EDGAR 10-K Filing

Company CIK: 749660
Filing Year: 2022
Filename: 749660_10-K_2022_0001193125-22-086983.json

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ITEM 1. BUSINESS
Item 1.
Business

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ITEM 1A. RISK FACTORS
Item
1A.
Risk Factors.
The Company operates in a changing environment that involves numerous known and unknown risks and uncertainties that could materially adversely affect its operations. The following highlights some of the factors that have affected, and/or in the future could affect, the Company’s operations.
The following is a summary of certain important factors that may make an investment in iCAD speculative or risky. You should carefully consider the fuller risk factor disclosure set forth in this Annual Report, in addition to the other information herein, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s financial statements and related notes.
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The Company has incurred significant losses from inception through 2021 and there can be no assurance that we will be able to achieve and sustain future profitability.
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The Company’s quarterly and annual operating and financial results and gross margins are likely to fluctuate significantly in future periods.
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Management expects the novel coronavirus (COVID-19)
pandemic to continue to have a significant effect on the Company’s results of operations. A continuation or worsening of the pandemic will have a material adverse impact on iCAD’s business, results of operations and financial condition and on the market price of iCAD’s common stock.
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The markets for the Company’s products and treatments and newly introduced enhancements to iCAD’s existing products and treatments may not develop as expected, the Company may continue to face barriers to broad market acceptance.
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Sales and market acceptance of Company 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 Company products and treatments facilitated by the Company’s products could harm the Company’s business and prospects.
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A limited number of customers account for a significant portion of the Company’s total revenue. The loss of a principal customer could seriously hurt the Company’s business.
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The markets for many of the Company’s products are subject to changing technology.
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Revenue from the Company’s new subscription license model may be difficult to predict.
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The Company distributes its products in highly competitive markets and the Company’s sales may suffer as a result.
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The Company relies on intellectual property and proprietary rights to maintain its competitive position and may not be able to protect these rights.
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The Company’s future prospects depend on its ability to retain current key employees and attract additional qualified personnel.
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The market price of the Company’s common stock has been, and may continue to be volatile, which could reduce the market price of the Company’s common stock.
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Future issuances of shares of the Company’s common stock may cause significant dilution of equity interests of existing holders of common stock and decrease the market price of shares of the Company’s common stock.
Risks Related to Financial Position, Operating Results and Need for Additional Capital
The Company has incurred significant losses from inception through 2021 and there can be no assurance that it will be able to achieve and sustain future profitability.
The Company has incurred significant losses since inception. The Company incurred a net loss of $11.2 million in 2021 and has an accumulated deficit of $253.1 million at December 31, 2021. The Company may not be able to achieve profitability. Substantially all of our operating losses have resulted from costs incurred in connection with research and development efforts, including clinical studies, and from general and administrative costs associated with our operations. We expect our operating expenses to significantly increase as we continue to invest in research and development efforts. We also continue to incur additional costs associated with operating as a public company. As a result, we expect to continue to incur substantial and increasing operating losses for the foreseeable future.
The Company’s quarterly and annual operating and financial results and its gross margins are likely to fluctuate significantly in future periods.
The Company’s quarterly and annual operating and financial results are difficult to predict and may fluctuate significantly from period to period. The Company’s revenue and results of operations may fluctuate as a result of a variety of factors that are outside of the Company’s control including, but not limited to, general economic conditions, the timing of orders from the Company’s OEM partners, its OEM partners’ ability to manufacture and ship their digital mammography systems, its timely receipt by the FDA for the clearance or approval to market Company products, its ability to timely engage other OEM partners for the sale of Company products, the timing of product enhancements and new product introductions by Company or its competitors, the pricing of Company products, changes in customers’ budgets, changes to the economic strength of the Company’s customers, economic changes in the markets served by the Company’s customers, competitive conditions and the possible deferral of revenue under the Company’s revenue recognition policies.
Risks Related to the Company and its Business
The Company expects the novel coronavirus (COVID-19)
pandemic, including the emergence of new variants, to have a significant effect on the Company’s results of operations. In addition, the pandemic has resulted in significant financial market volatility, and its impact on the global economy appears to be significant. A continuation or worsening of the pandemic will have a material adverse impact on the Company’s business, results of operations and financial condition and on the market price of the Company’s common stock.
As a provider of devices and services to the health care industry, the Company’s operations have been materially affected, and may continue to be impacted, by the COVID-19
pandemic. Beginning with Q1 2020 through Q4
2021, the COVID-19
pandemic has presented a number of challenges and risks for the Company’s business, including, but not limited to, decreased product demand due to reduced numbers of in-person
meetings with potential clients; potential clients’ singular focus on surging COVID-19
infection rates following the emergence of the Omicron variant, causing attention to be diverted from purchasing decisions; pandemic-related public health impacts, including significant shifts in workforce availability and priorities, on customer, supplier, and iCAD’s business process; supply chain interruptions; disruptions to the Company’s clinical trials; challenges operating in a virtual work environment; impacts resulting from travel limitations and mobility restrictions; and other challenges presented by disruptions to the Company’s normal operations in response to the pandemic, as well as uncertainties regarding the duration and severity of the pandemic on the global economy and the Company’s operations, and the unpredictable and periodic emergence of new variants of the COVID-19
virus.
The COVID-19
pandemic has resulted in significant financial market volatility and uncertainty. A continued or worsening level of market disruption and volatility observed since the start of the pandemic will have an adverse effect on the Company’s ability to access capital, on its business, results of operations and financial condition, and on the market price of the Company’s common stock. Although the Company does not provide guidance to investors relating to the Company’s results of operations, the Company’s quarterly results for the quarter ending March 31, 2022, and possibly future quarters, could reflect a continued negative impact from the COVID-19
pandemic for similar or additional reasons.
The Company’s exposure to trade accounts receivable losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19
pandemic, or other customer-specific factors. The Company has historically not experienced significant trade account receivable losses, but it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade account receivables as hospitals’ cash flows are impacted by their response to the COVID-19
pandemic.
The markets for the Company’s products and treatments and newly introduced enhancements to the Company’s existing products and treatments may not develop as expected, the Company continues to face barriers to broad market acceptance.
The successful commercialization of the Company’s newly developed products and treatments and newly introduced enhancements to the Company’s existing products and treatments are subject to numerous risks, both known and unknown, including:
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market acceptance of the Company’s products;
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uncertainty of the development of a market for such product or treatment;
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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 the Company’s products, technologies, treatments or therapies;
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the perceptions of the Company’s products or treatments as compared to other products and treatments;
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recommendation and support for the use of the Company’s products or treatments by influential customers, such as hospitals, radiological practices, breast surgeons and radiation oncologists and treatment centers and U.S. and international medical professional societies;
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the availability and extent of data demonstrating the clinical efficacy of the Company’s products or treatments;
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competition, including the presence of competing products sold by companies with longer operating histories, more recognizable names and more established distribution networks; and
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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 the Company is unable to successfully commercialize and create a significant market for the Company’s newly developed products and treatments and newly introduced enhancements to the Company’s existing products and treatments, the Company’s business and prospects could be harmed.
The Company may be exposed to significant product liability for which the Company may not have sufficient insurance coverage or be able to procure sufficient insurance coverage.
The Company’s 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 the Company’s reputation and business.
Sales and market acceptance of the Company’s 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 the Company’s products and treatments facilitated by the Company’s products could harm the Company’s business and prospects.
Sales and market acceptance of the Company’s medical products and the treatments facilitated by Company 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 the Company’s products and treatments has and will continue to depend upon the Company’s customers’ ability to obtain coverage for, and appropriate reimbursement from third-party payers for, these products and treatments. In the United States, 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 the Company’s products and treatments. In the absence of a national coverage determination, coverage policies for Medicare patients may vary by regional Medicare Administrative Contractors. Reimbursement rates for treatments vary 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 Company 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. On September 29, 2020, CMS finalized a rule regarding its new RO Model, designed, according to CMS, to improve the quality of care for cancer patients receiving radiotherapy and reduce Medicare expenditures through bundled payments. In the final notice, CMS did not include IORT treatments (including CPT codes 77424, 77425, and 77469) within the new alternative payment model for radiation oncology. As a result, whether or not a particular physician practice or hospital is subject to the new radiation oncology payment model, IORT services covered by Medicare will continue to be subject to the existing payment systems for physician services and hospital outpatient services. On December 10, 2021, the Protecting Medicare and American Farmers from Sequestration Cuts Act delayed the RO Model implementation until no earlier than January 1, 2023. Management cannot provide assurance that government or private third-party payers will continue to reimburse the Company’s products or services, nor can management provide assurance that the payment rates will be adequate. If providers and physicians are unable to obtain adequate reimbursement for the Company’s products or services, this could have a material adverse effect on the Company’s 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 the Company’s business and business operations.
Management cannot guarantee that providers and physicians will be able to obtain adequate reimbursement for the Company’s products or services.
The Company’s 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.
The Company’s 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 the Company anticipates due to a variety of factors, including, general economic 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. If the market for the products and technologies upon which the Company’s products are dependent does not grow or grows too slowly, this could have a material adverse effect on the Company’s business.
A limited number of customers account for a significant portion of the Company’s total revenue. The loss of a principal customer could seriously hurt the Company’s business.
A limited number of major customers have in the past and may continue in the future to account for a significant portion of the Company’s revenue. The Company’s principal
sales distribution channel for its digital products is through its OEM partners. In 2021, the Company’s OEM partners accounted for 22% of its total revenue, with one major customer, GE Healthcare, accounting for 14% of the Company’s revenue. In addition, in 2021, four customers, consisting of both OEM and direct customers, accounted for 31% of the Company’s total revenue. The loss of the Company’s relationships with principal customers or a decline in sales to principal customers could materially adversely affect its business and operating results.
If goodwill and/or other intangible assets that the Company has recorded in connection with its acquisitions become impaired, the Company could have to take significant charges against earnings.
Under current accounting, management must assess, at least annually and potentially more frequently, whether the value of the Company’s goodwill of $8.4 million at December 31, 2021 and its 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 the Company’s reported results of operations in future periods.
The Company’s 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, the Company is subject to taxation in numerous countries, states and other jurisdictions. In preparing the Company’s financial statements, the Company records the amount of tax payable in each of the countries, states and other jurisdictions in which the Company operates. The Company’s future effective tax rate, however, may be lower or higher than prior years due to numerous factors, including a change in the Company’s geographic earnings mix, changes in the measurement of the Company’s deferred taxes, and recently enacted and future tax law changes in jurisdictions in which the Company operates. The Company is also subject to ongoing tax audits in various jurisdictions, and tax authorities may disagree with certain positions the Company has taken and assess additional taxes. Any of these factors could cause the Company to experience an effective tax rate significantly different from previous periods or the Company’s current expectations, which could adversely affect the Company’s business, results of operations and cash flows.
The Company’s ability to use its net operating loss carryovers and certain other tax attributes may be limited.
Under the Internal Revenue Code of 1986, as amended (the “Code”), a corporation is generally allowed a deduction for net operating losses (“NOLs”) carried over from a prior taxable year. Under that provision, the Company can carryforward its NOLs to offset future taxable income, if any, until such NOLs are fully utilized or expire. The same is true of other unused tax attributes, such as tax credits. Under the Tax Cut and Jobs Act of 2017 (the “Tax Act”), federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. It is uncertain if and to what extent various states will conform to the federal Tax Act.
In addition, under Section 382 of the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 percent change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change
net operating loss carryforwards and other pre-change
tax attributes to offset its post-change income or taxes may be limited. The Company may experience ownership changes in the future as a result of subsequent shifts in the Company’s stock ownership, some of which may be outside of the Company’s control. If an ownership change occurs and the Company’s ability to use its net operating loss carryforwards or other tax attributes is materially limited, it would harm the Company’s future operating results by effectively increasing the Company’s future tax obligations.
The markets for many of the Company’s products are subject to changing technology.
The Company’s business depends on its ability to adapt to evolving technologies and industry standards and introduce new technology solutions and services accordingly. If the Company cannot adapt to changing technologies, its technology solutions and services may become obsolete, and its business may suffer. Because the healthcare information technology market is constantly evolving, the Company’s existing technology may become obsolete and fail to meet the requirements of current and potential customers. The Company’s success will depend, in part, on its ability to continue to enhance its existing technology solutions and services, develop new technology that addresses the increasingly sophisticated and varied needs of its customers, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of the Company’s proprietary technology entails significant technical and business risks. The Company may not be successful in developing, using, marketing, selling, or maintaining new technologies effectively or adapting its proprietary technology to evolving customer requirements or emerging industry standards, and, as a result, the Company’s business and reputation could suffer. The Company 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 the Company’s results of operations. The Company’s failure to introduce new products or to introduce these products on schedule could have an adverse effect on its business, financial condition and results of operations.
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 for it by a sole manufacturer, by a limited number of manufacturers or assembled by the Company from supplies it obtains from a limited number of suppliers. Critical components required to manufacture the Company’s products, whether by outside manufacturers or directly by the Company, 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. The loss of a sole or key manufacturer or supplier could materially impair the Company’s ability to deliver products to its customers in a timely manner and would adversely affect the Company’s sales and operating results. The Company’s business would be harmed if any of its manufacturers or suppliers could not meet its quality and performance specifications and quantity and delivery requirements.
Additionally, the Company’s suppliers and manufacturers are, and will continue to be, subject to extensive government regulation in connection with the manufacture of any medical devices. The Company’s suppliers and
manufacturers must ensure that they are compliant with applicable quality systems and other regulatory requirements, as mandated by the FDA and other regulatory authorities. If the Company’s materials suppliers or manufacturers face manufacturing or quality control problems this may lead to delays in product production or shipment or the Company’s supplier or manufacturer no longer being able to continue operations. The Company’s business would be harmed if any of its manufacturers or suppliers could not meet its quality and performance specifications and quantity and delivery requirements.
Revenue from the Company’s new subscription license model may be difficult to predict.
The Company is devoting resources to the development of a new software license model to complement its traditional perpetual licensing models. This model allows the Company to license Detection software through subscription licenses that are cancelable at any time. The Company has limited operating history with subscription licensing models and may not be able to accurately predict initial subscription enrollment or future renewal or cancellation rates. Subscription renewal rates may decline or fluctuate as a result of a number of factors, including but not limited to customer satisfaction or dissatisfaction with Company products, the price of Company products, the prices of similar competitive products, or customer budget sensitivity. If any of the Company’s assumptions about revenue from the subscription licensing model are incorrect, the Company’s actual results may vary materially from those anticipated, estimated, or projected.
The Company distributes its products in highly competitive markets and its sales may suffer as a result.
The Company operates 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 the Company and are well established. 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 the Company’s products obsolete or noncompetitive. The Company’s competitors may achieve patent protection, regulatory approval, or product commercialization that would limit the Company’s ability to compete with them. These and other competitive pressures could have a material adverse effect the Company’s business.
Disruptions in service or damage to the Company’s third-party providers’ data centers could adversely affect the Company’s business.
The Company relies on third parties who provide access to data centers. The Company’s information technologies and systems are vulnerable to damage or interruption from various causes, including (i) acts of God and other natural disasters, war and acts of terrorism and (ii) power losses, computer systems failures, internet and telecommunications or data network failures, operator error, losses of and corruption of data and similar events. The Company conducts business continuity planning and works with its 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 the Company utilizes. In addition, the occurrence of any of these events could result in interruptions, delays or cessations in service to the Company’s customers. Any of these events could impair or prohibit the Company’s ability to provide its services, reduce the attractiveness of its services to current or potential customers and adversely impact its financial condition and results of operations.
In addition, despite the implementation of security measures, the Company’s infrastructure, data centers, or systems that it interfaces 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, the Company 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.
Instability in geographies where the Company has operations and personnel or where the Company derives revenue could have a material adverse effect on the Company’s business, customers, operations and financial results.
Economic, civil, military and political uncertainty may arise or increase in regions where the Company operates or derives revenue. Further, countries from which the Company derives revenue may experience military action and/or civil and political unrest. For the fiscal year ended 2021, approximately 8.6% of the Company’s revenue was derived from customers located in Europe, and approximately 39.0% of the Company’s export revenue was derived from customers located in Europe. In late February 2022, Russian military forces launched significant military action against Ukraine. Sustained conflict and disruption in the region is likely. The aggregate impact to Eastern Europe and Europe as a whole, as well as actions taken by other countries, including new and stricter sanctions by the United States, Canada, the United Kingdom, the European Union, and other countries and organizations against officials, individuals, regions, and industries in Russia, Belarus and Ukraine, and each country’s potential response to such sanctions, tensions and military actions, is not knowable at this time, and could have a material adverse effect on the Company, its business and operations. Any such material adverse effect from the conflict and enhanced sanctions activity may disrupt the Company’s sales to customers in the region. Prolonged unfavorable economic conditions or uncertainty may have an adverse effect on the Company’s sales and profitability
If the Company’s products fail to perform properly due to errors or similar problems, the Company’s business could suffer.
Despite testing, complex software may contain defects or errors. Addressing software errors may delay development of the Company’s solutions, and if discovered after deployment, may require the expenditure of substantial time and resources to correct. Errors in the Company’s software could result in:
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harm to the Company’s reputation;
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lost sales;
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delays in commercial releases;
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product liability claims;
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delays in or loss of market acceptance of the Company’s solutions;
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license terminations or renegotiations;
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unexpected expenses and diversion of resources to remedy errors; and
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privacy and security vulnerabilities.
Furthermore, the Company’s customers might use its 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 the Company’s software does not cause these problems, the existence of these errors might cause the Company to incur significant costs, divert the attention of its technical personnel from the Company’s solution development efforts or impact its reputation and cause significant customer relations problems.
Unfavorable results of legal proceedings could materially adversely affect the Company’s financial results
From time to time, the Company is 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 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 operations. For these and other reasons, the Company may choose to settle legal proceedings and claims, regardless of their actual merit.
A legal proceeding finally resolved against the Company, 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 the Company’s 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 the Company’s ability to market one or more of the Company’s material products or services, the Company’s 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 the Company’s reputation, which could adversely impact the Company’s business.
If the Company is subject to claims that its employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties, the Company could incur substantial expenses.
The Company employ individuals who were previously employed at other medical device and technology companies. The Company may be subject to claims that the Company or its employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of employees’ former employers or other third parties. The Company may also be subject to claims that former employers or other parties have an ownership interest in patents or intellectual property. Litigation may be necessary to defend against these claims. The Company may not be successful in defending these claims, and if the Company is successful, litigation could result in substantial cost and be a distraction to its management and other employees.
Healthcare industry consolidation could impose pressure on the Company’s prices, reduce potential customer base and reduce demands for the Company’s systems.
Many hospitals and imaging centers have consolidated to create larger healthcare enterprises with greater market and purchasing power. When hospitals and imaging centers combine, they often consolidate infrastructure, and consolidation of the Company’s customers could result in fewer overall customers. If this consolidation trend continues, it could reduce the size of the Company’s potential customer base, reduce demand for the Company’s systems, give the resulting enterprises greater bargaining or purchasing power, and may lead to erosion of the prices for the Company’s systems or decreased margins for its systems, all of which would adversely affect the Company’s ability to generate revenue.
Clinical trials are very expensive, lengthy, and difficult to design and implement and have uncertain outcomes, and, as a result, the Company may suffer delays or suspensions in current or future trials which would have a material adverse effect on the Company’s ability to obtain regulatory approvals timely or at all, and if the Company fails to receive such approvals, on its ability to generate revenues.
Clinical trials involve a time-consuming and expensive process with an uncertain outcome, and the results of earlier trials are not necessarily predictive of future results. Human clinical trials are difficult to design and implement and very expensive, due in part to being subject to rigorous regulatory requirements.
Additionally, the Company may encounter problems at any stage of the trials that cause it to abandon or repeat clinical trials. The commencement and completion of clinical trials may be delayed by several factors, including:
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non-approval
of an investigational device exemption (IDE), which is required by the FDA for the study in humans of a significant risk device that is not approved for the indication being studied;
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failure to reach an agreement with contract research organizations or clinical trial sites;
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failure of third-party contract research organizations to properly implement or monitor the clinical trial protocols;
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failure of IRBs to approve the Company’s clinical trial protocols or suspension or termination of the Company’s clinical trial by the IRB, DSMB, or the FDA;
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slower than expected rates of patient recruitment and enrollment, which may be further negatively impacted by the COVID-19
global pandemic;
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inability to retain patients in clinical trials, which may be further negatively impacted by the COVID-19
global pandemic;
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lack of effectiveness during clinical trials;
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unforeseen safety issues;
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inability or unwillingness of medical clinical investigators and institutional review boards to follow the Company’s clinical trial protocols;
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failure of clinical investigators or sites to maintain necessary licenses or permits or comply with good clinical practices, or GCP, or other regulatory requirements; and
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lack of sufficient funding to finance the clinical trials.
In addition, the Company or regulatory authorities may suspend the Company’s clinical trials at any time if it appears that the Company is exposing participants to unacceptable health risks or if the regulatory authorities find deficiencies in the Company’s regulatory submissions or the conduct of these trials. Any suspension of clinical trials will delay possible regulatory approval, increase costs, and adversely impact the Company’s ability to develop products and generate revenue.
The Company’s future prospects depend on its ability to retain current key employees and attract additional qualified personnel.
The Company’s success depends in large part on the continued service of its executive officers and other key employees. The Company may not be able to retain the services of its executive officers and other key employees. The loss of executive officers or other key personnel could have a material adverse effect on the Company.
In addition, in order to support its continued growth, the Company will be required to effectively recruit, develop and retain additional qualified personnel. If the Company is unable to attract and retain additional necessary personnel, it could delay or hinder its plans for growth. Competition for such personnel is intense, and there can be no assurance that the Company 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 the Company’s business, financial condition and results of operations.
The Company’s international operations expose it to various risks, any number of which could harm the Company’s business.
The Company’s revenue from sales outside of the United States represented approximately 22% of the Company’s revenue for 2021. The Company is subject to the risks inherent in conducting business across national boundaries, any one of which could adversely impact its 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 the Company’s current or future operations and, as a result, harm the Company’s overall business.
Risks Related to Intellectual Property
The Company relies on intellectual property and proprietary rights to maintain its competitive position and may not be able to protect these rights.
The Company relies heavily on proprietary technology that it protects 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 the Company is 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 the Company. There can also be no assurance that the Company’s trade secrets or non-disclosure
agreements will provide meaningful protection of Company proprietary information. Further, the Company cannot assure that others will not independently develop similar technologies or duplicate any technology developed by the Company or that its technology will not infringe upon patents or other rights owned by others. Unauthorized third parties may infringe the Company’s intellectual property rights or copy or reverse engineer portions of the Company’s technology. In addition, because patent applications in the United States are not generally publicly disclosed until eighteen months after the application is filed, applications may have been filed by third parties that relate to the Company’s technology. Moreover, there is a risk that foreign intellectual property laws will not protect the Company’s intellectual property rights to the same extent as intellectual property laws in the United States. The rights provided by a patent are finite in time. The Company has certain patents that expire between 2022 and 2029. In the absence of significant patent protection, the Company may be vulnerable to competitors who attempt to copy the Company’s products, processes or technology.
In addition, in the future, the Company 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 the Company. Any resulting litigation or proceeding could result in significant expense to the Company and divert the efforts of its management personnel, whether or not such litigation or proceeding is determined in the Company’s favor. In addition, if any of the Company’s intellectual property and proprietary rights are deemed to violate the proprietary rights of others, the Company may be prevented from using those intellectual property or proprietary rights, which could prevent it from being able to sell its products. Litigation could also result in a judgment or monetary damages being levied against the Company.
If the Company fails to obtain licenses to necessary intellectual property or does not comply with its obligations in license agreements, the Company could lose important rights.
The Company may need to obtain licenses from owners of intellectual property to advance its research and products or allow commercialization of its product, and the Company has done so from time to time. If the Company does not obtain any of these licenses at a reasonable cost and on reasonable terms, the Company would be unable to further develop and commercialize one or more of its product, which could harm the Company’s business.
Risks Related to Regulation of the Company’s Industry
The healthcare industry is highly regulated, and government authorities may determine that the Company has failed to comply with applicable laws, rules or regulations. Additionally, the Company may incur substantial costs defending its interpretations of U.S. federal and state government regulations, and if the Company loses, the government could force the Company to restructure its operations and subject it to fines, monetary penalties and possibly exclude the Company from participation in U.S. government-sponsored health care programs such as Medicare and Medicaid.
Both in the United States 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 the Company. 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 the Company’s, from engaging in practices that may influence professional decision-making, such as splitting fees with physicians. In addition, the Company believes that its business will continue to be subject to increasing regulation as legislatures and governmental agencies periodically consider proposals to revise or create new requirements, particularly in response to and following the COVID-19
pandemic, the scope and effect of which the Company cannot predict. Such proposals, if implemented, could impact the Company’s operations, the use of its services, and its ability to market new services, and could create unexpected liabilities for the Company.
Many healthcare laws are complex, and their application to specific services and relationships may not be clear. The laws often have related rules and regulations that are subject to interpretation and may not provide definitive guidance as to their application to the Company’s operations, including its arrangements with physicians and professional corporations. Further, healthcare laws differ from jurisdiction to jurisdiction and it is difficult to ensure the Company’s business complies with evolving laws in all jurisdictions.
Consequently, the Company’s operations, including its arrangements with healthcare providers, are subject to audits, inquiries and investigations from government agencies from time to time. The Company believes it is in substantial compliance with these laws, rules and regulations based upon what the Company believes are reasonable and defensible interpretations of these laws, rules and regulations. However, U.S. federal and state laws are broadly worded and may be interpreted or applied by prosecutorial, regulatory or judicial authorities in ways that the Company cannot predict. Accordingly, the Company may in the future become the subject of regulatory or other investigations or proceedings, and its interpretations of applicable laws, rules and regulations may be challenged. Any challenge to the Company’s operations or arrangements with third parties that the Company has structured based upon its interpretation of these laws, rules and regulations could potentially disrupt business operations and lead to substantial defense costs and a diversion of management’s time and attention, even if the Company successfully defends its interpretation. In addition, if the government successfully challenges the Company’s interpretation of the applicability of these laws, rules and regulations as they relate to its operations and arrangements, such successful challenge may have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows, and the trading price of the Company’s common stock.
In the event regulatory action were to limit or prohibit the Company from carrying on its business as it presently conducts it or from expanding its operations into certain jurisdictions, the Company may need to make structural, operational and organizational modifications to the Company or to its contractual arrangements with physicians and professional corporations. The Company’s operating costs could increase significantly as a result. The Company could also lose contracts, or its revenues could decrease under existing contracts. Any restructuring would also negatively impact the Company’s operations because its management’s time and attention would be diverted from running its business in the ordinary course.
Compliance with the many laws and regulations governing the healthcare industry could restrict the Company’s sales and marketing practices, and other relationships with healthcare professionals.
Once the Company’s products are sold, the Company must comply with various U.S. federal and state healthcare fraud and abuse laws, rules and regulations pertaining false claims, kickbacks and physician self-referral. 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 the Company’s sales and marketing practices, and any challenge to the Company’s practices could disrupt its operations and lead to substantial defense costs and a diversion of management’s time and attention, even if the Company successfully defends its practices. If the Company is unable to successfully defend its practices, in addition to incurring significant expense in defending itself, the Company could be subject to a significant settlement, monetary penalties, and costs related to implementation of changes to its practices, which could have a material adverse effect on its business.
Healthcare reform legislation in the United States may adversely affect the Company’s business and/or results of operations.
The Company is unable to predict what 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 the Company’s business. Any cost containment measures or other health care system reforms that are adopted could have a material and adverse effect on the Company’s ability to commercialize its existing and
future products successfully. The Company cannot predict whether any existing or enacted legislation will be repealed, replaced, or modified or how such repeal, replacement or modification may be timed or structured.
As a result, the Company cannot quantify or predict the effect of such repeal, replacement, or modification might have on its business and results of operations. However, any changes that lower reimbursement for the Company’s products or reduce medical procedure volumes could adversely affect its business and results of operations.
The Company’s products and manufacturing facilities are subject to extensive regulation with potentially significant costs for compliance.
In the United States, the Company’s CAD systems and Xoft Systems are medical devices subject to extensive regulation by the FDA under the FDCA. The FDA’s regulation of the Company’s products includes its manufacturing operations, product labeling, adverse event reporting, and the FDA’s general prohibition against promoting products for unapproved or “off-label”
uses.
The Company’s 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 the Company’s operating and compliance burdens and adversely affect its business, financial condition and results of operations.
Sales of the Company’s products in certain countries outside of the United States are also subject to extensive regulatory approvals. Obtaining and maintaining foreign regulatory approvals is an expensive and time-consuming process. The Company cannot be certain that it will be able to obtain the necessary regulatory approvals timely or at all in any foreign country in which the Company plans to market its CAD products and Xoft Systems, and if the Company fails to receive such approvals, its ability to generate revenue may be significantly diminished.
The Company may not be able to obtain regulatory approval for any of the other products that we may consider developing.
The Company has received the required premarket approvals from FDA or the equivalent foreign authority in the relevant jurisdictions in which its currently offers its products. Before the Company is able to commercialize any new product or promote a new indicated use of an existing product, it must obtain the required regulatory approvals. The process for satisfying these regulatory requirements is lengthy and costly and will require the Company to comply with complex standards for research and development, clinical trials, testing, manufacturing, quality control, labeling, and promotion of products. Additionally, even if the Company receives regulatory approval for a new product or indicated use in one jurisdiction, its products may be subject to separate regulatory approval in each country or jurisdiction in which the Company plans to market its products. The Company cannot be certain that it will be able to obtain the necessary regulatory approvals timely or at all in any country or jurisdiction. Successfully obtaining regulatory approval in one jurisdiction does not guarantee approval in another; however, a delay or failure to obtain regulatory approval in one jurisdiction may negatively affect the regulatory process in another. If the Company is unable to obtain regulatory approval for other products or indicated uses, its ability to generate sufficient revenue to continue its business may be significantly impacted.
The Company’s products may be recalled even after it has received FDA or other governmental approval or clearance.
If the safety or efficacy of any of the Company’s products is called into question, the Company may initiate or the FDA and similar governmental authorities in other countries may press the Company to implement or even require a product recall, even if the Company’s product received approval or clearance by the FDA or a similar
governmental body. Such a recall would divert the focus of the Company’s management and its financial resources and could materially and adversely affect the Company’s reputation with customers and its financial condition and results of operations.
The Company is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. The Company may be subject to criminal or civil sanctions if it fails 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 HIPAA. In the provision of services to the Company’s customers, the Company and its third-party vendors may collect, use, maintain and transmit patient health information in ways that are subject to many of these laws and regulations. The Company is 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.
The Company’s customers are covered entities, and the Company is a business associate of its customers under HIPAA as a result of the Company’s contractual obligations to perform certain functions on behalf of and provide certain services to those customers. In the ordinary course of business, the Company collects and stores sensitive data, including personally identifiable information received from its customers. The secure processing, maintenance and transmission of this information is critical to the Company’s operations. Despite its security measures and business controls, the Company’s 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 the Company’s networks and the information stored thereon could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information by the Company or its subcontractors could (i) result in legal claims or proceedings, liability under laws that protect the privacy of personal information and regulatory penalties, (ii) disrupt the Company’s operations and the services it provides to its customers and (iii) damage the Company’s reputation, any of which could adversely affect the Company’s 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 the Company and its customers and potentially exposing the Company to additional expense, adverse publicity and liability. The Company may not remain in compliance with the diverse privacy requirements in each of the jurisdictions in which it does 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 the Company to incur significant additional costs to re-design
its products in a timely manner to reflect these legal requirements, which could have an adverse impact on its 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 the Company must handle healthcare related data, and the cost of complying with standards could be significant. If the Company does not properly comply with existing or new laws and regulations related to patient health information, it could be subject to criminal or civil sanctions.
Data protection laws in the United States, Europe and around the world may restrict the Company’s activities and increase the Company’s costs.
Various statutes and rules in the United States, Europe and around the world regulate privacy and data protection which may affect the Company’s 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 the Company’s data access, use and disclosure, and may require increased expenditures by us.
The European Union’s General Data Protection Regulation (“GDPR”) requires the Company 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.
Risk Related to the Company’s Common Stock
A substantial number of shares of the Company’s 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 the Company’s stock price.
Sales of substantial additional shares of the Company’s common stock in the public market, or the perception that these sales may occur, may significantly lower the market price of the Company’s common stock. The Company is unable to estimate the amount, timing or nature of future sales of shares of its common stock. The Company has 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 (the “Securities Act”), and may become freely tradable. The Company has also registered shares that are issuable upon the exercise of options and warrants. If holders of options, or warrants 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 the Company’s common stock may decline.
The Company has a limited number of shares of common stock available for future issuance which could adversely affect the Company’s ability to raise capital or consummate acquisitions.
The Company is currently authorized to issue 60,000,000 shares of common stock under its amended Certificate of Incorporation (“Certificate of Incorporation”). As of December 31, 2021, the Company had issued 25,326,086 shares
of common stock and had 2,486,511 shares of common stock reserved for issuance upon exercise of options granted, 875 shares of common stock reserved for vesting of restricted stock and 882,608 shares of common stock reserved for issuance under our Employee Stock Purchase Plan.
On March 5, 2021, the Company closed an underwritten public offering of 1,393,738 shares of common stock at a public offering price of $18.00 per share.
The Company’s stockholders approved a proposal to amend the Certificate of Incorporation (the “Amendment to the Certificate of Incorporation”) to increase the Company’s authorized shares of common stock from 30,000,000 shares to 60,000,000 shares, and a proposal to approve an amendment to the Company’s 2016 Stock Incentive Plan, as amended, to increase the number of shares of common stock available thereunder from 2,600,000 shares to 4,700,000 shares and to increase the aggregate number of incentive stock options available thereunder from 1,000,000 to 2,000,000 (the “Plan Amendment”). Following stockholder approval of
all Proposals at the Meeting, the Company filed the Amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware on July 21, 2021, and the Plan Amendment was made effective as of July 15, 2021.
Due to the limited number of authorized shares of common stock available for issuance, the Company may not be able to raise additional equity capital or complete a merger, other business combination or partnership unless the Company increases the number of shares it is authorized to issue.
If the Company does not receive the requisite stockholder approval, its operations could be materially adversely impacted. In addition, an increase in the authorized number of shares of common stock and the subsequent issuance of such shares could have the effect of delaying or preventing a change in control of the Company without further action by the Company’s stockholders.
Provisions in the Company’s Certificate of Incorporation and in Delaware law could make it more difficult for a third party to acquire the Company, discourage a takeover and adversely affect existing stockholders.
The Company’s 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 the Company’s 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 stock outstanding, future holders of preferred stock may have rights superior to the Company’s common stock and such rights could also be used to restrict the Company’s ability to merge with or sell its assets to a third party.
The Company is also subject to the provisions of Section 203 of the Delaware General Corporation Law, which could prevent the Company 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 the Company’s 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.
The market price of the Company’s common stock has been, and may continue to be volatile, which could reduce the market price of the Company’s common stock.
The publicly traded shares of the Company’s common stock have experienced, and may experience in the future, significant price and volume fluctuations. This market volatility could reduce the market price of the Company’s common stock without regard to its operating performance. In addition, the trading price of the Company’s common stock could change significantly in response to actual or anticipated variations in its quarterly operating results, announcements by the Company or its competitors, factors affecting the medical imaging industry generally, changes in national or regional economic conditions, changes in securities analysts’ estimates for the Company or its competitors’ or industry’s future performance or general market conditions, making it more difficult for shares of the Company’s common stock to be sold at a favorable price or at all. The market price of the Company’s 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 the Company’s industry.
General Risk Factors
Security breaches and other disruptions could compromise the Company’s information and expose the Company to liability, which would cause its business and reputation to suffer and could subject it to substantial liabilities.
If the Company’s security measures are breached or fail and unauthorized access is obtained to a customer’s data, the Company’s service may be perceived as insecure, the attractiveness of its services to current or potential customers may be reduced, and the Company may incur significant liabilities.
The Company’s services involve the storage and transmission of customers’ proprietary information and patient information, including health, financial, payment and other personal or confidential information. The Company relies on proprietary and commercially available systems, software, tools and monitoring, as well as other processes, to provide security for 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 the Company will not be subject to cybersecurity incidents that bypass its security measures, impact the integrity, availability or privacy of personally identifiable information or other data subject to privacy laws or disrupt the Company’s information systems, devices or business, including its ability to deliver services to its customers. As a result, cybersecurity, physical security and the continued development and enhancement of the Company’s controls, processes and practices designed to protect its enterprise, information systems and data from attack, damage or unauthorized access remain a priority. As cyber threats continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance its 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 the Company’s financial position and results of operations and harm its business reputation.
Changes in interpretation or application of Accounting Principles Generally Accepted in the United States of America (“GAAP”) may adversely affect the Company’s operating results.
Management prepares the Company’s consolidated 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 management’s application of, these principles can have a significant effect on the Company’s reported results and may even affect the Company’s reporting of transactions completed before a change is announced. In addition, when the Company is required to adopt new accounting standards, the Company’s methods of accounting for certain items may change, which could cause the Company’s results of operations to fluctuate from period to period and make it more difficult to compare the Company’s financial results to prior periods.
As the Company’s operations evolve over time, the Company may introduce new products or new technologies that require it to apply different accounting principles, including ones regarding revenue recognition, than the Company has applied in past periods. The application of different types of accounting principles and related potential changes may make it more difficult to compare the Company’s financial results from quarter to quarter, and the trading price of the Company’s common stock could suffer or become more volatile as a result.
The Company cannot be certain of the future effectiveness of its internal controls over financial reporting or the impact of the same on its operations or the market price for the Company’s common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), the Company is required to include in its Annual Report on Form 10-K
its assessment of the effectiveness of the Company’s internal controls over
financial reporting. The Company has dedicated a significant amount of time and resources to ensure compliance with this legislation for the year ended December 31, 2021 and will continue to do so for future fiscal periods. Although the Company believes that it currently has adequate internal control procedures in place, it cannot be certain that its internal controls over financial reporting will continue to be effective. If the Company cannot adequately maintain the effectiveness of its internal controls over financial reporting, it might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect the Company’s financial results and the market price of its common stock.
Changes in credit markets or to the Company’s credit rating could impact its ability to obtain financing for business operations or result in increased borrowing costs and interest expense.
The Company’s credit ratings reflect each credit rating agency’s opinion of its financial strength, operating performance and ability to meet its debt obligations at the time such opinion is issued. The Company utilizes the short- and long-term debt markets to obtain capital from time to time. Adverse changes in the Company’s 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 the Company’s operating flexibility. Macroeconomic conditions, such as continued or increased volatility or disruption in the credit markets, may adversely affect the Company’s ability to refinance existing debt or obtain additional financing for working capital, capital expenditures or fund new acquisitions.
Future issuances of shares of the Company’s common stock may cause significant dilution of equity interests of existing holders of common stock and decrease the market price of shares of the Company’s common stock.
The Company has previously issued options that are exercisable or convertible into a significant number of shares of its common stock. Should existing holders of options exercise their options for shares of the Company’s common stock, it may cause significant dilution of equity interests of existing holders of the Company’s common stock and reduce the market price of shares of the Company’s common stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item
1B.
Unresolved Staff Comments.
Not applicable.

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ITEM 2. PROPERTIES
Item
2.
Properties.
The Company’s executive offices are leased pursuant to a lease originally entered into in December 2006 as amended. The lease covers approximately 11,000 square feet of office space located at 98 Spit Brook Road, Suite 100 in Nashua, New Hampshire. The lease expires in February 2023 with monthly base rent of $17,901. Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses and obtain insurance for the facility.
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, as amended. The operating lease commenced in September 2012 and expires in March 2023, with monthly base rent payments of $53,816 until March 31, 2022 and monthly base rent payments of $55,520 from April 2022 until March 2023. 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 and office space in Lyon, France.
If the Company is required to seek additional or replacement facilities, it believes there are adequate facilities available at commercially reasonable rates.

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ITEM 3. LEGAL PROCEEDINGS
Item
3.
Legal Proceedings.
From time to time, we may be involved in various legal proceedings and subject to claims that arise in the ordinary course of business. Although the results of litigation and claims are inherently unpredictable and uncertain, we are not currently a party to any material legal proceedings.

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ITEM 4. MINE SAFETY DISCLOSURE
Item
4.
Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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”.
As of March 21, 2022, there were 89 holders of record of the Company’s common stock.
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.
Information with respect to the Company’s equity compensation plans in effect at December 31, 2021 will be included in the Company’s 2022 Proxy Statement and is incorporated herein by reference.
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 tax authorities on behalf of our employees. The Company did not have any repurchases of securities in the year ended December 31, 2021.
Item
.
Reserved
.
Item
.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
.
The following discussion and analysis of the Company’s financial condition and results and operations should be read in conjunction with the Company’s consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K.
Results of Operations
Overview
iCAD, Inc. is a global medical technology company providing innovative cancer detection and therapy solutions. The Company reports in two segments: Detection and Therapy.
In the Detection segment, the Company’s solutions include (i) advanced image analysis and workflow solutions that enable healthcare professionals to better serve patients by identifying pathologies and pinpointing the most prevalent cancers earlier, and (ii) a comprehensive range of high-performance, Artificial Intelligence and Computer-Aided Detection (CAD) systems and workflow solutions for 2D and 3D mammography, Magnetic Resonance Imaging (MRI) and Computed Tomography (CT).
In the Therapy segment, the Company offers the Xoft System, an isotope-free cancer treatment platform technology. The Xoft System can be used for the treatment of early-stage breast cancer, endometrial cancer, cervical cancer and nonmelanoma skin cancer.
The Company’s headquarters are located in Nashua, New Hampshire, with a manufacturing and warehousing facility in New Hampshire and an operations, research, development, manufacturing and warehousing facility in San Jose, California.
Discussion of Operating Results:
Year Ended December 31, 2021 compared to Year Ended December 31, 2020
Revenue.
Revenue for the year ended December 31, 2021 was $33.6 million compared with revenue of $29.7 million for the year ended December 31, 2020, an increase of $3.9 million, or 13.3%. Detection revenue increased by 0.1% and Therapy revenue increased by $3.9 million, or 50.9%.
The table below presents the components of revenue for 2021 and 2020 (in thousands):
For the year ended December 31,
$ Change
% Change
Detection revenue
Product revenue
$ 15,661
$ 16,291
$ (630 )
(3.9 )%
Service and supplies revenue
6,358
5,706
11.4 %
Subtotal
22,019
21,997
0.1 %
Therapy revenue
Product revenue
5,530
2,612
2,918
111.7 %
Service and supplies revenue
6,089
5,089
1,000
19.7 %
Subtotal
11,619
7,701
3,918
50.9 %
$ 33,638
$ 29,698
$ 3,940
13.3 %
Detection revenues were flat as they were approximately $22.0 million for each of the years ended December 31, 2021 and 2020, respectively.
Detection product revenue decreased by $0.6 million and Detection service revenue increased by $0.7 million. The Company believes that Detection product revenue was adversely affected in 2021 by the COVID-19
pandemic, as the typical sales cycle and ordering patterns were disrupted due to supply chain issues, travel restrictions, and some healthcare facilities’ reprioritization of resources to provide additional focus on COVID-19.
The impact on 2021 began in the second quarter and continued through the remainder of 2021 but was most acute in December. The Company is not able to predict how the COVID-19
pandemic will affect future revenue and order volume. The $0.7 million increase in Detection service revenue was due primarily to an increase in service revenue from direct customers. The Company did not see significant impact of the COVID-19
pandemic on Detection service revenue in 2021 as compared to 2020 but is not able to predict how the COVID-19
pandemic could affect future Detection service revenue.
Therapy revenue increased 50.9%, or $3.9 million, to $11.6 million for the year ended December 31, 2021 from $7.7 million in the year ended December 31, 2020.
Therapy product revenue increased by $2.9 million and Therapy service and supplies revenue increased by $1.0 million. Therapy product revenue for the year ended December 31, 2021 benefitted from reimbursement and regulatory policy changes in the dermatology market. Sales were also higher in international markets for Intraoperative Radiation Therapy indications. Therapy product revenue is related to the sale of our Xoft Systems including the Controller unit and re-usable
applicators. Therapy service revenue was positively impacted by the additional controller placement leading to more service and source contracts and consumables usage.
Gross Profit
. Gross profit was $24.2 million for the year ended December 31, 2021 compared to $21.4 million for the year ended December 31, 2020, a increase of $2.9 million, or 13.5%. Detection gross profit increased by $0.7 million from $17.9 million in the year ended December 31, 2020 to $18.5 million in the year ended December 31, 2021. Detection gross profit as a percentage of Detection revenue increased to 84% in the year ended December 31, 2021
from 81% in the year ended December 31, 2020. The increase was due primarily to an increase in high margin licenses added to existing servers rather than the lower margin license and server bundle. Therapy gross profit increased by $2.2 million from $3.5 million in the year ended December 31, 2020 to $5.7 million in the year ended December 31, 2021. Therapy gross profit as a percentage of Therapy revenue increased to 49% in the year ended December 31, 2021 from 45% in the year ended December 31, 2020. The increase was due primarily to revenue mix shifting to higher margin product revenues relative to service revenues.
Gross profit as a percentage of revenue was 72.1% for the year ended December 31, 2021 compared to 71.9% for the year ended December 31, 2020. Gross profit as a percentage of revenue is dependent on product and service mix within each segment and segment mix. The lower margin Therapy segment growing as a percentage of total revenue largely offset the margin gains within each individual segment.
The COVID-19
pandemic adversely affected revenues from both segments in the years ended December 31, 2021 and 2020, and as a result, gross profit in both segments. The primary impact of the COVID-19
pandemic started in the second quarter of 2020 and the Company undertook cost cutting measures to reduce operating expenses and manufacturing costs to offset some of the COVID-19
impact to gross profit. The Company lessened some of these cost control efforts, until COVID-19
negative impacts on revenues re-emerged
in the second quarter of 2021, as the typical sales cycle and ordering patterns were disrupted due to supply chain issues, travel restrictions, and some healthcare facilities’ reprioritization of resources to provide additional focus on COVID-19.
The impact began in the second quarter and continued through the remainder of 2021, but was most acute in December. Starting in the second quarter of 2021, the company re-introduced
cost management strategies to minimize the effect of 2021 COVID-19
impacts on gross profit. The Company is not able to predict how the COVID-19
pandemic, supply chain disruptions, macro-economic conditions and other factors will affect future gross profit.
Cost of revenue and gross profit for 2021 and 2020 were as follows (in thousands):
For the year ended December 31,
Change
% Change
Products
$ 5,653
$ 5,000
$
13.1 %
Service and supplies
3,425
2,965
15.5 %
Amortization and depreciation
(62 )
(16.4 %)
Total cost of revenue
9,395
8,344
1,051
12.6 %
Gross profit
$ 24,243
$ 21,354
$ 2,889
13.5 %
Gross profit %
72.1 %
71.9 %
For the year ended December 31,
Change
% Change
Detection gross profit
$ 18,510
$ 17,856
$
3.7 %
Therapy gross profit
5,733
3,498
2,235
63.9 %
Gross profit
$ 24,243
$ 21,354
$ 2,889
13.5 %
Operating Expenses:
Operating expenses for 2021 and 2020 were as follows (in thousands):
For the year ended December 31,
Change
% Change
Operating expenses:
Engineering and product development
$ 9,194
$ 8,114
$ 1,080
13.3 %
Marketing and sales
15,135
13,312
1,823
13.7 %
General and administrative
10,406
9,117
1,289
14.1 %
Amortization and depreciation
20.6 %
Total operating expenses
$ 34,975
$ 30,742
$ 4,233
13.8 %
Operating expenses were $35.0 million for the year ended December 31, 2021, compared to $30.7 million for the year ended December 31, 2020, an increase of $4.3 million or 13.8%. Operating expenses as a percentage of sales was 104.0% in the year ended December 31, 2021, compared to 103.5% for the year ended December 31, 2020. In early 2021, the Company reduced cost-cutting programs implemented in 2020 in response to COVID-19,
returning furloughed employees and hiring a number of employees for positions vacant in early 2021. When the impacts of COVID-19
re-emerged
in the second quarter of 2021, the Company continued to remain focused on a disciplined approach to spending.
Engineering and Product Development.
Engineering and product development costs for the year ended December 31, 2021 increased by $1.1 million, or 13.3%, from $8.1 million in 2020 to $9.2 million in 2021. The increase was largely due to increased personnel as a result of the resumption of hiring for prioritized positions in early 2021 and an increase in consulting fees.
Marketing and Sales.
Marketing and sales expense for the year ended December 31, 2021 increased by $1.8 million, or 13.7%, from $13.3 million in 2020 to $15.1 million in 2021. The increase in marketing and sales expense was due primarily to increased personnel and trade show costs after resumption of sales and marketing activity after the 2020 cost-cutting measures prompted by the COVID-19
pandemic and some additional management costs being reclassified and sales and marketing.
General and Administrative.
General and administrative expenses for the year ended December 31, 2021 increased by $1.3 million, or 14.1%, from $9.1 million in 2020 to $10.4 million in 2021. The increase was due primarily to an increase in consulting fees related to corporate strategic projects and the interim consulting CFO and to insurance premium expenses as well as board of director related expenses. Employee compensation increased, but was offset by a decrease in external service expenses as multiple functions were brought in-house.
Amortization and Depreciation.
Amortization and depreciation expenses for the year ended December 31, 2021 increased by $0.04 million, or 20.6%, from $0.20 million in 2020 to $0.24 million in 2021. The Company’s depreciable and amortizable assets have remained relatively consistent between 2021 and 2020.
Other Income, Tax and Expense (in thousands
)
:
For the year ended December 31,
Change
Change %
Interest expense
$ (141 )
$ (476 )
(70.4 )%
Interest income
(82 )
(84.5 )%
Loss on extinguishment of debt
(386 )
(341 )
(45 )
13.2 %
Loss on fair value of debentures
-
(7,464 )
7,464
(100.0 )%
Total other expense
$ (512 )
$ (8,184 )
$ 7,672
(93.7 )%
Income tax expense
$
$
(37 )
(97.4 )%
Interest Expense.
The Company recorded $0.1 million of interest expense in the year ended December 31, 2021 as compared with $0.5 million of interest expense in the year ended December 31, 2020. The Western Alliance debt facility was fully paid and extinguished in April 2021.
Interest income.
Interest income of $0 million and $0.1 million for the years ended December 31, 2021 and 2020, respectively, reflects income earned from our money market accounts.
Loss on Extinguishment of Debt.
The Company recorded a loss on extinguishment of debt of $0.4 million and $0.3 million for the years ended December 31, 2021 and 2020, respectively. The loss in 2021 was due to the April 27, 2021 extinguishment of the Loan and Security Agreement with Western Alliance Bank, originally issued on March 30, 2020. The loss in 2020 was due to the March 30, 2020, extinguishment of the amended Loan and Security Agreement with Silicon Valley Bank, entered into in August 2017.
Loss on fair value of debentures.
The Company recorded a loss of $7.5 million in 2020, which reflected an increase in the fair value of the unsecured subordinated convertible debentures (the “Convertible Debentures”) liability from approximately $13.7 million at December 31, 2019 to $21.2 million at February 21, 2020, the forced conversion date. Upon the consummation of the forced conversion, the Company issued 1,816,466 shares of common stock with a fair value of approximately $21.2 million, and the Convertible Debenture liability was reclassified to stockholders’ equity.
Tax expense.
The Company had tax expense of $1,000 for the year ended December 31, 2021 as compared to tax expense of $38,000 for the year ended December 31, 2020.
Discussion of Operating Results:
Year Ended December 31, 2020 compared to Year Ended December 31, 2019
Revenue.
Revenue for the year ended December 31, 2020 was $29.7 million compared with revenue of $31.3 million for the year ended December 31, 2019, a decrease of $1.6 million, or 5.2%. Detection revenue decreased by $0.3 million and Therapy revenue decreased by $1.3 million.
The table below presents the components of revenue for 2020 and 2019 (in thousands):
Twelve months ended December 31,
$ Change
% Change
Detection revenue
Product revenue
$ 16,291
$ 16,788
$ (497 )
(3.0 )%
Service revenue
5,706
5,531
3.2 %
Subtotal
21,997
22,319
(322 )
(1.4 )%
Therapy revenue
Product revenue
2,612
2,979
(367 )
(12.3 )%
Service revenue
5,089
6,042
(953 )
(15.8 )%
Subtotal
7,701
9,021
(1,320 )
(14.6 )%
Total revenue
$ 29,698
$ 31,340
$ (1,642 )
(5.2 )%
Detection revenues decreased by $0.3 million, or 1.4%, from $22.3 million for the year ended December 31, 2019 to $22.0 million for the year ended December 31, 2020.
Detection product revenue decreased by $0.5 million and Detection service revenue increased by $0.2 million. The Company believes that Detection product revenue was adversely affected in 2020 by the COVID-19
pandemic, as the typical sales cycle and ordering patterns were disrupted due to some healthcare facilities’
additional focus on COVID-19.
The primary impact occurred during the second and third quarters of 2020. The total impact was partially offset by an increase in revenue in the fourth quarter of 2020 as compared to the fourth quarter of 2019. The Company is not able to predict how the COVID-19
pandemic will affect future revenue and order volume. The $0.2 million increase in Detection service revenue was due primarily to an increase in service revenue from direct customers. The Company did not see a significant impact of the COVID-19
pandemic on Detection service revenue in 2020 as compared to 2019 but is not able to predict how the COVID-19
pandemic could affect future Detection service revenue.
Therapy revenue decreased 14.6%, or $1.3 million, to $7.7 million for the year ended December 31, 2020 from $9.0 million in the year ended December 31, 2019.
Therapy product revenue decreased by $0.4 million and Therapy service revenue decreased by $1.0 million. Therapy product revenue for the year ended December 31, 2020 was adversely affected by the COVID-19
pandemic, due to stay-at-home
and social distancing orders as well as the uncertainty in the market. Therapy product revenue is related to the sale of our Xoft Systems and can vary significantly from quarter to quarter due to changes in the number of units sold, and the average selling price. We expect Therapy sales to continue to vary as the sales of controller units can represent a significant component of Therapy product revenue. We believe Therapy service revenue was negatively impacted primarily due to the lack of ability to treat patients, mostly in the second and third quarters, due to the additional focus by healthcare professionals on the COVID-19
pandemic.
Gross Profit
. Gross profit was $21.3 million for the year ended December 31, 2020 compared to $24.2 million for the year ended December 31, 2019, a decrease of $2.9 million, or 11.9%. Detection gross profit decreased by $0.8 million from $18.6 million in the year ended December 31, 2019 to $17.8 million in the year ended December 31, 2020. Detection gross profit as a percentage of Detection revenue decreased to 81.2% in the year ended December 31, 2020 from 84% in the year ended December 31, 2019. The decrease was due primarily to higher installation costs and equipment costs to support processing of higher resolution and increased volume of 3D images. Therapy gross profit decreased by $2.1 million from $5.6 million in the year ended December 31, 2019 to $3.5 million in the year ended December 31, 2020. This decrease is largely due to Therapy revenue being adversely affected by the COVID-19
pandemic, due to stay-at-home
and social distancing orders as well as the uncertainty in the market. Therapy gross profit as a percentage of Therapy revenue decreased to 45% in the year ended December 31, 2020 from 62% in the year ended December 31, 2019.
Gross profit as a percentage of revenue was 71.9% for the year ended December 31, 2020 compared to 77.3% for the year ended December 31, 2019. Gross profit as a percentage of revenue will fluctuate due to the costs related to manufacturing, amortization and the impact of product mix in each segment.
The COVID-19
pandemic adversely affected revenues from Detection products and the Therapy segment in the year ended December 31, 2020, and as a result, gross profit in both segments. The primary impact of the COVID-19
pandemic was felt during the second and third quarters of 2020. However, the Company continued to follow steps taken during the second and third quarters of 2020 to reduce operating expenses, including cutting non-essential
travel, implementing employee furloughs and terminations, reducing employee salaries by 10%, and cancelling most in-person
trade shows. These measures offset some of the impact on gross profit caused by COVID-19.
Salary reductions, employee furloughs, and certain other of these measures were ended in the fourth quarter of 2020.
Cost of revenue and gross profit for 2020 and 2019 were as follows (in thousands):
Twelve months ended December 31,
Change
% Change
Products
$ 5,000
$ 3,278
$ 1,722
52.5 %
Service and supplies
2,965
3,438
(473 )
(13.8 )%
Amortization and depreciation
(18 )
100.0 %
Total cost of revenue
$ 8,344
$ 7,113
$ 1,231
17.3 %
Gross profit
$ 21,354
$ 24,227
$ (2,873 )
(11.9 )%
profit %
71.9 %
77.3 %
For the year ended December 31,
Change
% Change
Detection gross profit
$ 17,856
$ 18,627
$ (771 )
(4.1 )%
Therapy gross profit
3,498
5,600
(2,102 )
(37.5 )%
Gross profit
$ 21,354
$ 24,227
$ (2,873 )
(11.9 )%
Operating Expenses:
Operating expenses for 2020 and 2019 were as follows (in thousands):
Year ended December 31,
Change
Change %
Operating expenses:
Engineering and product development
$ 8,114
$ 9,271
$ (1,157 )
(12.5 )%
Marketing and sales
13,312
13,634
(322 )
(2.4 )%
General and administrative
9,117
7,443
1,674
22.5 %
Amortization and depreciation
(77 )
(27.9 )%
Total operating expenses
$ 30,742
$ 30,624
$
0.4 %
Operating expenses were $30.7 million for the year ended December 31, 2020, compared to $30.6 million for the year ended December 31, 2019, an increase of $0.1 million or 0.4%. The Company was able to keep operating expenses relatively flat after implementing ongoing cost-cutting measures prompted by the COVID-19
pandemic in the second quarter of 2020. These cost-cutting measures followed increased expenditures in the year ended December 31, 2019 as the Company invested in additional commercial resources prior to the onset of the COVID-19
pandemic.
Engineering and Product Development.
Engineering and product development costs for the year ended December 31, 2020 decreased by $1.2 million, or 12.5%, from $9.3 million in 2019 to $8.1 million in 2020.The decrease was largely due to decreased personnel as a result of the cost-cutting measures prompted by the COVID-19
pandemic.
Marketing and Sales.
Marketing and sales expense for the year ended December 31, 2020 decreased by $0.3 million, or 2.4%, from $13.6 million in 2019 to $13.3 million in 2020. The decrease in marketing and sales expense was due primarily to decreased personnel and trade show costs through the implementation of cost-cutting measures prompted by the COVID-19
pandemic. The decrease was offset by an increase in costs in the first three months of the year when the Company invested in additional commercial resources to help drive sales of new Detection products prior to the onset of the COVID-19
pandemic.
General and Administrative.
General and administrative expenses for the year ended December 31, 2020 increased by $1.7 million, or 22.5%, from $7.4 million in 2019 to $9.1 million in 2020. The increase was due primarily to an
increase in stock compensation and legal expenses and was offset by cost-cutting measures prompted by the COVID-19
pandemic.
Amortization and Depreciation.
Amortization and depreciation expenses for the year ended December 31, 2020 decreased by $0.1 million, or 27.9%, from $0.3 million in 2019 to $0.2 million in 2020. The Company’s depreciable and amortizable assets have remained relatively consistent between 2020 and 2019.
Other Income, Tax and Expense (in thousands)
:
Year ended December 31,
Change
Change %
Interest expense
$ (476 )
$ (784 )
$
(39.3 )%
Interest income
(247 )
(71.8 )%
Loss on extinguishment of debt
(341 )
-
(341 )
0.0 %
Loss on fair value of debentures
(7,464 )
(6,671 )
(793 )
11.9 %
$ (8,184 )
$ (7,111 )
$ (1,073 )
15.1 %
Tax expense
$
$
$ (5 )
(11.6 )%
Interest Expense.
The Company recorded $0.5 million of interest expense in the year ended December 31, 2020 as compared with $0.8 million of interest expense in the year ended December 31, 2019.
Interest income.
Interest income of $0.1 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively, reflects income earned from our money market accounts.
Loss on fair value of debentures.
The Company recorded a loss of $7.5 million in 2020, which reflected an increase in the fair value of the unsecured subordinated convertible debentures (the “Convertible Debentures”) liability from approximately $13.7 million at December 31, 2019 to $21.2 million at February 21, 2020, the forced conversion date. Upon the consummation of the forced conversion, the Company issued 1,816,466 shares of common stock with a fair value of approximately $21.2 million, and the Convertible Debenture liability was reclassified to stockholders’ equity.
Tax expense.
The Company had tax expense of $38,000 for the year ended December 31, 2020 as compared to tax expense of $43,000 for the year ended December 31, 2019.
Segment Analysis
The Company operates in and reports results for two segments: Detection and 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, 2021, 2020, and 2019 are below (in thousands):
Year Ended December 31,
Segment revenues:
Detection
$ 22,019
$ 21,997
$ 22,319
Therapy
11,619
7,701
9,021
Total Revenue
$ 33,638
$ 29,698
$ 31,340
Segment gross profit:
Detection
$ 18,510
$ 17,856
$ 18,627
Therapy
5,733
3,498
5,600
Total gross profit
$ 24,243
$ 21,354
$ 24,227
Year Ended December 31,
Segment operating income (loss):
Detection
$ 1,563
$ 2,719
$ 2,564
Therapy
(1,835 )
(3,028 )
(1,476 )
Segment operating income (loss)
$ (272 )
$ (309 )
$ 1,088
General administrative
$ (10,460 )
$ (9,079 )
$ (7,486 )
Interest expense
(141 )
(476 )
(784 )
Loss on extinguishment of debt
(386 )
(341 )
-
Other income
Fair value of convertible debentures
-
(7,464 )
(6,671 )
Loss before income tax
$ (11,244 )
$ (17,572 )
$ (13,508 )
Detection gross profit increased to approximately $18.5 million, or 84% of revenue, for the year ended December 31, 2021 from $17.9 million, or 81% of revenue, for the year ended December 31, 2020. The increase in Detection gross profit was due primarily to the decrease in Detection cost of goods related to changes in product mix. Detection segment operating income for the year ended December 31, 2021 decreased by $1.1 million to $1.6 million from $2.7 million for the year ended December 31, 2020. The decrease in Detection segment operating income was due primarily to an increase in operating expenses relative to the increase in revenues. Detection operating expenses increased by $1.8 million to $16.9 million for the year ended December 31, 2021 from $15.1 million for the year ended December 31, 2020.
Detection gross profit decreased to approximately $17.9 million, or 81% of revenue, for the year ended December 31, 2020 from $18.6 million, or 84% of revenue, for the year ended December 31, 2019. The decrease in Detection gross profit was due primarily to the decrease in Detection revenue. Detection segment operating income for the year ended December 31, 2020 increased by $0.1 million to $2.7 million from $2.6 million for the year ended December 31, 2020. The increase in Detection segment operating income was due primarily to a decrease in operating expenses. Detection operating expenses decreased by $1.0 million to $15.1 million for the year ended December 31, 2021 from $16.1 million for the year ended December 31, 2020.
Therapy gross profit increased by approximately $2.2 million to $5.7 million, or 49% of revenue, for the year ended December 31, 2021 from approximately $3.5 million or 45% of revenue for the year ended December 31, 2020. The increase in Therapy gross profit was largely due to the $3.9 million increase in revenue. Therapy operating expenses decreased by $1.1 million to $7.6 million for the year ended December 31, 2021 from $6.5 million for the year ended December 31, 2020. Therapy segment operating loss decreased to $1.8 million for the year ended December 31, 2021 from $3.0 million for the year ended December 31, 2020. The decrease in Therapy segment operating loss was due primarily to the $2.2 million increase in gross profit partially offset by the increase in operating expenses.
Therapy gross profit decreased by approximately $2.1 million to $3.5 million, or 45% of revenue, for the year ended December 31, 2020 from approximately $5.6 million or 62% of revenue for the year ended December 31, 2019. The decrease in Therapy gross profit was partly due to the $1.3 million reduction in revenue and increased costs incurred prior to the implementation of cost-cutting measures in response to the COVID-19
pandemic. Therapy operating expenses decreased by $0.5 million to $6.6 million for the year ended December 31, 2020 from $7.1 million for the year ended December 31, 2029. Therapy segment operating loss increased to $3.0 million for the year ended December 31, 2020 from $1.5 million for the year ended December 31, 2019. The increase in Therapy segment operating loss was due primarily to the decreased revenue of $1.3 million.
Liquidity and Capital Resources
The Company believes that its cash and cash equivalents balance of $34.3 million as of December 31, 2021 and projected cash balances are sufficient to sustain operations through at least the next 12 months following the filing of this Form 10-K.
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.
On April 27, 2020, the Company issued 1,562,500 shares of common stock to several institutional investors at a price of $8.00 per share in a registered direct offering. The gross proceeds of the offering were approximately $12.5 million, and the Company received net proceeds of approximately $12.3 million. The Company entered into an at-the-market
offering program with JMP Securities (the “ATM”) to provide for additional potential liquidity. The Company’s ATM facility provided for the sale of common stock having a value of up to $25.0 million. On December 17, 2020 the company sold 470,704 shares of common stock under the ATM facility. The gross proceeds were approximately $6.6 million, and the Company received net proceeds of approximately $6.1 million. On March 2, 2021, the Company terminated the ATM.
On March 2, 2021, the Company entered into an underwriting agreement with Guggenheim Securities, LLC, as representative of the several underwriters thereto, in connection with an underwritten public offering of 1,393,738 shares of the Company’s common stock at an offering price of $18.00 per share. The Offering closed on March 5, 2021 for gross proceeds of approximately $25.1 million and net proceeds of approximately $23.2 million to the Company.
The Company had net working capital of $35.3 million at December 31, 2021. The ratio of current assets to current liabilities at December 31, 2021 and 2020 was 3.36 and 2.53, respectively.
Net cash used for operating activities for the year ended December 31, 2021 was $9.4 million, compared to $7.0 million for 2020.
The net cash used for investing activities for the year ended December 31, 2021 was $0.6 million compared to $0.5 million for the year ended December 31, 2020. The cash used for investing activities in both 2021 and 2020 was due primarily to purchases of fixed assets.
Net cash provided by financing activities for the year ended December 31, 2021 was $17.1 million, which was primarily related to the aforementioned public offering resulting in net proceeds of $23.2 offset by the debt repayment (see below). Net cash provided by financing activities for the year ended December 31, 2020 was $19.3 million, which was primarily related to the registered direct offering resulting in net proceeds of $12.3 million and the sale of stock related to the ATM resulting in net proceeds of $6.1 million.
The CARES Act allowed employers to defer the deposit and payment of employers share of Social Security payroll taxes that would otherwise have been owed from the date of enactment of the legislation. The legislation requires that the deferred taxes be paid over the two-year
period, with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. During 2021, the Company remitted $0.2 million which represented the first half of the amount due. As of December 31, 2021, the Company has recorded a $0.1 million deferral within “Accrued and other benefits” and this amount will be remitted during 2022.
Lease Obligations:
Operating Leases:
See item 2 of this annual report on Form 10-K.
Finance 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 was depreciated over its expected life of 3 years. The lease term expired in August of 2020.
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, 2021, the remaining liability for minimum royalty obligations totaling $0.2 million is recorded within accrued expenses and accounts payable.
Notes Payable:
On March 30, 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Western Alliance Bank (the “Bank”) that provided an initial term loan (“Term Loan”) facility of $7.0 million and a $5.0 million revolving line of credit.
Obligations to the Bank under the Loan Agreement were secured by a first priority security interest in the Company’s assets, except for certain permitted liens that have priority to the Bank’s security interest by operation of law.
On April 27, 2021, the Company repaid its obligations in the aggregate amount of $7,354,283 and terminated the Loan Agreement with the Bank, and the Company’s collateral securing the facility was released. The Company accounted for this repayment and retirement as an extinguishment of the Loan Agreement. The Company recorded a loss on extinguishment of approximately $386,000 related to the repayment and retirement of the Loan Agreement. The loss on extinguishment was composed of approximately $140,000 for a prepayment fee, $122,000 for the unaccrued final payment, $65,000 termination and other fees, and $58,000 for the unamortized discount and other closing costs from origination of the loan.
Loan and Security Agreement - Silicon Valley Bank
On August 7, 2017, the Company entered into a Loan and Security Agreement with Silicon Valley Bank, which was subsequently amended several times (as amended, the “SVB Loan Agreement”). The SVB Loan Agreement provided an initial term loan facility of $6.0 million and a $4.0 million revolving line of credit.
On March 30, 2020, the Company elected to repay all outstanding obligations (including accrued interest) and retire the SVB Loan Agreement. The Company accounted for this repayment and retirement as an extinguishment of the SVB Loan Agreement. The Company also wrote off unamortized original closing costs as
of the extinguishment date. The Company recorded a loss on extinguishment of approximately $341,000 related to the repayment and retirement of the SVB Loan Agreement. The loss on extinguishment was composed of approximately $185,000 for the unaccrued final payment, the $114,000 termination fee, and $42,000 of unamortized and other closing costs.
Convertible Debentures
On December 20, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain institutional and accredited investors (the “Investors”), including, but not limited to, all directors and executive officers of the Company at the time, pursuant to which the Investors purchased Convertible Debentures with an aggregate principal amount of approximately $7.0 million in a private placement.
On February 21, 2020 (the “Conversion Date”), the conditions permitting a forced conversion were met, and the Company elected to exercise its forced conversion right under the terms of the Convertible Debentures.
As a result of this election, all of the outstanding Convertible Debentures were converted, at a conversion price of $4.00 per share, into 1,742,500 shares of the Company’s common stock. In accordance with the make-whole provisions in the Convertible Debentures, the Company also issued an additional 76,966 shares of its common stock. The make-whole amount represented the total interest which would have accrued through the maturity date of the Convertible Debentures, less the amounts previously paid, totaling $697,000. The conversion prices related to the make-whole amount were dependent on whether the Investors were related parties or unrelated third parties.
Accounting Considerations and Fair Value Measurements Related to the Convertible Debentures
The Company had previously elected to make a one-time, irrevocable
election to utilize the fair value option to account for the Convertible Debentures as a single hybrid instrument at its fair value, with changes in fair value from period to period being recorded either in current earnings, or as an element of other comprehensive income (loss), for the portion of the change in fair value determined to relate to the Company’s own credit risk. The Company believed that the election of the fair value option allowed for a more meaningful representation of the total fair value of its obligation under the Convertible Debentures and allowed for a better understanding of how changes in the external market environment and valuation assumptions impact such fair value.
As of the December 31, 2019 valuation and the prior measurement dates, the Company utilized a Monte Carlo simulation model to estimate the fair value of the Convertible Debentures. The simulation model was designed to capture the potential settlement features of the Convertible Debentures, in conjunction with simulated changes in the Company’s stock price and the probability of certain events occurring. The simulation utilized 100,000 trials or simulations to determine the estimated fair value.
The simulation utilized the assumptions that if the Company was able to exercise its forced conversion right (if the requirements to do so were met), that it would do so in 100% of such scenarios. Additionally, if an event of default occurred during the simulated trial (based on the Company’s probability of default), the Investors would opt to redeem the Convertible Debentures in 100% of such scenarios. If neither event occurred during a simulated trial, the simulation assumed that the Investor would hold the Convertible Debentures until the maturity date. The value of the cash flows associated with each potential settlement were discounted to present value in each trial based on either the risk-free rate (for an equity settlement) or the effective discount rate (for a redemption or cash settlement).
The Company also recorded a final adjustment to the Convertible Debentures based on their fair value on the Conversion Date, just prior to the forced conversion being completed. Given that the Company’s prior simulation model included the assumption that the Company would elect to force conversion in 100% of scenarios when the requirements were met, the final valuation was based on the actual results of the forced conversion. As such, the
Company based the final fair value adjustment of approximately $7.5 million to the Convertible Debentures just prior to conversion on the number of shares of common stock that were issued to the Investors upon conversion and the fair value of the Company’s common stock as of the Conversion Date in 2020.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the U.S. requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes.
The U.S. Securities and Exchange Commission (“SEC”) requires companies to provide additional disclosure and commentary on their most critical accounting policies and estimates. The SEC has defined critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results and requires management to make its most significant estimates and judgments in the preparation of its Consolidated Financial Statements. The SEC has defined critical accounting estimates as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of a company.
Revenue Recognition
The Company recognizes revenue under the provisions of ASU 2014-09,
Revenue from Contracts with Customers
(“ASC 606”). The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 explains that to achieve the core principle, an entity should take the following actions:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price
Step 5: Recognize revenue when or as the entity satisfies a performance obligation
The Company’s contracts with customers may include promises to transfer multiple products and services to a customer. Identifying 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 the Company sells 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.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents management’s estimate for potential uncollectible accounts receivable. This estimate is developed from management’s ongoing credit evaluation of Company customers and a detailed review of its outstanding accounts receivable balances.
Inventory
Inventory consists of finished products, work-in-process,
and raw materials. The Company values its inventory at the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead and is determined using the first-in,
first-out
(FIFO) method. On a quarterly basis, management reviews inventory quantities on hand and analyzes the provision for excess and obsolete inventory based primarily on product expiration dating and estimated sales forecast, which is based on sales history and anticipated future demand.
Goodwill
Goodwill represents the amount of consideration paid in connection with business acquisitions in excess of the fair value of assets acquired and liabilities assumed. The Company performs an annual impairment test each year on October 1 using both qualitative and quantitative methods and assumptions. The quantitative test utilizes a combination of both the market and income approach. The most significant estimates in the income approach relate to management’s assumptions to calculate a present value of estimated future cash flows.
Stock Based Compensation
The Company uses the Black-Scholes option pricing model to value stock options which requires extensive use of accounting judgment and financial estimates, including estimates of the expected term participants will retain their 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.
Other Commitments
Other Commitments include non-cancelable
purchase orders with key suppliers executed in the normal course of business.
Effect of New Accounting Pronouncements
See note 3 in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
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. For international sales, the majority of those customers pay 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.
Financial Statements and Supplementary Data.
See Financial Statements attached hereto.
Item
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
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, 2021.
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, 2021, 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, 2021.
(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 year ended December 31, 2021, 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.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item
.
Directors, Executive Officers and Corporate Governance
.
The information required by this Item 10 of Form 10-K
will be included in the Company’s 2022 Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for the Company’s 2022 Annual Meeting of Stockholders (the “2022 Proxy Statement”) and is incorporated herein by reference.
Item
.
Executive Compensation
.
The information required by this Item 11 of Form 10-K
will be included in the Company’s 2022 Proxy Statement and is incorporated herein by reference.
Item
.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
.
The information required by this Item 12 of Form 10-K
will be included in the Company’s 2022 Proxy Statement and is incorporated herein by reference.
Item
.
Certain Relationships and Related Transactions, and Director Independence
.
The information required by this Item 13 of Form 10-K
will be included in the Company’s 2022 Proxy Statement and is incorporated herein by reference.
Item
.
Principal Accounting Fees and Services
.
The information required by this Item 14 of Form 10-K
will be included in the Company’s 2022 Proxy Statement and is incorporated herein by reference.
PART IV
Item
.
Exhibits, Financial Statement Schedules.
a) The following documents are filed as part of this Annual Report on Form 10-K:
i.
Financial Statements - See Index on page
ii.
Financial Statement Schedule - See Index on page.
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:
Underwriting Agreement, dated March 2, 2021, by and between iCAD, Inc. and Guggenheim Securities, LLC (incorporated by reference to Exhibit 1.1 to the Current Report on Form 8-K filed with the SEC on March 5, 2021).
3(a)
Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed with the SEC on August 6, 2015).
3(b)
Amended and Restated By-laws (incorporated by reference to Exhibit 3(b) to the Current Report on Form 10-K filed with the SEC on March 17, 2008.
3(c)
Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on July 21, 2021).
Description of Registrant’s Securities
10(a)
2016 Stock Incentive Plan as Amended as of July 2021 (incorporated by reference to Appendix B to the definitive proxy statement on Form DEF14A filed with the SEC on June 7, 2021).*
10(b)
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 of Quarterly Report on Form 10-Q filed with the SEC on November 15, 2014).
10(c)
Lease Agreement, dated December 6, 2006, between the Company 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 Annual Report on Form 10-K filed with the SEC on March 22, 2007).
10(d)
Employment Agreement between the Company and Michael Klein dated January 13, 2020 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on January 17, 2020).*
10(e)
Amendment to Employment Agreement, dated March 26, 2020, between iCAD, Inc. and Michael Klein (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on May 29, 2020).*
10(f)
Employment Agreement, dated May 26, 2020, between the Company and Stacey Stevens (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on May 29, 2020).*
10(g)
Employment Agreement, dated May 26, 2020, between the Company and Jonathan Go (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the SEC on May 29, 2020). *
10(h)
First Amendment to Lease, dated September 19, 2016, between the Company and The Irvine Company (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on September 21, 2016).
10(i)
2012 Stock Incentive Plan (incorporated by reference to Appendix B to the definitive proxy statement on Form DEF14A filed with the SEC on April 9, 2012).*
10(j)
Amendment No. 1 to the 2012 Stock Incentive Plan (incorporated by reference to Appendix A to the definitive proxy statement on Form DEF14A filed with the SEC on April 2, 2014).*
10(k)
2019 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the definitive proxy statement on Form DEF14A filed with the SEC on November 8, 2019).
10(l)
Loan and Security Agreement, dated as of March 30, 2020, by and between Western Alliance Bank, iCAD, Inc., Xoft, Inc. and Xoft Solutions LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on March 31, 2020).
10(m)
First Amendment to Loan and Security Agreement, dated June 16, 2020, between iCAD, Inc., Xoft, Inc., Xoft Solutions LLC and Western Alliance Bank (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the SEC on August 7, 2020).
10(n)
Employment agreement dated August 4, 2021, by and between iCAD, Inc. and Charles Carter (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on August 6, 2021).
21.1
Subsidiaries
23.1
Consent of BDO USA, LLP, Independent Registered Public Accounting Firm.
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020, (ii) Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019, (iii) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019, and (v) Notes to Consolidated Financial Statements.
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
* 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.
Form 10-K
Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
iCAD, INC.
Date: March 28, 2022
By:
/s/ Stacey Stevens
Stacey Stevens
Chief Executive Officer, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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
Date
/s/ Stacey Stevens
Stacey Stevens
Chief Executive Officer, President, Director,
(Principal Executive Officer)
March 28, 2022
/s/ Charles R. Carter
Charles R. Carter
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 28, 2022
/s/ Michael Klein
Michael Klein
Chairman, Director
March 28, 2022
/s/ Dana Brown
Director
March 28, 2022
Dana Brown
/s/ Timothy Norris Irish
Director
March 28, 2022
Timothy Norris Irish
/s/ Nathaniel Dalton
Director
March 28, 2022
Nathaniel Dalton
/s/ Rakesh Patel
Director
March 28, 2022
Rakesh Patel, MD
/s/ Andy Sassine
Director
March 28, 2022
Andy Sassine
/s/ Susan Wood
Director
March 28, 2022
Susan Wood, Ph.D.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (BDO USA, LLP Boston, Massachusetts PCAOB #243)
Consolidated Balance Sheets As of December 31, 2021 and 2020
Consolidated Statements of Operations For the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Stockholders’ Equity For the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows For the years ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
-F-35
Report of Independent Registered Public Accounting Firm
Shareholders 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”) as of December 31, 2021
and 2020
, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021
, 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 at December 31, 2021
and 2020
, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021
,
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition - Identification of distinct performance obligations in certain customer agreements
As described in Note 2 to the consolidated financial statements, certain of the Company’s revenue contracts with customers may include promises to transfer multiple products and services to a customer and identifying distinct performance obligations that should be accounted for separately versus together may require significant judgment. For these revenue contracts, the Company accounts for the individual products and services separately if they are distinct.
We identified the determination of distinct performance obligations within certain agreements as a critical audit matter. Significant judgment can be required to determine the performance obligations in a contract with a customer and whether they are distinct. Auditing these transactions involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters.
The primary procedures we performed to address this critical audit matter included:
•
Evaluating management’s accounting policies and practices, including the reasonableness of management’s judgments and assumptions related to the identification of each distinct performance obligation and its pattern of delivery.
•
Testing a sample of these revenue agreements together with their underlying documents to evaluate management’s identification of each distinct performance obligation and its respective pattern of revenue recognition.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 1989.
Boston, Massachusetts
March 28, 2022
iCAD, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
December 31,
Assets
(in thousands except shares and per share data)
Current assets:
Cash and cash equivalents
$ 34,282
$ 27,186
Trade accounts receivable, net of allowance for doubtful accounts of $268 in 2021 and $111 in 2020
8,891
10,027
Inventory, net
4,171
3,144
Prepaid expenses and other current assets
2,962
1,945
Total current assets
50,306
42,302
Property and equipment:
Equipment
7,121
6,765
Leasehold improvements
Furniture and fixtures
Marketing assets
7,988
7,522
Less accumulated depreciation and amortization
7,106
6,778
Property and equipment, net
Other assets:
Operating lease assets
1,059
1,758
Other assets
1,527
Intangible assets, net of accumulated amortization of $8,724 in 2021 and $8,494 in 2020
Goodwill
8,362
8,362
Total other assets
11,003
12,536
Total assets
$ 62,191
$ 55,582
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$ 2,779
$ 2,869
Accrued and other expenses
5,642
7,039
Lease payable, current
Deferred revenue, current
5,652
6,117
Total current liabilities
14,962
16,751
Lease payable, long-term
1,075
Deferred revenue, long-term
Notes payable, long-term
-
6,960
Deferred tax
Total liabilities
15,674
25,057
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $ .01 par value: authorized 1,000,000 shares; none issued.
-
-
Common stock, $ .01 par value: authorized 60,000,000 shares; issued 25,326,086 in 2021
and 23,694,406 in 2020. Outstanding 25,140,255 in 2021 and 23,508,575 in 2020.
Additional paid-in
capital
300,859
273,639
Accumulated deficit
(253,180 )
(241,935 )
Treasury stock at cost, 185,831 shares in 2021 and 2020
(1,415 )
(1,415 )
Total stockholders’ equity
46,517
30,525
Total liabilities and stockholders’ equity
$ 62,191
$ 55,582
See accompanying notes to consolidated financial statements.
iCAD, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31,
(in thousands except per share data)
Revenue:
Products
$ 21,191
$ 18,903
$ 19,767
Service and supplies
12,447
10,795
11,573
Total revenue
33,638
29,698
31,340
Cost of Revenue:
Products
5,653
5,000
3,278
Service and supplies
3,425
2,965
3,438
Amortization and depreciation
Total cost of revenue
9,395
8,344
7,113
Gross profit
24,243
21,354
24,227
Operating expenses:
Engineering and product development
9,194
8,114
9,271
Marketing and sales
15,135
13,312
13,634
General and administrative
10,406
9,117
7,443
Amortization and depreciation
Total operating expenses
34,975
30,742
30,624
Loss from operations
(10,732 )
(9,388 )
(6,397 )
Other expense
Interest expense
(141 )
(476 )
(784 )
Interest income
Loss on extinguishment of debt
(386 )
(341 )
-
Loss on fair value of convertible debentures
-
(7,464 )
(6,671 )
Other expense, net
(512 )
(8,184 )
(7,111 )
Loss before income tax expense
(11,244 )
(17,572 )
(13,508 )
Income tax expense
Net loss and comprehensive loss
$ (11,245 )
$ (17,610 )
$ (13,551 )
Net loss per share:
Basic
$ (0.45 )
$ (0.80 )
$ (0.74 )
Diluted
$ (0.45 )
$ (0.80 )
$ (0.74 )
Weighted average number of shares used in computing net loss per share:
Basic
24,778
22,140
18,378
Diluted
24,778
22,140
18,378
See accompanying notes to consolidated financial statements.
iCAD, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(in thousands except shares)
Common Stock
Additional
Paid-in
Capital
Number of
Shares Issued
Par Value
Accumulated
Deficit
Treasury
Stock
Stockholders’
Equity
Balance at December 31, 2018
17,066,510
$
$ 218,914
$ (210,774 )
$ (1,415 )
$ 6,896
Issuance of common stock relative to vesting of restricted stock, net of 29,887 shares forfeited for tax obligations
167,843
(198 )
-
-
(196 )
Issuance of common stock pursuant to stock option plans
429,980
1,396
-
-
1,400
Issuance of common stock, net
1,881,818
9,334
-
-
9,353
Stock-based compensation
-
-
1,169
-
-
1,169
Net Loss
-
-
-
(13,551 )
-
(13,551 )
Balance at December 31, 2019
19,546,151
$
$ 230,615
$ (224,325 )
$ (1,415 )
$ 5,071
Issuance of common stock relative to vesting of restricted stock, net of 20,247 shares forfeited for tax obligations
97,830
-
(225 )
-
-
(225 )
Issuance of common stock pursuant to stock option plans
155,149
-
-
Issuance of common stock, net
2,033,204
18,264
-
-
18,284
Issuance of common stock pursuant employee stock purchase plan
42,606
-
-
Issuance of common stock upon conversion of debentures
1,819,466
21,146
-
-
21,164
Stock-based compensation
-
-
2,844
-
-
2,844
Net loss
-
-
-
(17,610 )
-
(17,610 )
Balance at December 31, 2020
23,694,406
$
$ 273,639
$ (241,935 )
$ (1,415 )
$ 30,525
Issuance of common stock relative to vesting of restricted stock, net of 5,196 shares forfeited for tax obligations
44,706
(60 )
-
-
(59 )
Issuance of common stock pursuant to stock option plans
168,450
1,025
-
-
1,027
Issuance of common stock, net
1,393,738
23,215
-
-
23,229
Issuance of common stock pursuant to employee stock purchase plan
24,786
-
-
-
Stock-based compensation
-
-
2,783
-
-
2,783
Net loss
-
-
-
(11,245 )
-
(11,245 )
Balance at December 31, 2021
25,326,086
$
$ 300,859
$ (253,180 )
$ (1,415 )
$ 46,517
See accompanying notes to consolidated financial statements.
iCAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
(in thousands)
Cash flow from operating activities:
Net loss
$ (11,245 )
$ (17,610 )
$ (13,551 )
Adjustments to reconcile net loss to net cash used for operating activities:
Amortization
Depreciation
Bad debt provision
Stock-based compensation expense
2,783
2,844
1,169
Amortization of debt discount and debt costs
Loss on extinguishment of debt
-
Deferred tax
Loss on disposal of assets
-
-
Change in fair value of convertible debentures
-
7,464
6,671
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable
(302 )
(3,478 )
Inventory
(1,027 )
(533 )
(1,024 )
Prepaid and other assets
(1,390 )
Accounts payable
(90 )
Accrued and other expenses
(2,123 )
(207 )
Deferred revenue
(291 )
Total adjustments
1,837
10,625
6,444
Net cash used for operating activities
(9,408 )
(6,985 )
(7,107 )
Cash flow used for investing activities:
Additions to patents, technology and other
(24 )
(13 )
(10 )
Additions to property and equipment
(563 )
(461 )
(296 )
Net cash used for investing activities
(587 )
(474 )
(306 )
Cash flow from financing activities:
Issuance of common stock for cash, net
23,229
18,285
9,353
Issuance of common stock pursuant to Employee Stock Purchase Plan
-
Issuance of common stock pursuant to stock option plans
1,027
1,400
Taxes paid related to restricted stock issuance
(59 )
(225 )
(196 )
Principal payments of capital lease obligations
-
-
(16 )
Proceeds from notes payable
6,957
-
Principal repayment of notes payable
(7,363 )
(4,638 )
(2,000 )
Debt issuance costs
-
(42 )
-
Proceeds from line of credit
-
3,000
Repayment of line of credit
-
(2,775 )
(1,000 )
Net cash provided by financing activities
17,091
19,332
10,541
Increase in cash and equivalents
7,096
11,873
3,128
Cash and equivalents, beginning of year
27,186
15,313
12,185
Cash and equivalents, end of year
$ 34,282
$ 27,186
$ 15,313
Supplemental disclosure of cash flow information:
Interest paid
$
$
$
Taxes paid
$ -
$
$
Right-of-use
assets obtained in exchange for new operating lease liabilities
3,105
Issuance of common stock upon conversion of debentures
$ -
21,164
-
See accompanying notes to consolidated financial statements.
iCAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 -
Organization and Business
iCAD, Inc. and subsidiaries (the “Company” or “iCAD”) is a global medical technology company providing innovative cancer detection and therapy solutions.
The Company operates in two segments: Cancer Detection (“Detection”) and Cancer Therapy (“Therapy”). In the detection segment, offered solutions include advanced artificial intelligence and image analysis 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 systems and workflow solutions for digital breast tomosynthesis, full-field digital mammography, magnetic resonance imaging and computed tomography. In the Therapy segment, the Company offers the Xoft System, which is a cancer treatment platform technology incorporating a miniaturized, isotope-free radiation source. The Company’s commercial products are cleared with the United States Food and Drug Administration and various global regulatory agencies and use of iCAD’s products are reimbursable in the U.S. under federal and most third-party insurance programs. The Company sells its products throughout the world through its direct sales organization as well as through various OEM partners, distributors, technology platform partners, and resellers. See Note 14 of these consolidated financial statements for segment, major customer and geographical information.
The Company maintains its headquarters and a separate manufacturing facility in Nashua, New Hampshire, an operations, research, development, manufacturing and warehousing facility in San Jose, California, and an office in Lyon, France.
Note 2 -
Significant Accounting Policies
Use of Estimates
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, liabilities, revenues and expenses during the reporting period and disclosure of contingent assets and liabilities at the date of the financial statements. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Xoft, Inc., Xoft Solutions, LLC, and iCAD France, LLC. All material inter-company transactions and balances have been eliminated in consolidation.
Risk and Uncertainty
On March 12, 2020, the World Health Organization declared COVID-19
to be a pandemic. In an effort to contain and mitigate the spread of the COVID-19
pandemic, the United States and most countries of the world have imposed some level of unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19.
As a provider of devices and services to the health care industry, the Company’s operations have been materially affected in all periods presented. Significant uncertainty remains as to the continuing impact of the COVID-19
pandemic on the Company’s operations and on the global economy. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to
return to prior levels. The COVID-19
pandemic has resulted in significant financial market volatility and uncertainty. A continued or worsening level of market disruption and volatility seen since the start of the pandemic will have an adverse effect on the Company’s ability to access capital, on the Company’s business, results of the Company’s operations and financial condition, and on the market price of the Company’s common stock. The Company’s results for the years ended December 31, 2021 and 2020, as well as all quarterly results beginning with Q1 2020 through Q4 2021, reflect a negative impact from the COVID-19
pandemic, including but not limited to healthcare customers and potential customers providing additional focus on COVID-19;
pandemic-related public health impacts, including significant shifts in workforce availability and priorities, on customer, supplier, and iCAD’s business processes; and effects on healthcare customers and potential customers of pandemic related supply chain issues. The Company’s quarterly results for the quarter ending March
31, 2022
, and possibly future quarters, could reflect a continued negative impact from the COVID-19
pandemic for similar or additional reasons.
Although the Company did not see any material impact to trade accounts receivable losses in the year ended December 31, 2021, the Company’s exposure may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19
pandemic, or other customer-specific factors. The Company has historically not experienced significant trade account receivable losses, but it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade account receivables as clinical customers’ cash flows are impacted by their response to the COVID-19
pandemic as well as public health considerations impacting their underlying businesses.
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 and which are unrestricted as to timing or method of withdrawal. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits of $250,000 per depositor. Historically, the Company has not experienced any losses related to these balances
Financial instruments
Financial instruments consist of cash and cash equivalents, trade accounts receivable, contract assets, accounts payable, accrued and other expenses and notes payable. Due to their short-term nature and market rates of interest, the carrying amounts of the financial instruments approximated fair value as of December 31, 2021 and 2020.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are customer obligations due under normal trade terms. Credit limits are initially established through a process of reviewing the financial history and stability of each customer and the Company performs continuing credit evaluations of its customers’ financial condition and generally does not require collateral. Included in accounts receivable at December 31, 2021 are unbilled receivables of approximately $0.4 million which are scheduled to
be invoiced in 2022.
The Company’s policy is to maintain allowances for potential losses resulting from the inability of a portion 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 allowance for doubtful accounts. An amount is written off against the allowance after all attempts to collect the receivable have failed.
Based on the information available, the Company believes the allowance for doubtful accounts as of December 31, 2021 and 2020 is adequate.
Inventory
The Company uses the first-in,
first-out
method to track inventory, which is valued at the lower of cost or net realizable value. The
Company regularly reviews inventory quantities on hand and records an inventory reserve for excess and/or obsolete inventory primarily based upon the estimated usage of its inventory, as well as other factors.
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, which is generally three to five years, except for leasehold improvements, which are depreciated over the shorter of the term of the lease, or useful life of the asset.
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 or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Factors the Company considers important, which could trigger an impairment of Goodwill, include the following:
•
significant and sustained underperformance relative to historical or projected future operating results;
•
significant changes in the manner or use of the Company’s assets in the strategy for the Company’s overall business;
•
significant negative industry or economic trends;
•
significant and sustained decline in the Company’s stock price; and
•
a decline in the Company’s market capitalization below net book value.
The two reporting units within iCAD are its segments, Detection and Therapy.
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.
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.
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 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.
The Company performed the annual impairment assessment at October 1, 2021 and compared the fair value of each reporting unit to its carrying value as of this date. The fair value of the Detection reporting unit exceeded the carrying value.
Accordingly,
no impairment of goodwill was recorded. 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 an
d
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
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
the following factors are examples of events or changes in circumstances that indicate th
e 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.
The Company did
not record any impairment charges on its long-lived assets for the years ended December
31,
2021 or December
31,
2020.
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.
Leases
Per ASC 842, the Company determines if an arrangement contains a lease at inception. A lease is an operating or financing contract, or part of a contract, that conveys the right to control the use of an identified tangible asset for a period of time in exchange for consideration.
At lease inception, the Company recognizes a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as for lease incentives. In determining the present value of the lease payments, the Company uses its incremental borrowing rate, determined by estimating the Company’s applicable, fully collateralized borrowing rate, with adjustment as appropriate for lease term. The lease term at the lease commencement date is determined based on the non-cancellable
period for which the Company has the right to use the underlying asset, together with any periods covered by an extension option if the Company is reasonably certain to exercise that option.
Right-of-use
assets and obligations for leases with an initial term of 12 months or less are considered short term and are a) not recognized in the consolidated balance sheet and b) recognized as an expense on a straight-line basis over the lease term. The Company does not sublease any of its leased assets to third parties and the Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. The Company has lessor agreements that contain lease and non-lease
components, but the Company is accounting for the complete agreement under ASC 606 after determining that the non-lease
component is the predominant component of these agreements.
ASC 842 includes a number of reassessment and re-measurement
requirements for lessees based on certain triggering events or conditions. There were no impairment indicators identified during the year ended December 31, 2021 that would require impairment testing of the Company’s right-of-use
assets.
Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and certain non-lease
components that transfer a distinct service to the Company, such as common area maintenance services. The Company has elected to separate the accounting for lease components and non-lease
components for real estate and equipment leases.
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 has granted performance based restricted stock 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. The Company estimates forfeitures based on historical experience with pre-vested
forfeitures. To the extent actual forfeitures differ from the estimate, the difference is recorded to compensation expense in the period of the forfeiture. 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.
Revenue Recognition
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services and 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. The Company applies the following five steps to guide revenue recognition:
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 into master service agreements that define general terms but are not customer commitments to purchase 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 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. A good or service is distinct if both a) 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 b) 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 the goods or services meet the criteria to be distinct. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation. While the Company does not typically sell options to purchase goods or services at a predetermined price, doing so would represent a material right and require analysis to determine if the material right is a distinct performance obligation. The Company has sold one contract with a material right that is a distinct performance obligation.
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 Stand-alone Sales 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 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. Revenue is recognized when control of the promised goods or services is transferred to a customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. For iCAD’s typical product revenue, control typically transfers upon shipment as 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. Perpetual 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.
Goods and Services Classifications
Products
. Product revenue consists of sales of cancer detection perpetual licenses, 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. 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.
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 the Company’s 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 and identifying 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 the Company sells 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.
Assets Recognized from the Costs to Obtain a Contract with a Customer
The Company recognizes incremental costs of obtaining a contract with a customer as an asset if the Company expects the benefit of those costs to be longer than one year and as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less.
Right to Invoice
Where applicable, the Company recognizes 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 Company has a right to invoice.
Sales and Other Similar Taxes
The Company excludes sales taxes and similar taxes from the measurement of transaction price and ensures compliance w
ith
the disclosure requirements of ASC 235.
Significant Financing Component
The Company does 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.
Promised Goods or Services that are Immaterial in the Context of a Contract
The Company assesses materiality of promised goods or services as performance obligations in the context of a contract and the Company does not aggregate and assess immaterial items at the entity level. 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 it recognizes revenue at the amount to which it has the right to invoice for services performed.
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 any applicable medical device tax.
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 costs have not historically been material to the Company’s consolidated financial statements.
Engineering and Product Development Costs
Engineering and product development costs relate to research and development efforts including Company sponsored clinical trials are expensed as incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2021, 2020 and 2019 was approximately $689,000, $274,000, and $1,101,000, respectively.
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, 2021 and 2020, 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. See note 13 of these consolidated financial statements for detailed information.
Note 3 - Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, “Financial
Instruments-Credit Losses (Topic 326)” (“ASU 2016-13”),
which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13
replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. These changes will result in earlier recognition of credit losses. In November 2019, the FASB elected to defer the adoption date of ASU 2016-13
for public business entities that meet the definition of a smaller reporting company to fiscal years beginning after December 15, 2022. Early adoption of the guidance in ASU 2016-13
is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-13
will have on its consolidated financial
statements.
In December 2019, the FASB issued ASU 2019-12,
“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”).
ASU 2019-12
is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify US GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is
effective for the Company for the fiscal year and interim periods therein beginning January 1, 2021. The Company notes that the adoption of ASU 2019-12 resulted
in the reclassification of an immaterial amount from income tax expense to non-income tax
included in operating expenses related to the accounting for state and franchise taxes, with no impact to the Company’s consolidated loss, equity or cash flows.
Note 4 - Fair Value Measurements
The Company follows the provisions of FASB ASC Topic 820, “Fair Value Measurement and Disclosures
” (“ASC 820”), which 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 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company applies the fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, 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
The assigned level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Money market funds included in cash and cash equivalents in the accompanying balance sheet are considered a Level 1 measurement as they are valued at quoted market prices in active markets.
The following table sets forth the Company’s assets which are measured at fair value on a recurring basis by level within the fair value hierarchy (in thousand):
Fair Value Measurements (in thousands) as of December 31, 2021
Level 1
Level 2
Level 3
Total
Assets
Money market accounts
$ 30,573
-
-
$ 30,573
Total Assets
$ 30,573
-
-
$ 30,573
Fair Value Measurements (in thousands) as of December 31, 2020
Level 1
Level 2
Level 3
Total
Assets
Money market accounts
$ 24,635
$ -
$ -
$ 24,635
Total Assets
$ 24,635
$ -
$ -
$ 24,635
The following is a roll forward of the Company’s Level 3 instruments for the years ended December 31, 2021 and 2020:
Convertible Debentures
Balance, December 31, 2019
$ 13,642
Issuances
-
Fair value adjustments
7,522
Conversion
(21,164 )
Balance, December 31, 2020
$ -
There were no
Level 3 instruments measured at fair value at December 31, 2021 or December 31, 2020.
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. There were no items measured at fair value on a nonrecurring basis as of or during the years ended December 31, 2021 and 2020.
Note 5 - Revenue
Disaggregation of Revenue
The following tables presents the Company’s revenues disaggregated by major good or service line, timing of revenue recognition and sales channel, reconciled to its reportable segments (in thousands).
Year ended December 31, 2021
Reportable Segments
Detection
Therapy
Total
Major Goods/Service Lines
Products
$ 15,661
$ 7,924
$ 23,585
Service contracts
6,358
1,517
7,875
Supply and source usage agreements
-
2,089
2,089
Professional services
-
$ 22,019
$ 11,619
$ 33,638
Timing of Revenue Recognition
Goods transferred at a point in time
$ 15,584
$ 8,012
$ 23,596
Services transferred over time
6,435
3,607
10,042
$ 22,019
$ 11,619
$ 33,638
Sales Channels
Direct sales force
$ 14,713
$ 4,421
$ 19,134
OEM partners
7,306
-
7,306
Channel partners
-
7,198
7,198
$ 22,019
$ 11,619
$ 33,638
Year ended December 31, 2020
Reportable Segments
Detection
Therapy
Total
Major Goods/Service Lines
Products
$ 16,291
$ 4,535
$ 20,826
Service contracts
5,661
1,333
6,994
Supply and source usage agreements
-
1,804
1,804
Professional services
-
Other
-
$ 21,997
$ 7,701
$ 29,698
Timing of Revenue Recognition
Goods transferred at a point in time
$ 16,332
$ 4,624
$ 20,956
Services transferred over time
5,665
3,077
8,742
$ 21,997
$ 7,701
$ 29,698
Sales Channels
Direct sales force
$ 13,809
$ 3,773
$ 17,582
OEM partners
8,188
-
8,188
Channel partners
-
3,928
3,928
$ 21,997
$ 7,701
$ 29,698
Year ended December 31, 2019
Reportable Segments
Detection
Therapy
Total
Major Goods/Service Lines
Products
$ 16,788
$ 4,957
$ 21,745
Service contracts
5,370
1,814
7,184
Supply and source usage agreements
-
2,036
2,036
Professional services
-
Other
$ 22,319
$ 9,021
$ 31,340
Timing of Revenue Recognition
Goods transferred at a point in time
$ 16,949
$ 5,391
$ 22,340
Services transferred over time
5,370
3,630
9,000
$ 22,319
$ 9,021
$ 31,340
Sales Channels
Direct sales
$ 11,968
$ 5,804
$ 17,772
OEM partners
10,351
-
10,351
Channel partners
-
3,217
3,217
$ 22,319
$ 9,021
$ 31,340
Contract Balances
Contract liabilities are a component of deferred revenue, current contract assets are a component of prepaid and other assets and non-current
contract assets are a component of other assets. The following table provides information about receivables, current and non-current
contract assets, and contract liabilities from contracts with customers (in thousands).
Balance at
December 31, 2021
Balance at
December 31, 2020
Receivables, which are included in ‘Trade accounts receivable’
$ 8,891
$ 10,027
Current contract assets, which are included in “Prepaid and other assets”
$ 1,895
$
Non-current
contract assets, which are included in “other assets”
$
$ 1,434
Contract liabilities, which are included in “Deferred revenue”
$ 6,093
$ 6,384
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 Company records net contract assets or contract liabilities on a contract-by-contract
basis. The Company records a contract asset for unbilled revenue when the Company’s performance exceeds amounts billed or billable. The Company classifies the net contract asset as either current or non-current
based on the expected timing of the Company’s right to bill under the terms of the contract. The current contract asset balance primarily relates to the net unbilled revenue balances with two significant customers, which the Company expects to be able to bill for within one year. The non-current
contract asset balance consists of net unbilled revenue balances with two customers which the Company expects to be able to bill for in more than one year.
Contract liabilities, or 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 the Company has been paid in advance and earn the revenue when it transfers control of the product or service.
Changes in deferred revenue from contracts with customers were as follows (in thousands):
Year Ended
December 31, 2021
Year Ended
December 31, 2020
Balance at beginning of period
$ 6,384
$ 5,604
Deferral of revenue
12,315
11,212
Recognition of deferred revenue
(12,606 )
(10,432 )
Balance at end of period
$ 6,093
$ 6,384
The Company expects to recognize estimated revenues related to performance obligation that are unsatisfied (or partially satisfied) in the amounts of approximately $7.1 million in 2022, $1.2 million in 2023, $1.0 million in 2024, and $1.0 million in 2025.
Assets Recognized from the Costs to Obtain a Contract with a Customer
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. Certain commission programs implemented by
the Company require costs to be capitalized. The Company has classified the capitalized costs to obtain a contract as a component of prepaid expenses and other current assets as of December 31, 2021 and 2020, respectively.
Changes in the balance of capitalized costs to obtain a contract were as follows (in thousands):
Years Ended December 31,
Balance at beginning of period
$
$
Deferral of costs to obtain a contract
Recognition of costs to obtain a contract
(353 )
(130 )
Balance at end of period
$
$
Note 6 - Net Loss per Common Share (1o)
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):
Net loss available to common shareholders
$ (11,245 )
$ (17,610 )
$ (13,551 )
Basic shares used in the calculation of earnings per share
24,778
22,140
18,378
Effect of dilutive securities:
Stock options
-
-
-
Restricted stock
-
-
-
Diluted shares used in the calculation of earnings per share
24,778
22,140
18,378
Net loss per share
:
Basic
$ (0.45 )
$ (0.80 )
$ (0.74 )
Diluted
$ (0.45 )
$ (0.80 )
$ (0.74 )
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:
Year Ended December 31,
Common stock options
2,486,511
1,869,507
1,550,662
Restricted Stock
29,166
150,909
Convertible Debentures
-
-
1,742,500
2,487,386
1,898,673
3,444,071
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.
Note 7 - Allowance for Doubtful Accounts
The rollforward of the Company’s allowance for doubtful accounts for the years ended December 31 is as follows (in thousands):
Balance at beginning of period
$
$
$
Additions charged to costs and expenses
Reductions
(10 )
(119 )
(103 )
Balance at end of period
$
$
$
Note 8 - Inventories
Inventory balances at December 31, 2021 and 2020 were as follows
(in thousands):
December 31, 2021
December 31, 2020
Raw materials
$ 2,962
$ 1,538
Work in process
Finished Goods
1,279
1,774
Inventory Gross
4,414
3,388
Inventory Reserve
(243 )
(244 )
Inventory Net
$ 4,171
$ 3,144
Note 9 - Goodwill and Intangible assets
At December 31, 2021 and 2020, all of the Company’s goodwill of $8,362,000 is allocated to its Detection reporting. There were no additions, impairments or other changes to the Company’s goodwill balance for either of the years ended December 31, 2021 or 2020.
Amortization expense related to intangible assets was approximately $230,000, $309,000 and $377,000 for the years ended December 31, 2021, 2020, and 2019, respectively.
Weighted
average
useful life
Gross Carrying Amount
Patents and licenses
$
$
$
5 years
Technology
8,257
8,257
8,257
10 years
Customer relationships
7 years
Tradename
10 years
Total amortizable intangible assets
9,407
9,383
9,369
Accumulated Amortization
Patents and licenses
$
$
$
Technology
7,769
7,571
7,299
Customer relationships
Tradename
Total accumulated amortization
8,724
8,494
8,186
Total amortizable intangible assets, net
$
$
$ 1,183
Estimated remaining amortization of the Company’s intangible assets is as follows (in thousands):
For the years ended
December 31:
Estimated
amortization
expense
$
Note 10 - Accrued and Other expenses
Accrued and other expenses consist of the following at December 31 (in thousands):
Accrued salary and related expenses
$ 2,016
$ 3,654
Accrued accounts payable
2,838
2,405
Accrued professional fees
Other accrued expenses
$
5,642
$
7,039
Note 11 -
Leases
The Company has leases for office space and office equipment. The leases expire at various dates through 2024. In connection with the 2019 lease amendment for the Nashua headquarters, the Company was eligible for $110,160 of lease incentives. During 2021 the leasehold improvements were completed and the Company received the related lease incentives in cash resulting in an increase to the lease payable.
In October 2021, the Company extended the term of its Nashua warehouse until 2024. This resulted in an increase of approximately $79,000 to the Company’s right of use asset and related lease liability.
Year Ended December 31,
Lease Cost
Classification
Operating lease cost - Right of Use
Operating expenses
$
$
Operating lease cost - Variable Costs
Operating expenses
Total
$ 1,048
$ 1,049
Year Ended December 31,
Cash paid for operating cash flows from operating leases
$
$
As of December 31,
Weighted-average remaining lease term of operating leases (in years)
1.33
2.21
Weighted-average discount rate for operating leases
5.5 %
5.6 %
Maturities of the Company’s lease liabilities as of December 31, 2021 were as follows (in thousands):
Year Ended December 31:
Total
Total lease payments
1,200
Less: imputed interest
(45 )
Total lease liabilities
1,155
Less: current portion of lease liabilities
(889 )
Long-term lease liabilities
$
Note 12 - Stockholders’ Equity
(a) Financing Activity
On April 27, 2020, the Company issued 1,562,500 shares of common stock to several institutional investors at a price of $8.00 per share in a registered direct offering. The gross proceeds of the offering were approximately $12.5 million, and the Company received net proceeds of approximately $12.3 million. The Company also entered into an at-the-market
offering program with JMP Securities (the “ATM”) to provide for additional potential liquidity. The Company’s ATM facility provided
for the sale of common stock having a value of up to $25.0 million. On December 17, 2020 the company sold 470,704 shares of common stock under the ATM facility. The gross proceeds were approximately $6.6 million, and the Company received net proceeds of approximately $6.1 million which is net of brokerage fees and offering costs to open the ATM. On March 2, 2021, the Company terminated the ATM offering program with JMP Securities
On March 2, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Guggenheim Securities, LLC, as representative of the several underwriters (the “Underwriters”), in connection with an underwritten public offering of 1,393,738 shares of the Company’s common stock, at a public offering price of $18.00 per share (the “Offering”). The Underwriting Agreement contained
customary representations, warranties and covenants by the Company, indemnification obligations of the Company and the Underwriters, including for liabilities under the Securities Act, other obligations of the parties and termination provisions. In exchange for the Underwriters’ services, the Company agreed to sell the shares to the Underwriters at a purchase price of $16.92 per share and to reimburse the representative of the Underwriters for up to $125,000 of its expenses in connection with the Offering. The Offering closed March 5, 2021. The net proceeds to the Company from the Offering were approximately $23.2 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.
(b) Stock Options
The Company has two effective stock option or stock incentive plans, the 2012 Stock Incentive Plan (the “2012 Plan”) and the 2016 Stock Incentive Plan (the “2016 Plan”) (collectively the “Stock Plans”). Each of the Stock Plans provide 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. All awards granted under the Stock Plans are required to be granted at not less
than 100% of the fair market value of the related award on the respective grant date. Awards under the Stock Plans may be granted to employees, directors and advisors to the Company and its subsidiaries.
At December 31, 2021, there were 37,871 shares available for issuance under the 2012 Plan.
At
the Company’s 2021
annual meeting, the 2016
Plan was amended to increase the number of shares of common stock available thereunder from 2,600,000 to 4,700,000. At December 31
, 2021
, there were 1,718,200 shares available for issuance under the 2016
Plan.
Number of
Shares
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
Outstanding, December 31, 2019
1,550,662
$ 4.33
Granted
563,502
$ 10.09
Exercised
(155,149 )
$ 4.70
Forfeited
(89,508 )
$ 2.51
Outstanding, December 31, 2020
1,869,507
$ 5.91
6.0 Years
Granted
865,938
$ 16.33
Exercised
(168,450 )
$ 6.10
Forfeited
(80,484 )
$ 13.74
Outstanding, December 31, 2021
2,486,511
$ 9.27
5.42 Years
Exercisable at December 31, 2019
881,461
$ 4.43
Exercisable at December 31, 2020
1,540,287
$ 5.55
Exercisable at December 31, 2021
1,619,855
$ 6.47
The Company’s stock-based compensation expense, including options and restricted stock by category is as follows (amounts in thousands):
Year Ended December 31,
Cost of revenue
$
$
$
Engineering and product development
Marketing and sales
General and administrative expense
1,627
1,781
$
2,783
$
2,844
$
1,168
As of December 31, 2021, there was approximately $4.3 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 1.7 years.
Options granted under the stock incentive plans were valued utilizing the Black-Scholes model using the following assumptions and had the following fair values:
Year Ended December 31,
Average risk-free interest rate
0.42 %
0.65 %
1.88 %
Expected dividend yield
None
None
None
Expected life
3.5
years
3.5
years
3.5 years
Expected volatility
65.57-67.4
%
50.17-66.04
%
50.01% to 54.23 %
Weighted average fair value
$
7.22
$4.37
$2.34
The Company’s 2021, 2020 and 2019 average expected volatility and average expected life is based on
the Company’s historical information. The risk-free rate is based on the rate of U.S. Treasury zero-coupon
issues with a term most closely approximating 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:
Intrinsic value of stock options
Year Ended December 31,
Outstanding
$ 3,820
$ 13,626
$ 5,465
Exercisable
$ 3,730
$ 11,786
$ 3,067
Exercised
$ 1,453
$ 1,037
$
Company’s stock price at December 31
$ 7.20
$ 13.20
$ 7.77
(c) 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. All of the Company’s restricted stock grants in 2021 and 2019 had time-based vesting requirements. The grant date fair value for restricted stock awards is based on the quoted market value of Company stock on the grant date.
A summary of unvested restricted stock activity for the Stock Plans is follows:
Year Ended December 31,
Beginning outstanding balance
29,166
150,909
423,202
Granted
22,488
-
15,990
Vested
(50,779 )
(118,077 )
(197,730 )
Forfeited
-
(3,666 )
(90,553 )
Ending outstanding balance
29,166
150,909
(d) Employee Stock Purchase Program:
In December 2019, the Company’s Board of Directors adopted, and the stockholders approved the 2019 Employee Stock Purchase Plan (“ESPP”), effective January 1, 2020. The ESPP provides for the issuance of up 950,000 shares of common stock, subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The ESPP may be terminated or amended by the Board of Directors at any time. Certain amendments to the ESPP require stockholder approval.
Substantially all of the Company’s employees whose customary employment is for more than 20 hours a week are eligible to participate in the ESPP. Any employee who owns 5% or more of the voting power or value of the Company’s shares of common stock is ineligible to participate in the ESPP.
Any eligible employee can enroll in the Plan as of the beginning of a respective quarterly accumulation period. Employees who participate in the ESPP may purchase shares by authorizing payroll deductions of up to 15% of their base compensation during an accumulation period. Unless the participating employee withdraws from participation, accumulated payroll deductions are used to purchase shares of common stock on the last business day of the accumulation period (the “Purchase Date”) at a price equal to 85% of the lower of the fair market value on (i) the Purchase Date or (ii) the first day of such accumulation period. Under applicable tax rules, no employee may purchase more than $25,000 worth of common stock, valued at the start of the purchase period, under the ESPP in any calendar year.
The Company issued 24,786 and 42,606 shares of common stock under the ESPP for the years ended December 31, 2021 and 2020, respectively. 882,608 shares of Company common stock are reserved for issuance under the ESPP as of December 31, 2021.
Note 13 - Income Taxes
Income Taxes
The components of income tax expense for the years ended December 31 are as follows (in thousands):
Current provision:
Federal
$ -
$ -
$ -
State
-
Foreign
-
-
-
$ -
$
$
Deferred provision:
Federal
$
$
$
State
-
-
-
Foreign
-
-
-
$
$
$
Total
$
$
$
The Company adopted ASU 2019-12 as
of January 1, 2021. In accordance with this standard non-income
and state franchise taxes are now classified as a component of operating expenses in General and Administrative expense. Income based tax expense will continue to be recognized as tax expense in the Consolidated Financial Statements. Tax expense for the year ended December 31, 2020 represents non-income
and state franchise tax, however, the expense was not reclassified to operating expenses in accordance with ASU 2019-12.
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 is as follows:
Federal statutory rate
21.0 %
21.0 %
21.0 %
State income taxes, net of federal benefit
5.2 %
2.4 %
1.7 %
Net state impact of deferred rate change
0.8 %
(0.7 %)
(0.2 %)
Stock compensation expense
1.3 %
0.9 %
(10.7 %)
Other permanent differences
(0.1 %)
(0.1 %)
0.0 %
Change in valuation allowance
(24.4 %)
(13.4 %)
(6.0 %)
Tax credits
3.1 %
1.4 %
2.8 %
Accrual to TR
(1.4 %)
0.0 %
1.3 %
FV Mark to market on convertible notes
0.0 %
(9.0 %)
(10.4 %)
Foreign Rate Differential
0.0 %
0.0 %
0.2 %
True Ups - NOL Expiration/162(m) limits
(5.4 %)
(2.8 %)
0.0 %
Effective income tax
0.1 %
(0.3 %)
(0.3 %)
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, 2021 and 2020 (in thousands):
Inventory (Section 263A)
$
$
Inventory reserves
Receivable reserves
Other accruals
1,081
Deferred revenue
Accumulated depreciation/amortization
Stock options
Developed technology
1,242
1,449
Tax credits
4,176
3,859
NOL carryforward
38,383
36,078
Lease Liability
Deferred tax assets
46,259
43,789
Valuation allowance
(45,994 )
(43,356 )
Right of Use Asset
(265 )
(433 )
Goodwill tax amortization
(5 )
(4 )
Deferred tax liability
$ (5 )
$ (4 )
The increase in the net deferred tax assets and corresponding valuation allowance during the
year ended December 31, 2021 and December 31, 2020 is primarily attributable to net operating losses and research and development credits.
As of December 31, 2021, the Company has federal net operating loss carryforwards totaling approximately $159.0 million. Federal net operating loss carryforwards totaling $120.1 million will expire at various dates from 2022 and 2037. The remaining $39.0 million of the federal net operating losses generated since December 31, 2017 can be carried forward indefinitely. As of December 31, 2021, 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. There were no net operating losses utilized for the years ended December 31, 2021, 2020, or 2019.
The Company currently has approximately $5.2 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 $4.2 million. The credits expire in various years through 2041. The Company has additional tax credits of $1.8 million related to Xoft which have been fully reserved for and as a result no deferred tax asset has been recorded. These credits expire in various years through 2030.
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, 2021 and 2020, 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, 2021, 2020 and 2019. The Company files United States federal and various state income
tax returns. The Company also files tax returns in France. Generally, the Company’s
three preceding tax years remain subject to examination by federal and state taxing authorities. 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, 2021 will significantly change within the next 12 months.
Note 14 - Segment Reporting
(a) Segment Reporting
Operating segments are the components of our business for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executive officer. Our operating segments are generally organized by the type of product or service offered and by geography. Each reportable segment generates revenue from the sale of medical equipment and related services and/or sale of supplies. The Company has determined there are two segments: Detection and Therapy.
The Detection segment consists of the Company’s advanced image analysis and workflow products, and the Therapy segment consists of the Company’s radiation therapy products, and related services. The primary factors used by the Company’s 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 of each segment. Included in segment operating income are stock compensation, amortization of technology and depreciation expense. There are no intersegment revenues.
The Company does not track its assets by operating segment and the 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):
Year Ended December 31,
Segment revenues:
Detection
$ 22,019
$ 21,997
$ 22,319
Therapy
11,619
7,701
9,021
Total Revenue
$ 33,638
$ 29,698
$ 31,340
Segment gross profit:
Detection
$ 18,510
$ 17,856
$ 18,627
Therapy
5,733
3,498
5,600
Total gross profit
$ 24,243
$ 21,354
$ 24,227
Segment operating income (loss):
Detection
$ 1,563
$ 2,719
$ 2,564
Therapy
(1,835 )
(3,028 )
(1,476 )
Segment operating income (loss)
$ (272 )
$ (309 )
$ 1,088
General administrative
$ (10,460 )
$ (9,079 )
$ (7,486 )
Interest expense
(141 )
(476 )
(784 )
Loss on extinguishment of debt
(386 )
(341 )
-
Other income
Fair value of convertible debentures
-
(7,464 )
(6,671 )
Loss before income tax
$ (11,244 )
$ (17,572 )
$ (13,508 )
Segment depreciation and amortization included in segment operating income (loss) is as follows (in thousands):
Year Ended December 31,
Detection depreciation and amortization
Depreciation
$
$
$
Amortization
$
Therapy depreciation and amortization
Depreciation
$
$
$
Amortization
$
(b) Geographic Information
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 revenue to a single country did not exceed 10% of total revenue in any year. Total export revenues
were approximately $7.5 million or 22% of total revenue in 2021, $6.1 million or 20% of total revenue in 2020, and $3.8 million or 12% of total revenue in 2019.
As of December 31, 2021 and 2020, the Company had outstanding receivables of $3.3 million and $3.4 million, respectively, from distributors and customers of its products who are located outside of the U.S.
Percent of Export sales
Region
Europe
%
%
%
Taiwan
%
%
%
Canada
%
%
%
China
%
%
%
Other
%
%
%
Total
%
%
%
Total Export Revenue
$ 7,527
$ 6,081
$ 3,788
Significant export sales in Europe are as follows:
Percent of Export sales
Region
France
%
%
%
Spain
%
%
%
Russia
%
%
%
Switzerland
%
%
%
Italy
%
%
%
Germany
%
%
%
United Kingdom
%
%
%
(c) Major Customers
The Company had one major OEM customer, GE Healthcare, with revenues of approximately $4.8
million
in 2021, $5.0 million in 2020 and $7.6 million in 2019 or 14%, 17% and 24% of total revenue, respectively. Cancer detection products are also sold through OEM partners, including GE Healthcare, Fujifilm Medical
Systems, Siemens Medical, and Vital Images. For the year ended December 31, 2021, these four OEM partners composed approximately 29% of Detection revenues and 19% of total revenue. Detection OEM partners in total composed approximately 40% of Detection revenue and 26% of total revenue for the year ended December 31, 2021
, 37% of Detection revenue and 28% of total revenue for the year ended December 31, 2020 and 46% of Detection revenue and 33% of total revenue for the year ended December 31, 2019. The Company also had one major direct customer with revenues of approximately $.8 million, or 2% of total revenue for year ended December 31, 2021.
OEM partners represented $5.5 million or 60% of outstanding receivables as of December 31, 2021, with GE Healthcare accounting for $.7 million or 8% of this amount. The four largest Therapy customers composed 2.8 million or 31% of outstanding receivables as of December 31, 2021. The largest Detection direct customer represents $.3 million or 3% of outstanding receivables as of December 31, 2021.
These customers
in total represented $8.6 million or 94% of outstanding receivables as of December 31, 2021.
Note 15 - Commitments and Contingencies
(a)
Purchase Commitments
The Company has non-cancelable
purchase orders with key suppliers executed in the normal course of business that total approximately $7.2 million.
(b) Employment Agreements
The Company has entered into employment agreements with certain key current and former executives. The employment agreements provide for minimum annual salaries and performance-based annual bonus compensation as defined in their respective agreements. In addition, the employment agreements provide that if employment is terminated without cause, the executive will receive an amount equal to their respective base salary then in effect for (i) fifteen months from the date of termination, for Mr. Klein, CEO, (ii) eighteen months from the date of termination, for Ms. Stevens, President, and (iii) twelve months from the date of termination, for Mr. Carter, CFO, and in each case, plus the pro rata portion of any annual bonus earned in any employment year through the date of termination.
(c) 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 $0.2 million.
(d) Legal Matters
In December 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation (the “Asset Purchase Agreement”). In accordance with the Asset Purchase 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 net proceeds of approximately $2.9
million.
On September 5, 2018, third-party Yeda Research and Development Company Ltd. (“Yeda”), filed a complaint (the “Complaint”) against the Company and Invivo in the United States District Court for the Southern
District of New York, captioned Yeda Research and Development Company Ltd. v. iCAD, Inc. and Invivo Corporation, Case No.
1:18-cv-08083-GBD,
related to the Company’s sale of the VersaVue software and DynaCAD product under the Asset Purchase Agreement. Yeda alleged, among other things, that the Company infringed upon Yeda’s source code, which was originally licensed to the Company, by using it in the products that the Company sold to Invivo and that it is entitled to damages that could include, among other things, profits relating to the sales of these products. On April
13,
2021, the Company and Yeda entered into a Settlement and Release Agreement (the “Settlement Agreement”) whereby the Company furnished to Yeda a
one-time
cash payment of $
85,000 and received a full,
non-conditional
release from Yeda of any and all claims related to the Complaint and the subject of the Complaint. Neither the Company nor Invivo acknowledged any wrongdoing at any point in connection with the Complaint or the subject matter thereof. The Escrowed Amount was reserved, in part, to cover any legal expenses related to the Asset Purchase Agreement and the transactions contemplated therein. The remaining balance of the Escrowed Amount following such expenses is due and payable to the Company in accordance with the terms of the Asset Purchase Agreement. The Company and Invivo agreed that Invivo would pay $
50,000 of the Escrowed Amount and the Company expensed approximately $
93,000 in the second quarter of
2021.
In addition to the foregoing, the Company may be a party to various legal proceedings and claims arising out of the ordinary course of its business. Although the final results of all such matters and claims cannot be predicted with certainty, the Company currently believes that there are no current proceedings or claims pending against it the ultimate resolution of which would have a material adverse effect on its financial condition or results of operations, other than as set forth above. However, should the Company fail to prevail in any legal matter or should several legal matters be resolved against the Company in the same reporting period, such matters could have a material adverse effect on the Company’s operating results and cash flows for that particular period. The Company may be party to certain actions that have been filed against the Company which are being vigorously defended. The Company has determined that potential losses in these matters are neither probable or reasonably possible at this time. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450, “Contingencies.” Legal costs are expensed as incurred.
Note 16 - Notes Payable
(a) Loan and Security Agreement - Western Alliance Bank
On March 30, 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Western Alliance Bank (the “Bank”) that provided an initial term loan (“Term Loan”) facility of $7.0 million and a $5.0 million revolving line of credit.
On April 27, 2021, the Company repaid its obligations in the aggregate amount of $7,354,283 under and terminated the Loan Agreement with the Bank, and its collateral securing the facility was released.
The Company accounted for this repayment and retirement as an extinguishment of the Loan Agreement.
The Company recorded a loss on extinguishment of approximately $386,000 related to the repayment and retirement of the Loan Agreement. The loss on extinguishment was composed of approximately $140,000 for a prepayment fee, $122,000 for the unaccrued final payment, $65,000 termination and other fees, and $58,000 for the unamortized and other closing costs from origination of the loan.
(b) Loan and Security Agreement - Silicon Valley Bank
On August 7, 2017, the Company entered into a Loan and Security Agreement, (as amended, the “SVB Loan Agreement”), with Silicon Valley Bank that provided an initial term loan facility of $6.0 million and a $4.0 million revolving line of
credit.
On March 30, 2020, the Company elected to repay all outstanding obligations (including accrued interest) and retire the SVB Loan Agreement. The Company accounted for this repayment and retirement as an
extinguishment
of the SVB Loan Agreement. In addition to the outstanding principal and accrued interest, the Company was required to pay the $
510,000 final payment, a termination fee of $
114,000 and other costs totaling $
10,000. The Company also wrote off unamortized original closing costs as of the extinguishment date. In
March 2020 the Company recorded a loss on extinguishment of approximately $
341,000 related to the repayment and retirement of the SVB Loan Agreement. The loss on extinguishment was composed of approximately $
185,000 for the unaccrued final payment, $
114,000 termination fee, and $
42,000 of unamortized and other closing costs.
(c) Convertible Debentures
On December 20, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain institutional and accredited investors (the “Investors”), including, but not limited to, all directors and executive officers of the Company at the time, pursuant to which the Investors purchased unsecured subordinated convertible debentures (the “Convertible Debentures”) with an aggregate principal amount of approximately $7.0 million in a private placement.
On February 21, 2020 (the “Conversion Date”), the conditions permitting a forced conversion were met, and the Company elected to exercise its forced conversion right under the terms of the Convertible Debentures.
As a result of this election, all of the outstanding Convertible Debentures were converted, at a conversion price of $4.00 per share, into 1,742,500 shares of the Company’s common stock. In accordance with the make-whole provisions in the Convertible Debentures, the Company also issued an additional 76,966 shares of its common stock. The make-whole amount represented the total interest which would have accrued through the maturity date of the Convertible Debentures, less the amounts previously paid, totaling $697,000. The conversion prices related to the make-whole amount were dependent on whether the Investors were related parties or unrelated third parties.
Accounting Considerations and Fair Value Measurements Related to the Convertible Debentures
The Company had previously elected to make a one-time, irrevocable
election to utilize the fair value option to account for the Convertible Debentures as a single hybrid instrument at its fair value, with changes in fair value from period to period being recorded either in current earnings, or as an element of other comprehensive income (loss), for the portion of the change in fair value determined to relate to the Company’s own credit risk. The Company believed that the election of the fair value option allowed for a more meaningful representation of the total fair value of its obligation under the Convertible Debentures and allowed for a better understanding of how changes in the external market environment and valuation assumptions impact such fair value. The Company utilized a Monte Carlo simulation model to estimate the fair value of the Convertible Debentures.
The Company recorded a final adjustment to the Convertible Debentures based on their fair value on the Conversion Date, just prior to the forced conversion being completed. Given that the Company’s prior simulation model included the assumption that the Company would elect to force conversion in 100% of scenarios when the requirements were met, the final valuation was based on the actual results of the forced conversion. As such, the Company based the final fair value adjustment to the Convertible Debentures just prior to conversion on the number of shares of common stock that were issued to the Investors upon conversion and the fair value of the Company’s common stock as of the Conversion Date.
The Company
notes that the key inputs to the simulation model that were utilized to estimate the fair value of the Convertible Debentures at each valuation date included:
Input
December 31, 2019
February 21, 2020
Company’s stock price
$ 7.77
$ 11.64
Conversion price
4.00
4.00
Remaining term (years)
1.97
0.00
Equity volatility
49.00 %
N/A
Risk free rate
1.57 %
N/A
Probability of default event
0.45 %
N/A
Utilization of Forced Conversion (if available)
100.00 %
100.00 %
Exercise of Default Redemption (if available)
100.00 %
N/A
Effective discount rate
18.52 %
N/A
Represents
a Level 3 unobservable input, as defined in
Note
4 -
Fair Value Measurements, below.
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 one 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 the December 31, 2019 and February 21, 2020 valuation dates 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 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. The effective discount rate utilized at the December 31, 2019 valuation date was based on yields on CCC-rated
debt instruments with terms equivalent to the remaining term of the Convertible Debentures. The credit rating estimate was based on the implied credit rating determined at issuance and no changes were identified by the Company that would impact this assessment.
The fair value and principal value of the Convertible Debentures as of December 31, 2019 and the Conversion Date was as follows
(in thousands):
Convertible Debentures
December 31, 2019
February 21, 2020
Fair value, in accordance with fair value option
$ 13,642
$ 21,164
Principal value outstanding
$ 6,970
$ 6,970
The Company recorded a loss from the change in fair value of the Convertible Debentures of approximately $7.5 million for the year ending December 31
, 2020
. Upon the consummation of the forced conversion, the Company issued 1,816,466 shares of common stock with a fair value of approximately $21.2 million, which was reclassified to stockholders’ equity.
Note 17 - Employee Benefit Plan
The Company has a 401(k) retirement plan (the “401(k) Plan”) for the benefit of eligible employees, as defined. Each participant may elect to contribute up to 90% of his or her compensation to the 401(k) Plan each year, subject to certain Internal Revenue Service limitations. The Company makes a safe harbor matching contribution of 100% of every dollar contributed, not to exceed 3% of participants’ eligible wages. The Company contributed approximately $.5 million during each of the years ended December 31, 2021 and 2020, respectively.
Note 18 - Subsequent Events
The Company has evaluated events and transactions subsequent to the balance sheet date to the date of filing and is not aware of any events or transactions that occurred subsequent to the balance sheet date that would require recognition or disclosure in the consolidated financial statements.

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. For international sales, the majority of those customers pay 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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item
8.
Financial Statements and Supplementary Data.
See Financial Statements attached hereto.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
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, 2021.
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, 2021, 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, 2021.
(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 year ended December 31, 2021, 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.

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ITEM 9B. OTHER INFORMATION
Item 9B.
Other Information.
Not applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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ITEM 11. EXECUTIVE COMPENSATION

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES