,6
(15,102)
)107,8(
$
$
$
17,133
502,9
26,338
$
$
15,113
504,3
18,518
$
$
496,5
(7,752)
(2,058)
$
$
$
(9,169)
(504)
(451)
-
110
-
(8,975)
)579,7(
(124)
-
805,2
18
-
(14,274)
(7,912)
(63)
-
-
10
-
(10,023)
$
$
$
Detection gross profit decreased to approximately $14.7 million or 87% of revenue for the year ended December 31,
2018 from $16.2 million or 89% of revenue for the year ended December 31, 2017. The decrease in Detection gross
profit is due primarily to the decrease in revenue. Detection segment operating income for the year ended December
31, 2018 decreased by $3.0 million to $3.4 million from $6.4 million for the year ended December 31, 2017. The
decrease in Detection segment operating income for the year ended December 31, 2018 as compared to the year ended
December 31, 2017 was due primarily to the decrease in revenue and increased operating expenses for the year ended
December 31, 2018 as compared to the year ended December 31, 2017. Detection operating expenses increased by
$1.5 million to $11.3 million for the year ended December 31, 2018 as compared to $9.8 million for the year ended
December 31, 2017, reflecting increased research and development and increased marketing and sales expenses,
which is primarily clinical development costs, personnel related expenses and consulting costs.
Detection gross profit increased to approximately $16.2 million or 89% of revenue for the year ended December 31,
2017 from $15.1 million or 88% of revenue for the year ended December 31, 2016. Detection cost of sales also had a
reduction of $0.2 million in 2016 related to Medical Device Excise tax refunds. Detection segment operating income
for the year ended December 31, 2017 increased by $0.7 million to $6.4 million from $5.7 million for the year ended
December 31, 2016. The increase in segment operating income for the year ended December 31, 2017 as compared
to the year ended December 31, 2016 was due primarily to the increase in revenue for the year ended December 31,
42
2017 as compared to the year ended December 31, 2016. Detection operating expenses increased by $0.4 million to
$9.8 million for the year ended December 31, 2017 as compared to $9.4 million for the year ended December 31,
2016, reflecting increases in marketing and sales expenses, which is primarily increased commissions and personnel
related expenses.
Therapy gross profit increased by approximately $2.7 million to $4.7 million or 54% of revenue for the year ended
December 31, 2018 from approximately $2.0 million or 20% of revenue for the year ended December 31, 2017. The
increase in Therapy gross profit is due primarily to the inventory reserve of $1.0 million and increased labor costs
associated with the Therapy subscription business in the fiscal year ended December 31, 2017. Therapy operating
expenses for the year ended December 31, 2018 were approximately $7.4 million as compared to $17.1 million for
the year ended December 31, 2017. The decrease in operating expenses is due primarily to the goodwill and long-
lived asset impairment charge of $6.7 million in the year ended December 31, 2017 as well as reductions in clinical
expenses, consulting, personnel expenses and commissions. Therapy segment operating loss decreased to a loss of
$2.4 million for the year ended December 31, 2018 from a loss of $15.1 million for the year ended December 31,
2017. The decrease in loss is due primarily to the impairment charges, and the increased labor costs related to the skin
subscription business in the year ended December 31, 2017.
Therapy gross profit decreased by approximately $1.4 million to $2.0 million or 20% of revenue for the year ended
December 31, 2017 from approximately $3.4 million or 37% of revenue for the year ended December 31, 2016. The
decrease in Therapy gross profit is due primarily to the inventory reserve of $1.0 million and increased labor costs
associated with the Therapy subscription business, which the Company exited in 2018. Therapy cost of sales also
had a reduction of $0.3 million in 2016 related to Medical Device Excise tax refunds. Therapy operating expenses
for the year ended December 31, 2017 were approximately $17.1 million as compared to $11.2 million for the year
ended December 31, 2016. The increase in operating expenses is due primarily to the goodwill and long-lived asset
impairment charge of $6.7 million offset by reductions in clinical expenses, research and development, and personnel
expenses in marketing. Therapy segment operating loss increased to a loss of $15.1 million for the year ended
December 31, 2017 from a loss of $7.8 million for the period ended December 31, 2016.
Liquidity and Capital Resources
The Company believes that its cash and cash equivalents balance of $12.2 million as of December 31, 2018, 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 net working capital of $8.0 million at December 31, 2018. The ratio of current assets to current
liabilities at December 31, 2018 and 2017 was 1.60 and 1.76, respectively. In December 2018, the Company
successfully completed a $7 million private placement of unsecured subordinated convertible debentures. In January
2017, the Company closed an Asset Purchase agreement for $3.2 million with Invivo to sell certain MRI assets and
received $2.9 million in cash, which was net of a $350,000 holdback in escrow. In August 2017 the Company entered
into a debt facility that provided an initial term loan of $6.0 million and a $4.0 million revolving line of credit.
Net cash used for operating activities for the year ended December 31, 2018 was $3.9 million as compared to $7.3
million for 2017. The decrease in cash used for operating activities during the year ended December 31, 2018 was due
primarily to the cash provided by operating assets and liabilities for 2018 of approximately $2.5 million as compared
to cash used for changes in operating assets and liabilities of approximately $3.9 million, as well as an increased loss,
net of adjustments, due to lower revenues in the fiscal year ended December 31, 2018. The change in operating assets
was due primarily to a decrease in accounts receivable and inventories. We expect that changes in operating assets and
liabilities will continue to be a significant driver of changes in cash used in or provided by operations.
The net cash used for investing activities for the year ended December 31, 2018 was $0.3 million, as compared to cash
provided by investing activities of $2.5 million for the year ended December 31, 2017. The cash provided by investing
activities in 2017 was due primarily to the proceeds from the sale of MRI assets. The cash used for investing activities
in 2018 was due primarily to purchases of fixed assets.
Net cash provided by financing activities for the year ended December 31, 2018 was $7.0 million, which included the
$7.0 million received from the convertible debentures. Net cash provided by financing activities for the year ended
December 31, 2017 was $5.7 million, which was composed of $6.0 million received from the debt facility offset by
taxes paid for restricted stock issuance.
43
The following table summarizes as of December 31, 2018, for the periods presented, the Company’s future estimated
cash payments under existing contractual obligations, and the financing obligations as noted below (in thousands).
Contractual Obligations
Payments due by period
Total
Less than 1
year
1-3 years
3-5 years
5+ years
Operating Lease Obligations
$ 964 $ 781 $ 183 $ - $ -
snoitagilbO esaeL latipaC
62
11 51
- -
snoitagilbO tnemeltteS
364
- 364
- -
Notes Payable - principal and interest
6,957 2,275 4,682 - -
Convertible Debentures - principal and interest
8,015 349 7,666 - -
stnemtimmoC rehtO
323,2
47 82 58 631,2
Total Contractual Obligations
$ 18,748
$ 6,019
$ 12,627 $ 28 $ 74
Lease Obligations:
Operating Leases:
As of December 31, 2018, 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
for the Premises.
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 annual
payments 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 obtain insurance
for the facility.
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.
Capital Leases:
In August 2017, the Company assumed an equipment lease obligation with payments, including interest payable,
totaling $50,000. The lease was determined to be a capital lease and, accordingly, the equipment was capitalized and a
liability of $42,000 was recorded. The equipment is being depreciated over the expected life of 3 years.
Settlement Obligations:
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 sublicense certain Hologic patents, and a non-compete covenant 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 provided for payment
of royalties based upon a specified percentage of future net sales on any products that practice the licensed rights.
The estimated fair value of the patent license and non-compete covenant is $100,000 and was amortized over the
estimated useful life of approximately four years. As of December 31, 2018 the remaining liability for minimum
royalty obligations totaling $0.4 million is recorded within accrued expenses and accounts payable.
44
Notes Payable:
On August 7, 2017, the Company entered into a Loan and Security Agreement, which has been modified by the
First Loan Modification Agreement dated as of March 22, 2018, the Second Loan Modification Agreement dated as
of August 13, 2018, the Third Loan Modification Agreement dated as of December 20, 2018, and the Fourth Loan
Modification Agreement, dated as of March 15, 2019 (collectively, the “Loan Agreement”) with Silicon Valley Bank
(the “Bank”) that provided an initial term loan facility (amounts borrowed thereunder, the “Initial Term Loan”) of
$6.0 million and a $4.0 million revolving line of credit (amounts borrowed thereunder, the “Revolving Loans”). The
Company also has the option to borrow an additional $3.0 million term loan under the Loan Agreement (amounts
borrowed thereunder, the “Subsequent Term Loan” and together with the Initial Term Loan, the “Term Loan”), subject
to meeting a Detection revenue minimum of at least $21.5 million for a trailing twelve month period ending on or
prior to June 30, 2019.
The Company will begin repayment of the Initial Term Loan on March 1, 2019, in 30 equal monthly installments of
principal, based on the amended terms of the Loan Agreement. The maturity date of the Initial Term Loan is August
1, 2021.
The Company will be required to begin repayment of the Subsequent Term Loan, if drawn, on October 1, 2019 and
make 23 equal monthly installments of principal, as determined by the Third Loan Modification Agreement. The
maturity date of the Subsequent Term Loan is August 1, 2021.
The maturity date of the Revolving Loans is March 1, 2022. However, the maturity date will become April 30, 2020 or
April 30, 2021 if, after the Fourth Loan Modification Agreement, on or before March 15, 2020 or 2021, as applicable,
the Company does not agree in writing to the Detection revenue and adjusted EBITDA covenant levels proposed by
the Bank with respect to the upcoming 2020 or 2021 calendar year.
The outstanding Revolving Loans will accrue interest at a floating per annum rate equal to 1.50% above the prime rate
for periods when the ratio of the Company’s unrestricted cash to the Company’s outstanding liabilities to the Bank,
plus the amount of the Company’s total liabilities that mature within one year is at least 1.25 to 1.0. At all other times,
the interest rate shall be 0.50% above the prime rate. The outstanding Term Loans will accrue interest at a floating per
annum rate equal to the prime rate.
If the Revolving Loans are paid in full and the Loan Agreement is terminated prior to the maturity date, then the
Company will pay to the Bank a termination fee in an amount equal to two percent (2.0%) of the maximum revolving
line of credit. If the Company prepays the Term Loans prior to the maturity date, then the Company will pay to
the Bank an amount equal to 1.0% to 3.0% of the Term Loans, depending on when such Term Loans are repaid. In
addition, the Loan Agreement requires the Company to pay a final payment of 8.5% of the Term Loans (which was
increased by the Second Loan Modification Agreement from 8.0%) upon the earliest of the repayment of the Term
Loans, the termination of the Loan Agreement and the maturity date. The Company is accruing such payment as
additional interest expense. As of December 31, 2018, the accrued final payment is approximately $162,000 and is a
component of the outstanding loan balance.
The Loan Agreement, as amended, required the Company to maintain minimum Detection revenues during the
trailing six month period ending on December 31, 2018 of $8.75 million, and adjusted EBITDA during the trailing
six month period ending on December 31, 2018 of $1.00. On December 20, 2018, in accordance with the Third Loan
Modification agreement, the bank agreed to waive the covenants for the six month period ended December 31, 2018.
Although the Bank has agreed to revise the covenants in prior periods, there is no guarantee that the Bank would be
willing to revise the covenants in future periods.
Obligations to the Bank under the Loan Agreement or otherwise are secured by a first priority security interest in
substantially all of the assets, including intellectual property, accounts receivable, equipment, general intangibles,
inventory and investment property, and all of the proceeds and products of the foregoing, of each of the Company and
Xoft, Inc. and Xoft Solutions LLC, wholly-owned subsidiaries of the Company.
Convertible Debentures:
On December 20, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain
institutional and accredited investors, including, but not limited to, all directors and executive officers of the Company
(the “Investors”), pursuant to which the Investors agreed to purchase unsecured subordinated convertible debentures
(the “Convertible Debentures” or the “Notes”) with an aggregate principal amount of approximately $7.0 million in
a private placement.
45
The Company will pay interest to the Investors on the outstanding principal amount of the Convertible Debentures
at the rate of 5.0% per annum, payable semi-annually on December 21st and June 21st, beginning on June 21, 2019,
as well as on each conversion date (as to that principal amount then being converted) and on the maturity date. The
Convertible Debentures mature on December 21, 2021.
At any time prior to the maturity date, the Convertible Debentures are convertible into shares of the Company’s
common stock at a conversion price of $4.00 per share, at the Investor’s option, subject to certain anti-dilution
adjustments. The Convertible Debentures contain a cap of shares to be issued upon the conversion of the Convertible
Debentures at 19.99% of the issued and outstanding shares of the Company’s Common Stock on December 21, 2018,
unless shareholder approval of such issuance has been obtained. Upon the satisfaction of certain conditions, the
Company has the right to cause the Investors to convert all or part of the then outstanding principal amount of the
Convertible Debentures (a “Forced Conversion”). In connection with such Forced Conversion, the Company will
be required to pay accrued but unpaid interest, an interest make whole amount determined based on the timing of
the Forced Conversion and interest payments made to that date, liquidated damages and other amounts owing to
the Investors under the Convertible Debentures. The conversion price in both the optional conversion and Forced
Conversion provisions is subject to adjustment due to certain ‘down-round’ dilutive issuances as well for typical anti-
dilutive actions, such as stock splits and stock dividends.
The Investors also have the right to require the Company to repurchase the Convertible Debentures, at a repurchase
price that would be at least 115% of the then outstanding principal, plus any accrued but unpaid interest, upon the
occurrence of an event of default, as defined in the SPA. The Convertible Debentures will also accrue interest upon an
event of default at a rate of the lesser of 10.0% or the maximum permitted by law.
The Convertible Debentures also include certain liquidate damages provisions, whereby the Company will be required
to compensate the Investors for certain contingent events, such as the failure to timely deliver conversion shares of
common stock, failure to timely pay any accrued interest when due and failure to timely report public information.
The Convertible Debentures are unsecured and structurally subordinated to the Company’s existing indebtedness. In
connection with the issuance of the Convertible Debentures, the Company’s subsidiaries entered into a Subsidiary
Guarantee, dated as of December 20, 2018, for the benefit of the Investors, pursuant to which the subsidiaries
guaranteed the Company’s payments under the Convertible Debentures.
In connection with the issuance, on December 20, 2018, the Company entered into a registration rights agreement
(the “Registration Rights Agreement”) with the Investors, pursuant to which the Company agreed to file a registration
statement with the Securities and Exchange Commission (“SEC”) to register the resale of shares of common stock
underlying the Convertible Debentures on or prior to January 31, 2019. The Company will have to pay damages to the
Investors if it fails to meet its obligations pursuant to the Registration Rights Agreement.
Certain Investors in the Convertible Debentures include directors and employees of the Company. These related parties
purchased approximately 10% of the principal value of the Convertible Debentures, or $670,000. The Convertible
Debentures issued to the related parties have substantially the same rights and provisions as the unrelated third party
investors, with the exception of certain terms where the related parties received less favorable terms than the unrelated
third parties (such as with determination of the make whole conversion rate, as defined in the SPA; or limits on the
impact of potential ‘down-round’ adjustments to the conversion price).
Other Commitments:
Other Commitments include non-cancelable purchase orders with key suppliers executed in the normal course of
business.
Effect of New Accounting Pronouncements
Revenue Recognition
On January 1, 2018, the Company adopted the new accounting standard ASC 606, “Revenue from Contracts with
Customers” and all the related amendments (“Topic 606”) using the modified retrospective method for all contracts not
completed as of the date of adoption. For contracts that were modified before the effective date, the Company reflected
the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in
accordance with practical expedient ASC 606-10-65-1-(f)-4, which did not have a material effect on the Company’s
assessment of the cumulative effect adjustment upon adoption. The Company recognized the cumulative effect of
initially applying the new standard as an adjustment to the opening balance of retained earnings. The comparative
information has not been restated and continues to be reported under the accounting standards in effect for those
46
periods. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic
605. See Note 1 for details of the impact of the Company’s adoption of Topic 606 and the updated accounting policies
related to revenue recognition.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition,
measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new
standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the
principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine
whether lease expense is recognized over the term of the lease based on an effective interest method for a finance lease
or on a straight line basis for an operating lease. A lessee is also required to record a right-of-use asset and a lease
liability for all leases unless it has elected as an accounting policy not to apply the recognition requirements under
the new standard for leases with a term of 12 months or less (short-term leases). The new standard requires lessors to
account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct
financing leases and operating leases.
For public companies, Topic 842 is effective for annual reporting periods beginning after December 15, 2018,
including interim periods within that reporting period. The effective date for us is January 1, 2019. An entity may
adopt the guidance either (1) retrospectively to each prior reporting period presented in the financial statements
with a cumulative-effect adjustment recognized at the beginning of the earliest comparative period presented or (2)
retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment. The Company will
adopt the guidance retrospectively at the beginning of the period of adoption, January 1, 2019, through a cumulative-
effect adjustment, and will not apply the new standard to comparative periods presented.
The new standard provides a number of practical expedients. Upon adoption, the Company will elect the transition
package of practical expedients permitted within the new standard, which among other things, allows the carryforward
of the historical lease classification. Further, upon implementation of the new guidance, the Company will elect
the practical expedients for lessees to combine lease and non-lease components for all asset classes and adopt an
accounting policy to not recognize right-of-use assets and lease liabilities for short-term leases for all asset classes.
The Company will not elect the practical expedients to use hindsight in determining the lease term and assessing
impairment of right-of-use assets. The Company will elect the practical expedients provided to lessors, including,
in certain circumstances, to not separate nonlease components (which are accounted for under Topic 606) from the
associated lease component, and to adopt an accounting policy to exclude sales and related taxes from consideration
in the contract.
ASC 842 will impact the Company’s consolidated financial statements as the Company has operating lease arrangements
for which it is the lessee. The Company has substantially identified a complete population of leases, including any
embedded leases. Based on the Company’s portfolio of leases as of December 31, 2018, we estimate the impact of
the adoption to be an increase in lease-related assets and liabilities of approximately $1.0 million on the Company’s
consolidated balance sheet with no material impact on the results of operations, equity or cash flows. In addition,
upon electing the practical expedient to combine lease and non-lease components under ASC 842, the Company does
not expect the changes to lessor accounting to impact the amount or timing of revenue recognition, but will result in
revenue to be recognized under ASC 606 because the nonlease component will be the predominant component in the
arrangement. The Company has implemented new business processes and developed the appropriate controls related
to the disclosures and accounting for leasing arrangements.
Financial Instruments
On January 1, 2018, the Company adopted FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), to update
certain aspects of recognition, measurement, presentation and disclosure of financial instruments and applies to all
entities that hold financial assets or owe financial liabilities. As a result of the adoption, the Company will be required
to present the portion of the change in fair value of its financial liabilities measured using the fair value option that
relates to changes in the Company’s own credit risk as a component of other comprehensive income, rather than as
a component of the change in fair value in current earnings. The Company did not have any financial instruments
outstanding that would be impacted by ASU 2016-01 prior to the fourth quarter of 2018. The Company elected to
account for the Convertible Debentures issued in December 2018 using the fair value option and considered the
impact of ASU 2016-01 as part of that decision. The adoption of this standard did not have a material impact on the
Company’s financial statements for the year ended December 31, 2018.
47
In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from
Equity (Topic 480), Derivatives and Hedging (Topic 815): (Part I.) Accounting for Certain Financial Instruments with
Down Round Features, and (Part II.) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial
Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a
Scope Exception” (“ASU 2017-11”). Among other provisions, ASU 2017-11 requires that when determining whether
certain financial instruments should be classified as liabilities or equity instruments, an entity should not consider a
down round feature. ASU 2017-11 also recharacterizes as a scope exception the indefinite deferral available to private
companies with mandatorily redeemable financial instrument and certain noncontrolling interests, which does not
have an accounting effect but addresses navigational concerns within the FASB Accounting Standards Codification.
The provisions of the ASU related to down round features are effective for the Company for the fiscal year and interim
periods therein beginning January 1, 2019. The Company does not currently expect that the adoption of ASU 2017-11
will have a material impact on its consolidated financial statements.
Stock Compensation
On January 1, 2018, the Company adopted FASB ASU 2017-09, “Compensation—Stock Compensation (Topic
718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 specifies which changes to the terms or
conditions of a share-based payment award require an entity to apply modification accounting. The adoption of this
standard did not have a material impact on the Company’s financial statements for the year ended December 31, 2018.
Statement of Cash Flows
On January 1, 2018, the Company adopted FASB ASU 2016-15, “Statement of Cash Flows (Topic 230)” (“ASU 2016-
15”). 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 adoption of ASU 2016-15 did not have a material impact on
the consolidated financial statements.
On January 1, 2018, the Company adopted FASB ASU 2016-18, “Restricted Cash” (“ASU 2016-18”), which requires
entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the
statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and
restricted cash and restricted cash equivalents in the statement of cash flows. The amendments in this update should be
applied using a retrospective transition method to each period presented. The adoption of this standard will change the
presentation of the Company’s statement of cash flows to include restricted cash balances with the non-restricted cash
balances. The adoption of ASU 2016-18 did not otherwise have a material impact on the consolidated financial statements.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
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 embedded with derivative instruments, such as foreign currency and interest rate swaps,
options, forwards, futures, collars, and warrants, either to hedge existing risks or for speculative purposes.
Item 8.
See Financial Statements and Schedule attached hereto.
Financial Statements and Supplementary Data.
Item 9.
Not Applicable.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A.
Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
The Company, under the supervision 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, 2018.
48
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-
effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts
periodic evaluations to enhance, where necessary its procedures and controls.
(b) Management’s Annual Report on Internal Control Over Financial Reporting.
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.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject 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 deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018, 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, 2018.
(c) Changes in Internal Control Over Financial Reporting.
The Company’s principal executive officer and principal financial officer conducted an evaluation of the Company’s
internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) to determine whether any changes
in internal control over financial reporting occurred during the quarter ended December 31, 2018, that have materially
affected or which are reasonably likely to materially affect internal control over financial reporting. Based on that
evaluation there has been no such change during such period.
Item 9B.
Other Information.
Not applicable
49
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
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 publicly-held companies of which he or she currently serves as a director or has served 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 believe that all of our directors have a reputation for integrity, honesty and adherence to high ethical standards.
They each have demonstrated business acumen and an ability to exercise sound judgment, 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.
Name
Age
Position with iCAD
Director/Officer Since
Michael Klein
Rakesh Patel, MD
Andy Sassine
Susan Wood, MD
Richard Areglado
Stacey Stevens
64
45
54
56
55
48
Chief Executive Officer,
Chairman of the Board, and Director
Director
Director
Director
Interim Chief Financial Officer,
V.P. and Corporate Controller
President
2018
2018
2015
2018
2019
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 five directors. On January 7, 2019, Dr. Brem resigned from the
board. There are currently four directors.
Mr. Michael Klein has served as the Chief Executive Officer at Inflection Point Consulting, an executive coaching and
consulting firm with a focus on medical technology, biopharma and healthcare services, since December 2014. Prior to
that, he was the Chief Executive Officer at US HIFU, LLC (f/k/a SonaCare Medical, LLC), a global leader in minimally
invasive high intensity focused ultrasound technologies, from December 2011 to November 2014. From April 2011
to December 2011, Mr. Klein was the President of the Civco Radiation Oncology Division within Roper Industries,
a diversified industrial company that produces engineered products for global niche markets. He was President and
Chief Executive Officer of Xoft, Inc. (“Xoft”), a medical device company, a position he held from December 2004
until the sale of Xoft to the Company in December 2010. Prior to joining Xoft, from 2000 to 2004, Mr. Klein served
as Chairman, President and Chief Executive Officer of R2 Technology, Inc., a breast and lung cancer computer aided
detection company. Mr. Klein received a Bachelor of Arts degree from the University at Albany, SUNY. Mr. Klein
also received his M.B.A. from the New York Institute of Technology and completed his post-graduate Executive
Education Studies at Harvard University and Babson College. We believe Mr. Klein’s qualifications to serve on our
Board of Directors include his significant experience as an executive in the healthcare industry, his understanding of
our products and markets and his previous tenure on our board.
Dr. Rakesh Patel has served as medical director of Radiation Oncology and Chair of the Multi-Disciplinary Breast
Care Program at Good Samaritan Hospital since July 2013. In addition, he has served as co-founder of the TME Breast
Care Network, a high-end physician peer-to-peer knowledge-sharing, research, education and consulting company,
since January 2013. Dr. Patel has also served as Chief Executive Officer of Precision Cancer Specialists Medical
Group, an organization whose core mission is to improve quality and access to advanced, targeted radiation therapy,
since December 2016. He previously served on the board of directors of Radion, Inc., a company that improved quality
of access for patients and doctors with an innovative e-collaboration platform, the assets of which were acquired by the
Company in July 2014. Prior to that, Dr. Patel was the founder and served on the board of directors of BrachySolutions,
Inc. (acquired by Radion Inc.), a telehealth company whose mission was to improve quality and access to advanced
brachytherapy globally via custom e-learning modules. He holds a Bachelor of Science degree from the University
of Notre Dame and an M.D. from Indiana University School of Medicine. Dr. Patel completed his radiation oncology
residency at the University of Wisconsin-Madison. We believe Dr. Patel’s qualifications to serve on our Board of
Directors include his expertise in the medical field as well as his understanding of our products and market.
50
Mr. Andy Sassine currently serves as Chief Financial Officer of Arcturus Therapeutics, Ltd., which he also serves on its
board of directors. Mr. Sassine also serves on the board of directors of Gemphire Therapeutics, Inc., a NASDAQ traded,
clinical-stage biopharma focusing on developing and commercializing therapies for Dyslipidemia and NASH. Andy
Sassine has served in various positions at Fidelity Investments from 1999 to 2012, rising to the position of Portfolio
Manager. Prior to joining Fidelity, he served as a vice president in the Acquisition Finance Group at Fleet National
Bank. Mr. Sassine previously served on the boards of MYnd Analytics, Inc., Acorn energy, Freedom Meditech, Inc.,
and MD Revolution. Mr. Sassine was a member of the Henry B. Tippie College of Business, University of Iowa Board
of Advisors from 2009 till 2018 and served on the Board of Trustees at the Clarke Schools for Hearing and Speech
from 2009 through 2014. Mr. Sassine holds a Bachelor of Arts degree from the University of Iowa and an MBA from
the Wharton School at the University of Pennsylvania. We believe Mr. Sassine’s extensive knowledge and experience
as a fund manager and board member of other companies of a similar size to our company qualifies him to serve as a
member of our Board of Directors.
Dr. Susan Wood has served as the President and Chief Executive Officer of Vida Diagnostics, Inc., a leader in precision
imaging and AI for pulmonary medicine, since September 2009. Previously, she held the position of Executive Vice
President of Marketing and Technology for Vital Images, Inc., an innovative software company specializing in
cardiovascular applications for advanced analysis software, from July 2005 until December 2008. Dr. Wood has been
issued multiple patents in the field of computer-aided detection and quantitative imaging; authored numerous book
chapters, peer-reviewed papers, abstracts, and served as an invited speaker at numerous conferences in the area of
three-dimensional imaging of the thorax, quantitative imaging and computer-aided detection. She holds a Bachelor of
Science in Engineering from the University of Maryland, College Park and an M.S. in Biomedical Engineering from
Duke University. Additionally, Dr. Wood received her Ph.D. from the Johns Hopkins Medical Institutions, School
of Hygiene and Public Health. We believe Dr. Wood’s qualifications to serve on our Board of Directors include her
expertise in the medical field her prior business experience in the medical field and her knowledge of our markets.
Audit Committee and Audit Committee Financial Expert
Our Board of Directors maintains an Audit Committee which is composed of Mr. Sassine (Chair), Dr. Wood and Dr.
Patel. 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. Sassine 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,
2018; all filing requirements applicable to all of our officers, directors, and greater than 10% beneficial stockholders
were timely complied with.
Code of Ethics
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
Attention: Corporate Secretary
Item 11. Executive Compensation.
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, 2018. The response to this item will be contained in
our proxy statement for our 2019 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 by reference.
51
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The response to this item will be contained in our proxy statement for our 2019 annual meeting of stockholders in part
under the caption “Stock Ownership of Certain Beneficial Owners and Management” and in part below.
Equity Compensation Plans
The following table provides certain information with respect to all of our equity compensation plans in effect as of
December 31, 2018.
Plan Category:
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
Weighted-average exercise price
of outstanding options, warrants
and rights
Number of securities remaining
available for issuance under
equity compensation plans
(excluding securities reflected in
column (a))
Equity compensation plans
approved by security
holders:
Equity compensation plans
not approved by security
holders (1):
latoT
1,983,477
0
774,389,1
52.4$
00.0$
52.4$
917,569
-0-
917,569
(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.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The response to this item will be contained in our proxy statement for our 2019 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 by reference.
Item 14.
Principal Accounting Fees and Services.
The response to this item will be contained in our proxy statement for our 2019 annual meeting of stockholders under
the caption “Ratification of Appointment of Independent Registered Public Accounting Firm,” and is incorporated
herein by reference.
Item 15.
Exhibits, Financial Statement Schedules.
PART IV
a) The following documents are filed as part of this Annual Report on Form 10-K:
i.
ii.
Financial Statements - See Index on page 93.
Financial Statement Schedule - See Index on page 93. All other schedules for
which provision is made in the applicable accounting regulations of the Securities
and Exchange Commission are not required under the related instructions or are
not applicable and, therefore, have been omitted.
iii.
Exhibits - the following documents are filed as exhibits to this Annual Report on
Form 10-K:
52
EXHIBIT INDEX
2(a)
2(b)
2(c)
2(d)
3(a)
3(b)
4(a)
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).
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).
4(b)
Form of Debenture (incorporated by reference to Exhibit 4.1 of the Registrant’s
report on Form 8-K filed with the SEC on December 27, 2018).
10(a)
2002 Stock Option Plan (incorporated by reference to Annex F to the Registrant’s
Registration Statement on Form S-4A (File No. 333-86454)).*
10(b)
10(c)
10(d)
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).*
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).*
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 B to the
Registrant’s report on Form DEF14A filed with the SEC on May 25, 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).*
10(g)
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).
53
10(h)
10(i)
10(j)
10(k)
10(l)
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).
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).
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 May 6, 2009). *
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)*
Form of Restricted Stock Agreement under the Registrant’s 2007 Stock Incentive
Plan. (incorporated by reference to Exhibit 10(ww) to the Registrant’s Report on
Form 10-K for the year ended December 31, 2009).*
10(m) 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(n) Employment Agreement entered into as of June 1, 2008 between the Registrant
and Stacey Stevens (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(o) Employment Agreement dated as of June 1, 2008 between the Registrant and
Jonathan Go (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(p) 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(q) 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(r) 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).
10(s)
10(t)
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).
10(u) 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).
10(v) 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).
54
10(w) Loan and Security Agreement dated August 7, 2017 by and among Silicon
Valley Bank, the Company, Xoft, Inc. and Xoft Solutions, LLC (incorporated by
reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed with the
SEC on August 10, 2017).
10(x)
2012 Stock Incentive Plan (incorporated by reference to Appendix B to the
Registrant’s definitive proxy statement on Schedule 14A filed with the SEC on
April 9, 2012).*
10(y) Amendment No. 1 to the 2012 Stock Incentive Plan (incorporated by reference to
Appendix A to the Registrant’s definitive proxy statement on Schedule 14A filed
with the SEC on April 2, 2014).*
10(z)
First Loan Modification Agreement dated March 22, 2018 by and among Silicon
Valley Bank, the Company, Xoft, Inc. and Xoft Solutions, LLC (incorporated by
reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed with the
SEC on March 23, 2018).
10(aa) Second Loan Modification Agreement dated August 31, 2018 by and among Silicon
Valley Bank, the Company, Xoft, Inc. and Xoft Solutions, LLC (incorporated by
reference to Exhibit 10.1 of the Registrant’s report on Form 10-Q filed with the
SEC on August 14, 2018).
10(bb) Third Loan Modification Agreement dated December 20, 2018 by and among
Silicon Valley Bank, the Company, Xoft, Inc. and Xoft Solutions, LLC
(incorporated by reference to Exhibit 10.4 of the Registrant’s report on Form 8-K
filed with the SEC on December 27, 2018).
10(cc) Fourth Loan Modification Agreement dated March 18, 2019 by and among Silicon
Valley Bank, the Company, Xoft, Inc. and Xoft Solutions, LLC (incorporated by
reference to Exhibit 10.1 of the Registrant’s report on Form 8-K filed with the
SEC on March 21, 2019).
10(dd) Employment Agreement between the Company and Michael Klein dated
November 19, 2018 (incorporated by reference to Exhibit 10.1 of the Registrant’s
report on Form 8-K filed with the SEC on November 20, 2018).
10(ee) Form of Securities Purchase Agreement by and among the Company and
certain investors party thereto (incorporated by reference to Exhibit 10.1 of the
Registrant’s report on Form 8-K filed with the SEC on December 27, 2018).
10(ff) Form of Subsidiary Guarantee (incorporated by reference to Exhibit 10.2 of the
Registrant’s report on Form 8-K filed with the SEC on December 27, 2018).
10(gg) Form of Registration Rights Agreement by and among the Company and
certain investors party thereto (incorporated by reference to Exhibit 10.3 of the
Registrant’s report on Form 8-K filed with the SEC on December 27, 2018).
10(hh) Cooperation Agreement between the Company and Andy Sassine dated October
18, 2018 (incorporated by reference to Exhibit 10.1 of the Registrant’s report on
Form 10-Q filed with the SEC on November 14, 2018).
21
23
31.1
31.2
Subsidiaries
Consent of BDO USA, LLP, Independent Registered Public Accounting Firm.
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.
55
32.1
32.2
101
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, 2018 and
December 31, 2017, (ii) Consolidated Statements of Operations for the twelve
months ended December 31, 2018 and 2016 and 2015, (iii) Consolidated
Statements of Cash Flows for the twelve months ended December 31, 2018 and
2017 and 2016, 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.
Item 16.
Summary.
None
SIGNATURES
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 behalf by the undersigned, thereunto duly authorized.
iCAD, INC.
Date: March 29, 2019
By: /s/ Michael Klein
Michael Klein
Chief Executive Officer, Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Michael Klein
Michael Klein
/s/ R. Scott Areglado
R. Scott Areglado
/s/ Rakesh Patel
Rakesh Patel, MD
/s/ Andy Sassine
Andy Sassine
/s/ Susan Wood
Susan Wood, MD
Executive Chairman,
Director, Chief Executive Officer
(Principal Executive Officer)
Interim Chief Financial Officer,
Vice President and Corporate Controller
(Principal Financial and Accounting Officer)
Director
Director
Director
56
Date
March 29, 2019
March 29, 2019
March 29, 2019
March 29, 2019
March 29, 2019
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
As of December 31, 2018 and 2017
Consolidated Statements of Operations
For the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity
For the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows
For the years ended December 31, 2018, 2017 and 2016
Page
58
59
60
61
62
Notes to Consolidated Financial Statements
63-105
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
iCAD, Inc.
Nashua, New Hampshire
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of iCAD, Inc. (the “Company”) and subsidiaries as of
December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2018, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 1989.
Boston, Massachusetts
March 29, 2019
58
iCAD, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Assets
Current assets:
stnelaviuqe hsac dna hsaC
Trade accounts receivable, net of allowance for doubtful
7102 ni 701$ dna 8102 ni 771$ fo stnuocca
ten ,yrotnevnI
stessa tnerruc rehto dna sesnepxe diaperP
stessa tnerruc latoT
Property and equipment:
tnempiuqE
stnemevorpmi dlohesaeL
serutxif dna erutinruF
stessa gnitekraM
noitazitroma dna noitaicerped detalumucca sseL
tnempiuqe dna ytreporp teN
Other assets:
Other assets
Intangible assets, net of accumulated amortization
7102 ni 334,7$ dna 8102 ni 908,7$ fo
Goodwill
stessa rehto latoT
stessa latoT
Liabilities and Stockholders' Equity
Current liabilities:
elbayap stnuoccA
sesnepxe deurccA
noitrop tnerruc - elbayap setoN
noitrop mret-trohs ,elbayap esael latipaC
eunever derrefeD
seitilibail tnerruc latoT
seitilibail mret-gnol rehtO
noitrop mret-gnol ,eunever derrefeD
noitrop mret-gnol ,elbayap setoN
Convertible debentures payable to non-related parties, at fair value
eulav riaf ta ,seitrap detaler ot elbayap serutnebed elbitrevnoC
noitrop mret-gnol - esael latipaC
Deferred tax
seitilibail latoT
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $ .01 par value: authorized 1,000,000 shares;
.deussi enon
Common stock, $ .01 par value: authorized 30,000,000
shares; issued 17,066,510 in 2018 and 16,711,512 in 2017;
7102 ni 186,525,61 dna 8102 ni 976,088,61 gnidnatstuo
latipac ni-diap lanoitiddA
ticifed detalumuccA
7102 dna 8102 ni serahs 138,581 ,tsoc ta kcots yrusaerT
ytiuqe 'sredlohkcots latoT
December 31,
2018
December 31,
2017
(in thousands except shares and per share data)
$
581,21
$
783,9
$
$
304,6
785,1
540,1
022,12
020,6
26
803
673
6,766
412,6
255
53
055,1
8,362
569,9
737,13
451,1
060,5
158,1
51
561,5
542,31
72
133
452,4
6,300
076
11
3
148,42
$
$
995,8
321,2
001,1
902,12
227,5
26
503
673
6,465
988,5
675
35
139,1
263,8
643,01
131,23
1,362
574,4
718
21
404,5
070,21
119
605
911,5
-
-
72
14
558,71
-
-
171
419,812
)477,012(
)514,1(
698,6
761
983,712
)568,102(
)514,1(
672,41
ytiuqe 'sredlohkcots dna seitilibail latoT
$
737,13
$
131,23
See accompanying notes to consolidated financial statements.
59
iCAD, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
2018
For the Years Ended December 31,
2017
(in thousands except per share data)
2016
Revenue:
Products
Service and supplies
Total revenue
Cost of Revenue:
Products
Service and supplies
Amortization and depreciation
Total cost of revenue
Gross profit
Operating expenses:
Engineering and product development
M arketing and sales
General and administrative
Amortization and depreciation
Gain on sale of M RI assets
Goodwill and long-lived asset impairment
Total operating expenses
Loss from operations
Other expense
Interest expense
Interest income
Financing costs
Other expense, net
Loss before income tax expense
Income tax (benefit) expense
Net loss and comprehensive loss
Net loss per share:
Basic
Diluted
Weighted average number of shares used in
computing loss per share:
Basic
Diluted
See accompanying notes to consolidated financial statements.
$
$
13,111
12,510
25,621
$
13,554
14,548
28,102
2,161
3,627
403
6,191
19,430
9,445
8,693
9,117
305
-
-
27,560
2,660
6,229
1,037
9,926
18,176
9,327
10,503
7,877
452
(2,508)
6,693
32,344
10,471
15,867
26,338
918
5,713
1,189
7,820
18,518
9,518
10,179
7,675
1,116
-
-
28,488
(8,130)
(14,168)
(9,970)
(504)
110
(451)
(845)
(124)
18
-
(106)
(63)
10
-
(53)
(8,975)
(14,274)
(10,023)
42
(18)
76
(9,017)
$
(14,256)
$
(10,099)
(0.54) $
(0.54) $
(0.87) $
(0.87) $
(0.63)
(0.63)
16,685
16,685
16,343
16,343
15,932
15,932
$
$
$
60
iCAD, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(in thousands except shares)
Balance at December 31, 2015
15,923,349 $
159 $
211,512 $
(177,510) $
(1,415) $
32,746
Common S tock
Number of
S hares Issued
Par Value
Additional
Paid-in
Capital
Accumulated
Deficit
Treasury
S tock
S tockholders'
Equity
Issuance of common stock relative to
vesting of restricted stock, net of 27,299
shares forfeited for tax obligations
Issuance of common stock pursuant
to stock option plans
Stock-based compensation
Net loss
261,731
75,583
-
-
3
1
-
-
(117)
197
2,307
-
-
-
-
(10,099)
-
-
-
-
(114)
198
2,307
(10,099)
Balance at December 31, 2016
16,260,663 $
163 $
213,899 $
(187,609) $
(1,415) $
25,038
Issuance of common stock relative to
vesting of restricted stock, net of 55,115
shares forfeited for tax obligations
Issuance of common stock pursuant
to stock option plans
Stock-based compensation
Net loss
414,319
36,530
-
-
4
-
-
-
(245)
79
3,656
-
-
-
-
(14,256)
-
-
-
-
(241)
79
3,656
(14,256)
Balance at December 31, 2017
16,711,512 $
167 $
217,389 $
(201,865) $
(1,415) $
14,276
Cumulative impact from the adoption of ASC 606
(see Note 1)
Issuance of common stock relative to
vesting of restricted stock, net of 56,946
shares forfeited for tax obligations
Issuance of common stock pursuant
to stock option plans
Stock-based compensation
Net loss
-
265,442
89,556
-
-
-
3
1
-
-
-
108
(183)
203
1,505
-
-
-
-
(9,017)
-
-
-
-
-
108
(180)
204
1,505
(9,017)
Balance at December 31, 2018
17,066,510 $
171 $
218,914 $
(210,774) $
(1,415) $
6,896
See accompanying notes to consolidated financial statements.
61
iCAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Cash flow from operating activities:
Net loss
Adjustments to reconcile net loss to net cash
used for operating activities:
Amortization
Depreciation
Bad debt provision
Inventory obsolesence reserve
Stock-based compensation expense
Amortization of debt discount and debt costs
Gain from acquisition settlement
Goodwill and long-lived asset impairment
Interest on settlement obligations
Deferred tax
Loss on disposal of assets
Gain on sale of M RI assets
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable
Inventory
Prepaid and other assets
Accounts payable
Accrued expenses
Deferred revenue
Total adjustments
Net cash used for operating activities
Cash flow from investing activities:
Additions to patents, technology and other
Additions to property and equipment
Acquisition of VuComp M -Vu CAD
Sale of M RI assets
Net cash provided by (used for) investing activities
Cash flow from financing activities:
Issuance of common stock for cash, net
sesicrexe noitpo kcotS
ecnaussi kcots detcirtser ot detaler diap sexaT
stsoc ecnaussi tbeD
snoitagilbo esael latipac fo stnemyap lapicnirP
gnicnanif tbed morf sdeecorP
serutnebed elbitrevnoc morf sdeecorP
seitivitca gnicnanif )rof desu( yb dedivorp hsac teN
stnelaviuqe dna hsac ni )esaerced( esaercnI
raey fo gninnigeb ,stnelaviuqe dna hsaC
raey fo dne ,stnelaviuqe dna hsaC
Supplemental disclosure of cash flow information:
diap tseretnI
Taxes paid
Escrow due from M RI asset sale
Equipment purchased under capital lease
See accompanying notes to consolidated financial statements.
62
For the Years Ended December 31,
2017
2018
(in thousands)
2016
$
(9,017)
$
(14,256)
$
(10,099)
383
325
225
-
1,505
170
-
-
-
(12)
12
-
2,003
536
172
(209)
494
(454)
5,150
(3,867)
(15)
(301)
-
-
(316)
402
)081(
-
)31(
-
079,6
189,6
897,2
783,9
581,21
492
51
-
-
$
$
$
494
995
45
1,052
3,656
-
-
6,693
26
8
52
(2,158)
(3,474)
554
29
(215)
(505)
(333)
6,919
(7,337)
(5)
(390)
-
2,850
2,455
79
(241)
(74)
(80)
6,000
-
5,684
802
8,585
9,387
97
60
350
42
$
$
$
983
1,322
177
114
703,2
(23)
(249)
-
82
7
10
-
2,201
482
(504)
(16)
309
(2,581)
4,621
(5,478)
(12)
(337)
(6)
-
(355)
-
198
(114)
-
(946)
-
-
(862)
(6,695)
15,280
8,585
07
67
-
-
$
$
$
$
$
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1)
Summary of Significant Accounting Policies
(a) Nature of Operations and Use of Estimates
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 better serve patients by identifying pathologies and pinpointing the most prevalent 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.
The Company intends to continue the extension of its image analysis 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 believes that early detection in combination with earlier targeted
intervention will provide patients and care providers with the best tools available to achieve better clinical
outcomes resulting in a market 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,
manufacturing and warehousing facility in San Jose, California.
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, major customer and geographical information.
In January 2018, the Company adopted a plan to discontinue offering radiation therapy professional services
to practices that provide the Company’s electronic brachytherapy solution for the treatment of non-melanoma
skin cancer under the subscription service model within the Therapy Segment.
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 revenue and expenses during the reporting period. Actual results
could differ from those estimates. It is reasonably possible that changes may occur in the near term that would
affect management’s estimates with respect to assets and liabilities.
(b) Principles of Consolidation
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
been eliminated in consolidation.
(c) Cash and cash equivalents
The Company defines cash and cash equivalents as all bank accounts, money market funds, deposits and
other money market 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 federally insured limits. The Company has never experienced any losses related to these balances.
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, 2018 approximated $11.9 million.
63
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(d) Financial instruments
Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, notes
payable and convertible debentures. Due to their short term nature and market rates of interest, the carrying
amounts of the financial instruments, except the convertible debentures, approximated fair value as of
December 31, 2018 and 2017.
The Company has elected to record the convertible debentures at fair value at each reporting date in accordance
with the fair value option election. See Note 4(b) for further details.
(e) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are customer obligations due under normal trade terms. Credit limits are established
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 for estimated losses from the inability of its customers to
make required payments. The Company’s senior management reviews accounts receivable on a periodic
basis to determine if any receivables may potentially be uncollectible. The Company includes any accounts
receivable balances that it determines may likely be uncollectible, along with a general reserve for estimated
probable losses based on historical experience, in its overall allowance for doubtful accounts. An 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, 2018
and 2017 is adequate.
The following table summarizes the allowance for doubtful accounts for the three years ended December 31,
2018 (in thousands):
Balance at beginning of period
Additions charged to costs and expenses
snoitcudeR
doirep fo dne ta ecnalaB
(f) Inventory
2018
$
2017
$
2016
$
107
225
)551(
771
172
45
(110)
107
236
177
(241)
172
$
$
$
Inventory is valued at the lower of cost or net realizable value, with cost determined by the first-in, first-out
method. The Company regularly reviews inventory quantities on hand and records a reserve for excess and/
or obsolete inventory primarily based upon the estimated usage of its inventory as well as other factors.
At December 31, 2018 and 2017, inventories consisted of the following (in thousands), which includes
an inventory reserve of approximately $1.1 million and $1.2 million as December 31, 2018 and 2017,
respectively.
As of December 31,
Raw materials
Work in process
Finished Goods
Inventory
2018
$
$
606
67
914
1,587
2017
992
63
1,068
2,123
$
$
64
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(g) Property and Equipment
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 life
Equipment
Leasehold improvements
Furniture and fixtures
Marketing assets
3-5 years
3-5 years
3-5 years
3-5 years
(h) Goodwill
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 events and circumstances indicate it is more likely than not that the fair value of the reporting
unit is less than the carrying value of the reporting unit.
Factors the Company considers important, which could trigger an impairment of such asset, include the
following:
•
•
•
•
•
significant underperformance relative to historical or projected future operating results;
significant changes in the manner or use of the assets or the strategy for the Company’s overall
business;
significant negative industry or economic trends;
significant decline in the Company’s stock price for a sustained period; and
a decline in the Company’s market capitalization below net book value.
The Company records an impairment charge when such assessment indicates that the fair value of a
reporting unit was less than the carrying value. In evaluating potential impairments outside of the annual
measurement date, judgment is required in determining whether an event has occurred that may impair the
value of goodwill or intangible assets. The Company utilizes either discounted cash flow models or other
valuation models, such as comparative transactions and market multiples, to determine the fair value of
reporting units. The Company makes assumptions about future cash flows, future operating plans, discount
rates, comparable companies, market multiples, purchase price premiums and other factors in those models.
Different assumptions and judgment determinations could yield different conclusions that would result in an
impairment charge to income in the period that such change or determination was made.
In January 2018, the Company adopted a plan to discontinue offering radiation therapy professional services
to practices that provide the Company’s electronic brachytherapy solution for the treatment of non-melanoma
skin cancer under the subscription service model within the Therapy Segment. As result, the Company no
longer offers the subscription service model to customers. Based on the decision to discontinue offering
radiation therapy professional services within the Therapy Segment, the Company revised its forecasts
related to the Therapy segment, which the Company deemed to be a triggering event.
The Company elected to early adopt ASU 2017-04, “Intangibles – Goodwill and Other: Simplifying the Test
for Goodwill Impairment” (“ASU 2017-04”) as of September 30, 2017 which affected both the third quarter
and fourth quarter impairment tests. ASU 2017-04 specifies that goodwill impairment is the amount by which
a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. In
accordance with the standard, the fair value of the Therapy reporting unit as of the fourth quarter was $0.1
million and the carrying value was $2.1 million. The deficiency exceeded the carry value of goodwill and
the balance of $1.7 million was recorded as an impairment charge in the fourth quarter of the year ended
December 31, 2017.
65
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(h) Goodwill (continued)
As a result of the underperformance of the Therapy reporting unit as compared to expected future results,
the Company determined there was a triggering event in the third quarter of 2017. As a result, the Company
completed an interim impairment assessment. The interim test resulted in the fair value of the Therapy
reporting unit being less than the carrying value of the reporting unit. The fair value of the Therapy reporting
unit was $3.5 million and the carrying value was $7.5 million. The deficiency of $4.0 million was recorded
as an impairment charge in the third quarter of the year ended December 31, 2017. The Company did not
identify a triggering event within the Detection reporting unit and accordingly did not perform an interim test.
The Company determines the fair value of reporting units based on the present value 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 fair
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 based on the most recent views of the long-term forecast for the reporting unit. Accordingly,
actual results can differ from those assumed in the forecasts. Discount rates are 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 businesses and in the internally developed forecasts.
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 analysis, the income approach provides a reasonable
estimate of the fair value of the Therapy reporting unit.
The Company performed the annual impairment assessment at October 1, 2018 and compared the fair value
of each reporting unit to its carrying value as of this date. The fair value exceeded the carrying value for the
Detection reporting unit as of the date of this impairment assessment. Goodwill for the Therapy reporting unit
was fully impaired as of December 31, 2017. As such, the Company did not record any impairment charges
for the year ended December 31, 2018. 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 liabilities, to the
reporting units and an apportionment of the remaining net assets based on the relative size of the reporting
units’ revenues and operating expenses compared to the Company as a whole. The determination of reporting
units also requires management judgment.
The Company determines the fair values for each reporting unit using a weighting of the income approach
and the market approach. For purposes of the income approach, fair value is determined based on the present
value of estimated future cash flows, discounted at an appropriate risk adjusted rate. The Company uses
internal forecasts to estimate future cash flows and includes estimates of long-term future growth rates based
on our most recent views of the long-term forecast for each segment. Accordingly, actual results can differ
from those assumed in our forecasts. Discount rates are derived from a capital asset pricing model and
by analyzing published rates for industries relevant to our reporting units to estimate the cost of equity
financing. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in
the respective businesses and in our internally developed forecasts.
In the market approach, the Company uses a valuation technique in which values are derived based on
market prices of publicly traded companies with similar operating characteristics and industries. A market
approach allows for comparison to actual market transactions and multiples. It can be somewhat limited in its
application because the population of potential comparable publicly-traded companies can be limited due to
differing characteristics of the comparative business and ours, as well as market data may not be available for
divisions within larger conglomerates or non-public subsidiaries that could otherwise qualify as comparable,
and the specific circumstances surrounding a market transaction (e.g., synergies between the parties, terms
and conditions of the transaction, etc.) may be different or irrelevant with respect to the business.
66
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(h) Goodwill (continued)
The Company corroborates the total fair values of the reporting units using a market capitalization approach;
however, this approach cannot be used to determine the fair value of each reporting unit value. The blend of
the income approach and market approach is more closely aligned to the business profile of the Company,
including markets served and products available. In addition, required rates of return, along with uncertainties
inherent in the forecast of future cash flows, are reflected in the selection of the discount rate. In addition,
under the blended approach, reasonably likely scenarios and associated sensitivities can be developed for
alternative future states that may not be reflected in an observable market price. The Company will assess
each valuation methodology based upon the relevance and availability of the data at the time the valuation is
performed and weights the methodologies appropriately.
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.
A rollforward of goodwill activity by reportable segment is as follows (in thousands):
Accumulated Goodwill
Detection
$ -
Accumulated impairment
-
Fair value allocation
7,663
-
Acquisition of DermEbx and Radion
Acquisition measurement period adjustments -
1,093
Acquisition of VuComp
Sale of MRI assets
(394)
tnemriapmI
-
8,362
Balance at December 31, 2016
Therapy
$ -
-
13,446
6,154
116
-
-
)189,31(
5,735
Total
$ 47,937
(26,828)
-
6,154
116
1,093
(394)
)189,31(
14,097
tnemriapmI
Balance at December 31, 2017
-
8,362
)537,5(
-
)537,5(
8,362
Balance at December 31, 2018
Accumulated Goodwill
Fair value allocation
Accumulated impairment
Balance at December 31, 2018
(i) Long Lived Assets
-
$ 8,362
-
$ -
-
$ 8,362
699
7,663
-
$ 8,362
6,270
13,446
(19,716)
$ -
49,171
-
(40,809)
$ 8,362
In accordance with FASB ASC Topic 360, “Property, Plant and Equipment”, (“ASC 360”), the Company
assesses long-lived assets for impairment if events and circumstances indicate it is more likely than not that
the fair value of the asset group is less than the carrying value of the asset group.
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.
67
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(i) Long Lived Assets (continued)
• A significant decrease in the market price of a long-lived asset (asset group);
• A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being
used or in its physical condition;
• A significant adverse change in legal factors or in the business climate that could affect the value of a
long-lived asset (asset group), including an adverse action or assessment by a regulator;
• An accumulation of costs significantly in excess of the amount originally expected for the acquisition or
construction of a long-lived asset (asset group);
• A current period operating or cash flow loss combined with a history of operating or cash flow losses or
a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset
(asset group).
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.
The Company completed an interim goodwill impairment assessment for the Therapy reporting unit in
the third quarter of 2017 and noted that there was an impairment of goodwill. As a result, the Company
determined this was a triggering event to review long-lived assets for impairment. The Company determined
the “Asset Group” 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. Accordingly, the Company completed an analysis pursuant to ASC 360-10-35-17 and determined
that the carrying value of the asset group exceeded the undiscounted cash flows, and that long-lived assets
were impaired. The Company recorded long-lived asset impairment charges of approximately $0.7 million
in the third quarter of the year ended December 31, 2017 based on the deficiency between the book value of
the assets and the fair value as determined in the analysis.
The Company also completed a goodwill assessment in the fourth quarter of 2017, and in connection with
that assessment, the Company completed an analysis pursuant to ASC 360-10-35-17 and determined that the
undiscounted cash flows exceeded the carrying value of the asset group and that long-lived assets were not
impaired.
The Company did not record any impairment charges for the years ended December 31, 2018 or 2016.
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 and
assumptions are reasonable, different assumptions could change the estimated fair values, and, therefore
additional impairment charges could be required. Significant negative industry or economic trends, disruptions
to the Company’s business, loss of significant customers, inability to effectively integrate acquired businesses,
unexpected significant changes or planned changes in use of the assets may adversely impact the assumptions
used in the fair value estimates and ultimately result in future impairment charges.
68
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(i) Long Lived Assets (continued)
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 2018 and 2017 are as follows (in thousands):
Gross Carrying Amount
sesnecil dna stnetaP
ygolonhceT
spihsnoitaler remotsuC
emanedarT
Total amortizable intangible assets
Accumulated Amortization
Patents and licenses
Technology
Customer relationships
emanedarT
Total accumulated amortization
2018
2017
$
175
752,8
272
952
9,359
$
556
8,257
292
259
9,364
Weighted
average
useful life
5 years
10 years
7 years
10 years
$ 511 $ 503
6,958 6,610
81 61
952 952
7,433
7,809
Total amortizable intangible assets, net
$
1,550
$
1,931
Amortization expense related to intangible assets was approximately $383,000, $494,000 and $983,000 for
the years ended December 31, 2018, 2017, and 2016, respectively. Estimated remaining amortization of the
Company’s intangible assets is as follows (in thousands):
For the years ended
December 31:
9102
0202
1202
2202
3202
Thereafter
Estimated
amortization
expense
$
224
403
622
792
001
201
1,550
$
69
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition
Revenue Recognition Upon Adoption of ASC 606
On January 1, 2018, the Company adopted FASB ASC Topic 606, “Revenue from Contracts with Customers”
and all the related amendments (“Topic 606”), using the modified retrospective method for all contracts
not completed as of the date of adoption. For contracts that were modified before the effective date, the
Company reflected the aggregate effect of all modifications when identifying performance obligations and
allocating transaction price in accordance with practical expedient ASC 606-10-65-1-(f)-4, which did not
have a material effect on the Company’s assessment of the cumulative effect adjustment upon adoption. The
Company recognized the cumulative effect of initially applying the new standard as an adjustment to the
opening balance of retained earnings. The comparative information has not been restated and continues to be
reported under the accounting standards in effect for those periods. Results for reporting periods beginning
after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue
to be reported in accordance with our historic accounting under Topic 605.
We recorded a net increase to opening retained earnings of $0.1 million as of January 1, 2018 due to the
cumulative impact of adopting Topic 606, with the impact primarily related to the deferral of commissions
on our long-term service arrangements and warranty periods greater than one year, which previously were
expensed as incurred but, under the amendments to ASC 340-40, are now generally capitalized and amortized
over the period of contract performance or a longer period if renewals are expected and the renewal
commission is not commensurate with the initial commission.
The cumulative effect of the changes made to the Company’s consolidated balance sheet for the adoption of
Topic 606 were as follows (in thousands):
Selected Balance Sheet
Assets
stessa tnerruc rehto dna sesnepxe diaperP
Balance at
December 31,
2017
Adjustments Due
to ASU 2014-09
Balance at
January 1, 2018
$
001,1
$
147
$
1,247
Liabilities
eunever derrefeD
seitilibail tcartnoC
Stockholders’ equity
ticifed detalumuccA
-
019,5
408
(369)
408
5,541
)568,102(
801
(201,973)
70
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition (continued)
In accordance with the requirements of the new standard, the disclosure of the impact of the adoption on our
consolidated balance sheet and statement of operations was as follows (in thousands):
Selected Balance Sheet
As of December 31, 2018
As Reported
Balances without
Adoption of ASC
606
Effect of Change
Increase (Decrease)
Asse ts
stessa tnerruc rehto dna sesnepxe diaperP
$
540,1
$
763
$
(282)
Liabilities
sesnepxe deurccA
eunever derrefeD
seitilibail tcartnoC
xat derrefeD
Stockholders’ equity
ticifed detalumuccA
060,5
782
902,5
3
5,060
287
5,209
2
-
-
-
(1)
)477,012(
(211,056)
(282)
The impact to revenues as a result of applying Topic 606 for the year ended December 31, 2018 was an
increase of $116,000 (table in thousands).
Selected Statement of Operations
Year ended December 31, 2018
As Reported
Balances without
Adoption of ASC
606
Effect of Change
Increase (Decrease)
Revenue
stcudorP
seilppus dna ecivreS
Cost of revenue
stcudorP
seilppus dna ecivreS
Operating expenses
selas dna gnitekraM
esnepxe tseretnI
emocni rehtO
Tax benefit (expense)
$
167
)15( 165,21 015,21
$
$
111,31
12,944
- 161,2 161,2
- 726,3 726,3
)282( 579,8 396,8
- )405( )405(
- 011 011
42 42 -
Net loss
(9,017) (9,415) (398)
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or
services. The amount of revenue recognized reflects the consideration to which the Company expects to be
entitled to receive in exchange for these goods or services and excludes any sales incentives or taxes collected
from customers which are subsequently remitted to government authorities. To achieve this core principle,
the Company applies the following five steps:
71
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition (continued)
1) Identify the contract(s) with a customer—A contract with a customer exists when (i) the Company
enters into an enforceable contract with a customer that defines each party’s rights regarding the goods
or services to be transferred and identifies the payment terms related to those goods or services, (ii) the
contract has commercial substance and (iii) the Company determines that collection of substantially
all consideration for goods or services that are transferred is probable based on the customer’s intent
and ability to pay the promised consideration. The Company’s contracts are typically in the form of a
purchase order. For certain large customers, the Company may also enter master service agreements
which although include the terms under which the parties will enter into contracts do not require any
minimum purchases and therefore, do not represent contracts until coupled with a purchase order. The
Company applies judgment in determining the customer’s ability and intention to pay, which is based
on a variety of factors including the customer’s historical payment experience or, in the case of a new
customer, published credit and financial information pertaining to the customer.
2) Identify the performance obligations in the contract—Performance obligations promised in a contract
are identified based on the goods or services that will be transferred to the customer that are both capable
of being distinct, whereby the customer can benefit from the good or service either on its own or together
with other resources that are readily available from third parties or from the Company, and are distinct in
the context of the contract, whereby the transfer of the goods or services is separately identifiable from
other promises in the contract. To the extent a contract includes multiple promised goods or services, the
Company must apply judgment to determine whether promised goods or services are capable of being
distinct and distinct in the context of the contract. If these criteria are not met the promised goods or
services are accounted for as a combined performance obligation. The Company’s contracts typically
do not include options that would result in a material right. If options to purchase additional goods or
services are included in customer contracts, the Company evaluates the option in order to determine
if the Company’s arrangement include promises that may represent a material right and needs to be
accounted for as a performance obligation in the contract with the customer. The Company did not note
any significant provisions within its typical contracts that would create a material right.
3) Determine the transaction price—The transaction price is determined based on the consideration to
which the Company will be entitled in exchange for transferring goods or services to the customer. To
the extent the transaction price includes variable consideration; the Company estimates the amount of
variable consideration that should be included in the transaction price utilizing either the expected value
method or the most likely amount method depending on the nature of the variable consideration. Variable
consideration is included in the transaction price if, in the Company’s judgment, it is probable that a
significant future reversal of cumulative revenue under the contract will not occur.
4) Allocate the transaction price to the performance obligations in the contract—If the contract
contains a single performance obligation, the entire transaction price is allocated to the single
performance obligation. Contracts that contain multiple performance obligations require an allocation of
the transaction price to each performance obligation on a relative standalone selling price (“SSP”) basis
unless the transaction price is variable and meets the criteria to be allocated entirely to a performance
obligation or to a distinct good or service that forms part of a single performance obligation. The
Company determines SSP based on the price at which the performance obligation is sold separately. If
the SSP is not observable through past transactions, the Company estimates the SSP taking into account
available information such as market conditions and internally approved pricing guidelines related to the
performance obligations.
5) Recognize revenue when (or as) the Company satisfies a performance obligation—The Company
satisfies performance obligations either over time or at a point in time as discussed in further detail
below. Revenue is recognized at the time the related performance obligation is satisfied by transferring
a promised good or service to a customer.
The Company recognizes revenue from its contracts with customers primarily from the sale of products
and from the sale of services and supplies. Under Topic 606, revenue is recognized when control of the
72
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition (continued)
promised goods or services is transferred to a customer, in an amount that reflects the consideration
we expect to be entitled to in exchange for those goods or services. For product revenue, control has
transferred upon shipment provided title and risk of loss have passed to the customer. Services and
supplies are considered to be transferred as the services are performed or over the term of the service
or supply agreement. The Company enters into contracts that can include various combinations of
products and services, which are generally capable of being distinct and accounted for as separate
performance obligations. The Company’s hardware is generally highly dependent on, and interrelated
with, the underlying software and the software is considered essential to the functionality of the product.
In these cases, the hardware and software license are accounted for as a single performance obligation
and revenue is recognized at the point in time when ownership is transferred to the customer. Taxes
assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-
producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control of a product has transferred
to a customer are accounted for as fulfillment costs and are included in cost of revenue. The Company
continues to provide for estimated warranty costs on original product warranties at the time of sale.
Disaggregation of Revenue
The following tables presents our revenues disaggregated by major good or service line, timing of revenue
recognition and sales channel, reconciled to our reportable segments (in thousands).
Major Goods/Service Lines
stcudorP
stcartnoc ecivreS
Supply and source usage agreements
secivres lanoisseforP
rehtO
Timing of Revenue Recognition
Goods transferred at a point in time
Services transferred over time
Sales Channels
ecrof selas tceriD
srentrap MEO
srentrap lennahC
Total Revenue
Revenue from contracts with customers
Revenue from lease components
Year ended December 31, 2018
Reportable Segments
Detection
Therapy
Total
$
387,01
113,5
-
-
922
$
4,393
1,450
2,261
264
389
$
15,176
6,761
2,261
264
618
$
16,323
$
8,757
$
25,080
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
10,835
5,488
16,323
533,8
889,7
-
16,323
16,323
541
16,864
4,676
4,081
8,757
7,554
-
1,203
8,757
8,757
-
8,757
15,511
9,569
25,080
15,889
7,988
1,203
25,080
25,080
541
25,621
73
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition (continued)
Year ended December 31, 2017(1)
Reportable Segments
Detection
Therapy
Total
Major Goods/Service Lines
stcudorP
stcartnoc ecivreS
Supply and source usage agreements
secivres lanoisseforP
rehtO
Timing of Revenue Recognition
Goods transferred at a point in time
Services transferred over time
Sales Channels
ecrof selas tceriD
srentrap MEO
srentrap lennahC
Total Revenue
Revenue from contracts with customers
Revenue from lease components
$
$
$
056,11
786,5
-
-
883
17,725
787,7
839,9
-
17,725
17,725
585
18,310
$
$
$
11,684
6,041
17,725
$
5,266
4,526
9,792
$
$
$
16,950
10,567
27,517
$
$
$
$
$
$
$
$
$
$
$
$
16,413
7,169
1,956
254
1,725
27,517
16,141
9,938
1,438
27,517
27,517
585
28,102
4,763
1,482
1,956
254
1,337
9,792
8,354
-
1,438
9,792
9,792
-
9,792
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.
Products. Product revenue consists of sales of cancer detection products, cancer therapy systems, cancer
therapy applicators, cancer therapy disposable applicators and other accessories that are typically shipped
with a cancer therapy system. The Company transfers control and recognizes a sale when the product is
shipped from the manufacturing or warehousing facility to the customer.
Service Contracts. The Company sells service contracts in which the Company provides professional
services including product installations, maintenance, training and service repairs, and in certain cases leases
equipment, to hospitals, imaging centers, radiological practices and radiation oncologists and treatment
centers. As lease contracts are not within the scope of Topic 606, the Company accounts for the lease
components of these arrangements in accordance with ASC 840 and the remaining consideration is allocated
to the other performance obligations identified in accordance with Topic 606. The consideration allocated
to the lease component is recognized as lease revenue on a straight-line basis over the specified term of the
agreement. Revenue for the non-lease components, such as service contracts, is recognized on a straight-
line basis over the term of the agreement. The service contracts range from 12 months to 48 months. The
Company typically receives payment at the inception of the contract and recognizes revenue on a straight-
line basis over the term of the agreement.
Supply and Source Usage Agreements. Revenue from supply and source usage agreements is recognized on
a straight-line basis over the term of the supply or source agreement.
74
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition (continued)
Professional Services. Revenue from fixed fee service contracts is recognized on a straight-line basis over
the term of the agreement. Revenue from professional service contracts entered into with customers on a
time and materials basis is recognized over the term of the agreement in proportion to the costs incurred in
satisfying the obligations under the contract.
Other. Other revenue consists primarily of miscellaneous products and services. The Company transfers
control and recognizes a sale when the installation services are performed or when the Company ships the
product from our manufacturing or warehouse facility to the customer.
Significant Judgments
The Company’s contracts with customers may include promises to transfer multiple products and services
to a customer. Determining whether products and services are considered distinct performance obligations
that should be accounted for separately versus together may require significant judgment. For arrangements
with multiple performance obligations, the Company allocates revenue to each performance obligation based
on its relative standalone selling price. Judgment is required to determine the standalone selling price for
each distinct performance obligation. The Company generally determines standalone selling prices based
on the prices charged to customers and uses a range of amounts to estimate standalone selling prices when
we sell each of the products and services separately and need to determine whether there is a discount that
needs to be allocated based on the relative standalone selling prices of the various products and services. The
Company typically has more than one range of standalone selling prices for individual products and services
due to the stratification of those products and services by customers and circumstances. In these instances,
the Company may use information such as the type of customer and geographic region in determining the
range of standalone selling prices.
The Company may provide credits or incentives to customers, which are accounted for as variable consideration
when estimating the transaction price of the contract and amounts of revenue to recognize. The amount of
variable consideration to include in the transaction price is estimated at contract inception using either the
estimated value method or the most likely amount method based on the nature of the variable consideration.
These estimates are updated at the end of each reporting period as additional information becomes available
and revenue is recognized only to the extent that it is probable that a significant reversal of any amounts of
variable consideration included in the transaction price will not occur. The Company provides for estimated
warranty costs on original product warranties at the time of sale.
Contract Balances
Contract liabilities are a component of deferred revenue, and contract assets are a component of prepaid
and other current assets. The following table provides information about receivables, contract assets, and
contract liabilities from contracts with customers (in thousands).
Balance at
December 31,
2018
’elbaviecer stnuocca edarT‘ ni dedulcni era hcihw ,selbavieceR
Contract assets, which are included in "Prepaid and other current assets"
"eunever derrefeD" ni dedulcni era hcihw ,seitilibail tcartnoC
$
252,6
19
902,5
Timing of revenue recognition may differ from timing of invoicing to customers. The Company records
a receivable when revenue is recognized prior to receipt of cash payments and the Company has the
unconditional right to such consideration, or unearned revenue when cash payments are received or due in
advance of performance. For multi-year agreements, the Company generally invoices customers annually at
the beginning of each annual service period.
The opening balance of accounts receivable from contracts with customers, net of allowance for doubtful
accounts, was $8.5 million as of January 1, 2018. As of December 31, 2018, accounts receivable, net of
allowance for doubtful accounts, was $6.3 million.
75
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition (continued)
The Company records a contract asset for unbilled revenue when the Company’s performance is in excess of
amounts billed or billable. The Company has classified the contract asset balance as a component of prepaid
expenses and other current assets as of January 1, 2018 and December 31, 2018. The opening balance of
contract assets was $166,000 as of January 1, 2018. As of December 31, 2018, the contract asset balance was
$19,000.
Deferred revenue from contracts with customers is primarily composed of fees related to long-term service
arrangements, which are generally billed in advance. Deferred revenue also includes payments for installation
and training that has not yet been completed and other offerings for which we have been paid in advance
and earn the revenue when we transfer control of the product or service. Deferred revenue from contracts
with customers is included in deferred revenue in the consolidated balance sheets. Deferred revenue on the
consolidated balance sheet also includes $369,000 and $287,000 at December 31, 2017 and December 31,
2018, respectively of amounts associated with service contracts accounted for under Topic 840. The balance
of deferred revenue at December 31, 2017 and December 31, 2018 is as follows (in thousands):
December 31, 2017
Contract
liabilities
Lease revenue
Total
mret trohS
mret gnoL
latoT
mret trohS
mret gnoL
latoT
$
$
$
$
$
$
440,5
794
145,5
588,4
423
902,5
360
9
369
280
7
287
5,404
506
5,910
5,165
331
5,496
December 31, 2018
Contract
liabilities
Lease revenue
Total
$
$
$
$
$
$
Changes in deferred revenue from contracts with customers were as follows (in thousands):
Year Ended
December 31,
2018
doirep fo gninnigeb ta ecnalaB
tnemtsujda noitpodA
eunever fo larrefeD
eunever derrefed fo noitingoceR
doirep fo dne ta ecnalaB
$
145,5
93
399,9
)463,01(
902,5
$
We expect to recognize approximately $4.9 million of the deferred amount in 2019, $0.2 million in 2020, and
$0.1 million thereafter.
Assets Recognized from the Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the
benefit of those costs to be longer than one year. We have determined that certain commissions programs
meet the requirements to be capitalized. The opening balance of capitalized costs to obtain a contract was
$117,000 as of January 1, 2018. As of December 31, 2018, the balance of capitalized costs to obtain a contract
was $282,000. The Company has classified the capitalized costs to obtain a contract as a component of
prepaid expenses and other current assets as of January 1, 2018 and December 31, 2018.
76
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition (continued)
Changes in the balance of capitalized costs to obtain a contract were as follows (in thousands):
Year Ended
December 31, 2018
doirep fo gninnigeb ta ecnalaB
tcartnoc a niatbo ot stsoc fo larrefeD
tcartnoc a niatbo ot stsoc fo noitingoceR
doirep fo dne ta ecnalaB
$
$
711
863
)302(
282
Practical Expedients and Exemptions
The Company has elected to make the following accounting policy elections through the adoption of the
following practical expedients:
Right to Invoice
Where applicable, the Company will recognize revenue from a contract with a customer in an amount that
corresponds directly with the value to the customer of the Company’s performance completed to date and the
amount to which the entity has a right to invoice.
Sales and Other Similar Taxes
The Company will exclude sales taxes and similar taxes from the measurement of transaction price and will
ensure that it complies with the disclosure requirements of ASC 235-10-50-1 through 50-6.
Significant Financing Component
The Company will not adjust the promised amount of consideration for the effects of a significant financing
component if the Company expects, at contract inception, that the period between when the entity transfers
a promised good or service to a customer and when the customer pays for that good or service will be one
year or less.
Cost to Obtain a Contract
The Company will recognize the incremental costs of obtaining a contract as an expense when incurred if the
amortization period of the asset that the Company otherwise would have recognized is one year or less and
there are no renewal periods on which the Company does not pay commissions that are not commensurate
with those originally paid.
Promised Goods or Services that are Immaterial in the Context of a Contract
The Company has elected to assess promised goods or services as performance obligations that are deemed
to be immaterial in the context of a contract. As such, the Company will not aggregate and assess immaterial
items at the entity level. That is, when determining whether a good or service is immaterial in the context of
a contract, the assessment will be made based on the application of ASC 606 at the contract level.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an
original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount
to which we have the right to invoice for services performed.
Revenue Recognition Prior to the Adoption of ASC 606
The Company’s reporting periods prior to the adoption of ASC 606 and the year ended December 31, 2018
are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Under Topic 605, revenue was recognized when delivery occurred, persuasive evidence of an arrangement
existed, fees were fixed or determinable and collectability of the related receivable was probable. For product
revenue, delivery was considered to occur upon shipment provided title and risk of loss had passed to the
77
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition (continued)
customer. Services and supplies revenue was considered to be delivered as the services were performed or over
the estimated life of the supply agreement. Revenue from the sale of certain CAD products was recognized in
accordance with ASC 840, which continues to be the case under Topic 606. In addition, revenue from certain
CAD products was recognized in accordance with ASC 985-605, which has now been superseded by Topic
606. For multiple element arrangements, revenue was allocated to all deliverables based on their relative
selling prices. In such circumstances, a hierarchy was 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 existed only when the deliverable was sold separately and was the price actually charged for that
deliverable. The process for determining BESP for deliverables without VSOE or TPE considered multiple
factors depending upon the unique facts and circumstances related to each deliverable including relative
selling prices, competitive prices in the marketplace and management judgment.
The Company historically determined that iCAD’s digital and film based sales generally followed the
guidance of ASC 605 as the software was 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 was responsible for product installation, the installation element was considered
a separate unit of accounting because the delivered product had standalone value to the customer. In these
instances, the Company allocated the revenue to the deliverables based on the framework established within
ASU 2009-13. Therefore, the installation and training revenue was recognized as the services were performed
according to the BESP of the element. Revenue from the digital and film based equipment when there was
installation was recognized based on the relative selling price allocation of the BESP, when delivered.
Revenue from certain CAD products was recognized in accordance with ASC 985-605. Sales of this product
include training, and the Company had established VSOE for this element. Product revenue was determined
based on the residual value in the arrangement and was recognized when delivered. Revenue for training
was deferred and recognized when the training had been completed. For multiple element arrangements, the
Company allocated revenue to the deliverables in the arrangement based on the BESP in accordance with
ASU 2009-13. Product revenue was generally recognized when the product had been delivered and service
and/or supplies revenue was typically recognized over the life of the service and/or supplies agreement.
Physics and management services revenue and development fees were considered to be delivered as the
services were performed or over the estimated life of the agreement. The Company deferred revenue from
the sale of certain service contracts and recognized the related revenue on a straight-line basis in accordance
with ASC 605-20, “Services.”
(k) Cost of Revenue
Cost of revenue consists of the costs of products purchased for resale, cost relating to service including costs
of service contracts to maintain equipment after the warranty period, inbound freight and duty, manufacturing,
warehousing, material movement, 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
year 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 the year
ended December 31, 2016 or to any prior period and as such no prior periods were restated. There have been
no MDET refunds received by the Company subsequent to the year ended December 31, 2016.
78
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(l) Warranty Costs
The Company provides for the estimated cost of standard product warranty against defects in material and
workmanship based on historical warranty trends, including the cost of product returns during the warranty
period. Warranty provisions and claims for the years ended December 31, 2018, 2017 and 2016, were as
follows (in thousands):
Beginning accrual balance
Warranty provision
Usage
Ending accrual balance
2018
$
2017
$
2016
$
10
19
(17)
12
11
49
(50)
10
19
47
(55)
11
$
$
$
(m) Engineering and Product Development Costs
Engineering and product development costs relate to research and development efforts including Company
sponsored clinical trials which are expensed as incurred.
(n) Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31,
2018, 2017 and 2016 was approximately $811,000, $990,000 and $955,000 respectively.
(o) Net Loss per Common Share
The Company follows FASB ASC 260-10, “Earnings per Share”, which requires the presentation of both
basic and diluted earnings per share on the face of the statements of operations. The Company’s basic net
loss per share is computed by dividing net loss by the weighted average number of shares of common stock
outstanding for the period and, if there are dilutive securities, diluted income per share is computed by
including common stock equivalents which includes shares issuable upon the exercise of stock options, net
of shares assumed to have been purchased with the proceeds, using the treasury stock method.
A summary of the Company’s calculation of net loss per share is as follows (in thousands, except per share
amounts):
2018
2017
2016
Net loss available to common shareholders
$
(9,017)
$
(14,256)
$
(10,099)
Basic shares used in the calculation of earnings per share
16,685
16,343
15,932
Effect of dilutive securities:
Stock options
Restricted stock
-
-
-
-
-
-
Diluted shares used in the calculation of earnings per share
16,685
16,343
15,932
Net loss per share :
Basic
Diluted
$
$
(0.54)
(0.54)
$
$
(0.87)
(0.87)
$
$
(0.63)
(0.63)
79
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(o) Net Loss per Common Share (continued)
The following table summarizes the number of shares of common stock for convertible securities, warrants
and restricted stock that were not included in the calculation of diluted net loss per share because such shares
are antidilutive:
Common stock options
Restricted Stock
Convertible Debentures
2018
2017
2016
1,983,477
423,202
1,742,500
4,149,179
1,465,115
415,147
-
1,880,262
1,425,348
511,398
-
1,936,746
Restricted common stock can be issued to directors, executives or employees of the Company and are subject
to time-based vesting. These potential shares were excluded from the computation of basic loss per share as
these shares are not considered outstanding until vested.
(p) Income Taxes
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, 2018 and 2017, 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.
(q) Stock-Based Compensation
The Company maintains stock-based incentive plans, under which it provides stock incentives to employees,
directors and contractors. The Company may grant to employees, 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 employees and directors. The underlying shares of the restricted stock
grant are not issued until the shares vest, and compensation expense is based 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 over the vesting period for 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 vested stock options before exercising them, the estimated volatility of its common stock price
over the expected term, the risk free rate, expected dividend yield, and the number of options that will be
forfeited prior to the completion of their vesting requirements.
The fair value of restricted stock is determined based on the stock price of the underlying option on the date
of the grant. The Company granted performance based restricted stock during 2016 based on the achievement
of certain revenue targets. Compensation cost for performance based restricted stock requires significant
judgment regarding probability of achieving the performance objectives and compensation cost is adjusted
for the probability of achieving these objectives. As a result, compensation cost could vary significantly
during the performance measurement period.
80
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(q) Stock-Based Compensation (continued)
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) Fair Value Measurements
The Company follows the provisions of FASB ASC Topic 820, “Fair Value Measurement and Disclosures”
(“ASC 820”). ASC 820 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 liability in an orderly 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
observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is
significant to the fair value measurement.
The Company’s assets and liabilities that are measured at fair value on a recurring basis include the Company’s
money market accounts and convertible debentures.
The money market funds are included in cash and cash equivalents in the accompanying balance sheet, and
are considered a Level 1 measurement as they are valued at quoted market prices in active markets.
The convertible debentures are recorded as a separate component of the Company’s consolidated balance
sheets, and are considered a Level 3 measurement due to the utilization of significant unobservable inputs in
their valuation. See Note 4(b) for a discussion of these fair value measurements.
81
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(r) Fair Value Measurements (continued)
The following table sets forth the Company’s assets and liabilities which are measured at fair value on a
recurring basis by level within the fair value hierarchy:
Fair Value Measurements (000's) as of December 31, 2018
Level 3
Level 1
Level 2
Total
Assets
Money market accounts
$ 12,134
$ - $ - $ 12,134
Total Assets
$ 12,134
$ - $ - $ 12,134
Liabilities
Convertible debentures
$ - $ - $ 6,970 $ 6,970
Total Liabilities
$ - $ - $ 6,970 $ 6,970
Fair Value Measurements (000's) as of December 31, 2017
Level 3
Level 2
Level 1
Total
Assets
Money market accounts
$ 8,853
$ - $ - $ 8,853
Total Assets
$ 8,853
$ - $ - $ 8,853
The following is a roll forward of the Company’s Level 3 instruments for the year ended December 31, 2018:
8102 ,02 rebmeceD ,ecnalaB
secnaussI
stnemtsujda eulav riaF
8102 ,13 rebmeceD ,ecnalaB
Convertible Debentures
-
$
079,6
-
079,6
$
Items Measured at Fair Value on a Nonrecurring Basis
Certain assets, including long-lived assets and goodwill, are measured at fair value on a nonrecurring basis.
These assets are recognized at fair value when they are deemed to be impaired. In 2017, the Company
recorded a $6.7 million impairment consisting of $5.7 million related to goodwill and $1.0 million related
to long-lived and other assets. The fair values of long-lived assets and goodwill were measured using Level
3 inputs. There were no items measured at fair value on a nonrecurring basis as of or during the year ended
December 31, 2018.
(s) Recently Issued and Recently Adopted Accounting Standards
Recently Adopted Accounting Standards
On January 1, 2018, the Company adopted the new accounting standard ASC 606, “Revenue from Contracts
with Customers” and all the related amendments (“Topic 606”) using the modified retrospective method
for all contracts not completed as of the date of adoption. For contracts that were modified before the
effective date, the Company reflected the aggregate effect of all modifications when identifying performance
obligations and allocating transaction price in accordance with practical expedient ASC 606-10-65-1-(f)-
4, which did not have a material effect on the Company’s assessment of the cumulative effect adjustment
82
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(s) Recently Issued and Recently Adopted Accounting Standards (continued)
upon adoption. The Company recognized the cumulative effect of initially applying the new standard as an
adjustment to the opening balance of retained earnings. The comparative information has not been restated
and continues to be reported under the accounting standards in effect for those periods. Results for reporting
periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not
adjusted and continue to be reported in accordance with our historic accounting under Topic 605. See Note 1
for details of the impact of the Company’s adoption of Topic 606 and the updated accounting policies related
to revenue recognition.
On January 1, 2018, the Company adopted FASB issued ASU 2016-01, “Financial Instruments — Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU
2016-01”), to update certain aspects of recognition, measurement, presentation and disclosure of financial
instruments and applies to all entities that hold financial assets or owe financial liabilities. As a result of the
adoption, the Company will be required to present the portion of the change in fair value of its financial
liabilities measured using the fair value option that relates to changes in the Company’s own credit risk as a
component of other comprehensive income, rather than as a component of the change in fair value in current
earnings. The Company did not have any financial instruments outstanding that would be impacted by ASU
2016-01 prior to the fourth quarter of 2018. The Company elected to account for the Convertible Debentures
issued in December 2018 using the fair value option and considered the impact of ASU 2016-01 as part
of that decision. The adoption of this standard did not have a material impact on the Company’s financial
statements for the year ended December 31, 2018.
On January 1, 2018, the Company adopted FASB ASU 2017-09, “Compensation—Stock Compensation
(Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 specifies which changes
to the terms or conditions of a share-based payment award require an entity to apply modification accounting.
The adoption of this standard did not have a material impact on the Company’s financial statements for the
year ended December 31, 2018.
On January 1, 2018, the Company adopted FASB ASU 2016-15, “Statement of Cash Flows (Topic 230)”
(“ASU 2016-15”). 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 adoption of ASU 2016-15 did not have a material impact on the consolidated
financial statements.
On January 1, 2018, the Company adopted FASB ASU 2016-18, “Restricted Cash” (“ASU 2016-18”), which
requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted
cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between
cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows.
The amendments in this update should be applied using a retrospective transition method to each period
presented. The adoption of this standard will change the presentation of the Company’s statement of cash
flows to include restricted cash balances with the non-restricted cash balances. The adoption of ASU 2016-18
did not otherwise have a material impact on the consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the
recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees
and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance
or operating leases based on the principle of whether or not the lease is effectively a financed purchase by
the lessee. This classification will determine whether lease expense is recognized over the term of the lease
83
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(s) Recently Issued and Recently Adopted Accounting Standards (continued)
based on an effective interest method for a finance lease or on a straight line basis for an operating lease. A
lessee is also required to record a right-of-use asset and a lease liability for all leases unless it has elected
as an accounting policy not to apply the recognition requirements under the new standard for leases with a
term of 12 months or less (short-term leases). The new standard requires lessors to account for leases using
an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases
and operating leases.
For public companies, Topic 842 is effective for annual reporting periods beginning after December 15, 2018,
including interim periods within that reporting period. The effective date for us is January 1, 2019. An entity
may adopt the guidance either (1) retrospectively to each prior reporting period presented in the financial
statements with a cumulative-effect adjustment recognized at the beginning of the earliest comparative
period presented or (2) retrospectively at the beginning of the period of adoption through a cumulative-effect
adjustment. The Company will adopt the guidance retrospectively at the beginning of the period of adoption,
January 1, 2019, through a cumulative-effect adjustment, and will not apply the new standard to comparative
periods presented.
The new standard provides a number of practical expedients. Upon adoption, the Company will elect the
transition package of practical expedients permitted within the new standard, which among other things, allows
the carryforward of the historical lease classification. Further, upon implementation of the new guidance, the
Company will elect the practical expedients for lessees to combine lease and non-lease components for all
asset classes and adopt an accounting policy to not recognize right-of-use assets and lease liabilities for
short-term leases for all asset classes. The Company will not elect the practical expedients to use hindsight
in determining the lease term and assessing impairment of right-of-use assets. The Company intends to elect
the practical expedients provided to lessors, including, in certain circumstances, to not separate nonlease
components (which are accounted for under Topic 606) from the associated lease component, and to adopt an
accounting policy to exclude sales and related taxes from consideration in the contract.
ASC 842 will impact the Company’s consolidated financial statements as the Company has operating lease
arrangements for which it is the lessee. The Company has substantially identified a complete population
of leases, including any embedded leases. Based on the Company’s portfolio of leases as of December
31, 2018, we estimate the impact of the adoption to be an increase in lease-related assets and liabilities of
approximately $1.0 million on the Company’s consolidated balance sheet with no material impact on the
results of operations, equity or cash flows. In addition, upon electing the practical expedient to combine lease
and non-lease components under ASC 842, the Company does not expect the changes to lessor accounting to
impact the amount or timing of revenue recognition, but will result in revenue to be recognized under ASC
606 because the nonlease component will be the predominant component in the arrangement. The Company
has implemented new business processes and developed the appropriate controls related to the disclosures
and accounting for leasing arrangements.
In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities
from Equity (Topic 480), Derivatives and Hedging (Topic 815): (Part I.) Accounting for Certain Financial
Instruments with Down Round Features, and (Part II.) Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). Among other provisions, ASU 2017-
11 requires that when determining whether certain financial instruments should be classified as liabilities or
equity instruments, an entity should not consider a down round feature. ASU 2017-11 also recharacterizes
as a scope exception the indefinite deferral available to private companies with mandatorily redeemable
financial instrument and certain noncontrolling interests, which does not have an accounting effect but
addresses navigational concerns within the FASB Accounting Standards Codification. The provisions of the
ASU related to down round features are effective for the Company for the fiscal year and interim periods
therein beginning January 1, 2019. The Company does not currently expect that the adoption of ASU 2017-11
will have a material impact on its consolidated financial statements.
84
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(1)
Summary of Significant Accounting Policies (continued)
(t) Subsequent Events
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance
of the consolidated financial statements to provide additional evidence relative to certain estimates or to
identify matters that require additional disclosure.
On March 15, 2019, the Company and Silicon Valley Bank entered into the Fourth Loan Modification
Agreement related to the Company’s Loan and Security Agreement. The modification revises certain
covenants such that the Company must maintain minimum consolidated revenues of $11.4 million, $11.6
million, $13.0 million and $14.5 million during the trailing six month periods ending on March 31, 2019,
June 30, 2019, September 30, 2019 and December 31, 2019, respectively, as well as adjusted EBITDA levels
of $(3.5 million), $(4.0 million), $(4.0 million) and $(2.0 million) during the trailing six month periods
ending on March 31, 2019, June 30, 2019, September 30, 2019 and December 31, 2019, respectively. In
addition, the Company and Silicon Valley Bank will be required to negotiate the covenants for the 2020 and
2021 fiscal years, with a failure to agree to such covenants by specified dates in the agreement leading to an
acceleration of the Initial Term Loan maturity date to either April 30, 2020 or April 31, 2021, respectively.
(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. As the Company considered this to be a business combination, the assets were valued
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 irrevocable, royalty-free 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
provided a release of the aforementioned claim. The Company determined that this claim was a component
of the purchase price. The Company determined the value of litigation settlement as the excess of the fair
value of the business acquired over the cash consideration paid. As a result the Company recorded a gain on
litigation settlement of $249,000 in the first quarter of 2016, which is a component of the purchase price as
noted below:
Amount (000's)
hsaC
Acquisition litigation settlement
Purchase price
6 $
249
$ 255
85
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(2)
Acquisitions (continued)
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 based on the estimated fair values as of the date of the
acquisition and the amortizable life:
Amount (000's)
Estimated
amortizable life
Current assets
tnempiuqe dna ytreporP
stessa elbignatni elbaifitnedI
lliwdooG
seitilibail tnerruC
seitilibail mret-gnoL
Purchase price
$ 84
56
996
392
)082(
)606(
$ 255
3 Years
1-10 Years
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 from 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.
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 provide advanced tools for breast disease detection and analysis, 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
is being amortized over the estimated useful life of approximately eight years and nine months from the
closing of the transaction. The following is a summary of the allocation of the total purchase price based on
the estimated fair values as of the date of the acquisition and the amortizable life (in thousands):
Developed Technology
lliwdooG
ecirp esahcruP
Estimated Amortizable
Life
8 years 9 months
Amount
$ 900
008
$
007,1
86
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(2)
Acquisitions (continued)
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.
(3)
Sale of MRI Assets
In December 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation. In
accordance with the agreement, the Company sold to Invivo all right, title and interest to certain intellectual
property relating to the Company’s VersaVue Software and DynaCAD product and related assets for $3.2
million. The Company closed the transaction on January 30, 2017 less a holdback reserve of $350,000 for a
net of approximately $2.9 million. The holdback reserve of $350,000 has been recorded as an asset in other
assets and will be paid to the Company within eighteen months from the closing date, less any amounts, if
any, due and payable or reserved under the indemnification provisions in the Asset Purchase agreement see
Note 9(g) Litigation.
The Company determined the sale constituted the sale of a business in accordance with ASC 805. The
Company performed an evaluation to determine if the sale constituted discontinued operations and concluded
that the sale did not represent a major strategic shift, and accordingly it was not considered to be discontinued
operations. In connection with the transaction, the Company allocated $394,000 of goodwill which was a
component of the gain on the 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.
The value of the net assets sold is as follows (in thousands):
Assets
Accounts Receivable
Intangible assets
Allocated Goodwill
Total Assets
Liabilities
Deferred Revenue
Total Liabilities
Net Assets Sold
$
116
810
394
1,320
$
$
$
746
746
$
574
In connection with the sale the Company agreed to provide certain transition services to Invivo. The fair
value of the transition services were determined based on the cost to provide plus a reasonable profit margin
and have been recognized as revenue over the term of approximately ninety days from the closing date. The
Company recorded a gain of $2.5 million as of January 30, 2017. The components of the gain on the sale are
as follows (in thousands):
Gain on Sale
deviecer hsaC
Holdback reserve
Fair value of transition services
Net Assets sold
latoT
$
$
058,2
350
(118)
(574)
805,2
87
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(4)
Financing Arrangements
(a) Loan and Security Agreement
On August 7, 2017, the Company entered into a Loan and Security Agreement, which has been modified by
the First Loan Modification Agreement dated as of March 22, 2018, the Second Loan Modification Agreement
dated as of August 13, 2018, and the Third Loan Modification Agreement dated as of December 20, 2018
(collectively, the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) that provided an initial term loan
facility (amounts borrowed thereunder, the “Initial Term Loan”) of $6.0 million and a $4.0 million revolving
line of credit (amounts borrowed thereunder, the “Revolving Loans”). The Company also has the option to
borrow an additional $3.0 million term loan under the Loan Agreement (amounts borrowed thereunder, the
“Subsequent Term Loan” and together with the Initial Term Loan, the “Term Loan”), subject to meeting a
Detection revenue minimum of at least $21.5 million for a trailing twelve month period ending on or prior
to June 30, 2019.
The Company began repayment of the Initial Term Loan on March 1, 2019, with 30 equal monthly installments
of principal, based on the amended terms of the Loan Agreement. The maturity date of the Initial Term Loan
is August 1, 2021.
The Company will be required to begin repayment of the Subsequent Term Loan, if drawn, on October 1,
2019 and make 23 equal monthly installments of principal, as determined by the Third Loan Modification
Agreement. The maturity date of the Subsequent Term Loan is August 1, 2021.
The maturity date of the Revolving Loans is March 1, 2022. However, the maturity date will become April
30, 2020 or April 30, 2021 if (after the Fourth Loan Modification Agreement, see Note 1(t) Subsequent
Events), on or before March 15, 2020 or 2021, as applicable, the Company does not agree in writing to the
Detection revenue and adjusted EBITDA covenant levels proposed by the Bank with respect to the upcoming
2020 or 2021 calendar year.
The outstanding Revolving Loans will accrue interest at a floating per annum rate equal to 1.50% above
the prime rate for periods when the ratio of the Company’s unrestricted cash to the Company’s outstanding
liabilities to the Bank, plus the amount of the Company’s total liabilities that mature within one year is at least
1.25 to 1.0. At all other times, the interest rate shall be 0.50% above the prime rate. The outstanding Term
Loans will accrue interest at a floating per annum rate equal to the prime rate.
If the Revolving Loans are paid in full and the Loan Agreement is terminated prior to the maturity date,
then the Company will pay to the Bank a termination fee in an amount equal to two percent (2.0%) of the
maximum revolving line of credit. If the Company prepays the Term Loans prior to the maturity date, then
the Company will pay to the Bank an amount equal to 1.0% to 3.0% of the Term Loans, depending on when
such Term Loans are repaid. In addition, the Loan Agreement requires the Company to pay a final payment of
8.5% of the Term Loans (which was increased by the Second Loan Modification Agreement from 8.0%) upon
the earliest of the repayment of the Term Loans, the termination of the Loan Agreement and the maturity date.
The Company is accruing such payment as additional interest expense. As of December 31, 2018, the accrued
final payment is approximately $162,000 and is a component of the outstanding loan balance.
The Loan Agreement, as amended, required the Company to maintain minimum Detection revenues during
the trailing six month period ending on December 31, 2018 of $8.75 million, and adjusted EBITDA during
the trailing six month period ending on December 31, 2018 of $1.00. On December 21, 2018, the Bank
agreed to waive the covenants for the six month trailing period ended December 31, 2018. Although the Bank
has agreed to revise the covenants in prior periods, there is no guarantee that the Bank would be willing to
revise the covenants in future periods.
Obligations to the Bank under the Loan Agreement or otherwise are secured by a first priority security
interest in substantially all of the assets, including intellectual property, accounts receivable, equipment,
general intangibles, inventory and investment property, and all of the proceeds and products of the foregoing,
of each of the Company and Xoft, Inc. and Xoft Solutions LLC, wholly-owned subsidiaries of the Company.
88
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(4)
Financing Arrangements (continued)
(a) Loan and Security Agreement (continued)
In connection with the Loan Agreement, the Company incurred approximately $74,000 of closing costs. In
accordance with ASC Topic 835, “Interest,” the closing costs have been deducted from the carrying value of
the debt and will be amortized through August 1, 2021, the maturity date of the Initial Term Loan.
The Company has evaluated the accounting impact of each of the modifications noted above, and as all have
occurred within a 12 month period, each successive modification has been combined and compared to the
terms of the original Loan Agreement. The Company has determined that modifications occurring at each
modification date above are modifications of the Loan Agreement for accounting purposes. As such, the
Company has capitalized any closing costs paid to the Bank as part of the modifications and has expensed
any third party costs incurred. The additional closing costs and the unamortized initial closing costs are being
amortized over the remaining term of the modified Initial Term Loan.
The current repayment schedule for the Initial Term Loan is based on repayment beginning on March 1, 2019.
The carrying value of the Term Loans (net of debt issuance costs) as of December 31, 2018 and 2017 is as
follows (in thousands):
Principal Amount of Term Loan
Unamortized closing costs
Accrued final payment
Carrying amount of Term Loan
December 31, 2018
December 31, 2017
$
6,000
(58)
163
6,105
$
6,000
(64)
-
5,936
Less current portion of Term Loan
Notes payable long-term portion
(1,851)
4,254
$
$
(817)
5,119
(b) Convertible Debentures
On December 20, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain
institutional and accredited investors, including, but not limited to, all directors and executive officers of
the Company (the “Investors”), pursuant to which the Investors agreed to purchase unsecured subordinated
convertible debentures (the “Convertible Debentures” or the “Notes”) with an aggregate principal amount of
approximately $7.0 million in a private placement.
The Company will pay interest to the Investors on the outstanding principal amount of the Convertible
Debentures at the rate of 5.0% per annum, payable semi-annually on December 21st and June 21st, beginning
on June 21, 2019, as well as on each conversion date (as to that principal amount then being converted) and
on the maturity date. The Convertible Debentures mature on December 21, 2021.
At any time prior to the maturity date, the Convertible Debentures are convertible into shares of the Company’s
common stock at a conversion price of $4.00 per share, at the Investor’s option, subject to certain anti-dilution
adjustments. The Convertible Debentures contain a cap of shares to be issued upon the conversion of the
Convertible Debentures at 19.99% of the issued and outstanding shares of the Company’s Common Stock on
December 21, 2018, unless shareholder approval of such issuance has been obtained. Upon the satisfaction
of certain conditions, the Company has the right to cause the Investors to convert all or part of the then
outstanding principal amount of the Convertible Debentures (a “Forced Conversion”). In connection with
such Forced Conversion, the Company will be required to pay accrued but unpaid interest, an interest make
whole amount determined based on the timing of the Forced Conversion and interest payments made to that
date, liquidated damages and other amounts owing to the Investors under the Convertible Debentures. The
conversion price in both the optional conversion and Forced Conversion provisions is subject to adjustment
due to certain ‘down-round’ dilutive issuances as well for typical anti-dilutive actions, such as stock splits
and stock dividends.
89
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(4)
Financing Arrangements (continued)
(b) Convertible Debentures (continued)
The Investors also have the right to require the Company to repurchase the Convertible Debentures, at a
repurchase price that would be at least 115% of the then outstanding principal, plus any accrued but unpaid
interest, upon the occurrence of an event of default, as defined in the SPA. The Convertible Debentures will
also accrue interest upon an event of default at a rate of the lesser of 10.0% or the maximum permitted by law.
The Convertible Debentures also include certain liquidate damages provisions, whereby the Company will
be required to compensate the Investors for certain contingent events, such as the failure to timely deliver
conversion shares of common stock, failure to timely pay any accrued interest when due and failure to timely
report public information.
The Convertible Debentures are unsecured and structurally subordinated to the Company’s existing
indebtedness. In connection with the issuance of the Convertible Debentures, all of the Company’s subsidiaries
entered into a Subsidiary Guarantee, dated as of December 20, 2018, for the benefit of the Investors, pursuant
to which all the subsidiaries guaranteed the Company’s payments under the Convertible Debentures.
In connection with the issuance, on December 20, 2018, the Company entered into a registration rights
agreement (the “Registration Rights Agreement”) with the Investors, pursuant to which the Company agreed
to file a registration statement with the Securities and Exchange Commission (“SEC”) to register the resale
of shares of common stock underlying the Convertible Debentures on or prior to January 31, 2019. The
Company filed the Registration Rights Agreement with the SEC on January 31, 2019.
Certain Investors in the Convertible Debentures include directors and employees of the Company. These
related parties purchased approximately 10% of the principal value of the Convertible Debentures, or
$670,000. The Convertible Debentures issued to the related parties have substantially the same rights and
provisions as the unrelated third party investors, with the exception of certain terms where the related parties
received less favorable terms than the unrelated third parties (such as with determination of the make whole
conversion rate, as defined in the SPA; or limits on the impact of potential ‘down-round’ adjustments to the
conversion price).
In connection with the issuance of the Convertible Debentures, the Company incurred approximately
$503,000 in issuance costs related to placement agent fees and third party legal fees.
The Company initially evaluated the required accounting for the Convertible Debentures under ASC Topic 470,
“Debt” (“ASC 470”), ASC Topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC Topic
815, “Derivatives and Hedging” (“ASC 815”). The Company determined that the Convertible Debentures
contained multiple embedded derivative features that would be required to be bifurcated and accounted for as
a combined derivative liability at fair value, with subsequent changes in fair value being recorded in current
earnings in the respective periods. As a result of this assessment, the Company elected to make a one-time,
irrevocable election to utilize the fair value option allowed under ASC Topic 825, “Financial Instruments.”
Under the fair value option election, the Company will account for the Convertible Debentures as a single
hybrid instrument at its fair value, with changes in fair value from period to period being recorded either in
current earnings, or as an element of other comprehensive income (loss), for the portion of the change in
fair value determined to relate to the Company’s own credit risk. The Company believes that the election of
the fair value option will allow for a more meaningful representation of the total fair value of its obligation
under the Convertible Debentures and allow for a better understanding of how changes in the external market
environment and valuation assumptions impact such fair value, when compared to recording the Convertible
Debentures and fair value of the bifurcated embedded derivatives separately under the guidance of ASC 470
and ASC 815.
In accordance the Company’s election of the fair value option, the Company expensed the approximately
$503,000 in issuance costs incurred related to the Convertible Debentures during the year ended December
31, 2018.
90
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(4)
Financing Arrangements (continued)
(b) Convertible Debentures (continued)
Fair Value Measurements Related to the Convertible Debentures
The Company utilized a Monte Carlo simulation model to estimate the fair value of the Convertible
Debentures as of their issuance date and as of December 31, 2018. The simulation model is designed to
capture the potential settlement features of the Convertible Debentures (the embedded features described
above), in conjunction with simulated changes in the Company’s stock price and the probability of certain
events occurring. The simulation utilizes 100,000 trials or simulations to determine the estimated fair value.
The simulation utilizes the assumptions that if the Company is able to exercise its Forced Conversion right
(if the requirements to do so are met), that it will do so in 100% of such scenarios. Additionally, if an event
of default occurs during the simulated trial (based on the Company’s probability of default), the Investors
will opt to redeem the Convertible Debentures in 100% of such scenarios. If neither event occurs during
a simulated trial, the simulation assumes that the Investor will hold the Convertible Debentures until the
maturity date. The value of the cash flows associated with each potential settlement are discounted to present
value in each trial based on either the risk free rate (for an equity settlement) or the effective discount rate
(for a redemption or cash settlement).
The Company notes that the key inputs to the simulation model that were utilized to estimate the fair value
of the Convertible Debentures included:
Input
Company's stock price
Conversion price
Remaining term (years)
Equity volatility
Risk free rate
Probabilty of default event
Utilization of Forced Conversion (if available)
Exercise of Default Redemption (if available)
Effective discount rate
December 21, 2018
$
3.68
4.00
$
3.00
54.00%
2.58%
0.75%
100.00%
100.00%
21.90%
December 31, 2018
$
$
3.70
4.00
2.97
54.00%
2.46%
0.81%
100.00%
100.00%
21.90%
The Company’s stock price is based on the closing stock price on the valuation date. The conversion price
is based on the contractual conversion price included in the SPA.
The remaining term was determined based on the remaining time period to maturity of the Convertible
Debentures.
The Company’s equity volatility estimate was based on the Company’s historical equity volatility, the
Company’s implied and observed volatility of option pricing, and the historical equity and observed volatility
of option pricing for a selection of comparable guideline public companies.
The risk free rate was determined based on U.S. Treasury securities with similar terms.
The probability of the occurrence of a default event was based on Bloomberg’s 1 year estimate of default risk
for the Company (extrapolated over the remaining term).
The utilization of the forced conversion right and the default redemption right is based on management’s best
estimate of both features being exercised upon the occurrence of the related contingent events.
The effective discount rate utilized at December 21, 2018 and December 31, 2018 was solved for utilizing
the simulation model based on the principal value of the Convertible Debentures, as the transaction was
determined to represent an ‘arm’s length’ transaction. The effective discount was corroborated against
91
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(4)
Financing Arrangements (continued)
(b) Convertible Debentures (continued)
market yield data which implied the Company’s credit rating, and this implied credit rating will be utilized to
determine the changes in the effective discount rate at future valuation dates.
As of the issuance date of the Convertible Debentures (December 21, 2018) and December 31, 2018, the fair
value and principal value of the Convertible Debentures was:
Convertible Debentures
Fair value, in accordance with fair value option
Principal value outstanding
December 21, 2018
$
6,970
$
6,970
December 31, 2018
6,970
6,970
$
$
The Company did not record any gains or losses from the change in fair value of the Convertible Debentures
between their issuance date and December 31, 2018. See also additional fair value disclosures related to the
Convertible Debentures in Note 1(r) above.
(c) Principal and Interest Payments Related to Financing Arrangements
Future principal and interest payments related to the Loan Agreement and Convertible Debentures are as
follows (in thousands):
Fiscal Year
Amount Due
2019
2020
2021
Total
$
2,624
2,895
9,454
14,972
$
The following amounts are included in interest expense in our consolidated statement of operations for the
years ended December 31, 2018, 2017 and 2016 (in thousands):
Cash interest expense, notes payable
Cash interest expense, convertible debentures
Amortization of debt costs
Accrual of notes payable final payment
Amortization of settlement obligations
Interest expense capital lease
Capital lease - fair value amortization
Total interest expense
December 31, 2018
299
$
9
29
163
-
4
$
-
504
December 31, 2017
98
$
-
9
-
26
1
(10)
124
$
December 31, 2016
$
-
-
-
-
82
70
(89)
63
$
Cash interest expense, notes payable, represents the cash interest paid monthly on the term loan. Cash interest
expense, convertible debentures represents cash interest accrued in connection with the convertible debt
closed in December 2018. Interest payments are due to the holders in June and December of each year. The
amortization of debt costs represents the closing costs incurred with the Loan Agreement, which have been
capitalized and expensed using the effective interest method. The amortization of the settlement obligations
represents the interest associated with the settlement agreement for Zeiss. See Note 9(f) to our Consolidated
Financial Statements.
92
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(5)
Accrued Expenses
Accrued expenses consist of the following at December 31 (in thousands):
2018
2017
$
$
Accrued salary and related expenses
Accrued accounts payable
Accrued professional fees
Other accrued expenses
Deferred rent
(6)
Stockholders’ Equity
(a) Stock Options
1,811
2,329
737
91
92
5,060
1,388
2,523
418
70
76
4,475
$
$
The Company has six stock option or stock incentive plans, which are described as follows:
The 2002 Stock Option Plan (the “2002 Plan”).
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’s common stock. The purchase price of each share for 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
be less than the fair market value of the Company’s common stock on the date of grant, except for options
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, 2018, there are no further options available for
grant under the 2002 Plan.
The 2004 Stock Incentive Plan (the “2004 Plan”).
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’s common stock. The purchase price of each share for 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 option is granted cannot be less than the fair market value 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, 2018, there are no further shares available for grant under the 2004 Plan.
The 2005 Stock Incentive Plan (the “2005 Plan”).
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
93
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(6)
Stockholders’ Equity (continued)
(a) Stock Options (continued)
incentive stock options to employees and other persons to purchase up to an aggregate of 120,000 shares of
the Company’s common stock. The purchase price of each share for 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 option is granted cannot be less than the fair market value 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, 2018, there are no further shares 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 available for distribution 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, deferred stock, or other stock-based 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 or a committee of
two or more directors appointed by the Board of Directors. 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
advisors of the Company and its subsidiaries. However, only employees of the Company and its subsidiaries
will be eligible to receive options that are designated as incentive stock options.
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, 2018, there are no further shares
available for grant 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, deferred stock, or other stock-based
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.
The 2012 Plan provides that it will be administered by the Company’s Board of Directors or a committee of
two or more directors appointed by the Board of Directors. 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
94
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(6)
Stockholders’ Equity (continued)
(a) Stock Options (continued)
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
advisors of the Company and its subsidiaries. However, only employees of the Company and its subsidiaries
will be eligible to receive options that are designated as incentive stock options.
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
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, 2018, there were 99,215 shares
available for issuance under the 2012 Plan.
The 2016 Stock Incentive Plan (the “2016 Plan”).
The 2016 Plan was adopted by the Company’s stockholders in May 2016 and amended in November 2018.
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 amended 2016 Plan provides for
a total of 2,600,000 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 form of incentive stock options and no more than 120,000 shares of stock may be
issued pursuant to awards to non-employee 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
subject to the award, determined as of the date of grant. Regarding incentive stock options, including that the
aggregate grant date fair market value 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 that are awarded subject to the satisfaction of
the terms and conditions established by the Compensation Committee. In general, awards that do not require
exercise may be made in exchange for such lawful consideration, including services, as determined by the
Compensation Committee. At December 31, 2018, there were 866,504 shares available for issuance under
the 2016 Plan.
95
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(6)
Stockholders’ Equity (continued)
(a) Stock Options (continued)
A summary of stock option activity for all stock option plans is as follows:
Number of
Shares
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
Outstanding, January 1, 2016
Granted
Exercised
Forfeited
Outstanding, December 31, 2016
Granted
Exercised
Forfeited
Outstanding, December 31, 2017
Granted
Exercised
Forfeited
Outstanding, December 31, 2018
Exercisable at December 31, 2016
Exercisable at December 31, 2017
Exercisable at December 31, 2018
1,571,998
127,500
(75,583)
(198,567)
1,425,348
200,813
(36,530)
(124,516)
1,465,115
888,263
(139,556)
(230,345)
1,983,477
1,054,211
1,301,651
1,296,439
$5.05
$5.46
$2.62
$6.19
$5.05
$4.14
$2.18
$4.71
$5.03
$2.95
$2.27
$5.41
$4.25
$4.71
$4.95
$4.90
4.4 years
4.1 years
There were 965,719 shares available for future grants from all plans at December 31, 2018.
The Company’s stock-based compensation expense, including options and restricted stock by category is as
follows (amounts in thousands):
eunever fo tsoC
Engineering and product development
selas dna gnitekraM
General and administrative expense
Years Ended December 31,
2017
5 $
715
300,1
1,933
$ 3,656
2018
4 $
399
091
912
$ 1,505
2016
6 $
329
776
1,295
$ 2,307
As of December 31, 2018, there was $1.8 million of total unrecognized compensation costs related to
unvested options and restricted stock. That cost is expected to be recognized over a weighted average period
of 1.0 years.
96
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(6)
Stockholders’ Equity (continued)
(a) Stock Options (continued)
Options granted under the stock incentive plans were valued utilizing the Black-Scholes model using the
following assumptions and had the following fair values:
Years Ended December 31,
2017
2018
2016
etar tseretni eerf-ksir egarevA
dleiy dnedivid detcepxE
efil detcepxE
ytilitalov detcepxE
Weighted average exercise price
eulav riaf egareva dethgieW
%56.2
enoN
sraey 5.3
%16.1
enoN
sraey 5.3
%89.0
enoN
sraey 5.3
%6.16 ot %4.05
%3.57 ot %5.86%0.27 ot %2.46
$2.96
32.1$
$4.14
99.1$
$5.46
66.2$
The Company’s 2018, 2017 and 2016 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
dividends on its common stock in the past and does not anticipate paying any dividends in the future.
Intrinsic values of options (in thousands) and the closing market price used to determine the intrinsic values
are as follows:
gnidnatstuO
elbasicrexE
desicrexE
Years Ended December 31,
2017
944 $
244
97
2018
120,1 $
994
422
2016
904 $
904
102
Company's stock price at December 31
$ 3.70
$ 3.44
$ 3.24
(b) Restricted Stock
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 based on exceeding the revenue goal. The revenue target was partially exceeded and 189,583 shares
were granted with initial vesting of 63,194 at the grant date in April 2018, and 63,194 vesting on the second
and third anniversary of the initial vesting. The Company granted an additional 144,500 shares with time
based vesting and 45,356 shares with immediate vesting in the year ended December 31, 2018.
A summary of restricted stock activity for all equity incentive plans is as follows:
Years Ended December 31,
2017
2018
2016
Beginning outstanding balance
detnarG
detseV
detiefroF
Ending outstanding balance
415,147
934,973
)883,223(
)699,84(
423,202
511,398
995,493
)434,964(
)614,12(
415,147
516,396
877,543
)030,982(
)647,16(
511,398
97
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(6)
Stockholders’ Equity (continued)
(b) Restricted Stock (continued)
Intrinsic values of restricted stock (in thousands) and the closing market price used to determine the intrinsic
values are as follows:
gnidnatstuO
detseV
Years Ended December 31,
2017
824,1 $
516,1
2018
665,1 $
391,1
2016
756,1 $
639
Company's stock price at December 31
$ 3.70
$ 3.44
$ 3.24
(7)
Income Taxes
The components of income tax expense for the years ended December 31, 2018, 2017 and 2016 are as
follows (in thousands):
Current provision (benefit):
laredeF
State
Deferred provision:
Federal
State
2018
2017
2016
$
-
54
54
$
$
-
)62(
(26)
$
-
$
69
69
$
$
$
(10)
(2)
(12)
$
7
1
8
$
6
$
1
$
7
Total
$
42
$
(18)
$
76
A summary of the differences between the Company’s effective income tax rate and the Federal statutory
income tax rate for the years ended December 31, 2018, 2017 and 2016 is as follows:
etar yrotutats laredeF
State income taxes, net of federal benefit
Net state impact of deferred rate change
esnepxe noitasnepmoc kcotS
lliwdoog no noitazitroma xaT
tnemriapmi lliwdooG
secnereffid tnenamrep rehtO
Change in valuation allowance
stiderc xaT
egnahC etaR laredeF
RT ot laurccA
Increase Xoft NOLs under 382 Study
xat emocni evitceffE
2018
2017
2016
%0.12
3.6%
0.6%
)%1.1(
%1.0
%0.0
)%5.0(
(27.6%)
%1.3
%0.0
%3.0
0.0%
)%5.0(
%0.43
1.4%
(0.3%)
)%9.1(
)%1.0(
)%7.31(
)%4.0(
97.4%
%5.1
)%5.331(
)%7.0(
16.2%
)%1.0(
%0.43
2.8%
0.2%
)%2.3(
)%1.0(
%0.0
)%4.0(
(37.3%)
%2.3
%0.0
%0.0
0.0%
)%8.0(
98
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(7)
Income Taxes (continued)
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
carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is applied against
any net deferred tax asset if, based on the available evidence, it is more likely than not that the deferred tax
assets will not be realized.
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 fully reserved the net deferred tax assets, as it is more likely than not that the deferred tax
assets will not be utilized. Deferred tax assets (liabilities) are composed of the following at December 31 (in
thousands):
2018
2017
Inventory (Section 263A)
sevreser yrotnevnI
sevreser elbavieceR
slaurcca rehtO
eunever derrefeD
Accumulated
depreciation/amortization
snoitpo kcotS
Developed technology
stiderc xaT
drawrofyrrac LON
Net deferred tax assets
Valuation allowance
Goodwill tax amortization
Deferred tax liability
$
$
$
239
072
54
88
58
138
978,1
2,031
463,3
470,23
40,213
(40,213)
(3)
(3)
$
287
305
27
224
129
320
1,901
2,201
3,130
31,113
39,637
(39,637)
(14)
(14)
The increase in the net deferred tax assets and corresponding valuation allowance during the year ended
December 31, 2018 is primarily attributable to additional net operating losses and additional research and
development credits. The decrease in the net deferred tax assets and corresponding valuation allowance
during the year ended December 31, 2017 is related primarily to the decrease in corporate tax rate from 34%
to 21% starting on January 1, 2018. 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 for impairment each year. For tax, the Company is allowed amortization expense over a 15-year
life. Prior to 2018, due to the indefinite life of the asset for book purposes, the Company could not assume
there would be a deferred tax assets available to offset the liability in future years. This created a tax expense
equal to the tax effected amount of tax amortization, or $7,434 in 2017. Beginning January 1, 2018, federal
net operating losses generated after December 31, 2017 will be carried forward indefinitely and able to offset
up to 80% of taxable income. As the deferred tax asset generated relating to federal net operating losses
for 2018 has an indefinite carryforward period, it can be used to offset the deferred tax liability related to
tax amortizable goodwill. This created a tax benefit in 2018 as the Company reversed 80% of the historical
deferred tax liability resulting in a benefit of $11,761.
As of December 31, 2018, Company has federal net operating loss carryforwards totaling approximately
$134.9 million. The federal net operating loss carryforwards of $127.7 million will expire at various dates
from 2019 to 2037. Approximately $7.2 million of the federal net operating losses can be carried forward
indefinitely. A portion of the total net operating loss carryforwards amounting to approximately $56.7 million
relate to the acquisition of Xoft, Inc. As of December 31, 2018, the Company has provided a valuation
allowance for its net operating loss carryforwards 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 utilization of
the net operating losses may result in the expiration of all or a portion of the net operating loss carryforwards.
99
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(7)
Income Taxes (continued)
There were no net operating losses utilized for the years ended December 31, 2018 or 2017.
The Company currently has approximately $7.9 million in net operating losses that are subject to limitations
related to Xoft. Approximately $656,000 can be used annually through 2029. 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 $3.4 million. The tax credits related to Xoft have been fully reserved
for and as a result no deferred tax asset has been recorded. The credits expire in various years through 2038.
ASC 740-10 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 and also provides
guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition.
As of December 31, 2018 and 2017, 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 zero for the years
ended December 31, 2018, 2017 and 2016. The Company files United States federal and various state income
tax returns. Generally, the Company’s three preceding tax years remain subject to examination by federal
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 is not under examination by any other federal or state jurisdiction for any tax year.
The Company does not anticipate that it is reasonably possible that unrecognized tax benefits as of December
31, 2018 will significantly change within the next 12 months.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”)
tax reform legislation. This legislation makes significant change in U.S. tax law including a reduction in the
corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate
alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of 34%
down to 21% starting on January 1, 2018. As a result of the enacted law, the Company was required to revalue
deferred tax assets and liabilities at the 21%. This revaluation resulted in a provision of $19.1 million to
income tax expense in continuing operations and a corresponding reduction in the valuation allowance. As a
result, there was no impact to the Company’s income statement as a result of reduction in tax rates. The other
provisions of the TCJA did not have a material impact on our consolidated financial statements.
In December 2017, the SEC staff issued SAB 118 to address the application of GAAP in situations when a
registrant does not have the necessary information available, prepared, or analyzed (including computations)
in reasonable detail to complete the accounting for certain income tax effects of TCJA. The Company did not
record any adjustments in the year ended December 31, 2018 to provisional amounts that were material to its
financial statements. As of December 31, 2018, the Company’s accounting treatment is complete.
(8)
Segment Reporting, Geographical Information and Major Customers
(a) Segment Reporting
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
performance.
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 (“Detection”) and Cancer Therapy (“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
100
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8)
Segment Reporting, Geographical Information and Major Customers (continued)
(a) Segment Reporting (continued)
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,
amortization of technology and depreciation expense. There are no intersegment revenues.
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.
Segment revenues, gross profit, segment operating income or loss, and a reconciliation of segment operating
income or loss to GAAP loss before income tax is as follows (in thousands, including prior periods which
have been presented for consistency):
Year Ended December 31,
2017
2016
2018
Segment revenues:
Detection
Therapy
Total Revenue
Segment gross profit:
Detection
Therapy
Segment gross profit
Segment operating income (loss):
Detection
Therapy
Segment operating income (loss)
General, administrative, depreciation and
amortization expense
Interest expense
Financing costs
Gain on sale of MRI assets
Other income
Loss on debt extinguishment
Loss before income tax
$
$
16,864
8,757
25,621
$
$
14,709
4,721
19,430
$
$
3,412
(2,373)
1,039
$
$
013,81
9,792
201,82
$
$
812,61
1,958
671,81
$
104,6
(15,102)
)107,8(
$
$
$
331,71
9,205
833,62
$
$
311,51
3,405
815,81
$
$
496,5
(7,752)
(2,058)
$
$
$
(9,169)
(504)
(451)
-
110
-
(8,975)
)579,7(
(124)
-
805,2
18
-
(14,274)
(7,912)
(63)
-
-
10
-
(10,023)
$
$
$
101
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(8)
Segment Reporting, Geographical Information and Major Customers (continued)
(a) Segment Reporting (continued)
Segment depreciation and amortization included in segment operating income (loss) is as follows (in
thousands):
Detection depreciation and amortization
noitaicerpeD
Amortization
Therapy depreciation and amortization
Depreciation
Amortization
(b) Geographic Information
Year Ended December 31,
2017
2016
2018
$
601
248
$
271
246
$
322
696
$
177
129
$
867
222
$
079
252
The Company’s sales are made to customers, distributors 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 $3.2 million or 12% of total revenue in 2018, $3.9 million or
14% of total revenue in 2017 and $2.3 million or 9% of total revenue in 2016.
As of December 31, 2018 and 2017, the Company had outstanding receivables of $1.1 million and $2.1
million, respectively, from distributors and customers of its products who are located outside of the U.S.
(c) Major Customers
The Company had one major customer, GE Healthcare, with revenues of approximately $6.1 million in 2018,
$7.1 million in 2017, and $3.9 million in 2016 or 24%, 25%, and 15% of total revenue, respectively. Cancer
detection products are also sold through OEM partners, including GE Healthcare, Fuji Medical Systems,
Siemens Medical and Vital Images and Invivo. For the year ended December 31, 2018, these five OEM
partners composed approximately 50% of Detection revenues and 33% of revenue overall. OEM partners
composed 55% of Detection revenues and 39% of revenue overall for the year ended December 31, 2017 and
47% of Detection revenues and 30% of revenue overall for the year ended December 31, 2016.
OEM partners represented $2.5 million or 37% of outstanding receivables as of December 31, 2018, with GE
Healthcare accounting for $1.6 million or 25% of this amount. The three largest Cancer Therapy customers
composed $0.8 million or 12% of outstanding receivables as of December 31, 2018. These eight customers
in total represented $3.3 million or 50% of outstanding receivables as of December 31, 2018.
(9)
Commitments and Contingencies
(a) Lease Obligations
As of December 31, 2018, the Company had three lease obligations related to its facilities. The Company’s
executive offices are leased pursuant to a five-year operating lease (the “Lease”) that commenced on
December 15, 2006, with renewals in January 2012 and August 2016, of office space located at 98 Spit Brook
Road, Suite 100 in Nashua, New Hampshire (the “Premises”). The August 2016 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 for
the Premises.
The Company leases a facility in San Jose, California under a non-cancelable operating lease which
commenced in September 2012, with annual payments of $295,140 through September 2017, and all amounts
102
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(9)
Commitments and Contingencies (continued)
(a) Lease Obligations (continued)
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 obtain insurance for the facility.
In addition to the foregoing leases relating to its principal properties, the Company also has an operating
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, 2018, 2017 and 2016 was $896,000, $899,000
and $745,000, respectively.
Future minimum rental payments due under these agreements as of December 31, 2018 are as follows (in
thousands):
Operating
Leases
$
781
183
964
$
Fiscal Year
2019
2020
(b) Capital lease obligations
In August, 2017, the Company assumed an equipment lease obligation with payments totaling $50,000. The
leases were determined to be capital leases and accordingly the equipment was capitalized and a liability of
$42,000 was recorded. The equipment will be depreciated over the expected life of 3 years. The remaining
minimum lease payments are as follows (in thousands):
Fiscal Year
2019
2020
Capital Lease
$
17
13
30
)4(
62
11
15
$
subtotal minimum lease obligation
tseretni ssel
ten ,latoT
less current portion
long term portion
(c) Other Commitments
The Company has non-cancelable purchase orders with key suppliers executed in the normal course of
business that total approximately $2.0 million. In connection with the Company’s employee savings plans,
the matching contribution for 2018 was approximately $0.5 million in cash. The matching contribution for
2019 is estimated to be approximately $0.5 million in cash.
(d) Employment Agreements
The Company has entered into employment agreements with certain key executives. The employment
agreements provide for minimum annual salaries and performance-based annual bonus compensation as
103
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(9)
Commitments and Contingencies (continued)
(d) Employment Agreements (continued)
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
effect for the greater of the remainder of the original term of employment or, for Mr. Ferry, a period of two
years from the date of termination, for Mr. Christopher and Ms. Stevens, a period of eighteen months from
the date of termination, in each case, plus the pro rata portion of any annual bonus earned in any employment
year through the date of termination.
On November 8, 2018, Mr. Ferry retired as Chief Executive Officer of the Company and from his position
as Chairman of the Board of Directors. Mr. Ferry and the Company entered into a Separation Agreement on
that date, to which Mr. Ferry will generally receive the payments that would have been payable had he been
terminated by the Company without cause. The Company accrued $1,009,000 representing 24 months of
severance and 18 months of health benefits as of November 2018 upon Mr. Ferry’s agreeing to the Separation
Agreement, which will be paid monthly beginning in May 2019.
On December 27, 2018, the Company announced that Mr. Christopher would be resigning from his position
as Chief Financial Officer of the Company, effective January 11, 2019. There were no termination benefits
associated with Mr. Christopher’s resignation.
(e) Foreign Tax Claim
In July 2007, a dissolved former Canadian subsidiary of the Company, CADx Medical Systems Inc. (“CADx
Medical”), received a tax re-assessment of approximately $6,800,000 from the Canada Revenue Agency
(“CRA”) resulting from CRA’s audit of CADx Medical’s Canadian federal tax return for the year ended
December 31, 2002. In February 2010, the CRA reviewed the matter and reduced the tax re-assessment
to approximately $703,000, excluding interest and penalties. The CRA has the right to pursue the matter
until July 2020. The Company believes that it is not liable for the re-assessment against CADx Medical and
continues to defend this position. As the Company believes that a probability of a loss is remote, no accrual
was recorded as of December 31, 2018.
(f) Royalty Obligations
In connection with prior litigation, the Company received a nonexclusive, irrevocable, perpetual, worldwide
license, including the right to sublicense certain Hologic patents, and a non-compete covenant 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 future net sales on any products that practice the licensed rights. The estimated fair value of the
patent license and non-compete covenant is $100,000 and was amortized over the 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.
(g) Litigation
The Company may be a party to various legal proceedings and claims arising out of the ordinary course of
its business. Although the final results of all such matters and claims cannot be predicted with certainty, the
Company currently believes that there are no current proceedings or claims pending against it 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 several legal matters be resolved 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 reporting period, the Company evaluates whether or
not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450,
Contingencies. Legal costs are expensed as incurred.
104
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(9)
Commitments and Contingencies (continued)
(g) Litigation (continued)
On September 5, 2018, third-party Yeda Research and Development Company Ltd., referred to in this Section
as Yeda, filed a complaint against the Company and Invivo in the United States District Court for the Southern
District of New York, captioned Yeda Research and Development Company Ltd. v. iCAD, Inc. and Invivo
Corporation, Case No. 1:18-cv-08083-GBD, related to the Company’s sale of the VersaVue software and
DynaCAD product under the Agreement. In the Complaint, Yeda asserts claims for: (i) copyright infringement
and misappropriation of trade secrets against both the Company and Invivo; (ii) breach of contract against
the Company only; and (iii) tortious interference with existing business relationships and unjust enrichment
against Invivo only. The Company and Invivo filed Motions to Dismiss the Complaint on December 21,
2018. On January 18, 2019, Yeda filed Oppositions to the Motions to Dismiss. The Company and Invivo
submitted responses to the Opposition to the Motion to Dismiss on February 8, 2019. The Court held oral
argument on the Motions to Dismiss on March 27, 2019. The Company is awaiting a decision from the Court.
To the extent that the Complaint is not dismissed in its entirety, the Company will vigorously defend against
the claims asserted by Yeda. The amount of the loss, if any, cannot be reasonably estimated at this time. Any
amounts owed by the Company in connection with its indemnification obligations to Invivo related to this
action may reduce the $350,000 holdback under the Asset Purchase Agreement.
(10)
Quarterly Financial Data (in thousands, except per share data, and unaudited)
Net
sales
Gross
profit
$
6,313
6,162
6,192
6,954
$
4,498
4,784
4,738
5,410
Net
loss
$
$
$
$
(3,281)
(1,027)
(1,365)
(3,344)
Income (loss)
per share
($0.20)
($0.06)
($0.08)
($0.20)
Weighted
average
number of
shares outstanding
16,583
16,664
16,700
16,774
$
6,791
6,409
7,000
7,902
$
4,689
4,503
4,643
4,341
$
$
$
$
(457)
(2,631)
(6,933)
(4,235)
($0.03)
($0.16)
($0.42)
($0.26)
16,135
16,310
16,424
16,501
2018
First quarter
Second quarter
Third quarter
Fourth quarter
2017
First quarter
Second quarter
Third quarter
Fourth quarter
105
EXHIBIT 21
Subsidiaries of iCAD, Inc.
Name
Jurisdiction of Incorporation/Organization
Xoft, Inc.
Xoft Solutions, LLC
Delaware
Delaware
106
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We hereby consent to the incorporation by reference in the Registration Statements 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 Registration Statements on Forms S-3, (No. 333-169716, 333-176777 and 333-178952) of iCAD,
Inc. and subsidiaries, of our report dated March 29, 2019, relating to the consolidated financial statements which
appears in this Annual Report on Form10-K.
Boston, Massachusetts
March 29, 2019
/s/ BDO USA, LLP
107
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Michael Klein, certify that:
1.
iCAD, Inc.;
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2018 of
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
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 for, 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 supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(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
presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and;
(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):
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
(a)
have a significant role in the registrant’s internal control over financial reporting.
(b)
Any fraud, whether or not material, that involves management or other employees who
Date: March 29, 2019
/s/ Michael Klein .
Michael Klein
Chief Executive Officer and Director
108
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, R. Scott Areglado, certify that:
1.
iCAD, Inc.;
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2018 of
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
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 for, 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 supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(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
presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and;
(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):
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
(a)
have a significant role in the registrant’s internal control over financial reporting.
(b)
Any fraud, whether or not material, that involves management or other employees who
Date: March 29, 2019
/s/ R. Scott Areglado .
R. Scott Areglado
Interim Chief Financial Officer,
Vice President and Corporate Controller
109
EXHIBIT 32.1
iCAD, Inc.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of iCAD, Inc. (the “Company”) on Form 10-K for the fiscal year ended December
31, 2018 (the “Report”), I, Michael Klein, 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 29, 2019
/s/ Michael Klein .
Michael Klein
Chief Executive Officer and Director
110
EXHIBIT 32.2
iCAD, Inc.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of iCAD, Inc. (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2018 (the “Report”), I, R. Scott Areglado, 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 29, 2019
/s/ R. Scott Areglado
R. Scott Areglado
Interim Chief Financial Officer,
Vice President and Corporate Controller
111
112
Dear Stockholder,
2018 was a pivotal year for iCAD, highlighted by
key achievements in both our Cancer Detection and
Cancer Therapy businesses. Importantly, we have a
new leadership team in place that has the Company
well-positioned to continue making significant strides
throughout 2019 and beyond. I was honored to step
into the Chief Executive Officer role in November of
2018. Having spent 30 years in the medical technology
industry, I can tell you with great confidence that iCAD’s
unique artificial intelligence (AI) technology has the
potential to significantly transform both cancer detection
and the assessment of at-risk patients. Our team is firmly
focused on unlocking the significant inherent value that
exists in iCAD’s core technologies.
Significant Progress in Cancer Detection Driven by
iCAD’s Innovative Technology – ProFound AI™
Our Cancer Detection business was bolstered
in December 2018 by the U.S. Food and Drug
Administration (FDA) clearance of our ProFound AI™
system for digital breast tomosynthesis (DBT). The
FDA clearance was based on positive clinical results
from a large reader study that was performed with 24
radiologists who read 260 tomosynthesis cases both
with and without iCAD’s ProFound AI solution.
Built on the latest deep-learning and artificial intelligence
technology, ProFound AI is clinically proven to improve
breast cancer detection rates and reduce unnecessary
patient recall rates. In addition to improving clinical
performance related to breast cancer detection and
false positive rates, study results showed that ProFound
AI can reduce radiologists’ reading time by more than
50 percent on average. An increase in reading time
has been a significant challenge for radiologists when
moving from 2D to 3D mammography.
Our technology is trained to detect malignant soft-tissue
densities and calcifications. It also provides radiologists
with scoring information representing the likelihood
that a detection or case is malignant based on the large
dataset of clinical images used to train the algorithm.
ProFound AI is currently available for use with leading
DBT systems in the U.S., Canada and Europe.
Our ProFound AI product has quickly begun to establish
itself in the marketplace. The demand continues to grow
as anticipated for this revolutionary product offering, and
importantly, customer feedback continues to be highly
positive. We are very pleased with the initial progress
and success our sales team has achieved since the FDA
clearance of ProFound AI late last year.
Michael Klein, Executive Chairman and CEO
Moving Beyond Cancer Detection
We have begun to accelerate our efforts around
our initiatives in breast cancer risk assessment and
prediction. These important initiatives reflect our
planned movement beyond the detection of cancer
under what is currently an age-based screening model
and are indicative of our future effort to move into
the exciting realm of being able to predict cancers
even before they emerge and are detected. This is a
quantum leap beyond the detection of cancer today.
The foundation of this capability is our exclusive risk
prediction license agreement with researchers at The
Karolinska Institute in Stockholm, Sweden.
The goal of this agreement is to go beyond the ability to
predict lifetime breast cancer risk or even a 5 to 10-year
risk. We believe it will be possible to accurately predict
the development of breast cancers within the coming 12
to 24 months, often the interval between normal age-
based screening regimens. There is no other product
on the market today that combines this level of image
analysis and individual predictive risk characteristics.
Favorable Trends Bode Well for the
Future of Cancer Therapy
One of the core focus areas for our new management
team was to improve the performance of the Company’s
Cancer Therapy segment. We believe that a strong
global market interest in general IORT applications,
including prostate, brain and rectal treatments, can be
drivers for that growth. We believe that these additional
applicators in brain and rectal can take us beyond our
current offerings in breast, gynecology and skin and
we see them as important extensions of our product
platform. In addition, we believe there is an opportunity
Board of Directors
Michael Klein
Executive Chairman and CEO
Dr. Rakesh Patel (1), (2), (3)
Chief Executive Officer, Precision Cancer Specialists
Medical Group
Andrew H. Sassine (1), (2), (3)
Chief Financial Officer, Arcturus Therapeutics
Susan Wood, Ph.D. (1), (2), (3)
Chief Executive Officer, VIDA Diagnostics
Executive Officers
Michael Klein
Executive Chairman and CEO
Stacey Stevens
President
R. Scott Areglado
Chief Financial Officer
Jonathan Go
Chief Technology Officer
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating & Corporate Governance Committee Member
© 2019, 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.
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2018 Annual ReportPioneering innovative cancer detection and therapy solutions