UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-Q

(Mark One)

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

For the quarterly period ended ~~September~~June 30, ~~2017~~2018

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

For the transition period from to to

Commission file number001-09341

iCAD, Inc.

(Exact name of registrant as specified in its charter)

Delaware

02-0377419

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


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

(603)882-5200

(Registrant’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES ☒ NO ☐.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, an emerging growth company or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act) YES ☐ NO ☒.

As of the close of business on ~~November 13, 2017~~August 6, 2018 there were ~~16,511,655~~16,862,737 shares outstanding of the registrant’s Common Stock, $.01 par value.

iCAD, Inc.

INDEX


		Page

PART I	FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017		3

	Condensed Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~September~~June 30, ~~2016~~2017		4

	Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~September~~June 30, ~~2016~~2017		5

	Notes to Condensed Consolidated Financial Statements		~~6-28~~6-36

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		~~29-41~~37-49

Item 3	Quantitative and Qualitative Disclosures about Market Risk		4250

Item 4	Controls and Procedures		4250

PART II	OTHER INFORMATION

Item 1	Legal Proceedings		4351

Item 1A	Risk Factors		4351

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		4351

Item 65	~~Exhibits~~Other Information		4351

Item 6	Exhibits		52

	Signatures		4553

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands except for share data)


	September 30,			December 31,			June 30,			December 31,
	2017			2016			2018			2017
Assets
Current assets:
Cash and cash equivalents	$	11,261		$	8,585		$	7,791		$	9,387
Trade accounts receivable, net of allowance for doubtful accounts of $209 in 2017 and $172 in 2016		7,189			5,189
Trade accounts receivable, net of allowance for doubtful accounts of $138 in 2018 and $107 in 2017								6,331			8,599
Inventory, net		3,340			3,727			2,101			2,123
Prepaid expenses and other current assets		949			1,128			1,126			1,100
Assets held for sale		—			1,304

Total current assets		22,739			19,933			17,349			21,209

Property and equipment, net of accumulated depreciation of $7,245 in 2017 and $6,538 in 2016		972			1,385
Property and equipment, net of accumulated depreciation of $6,067 in 2018 and $5,889 in 2017								458			576
Other assets		53			53			53			53
Intangible assets, net of accumulated amortization of $7,333 in 2017 and $7,518 in 2016		2,055			3,183
Intangible assets, net of accumulated amortization of $7,615 in 2018 and $7,433 in 2017								1,734			1,931
Goodwill		10,128			14,097			8,362			8,362

Total assets	$	35,947		$	38,651		$	27,956		$	32,131

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,346		$	1,577		$	872		$	1,362
Accrued and other expenses		4,935			4,988			3,312			4,475
Lease payable - current portion		12			86
Notes payable - current portion		317			—
Liabilities held for sale		—			832
Lease payable—current portion								14			12
Notes payable—current portion								652			817
Deferred revenue		5,021			5,372			6,140			5,404

Total current liabilities		11,631			12,855			10,990			12,070

Other long-term liabilities		140			83			72			119
Lease payable, long-term portion		30			—			18			27
Notes payable, long-term portion		5,612			—			5,386			5,119
Deferred revenue, long-term portion		525			668			701			506
Deferred tax		12			7			2			14

Total liabilities		17,950			13,613			17,169			17,855

Commitments and Contingencies (Note 6, 7 and 9)
Commitments and Contingencies (Note 5, 6 and 8)
Stockholders’ equity:
Preferred stock, $ .01 par value: authorized 1,000,000 shares; none issued.		—			—			—			—
Common stock, $ .01 par value: authorized 30,000,000 shares; issued 16,627,705 in 2017 and 16,260,663 in 2016; outstanding 16,441,874 in 2017 and 16,074,832 in 2016		167			163
Common stock, $ .01 par value: authorized 30,000,000 shares; issued 16,853,885 in 2018 and 16,711,752 in 2017; outstanding 16,668,054 in 2018 and 16,525,681 in 2017								169			167
Additionalpaid-in capital		216,875			213,899			218,098			217,389
Accumulated deficit		(197,630	)		(187,609	)		(206,065	)		(201,865	)
Treasury stock at cost, 185,831 shares in 2017 and 2016		(1,415	)		(1,415	)
Treasury stock at cost, 185,831 shares in 2018 and 2017								(1,415	)		(1,415	)

Total stockholders’ equity		17,997			25,038			10,787			14,276

Total liabilities and stockholders’ equity	$	35,947		$	38,651		$	27,956		$	32,131

See accompanying notes to condensed consolidated financial statements.

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands except for per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Revenue:
Products	$	3,426		$	2,014		$	9,225		$	7,460		$	3,194		$	2,668		$	6,208		$	5,799
Service and supplies		3,574			3,989			10,975			11,950			2,968			3,741			6,267			7,401

Total revenue		7,000			6,003			20,200			19,410			6,162			6,409			12,475			13,200
Cost of revenue:
Products		636			236			1,349			611			537			293			995			713
Service and supplies		1,458			1,370			4,169			3,911			739			1,327			1,991			2,711
Amortization and depreciation		263			296			847			899			102			286			207			584

Total cost of revenue		2,357			1,902			6,365			5,421			1,378			1,906			3,193			4,008

Gross profit		4,643			4,101			13,835			13,989			4,784			4,503			9,282			9,192

Operating expenses:
Engineering and product development		2,254			2,360			7,060			6,835			2,057			2,232			5,396			4,806
Marketing and sales		2,580			2,322			8,172			7,379			2,006			2,690			4,172			5,592
General and administrative		1,944			1,783			6,067			5,586			1,583			2,089			3,641			4,123
Amortization and depreciation		107			288			345			867			77			116			160			238
Gain on sale of MRI assets		—			—			(2,508	)		—			—			—			—			(2,508	)
Goodwill and long-lived asset impairment		4,700			—			4,700			—

Total operating expenses		11,585			6,753			23,836			20,667			5,723			7,127			13,369			12,251

Loss from operations		(6,942	)		(2,652	)		(10,001	)		(6,678	)		(939	)		(2,624	)		(4,087	)		(3,059	)
Interest expense		(36	)		(15	)		(51	)		(59	)		(113	)		(10	)		(255	)		(15	)
Other income		3			2			3			9			29			—			51			—

Other expense, net		(33	)		(13	)		(48	)		(50	)		(84	)		(10	)		(204	)		(15	)
Loss before income tax expense		(6,975	)		(2,665	)		(10,049	)		(6,728	)		(1,023	)		(2,634	)		(4,291	)		(3,074	)

Tax benefit (expense)		42			(10	)		28			(55	)
Tax (expense) benefit														(4	)		3			(17	)		(14	)
Net loss and comprehensive loss	$	(6,933	)	$	(2,675	)	$	(10,021	)	$	(6,783	)	$	(1,027	)	$	(2,631	)	$	(4,308	)	$	(3,088	)

Net loss per share:
Basic	$	(0.42	)	$	(0.17	)	$	(0.62	)	$	(0.43	)	$	(0.06	)	$	(0.16	)	$	(0.26	)	$	(0.19	)

Diluted	$	(0.42	)	$	(0.17	)	$	(0.62	)	$	(0.43	)	$	(0.06	)	$	(0.16	)	$	(0.26	)	$	(0.19	)

Weighted average number of shares used in computing loss per share:
Basic		16,424			15,957			16,291			15,896			16,664			16,310			16,624			16,223

Diluted		16,424			15,957			16,291			15,896			16,664			16,310			16,624			16,223

See accompanying notes to consolidated financial statements.

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)


	For the nine months ended September 30,						For the six months ended June 30,
	2017			2016			2018			2017
	(in thousands)						(in thousands)
Cash flow from operating activities:
Net loss	$	(10,021	)	$	(6,783	)	$	(4,308	)	$	(3,088	)
Adjustments to reconcile net loss to net cash used for by operating activities:
Amortization		394			753			189			264
Depreciation		798			1,013			178			558
Bad debt provision		44			133			101			34
Inventory obsolesence reserve								(7	)		44
Stock-based compensation expense		3,073			1,648			773			2,570
Amortization of debt discount and debt costs		(6	)		(13	)		102			(9	)
Interest on settlement obligations		26			69			—			26
Deferred tax expense		6			—			(13	)		4
Gain from acquisition litigation settlement		—			(249	)
Goodwill and long-lived asset impairment		4,700			—
Loss on disposal of assets		26			9			12			20
Gain on sale of MRI assets		(2,158	)		—			—			(2,158	)
Changes in operating assets and liabilities (net of the effect of acquisitions):
Changes in operating assets and liabilities:
Accounts receivable		(2,062	)		2,706			2,198			(690	)
Inventory		389			(82	)		30			204
Prepaid and other current assets		179			(483	)		91			707
Accounts payable		(231	)		(281	)		(490	)		(631	)
Accrued expenses		(23	)		78			(1,209	)		(457	)
Deferred revenue		(699	)		(2,380	)		890			(648	)

Total adjustments		4,456			2,921			2,845			(162	)

Net cash used for operating activities		(5,565	)		(3,862	)		(1,463	)		(3,250	)

Cash flow from investing activities:
Additions to patents, technology and other		(2	)		(8	)		(4	)		(2	)
Additions to property and equipment		(362	)		(248	)		(60	)		(330	)
Acquisition of VuCompM-Vu CAD		—			(6	)
Sale of MRI assets		2,850			—			—			2,850

Net cash provided by (used for) investing activities		2,486			(262	)
Net cash (used for) provided by investing activities								(64	)		2,518

Cash flow from financing activities:
Stock option exercises		57			188			—			30
Taxes paid related to restricted stock issuance		(151	)		(65	)		(63	)		(122	)
Debt issuance costs		(74	)		—
Principal payments of capital lease obligations		(77	)		(796	)		(6	)		(77	)
Proceeds from debt financing, net		6,000			—

Net cash provided by (used for) financing activities		5,755			(673	)
Net cash used for financing activities								(69	)		(169	)

Increase (decrease) in cash and equivalents		2,676			(4,797	)
Decrease in cash and equivalents								(1,596	)		(901	)
Cash and equivalents, beginning of period		8,585			15,280			9,387			8,585

Cash and equivalents, end of period	$	11,261		$	10,483		$	7,791		$	7,684

Supplemental disclosure of cash flow information:
Interest paid	$	14		$	63		$	139		$	3

Taxes paid	$	52		$	65		$	35		$	45

Escrow due from MRI asset sale	$	350		$	—

Equipment purchased under capital lease	$	42		$	—

See accompanying notes to consolidated financial statements.

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~September~~June 30, ~~2017~~2018

Note ~~1 -~~ 1—Basis of Presentation and Significant Accounting Policies

The accompanying condensed consolidated financial statements of iCAD, Inc. and subsidiaries (“iCAD” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). In the opinion of management, these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position of the Company at ~~September~~June 30, ~~2017,~~2018, the results of operations of the Company for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, and cash flows of the Company for the ~~nine~~six month ~~periods~~period ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in the footnotes prepared in accordance with US GAAP has been omitted as permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form10-K for the fiscal year ended December 31, ~~2016~~2017 filed with the SEC on March ~~24, 2017.~~30, 2018. The results for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2017,~~2018, or any future period.

Segments

The Company reports the results of two segments: Cancer Detection (“Detection”) and Cancer Therapy (“Therapy”). The Detection segment consists of our advanced image analysis and workflow products. The Therapy segment consists of our radiation therapy (“Axxent”) products, physics and management services, development fees, supplies, and fees for the AxxentHub software platform.

Revenue Recognition

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On January 1, 2018, the Company adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers” and all the related amendments (Topic 606) using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with practical expedient ASC606-10-65-1-(f)-4, which did not have a material effect on the Company’s assessment of the cumulative effect adjustment upon adoption. The Company recognized the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

A significant portion of the Company’s revenue continues to be recognized when products are shipped from manufacturing or warehousing facilities. Revenue generated from fixed fee service contracts and source agreements continues to be recognized on a straight-line basis over the term of the agreement. Revenue generated from professional service contracts entered into with customers on a time and material basis is recognized over the term of the agreement in proportion to the costs incurred in satisfying the obligations under the contract. Components of certain fixed fee service contracts are accounted for as a lease and therefore are outside the scope of Topic 606. See Note 1 for further details.

We recorded a net increase to opening retained earnings of $0.1 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the deferral of commissions on our long-term service arrangements and warranty periods greater than one year, which previously were expensed as incurred but under the amendments to ASC340-40 will generally be capitalized and amortized over the period of contract performance or a longer period if renewals are expected and the renewal commission is not commensurate with the initial commission.

The cumulative effect of the changes made to the Company’s consolidated balance sheet for the adoption of Topic 606 were as follows (in thousands):


Selected Balance Sheet	Balance at December 31, 2017			Adjustments Due to ASU 2014-09			Balance at January 1, 2018
Assets
Prepaid expenses and other current assets	$	1,100		$	147		$	1,247
Liabilities
Deferred revenue		—			409			409
Contract liabilities		5,910			(370	)		5,540
Stockholders’ equity
Accumulated deficit		(201,865	)		108			(201,973	)

In accordance with the requirements of the new standard, the disclosure of the impact of the adoption on our consolidated balance sheet and statement of operations was as follows (in thousands):

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018


	As of June 30, 2018
Selected Balance Sheet	As Reported			Balances without Adoption of ASC 606			Effect of Change Increase (Decrease)
Assets
Prepaid expenses and other current assets	$	1,126		$	888		$	(238	)
Liabilities
Accrued expenses		3,312			3,312			—
Deferred revenue		364			364			—
Contract liabilities		6,477			6,473			(4	)
Deferred tax		2			2			—
Stockholders’ equity
Accumulated deficit		(206,065	)		(206,307	)		(242	)

The impact to revenues as a result of applying Topic 606 for the three and six months ended June 30, 2018 was a decrease of $13,000 and $4,000, respectively (in thousands).


	Three months ended June 30, 2018									Six months ended June 30, 2018
Selected Statement of Operations	As Reported			Balances without Adoption of ASC 606			Effect of Change Increase (Decrease)			As Reported			Balances without Adoption of ASC 606			Effect of Change Increase (Decrease)
Revenue
Products	$	3,194		$	3,154		$	(40	)	$	6,208		$	6,157		$	51
Service and supplies		2,968			2,995			27			6,267			6,322			(55	)
Cost of revenue
Products		537			537			—			995			995			—
Service and supplies		739			739			—			1,991			1,991			—
Operating expenses
Marketing and sales		2,006			2,082			(76	)		4,172			4,410			(238	)
Interest expense		(113	)		(113	)		—			(255	)		(255	)		—
Other income		29			29			—			51			51			—
Tax benefit (expense)		(4	)		(4	)		—			(17	)		(17	)		—
Net loss		(1,027	)		(1,090	)		(63	)		(4,308	)		(4,542	)		(234	)

Revenue Recognition

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customer which are subsequently remitted to government authorities. To achieve this core principle, the Company applies the following five steps:

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

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company’s contracts are typically in the form of a purchase order. For certain large customers, the Company may also enter master service agreements which although include the terms under which the parties will enter into contracts do not require any minimum purchases and therefore, do not represent contracts until coupled with a purchase order. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

Identify the performance obligations in the contract—Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company must apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation. The Company’s contracts typically do not include options that would result in a material right. If options to purchase additional goods or services are included in customer contracts, the Company evaluates the option in order to determine if the Company’s arrangement include promises that may represent a material right and needs to be accounted for as a performance obligation in the contract with the customer. The Company did not note any significant provisions within its typical contracts that would create a material right.

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.

Allocate the transaction price to the performance obligations in the contract—If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (SSP) basis unless

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. The Company determines SSP based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, the Company estimates the SSP taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

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 ~~delivery has occurred, persuasive evidence of an arrangement exists, fees are fixed or determinable and collectability~~control of the ~~related receivable~~promised goods or services is ~~probable.~~transferred to a customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For product revenue, ~~delivery~~control has ~~occurred~~transferred upon shipment provided title and risk of loss have passed to the customer. Services and supplies ~~revenue~~ are considered to be ~~delivered~~transferred as the services are performed or over the ~~estimated life~~term of the service or supply agreement.

The Company ~~recognizes revenue from the sale~~enters into contracts that can include various combinations of ~~its digital, film-based CAD and cancer therapy~~ products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The Company’s hardware is generally highly dependent on, and interrelated with, the underlying software and the software is considered essential to the functionality of the product. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in ~~accordance~~time when ownership is transferred to the customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with ~~Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) UpdateNo. 2009-13,~~ ~~“Multiple-Deliverable~~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.

Disaggregation of Revenue ~~Arrangements” (“ASU2009-13”)~~

The following tables presents our revenues disaggregated by major good or service line, timing of revenue recognition, and ~~ASC UpdateNo. 2009-14,~~ ~~“Certain Arrangements That Contain Software Elements” (“ASU2009-14”)~~ ~~and ASC985-605,~~ ~~“Software” (“ASC985-605”)~~sales channel, reconciled to our reportable segments (in thousands). ~~Revenue from the sale of certain CAD products is~~

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~September~~June 30, ~~2017~~

2018

recognized in accordance with ASC 840 “Leases” (“ASC 840”). For multiple element arrangements, revenue is allocated to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of the selling price (“BESP”). VSOE generally exists only when the deliverable is sold separately and is the price actually charged for that deliverable. The process for determining BESP for deliverables without VSOE or TPE considers multiple factors including relative selling prices; competitive prices in the marketplace, and management judgment; however, these may vary depending upon the unique facts and circumstances related to each deliverable.
   Three months ended June 30, 2018
   Reportable Segments
   Detection    Therapy    Total
Major Goods/Service Lines

Products
   $ 2,486    $ 1,176    $ 3,662
Service contracts
   1,310    347    1,657
Supply and source usage agreements
   —      558    558
Professional services
   —      50    50
Other
   55    41    96






   $ 3,851    $ 2,172    $ 6,023






Timing of Revenue Recognition

Goods transferred at a point in time
   $ 2,486    $ 1,199    $ 3,685
Services transferred over time
   1,365    973    2,338






   $ 3,851    $ 2,172    $ 6,023






Sales Channels

Direct sales force
   $ 2,114    $ 1,917    $ 4,031
OEM partners
   1,737    —      1,737
Channel partners
   —      255    255






   $ 3,851    $ 2,172    $ 6,023






Total Revenue

Revenue from contracts with customers
   $ 3,851    $ 2,172    $ 6,023
Revenue from lease components
   139    —      139






   $ 3,990    $ 2,172    $ 6,162

The Company uses customer purchase orders that are subject to the Company’s terms and conditions or, in the case of an Original Equipment Manufacturer (“OEM”) are governed by distribution agreements. In accordance with the Company’s distribution agreements, the OEM does not have a right of return, and title and risk of loss passes to the OEM upon shipment. The Company generally ships Free On Board shipping point and uses shipping documents and third-party proof of delivery to verify delivery and transfer of title. In addition, the Company assesses whether collection is probable by considering a number of factors, including past transaction history with the customer and the creditworthiness of the customer, as obtained from third party credit references.

If the terms of the sale include customer acceptance provisions and compliance with those provisions cannot be demonstrated, all revenue is deferred and not recognized until such acceptance occurs. The Company considers all relevant facts and circumstances in determining when to recognize revenue, including contractual obligations to the customer, the customer’s post-delivery acceptance provisions, if any, and the installation process.

The Company has determined that iCAD’s digital and film based sales generally follow the guidance of FASB ASC Topic 605 “Revenue Recognition” (“ASC 605”) as the software has been considered essential to the functionality of the product per the guidance of ASU~~2009-14.~~ Typically, the responsibility for the installation process lies with the OEM partner. On occasion, when iCAD is responsible for product installation, the installation element is considered a separate unit of accounting because the delivered product has stand-alone value to the customer. In these instances, the Company allocates revenue to the deliverables based on the framework established within ASU~~2009-13.~~ Therefore, the installation and training revenue is recognized as the services are performed according to the BESP of the element. Revenue from the digital and film based equipment, when there is installation, is recognized based on the relative selling price allocation of the BESP, when delivered.

~~Revenue from certain CAD products is recognized in accordance with ASC985-605.~~ Sales of these products include training, and the Company has established VSOE for this element. Product revenue is determined based on the residual value in the arrangement and is recognized when delivered. Revenue for training is deferred and recognized when the training has been completed.

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~September~~June 30, ~~2017~~

2018


	Six months ended June 30, 2018
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	4,975	$	2,244	$	7,219
Service contracts		2,637		709		3,346
Supply and source usage agreements		—		1,087		1,087
Professional services		—		194		194
Other		109		240		349

	$	7,721	$	4,474	$	12,195

Timing of Revenue Recognition
Goods transferred at a point in time	$	4,975	$	2,470	$	7,445
Services transferred over time		2,746		2,004		4,750

	$	7,721	$	4,474	$	12,195

Sales Channels
Direct sales force	$	3,840	$	3,958	$	7,798
OEM partners		3,881		—		3,881
Channel partners		—		516		516

	$	7,721	$	4,474	$	12,195

Total Revenue
Revenue from contracts with customers	$	7,721	$	4,474	$	12,195
Revenue from lease components		280		—		280

	$	8,001	$	4,474	$	12,475

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018


	Three months ended June 30, 2017(1)
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	2,545	$	845	$	3,390
Service contracts		1,463		388		1,851
Supply and source usage agreements		—		478		478
Professional services		—		15		15
Other		75		452		527

	$	4,083	$	2,178	$	6,261

Timing of Revenue Recognition
Goods transferred at a point in time		2,545		1,008	$	3,553
Services transferred over time		1,538		1,170		2,708

	$	4,083	$	2,178	$	6,261

Sales Channels
Direct sales force	$	1,974	$	2,029	$	4,003
OEM partners		2,109		—		2,109
Channel partners		—		149		149

	$	4,083	$	2,178	$	6,261

Total Revenue
Revenue from contracts with customers	$	4,083	$	2,178	$	6,261
Revenue from lease components		148		—		148

	$	4,231	$	2,178	$	6,409

(1)	As noted above, prior period amounts have not been adjusted under the modified retrospective method.

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018


	Six months ended June 30, 2017(1)
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	5,212	$	2,001	$	7,213
Service contracts		2,939		804		3,743
Supply and source usage agreements		—		947		947
Professional services		—		68		68
Other		274		660		934

	$	8,425	$	4,480	$	12,905

Timing of Revenue Recognition
Goods transferred at a point in time		5,212		2,151	$	7,363
Services transferred over time		3,213		2,329		5,542

	$	8,425	$	4,480	$	12,905

Sales Channels
Direct sales force	$	4,111	$	4,170	$	8,281
OEM partners		4,314		—		4,314
Channel partners		—		310		310

	$	8,425	$	4,480	$	12,905

Total Revenue
Revenue from contracts with customers	$	8,425	$	4,480	$	12,905
Revenue from lease components		295		—		295

	$	8,720	$	4,480	$	13,200

(1)	As noted above, prior period amounts have not been adjusted under the modified retrospective method.

Products. Product revenue consists of sales of cancer detection products, cancer therapy systems, cancer therapy applicators, cancer therapy disposable applicators and other accessories that are typically shipped with a cancer therapy system. The Company transfers control and recognizes ~~post contract customer support revenue together with~~a sale when the ~~initial licensing fee~~product is shipped from the manufacturing or warehousing facility to the customer.

Service Contracts. The Company sells service contracts in which the Company provides professional services including product installations, maintenance, training, and service repairs, and in certain cases leases equipment, to hospitals, imaging centers, radiological practices, and radiation oncologists and treatment centers. As lease contracts are not within the scope of Topic 606, the Company accounts for ~~certain MRI products~~the lease components of these arrangements in accordance with ASC~~985-605-25-71.~~ ~~In January 2017~~ 840 “Leases” and the ~~Company sold certain MRI assets~~remaining consideration is

iCAD, INC. AND SUBSIDIARIES

Notes to ~~Invivo.~~Condensed Consolidated Financial Statements

~~Sales of the Company’s Therapy segment products typically include a controller, accessories, source agreements and services. The Company allocates revenue~~(Unaudited)

June 30, 2018

allocated to the ~~deliverables in the arrangement based on the BESP~~other performance obligations identified in accordance with ~~ASU2009-13.~~ ~~Product revenue is generally recognized when the product has been delivered and service and source revenue is typically recognized over the life of the service and source agreement.~~Topic 606. The ~~Company includes the following in service and supplies revenue: the sale of physics and management services,~~consideration allocated to the lease of electronic brachytherapy equipment, development fees, supplies and the right to use the Company’s AxxentHub software. Physics and management services revenue and development fees are considered to be deliveredcomponent is recognized as the services are performed or over the estimated life of the agreement. The Company typically bills items monthly over the life of the agreement except for development fees, which are generally billed in advance or over a 12 month period and the fee for treatment supplies which is generally billed in advance.

~~The Company defers revenue from the sale of certain service contracts and recognizes the related~~lease revenue on a straight-line basis over the specified term of the agreement. Revenue for thenon-lease components, such as service contracts, is recognized on a straight-line basis over the term of the agreement. The service contracts range from 12 months to 48 months. The Company typically receives payment at the inception of the contract and recognizes revenue on a straight-line basis over the term of the agreement.

Supply and Source Usage Agreements. Revenue from supply and source usage agreements is recognized on a straight-line basis over the term of the supply or source agreement.

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 ~~accordance~~proportion to the costs incurred in satisfying the obligations under the contract.

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

Significant Judgments

The Company’s contracts with ~~ASC Topic605-20,~~ ~~“Services”.~~customers may include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For arrangements with multiple performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company generally determines standalone selling prices based on the prices charged to customers and uses a range of amounts to estimate standalone selling prices when we sell each of the products and services separately and need to determine whether there is a discount that needs to be allocated based on the relative standalone selling prices of the various products and services. The Company typically has more than one range of standalone selling prices for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the type of customer and geographic region in determining the range of standalone selling prices.

The Company may provide credits or incentives to customers, which are accounted for as variable consideration when estimating the transaction price of the contract and amounts of revenue to recognize. The amount of variable consideration to include in the transaction price is estimated at contract inception using either the estimated value method or the most likely amount method based on the nature of the variable consideration. These estimates

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

are updated at the end of each reporting period as additional information becomes available and revenue is recognized only to the extent that it is probable that a significant reversal of any amounts of variable consideration included in the transaction price will not occur. The Company provides for estimated warranty costs on original product warranties at the time of sale.

Contract Balances

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

Contract balances


	Balance at June 30, 2018
Receivables, which are included in ‘Trade accounts receivable’	$	6,200
Contract assets, which are included in “Prepaid and other current assets”		2
Contract liabilities, which are included in “Deferred revenue”		6,477

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

The opening balance of accounts receivable from contracts with customers, net of allowance for doubtful accounts, was $8.5 million as of January 1, 2018. As of June 30, 2018, accounts receivable, net of allowance for doubtful accounts, was $6.2 million.

The Company will record a contract asset for unbilled revenue when the Company’s performance is in excess of amounts billed or billable. The Company has classified the contract asset balance as a component of prepaid expenses and other current assets as of January 1, 2018 and June 30, 2018. The opening balance of contract assets was $166,000 as of January 1, 2018. As of June 30, 2018, the contract asset balance was $2,000.

Deferred revenue from contracts with customers is primarily composed of fees related to long-term service arrangements, which are generally billed in advance. Deferred revenue also includes payments for installation and training that has not yet been completed and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. Deferred revenue from contracts with customers is included in deferred revenue in the consolidated balance sheets. Deferred revenue on the consolidated balance sheet also includes $369,000 and $364,000 at December 31, 2017 and June 30, 2018, respectively, of amounts associated with service contracts accounted for under Topic 840. The balance of deferred revenue at December 31, 2017 and June 30, 2018 is as follows (in thousands):

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018


December 31, 2017	Contract liabilities		Lease revenue		Total
Short term	$	5,044	$	360	$	5,404
Long term		497		9		506

Total	$	5,541	$	369	$	5,910


June 30, 2018	Contract liabilities		Lease revenue		Total
Short term	$	5,795	$	345	$	6,140
Long term		682		19		701

Total	$	6,477	$	364	$	6,841

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


	Six Months Ended June 30, 2018
Balance at beginning of period	$	5,541
Adoption adjustment		39
Deferral of revenue		5,717
Recognition of deferred revenue		(4,820	)

Balance at end of period	$	6,477

We expect to recognize approximately $4.5 million of the deferred amount in 2018, $1.6 million in 2019, and $0.4 million thereafter.

Assets Recognized from the Costs to Obtain a Contract with a Customer

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain commissions programs meet the requirements to be capitalized. The opening balance of capitalized costs to obtain a contract was $117,000 as of January 1, 2018. As of June 30, 2018, the balance of capitalized costs to obtain a contract was $238,000. The Company has classified the capitalized costs to obtain a contract as a component of prepaid expenses and other current assets as of January 1, 2018 and June 30, 2018.

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

Changes in the balance of capitalized costs to obtain a contract were as follows (in thousands):


	Six Months Ended June 30, 2018
Balance at beginning of period	$	117
Deferral of costs to obtain a contract		233
Recognition of costs to obtain a contract		(112	)

Balance at end of period	$	238

Practical Expedients and Exemptions

The Company has elected to make the following accounting policy elections through the adoption of the following practical expedients:

Right to Invoice

Where applicable, the Company will recognize revenue from a contract with a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date and the amount to which the entity has a right to invoice.

Sales and Other Similar Taxes

The Company will exclude sales taxes and similar taxes from the measurement of transaction price and will ensure that it complies with the disclosure requirements of ASC235-10-50-1 through50-6.

Significant Financing Component

The Company will not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Cost to Obtain a Contract

The Company will recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less and there are no renewal periods on which the Company does not pay commissions that are not commensurate with those originally paid.

Promised Goods or Services that are Immaterial in the Context of a Contract

The Company has elected to assess promised goods or services as performance obligations that are deemed to be immaterial in the context of a contract. As such, the Company will not aggregate and assess immaterial items at the entity level. That is, when determining whether a good or service is immaterial in the context of a contract, the assessment will be made based on the application of ASC 606 at the contract level.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

Cost of Revenue

Cost of revenue consists of the costs of products purchased for resale, costs relating to service including personnel costs for physicists, management services and radiation therapists, costs of service contracts to maintain equipment after the warranty period, product installation, training, customer support, certain warranty repair costs, inbound freight and duty, cost of supplies, manufacturing, warehousing, material movement, inspection, scrap, rework, amortization, depreciation andin-house product warranty repairs. Included in cost of revenue for the nine months ended September 30, 2016 is a credit of $467,000 related to a refund of the Medical Device Excise Tax (“MDET”). The MDET refund of $467,000 is related to refunds of the MDET for the periods from April 2013 to December 2015. The MDET refunds were not material to any prior period; accordingly, prior periods were not restated.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~

Note ~~2 -~~ 2—Loss per Common Share

The Company’s basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period.

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


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Net loss	$	(6,933	)	$	(2,675	)	$	(10,021	)	$	(6,783	)	$	(1,027	)	$	(2,631	)	$	(4,308	)	$	(3,088	)

Shares used in the calculation of basic and diluted net loss per share		16,424			15,957			16,291			15,896			16,664			16,310			16,624			16,223
Effect of dilutive securities:
Stock options		—			—			—			—			—			—			—			—
Restricted stock		—			—			—			—			—			—			—			—

Diluted shares used in the calculation of net loss per share		16,424			15,957			16,291			15,896			16,664			16,310			16,624			16,223

Net loss per share - basic and diluted	$	(0.42	)	$	(0.17	)	$	(0.62	)	$	(0.43	)
Net loss per share—basic and diluted													$	(0.06	)	$	(0.16	)	$	(0.26	)	$	(0.19	)

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

   Period Ended
   September 30,
   2017    2016
Stock options
   1,426,513    1,569,166
Restricted stock
   507,147    392,148




Stock options and restricted stock
   1,933,660    1,961,314

~~Note 3 - Business Combinations~~
   Period Ended
   June 30,
   2018    2017
Stock options
   1,394,275    1,419,540
Restricted stock
   574,213    384,323




Stock options and restricted stock
   1,968,488    1,803,863

~~Acquisition of VuComp Cancer detection portfolio~~

~~On January 13, 2016, the Company completed the acquisition of the VuCOMP cancer detection portfolio, including theM-Vu~~ computer aided detection (CAD) technology platform. The acquisition includes an extensive library of related clinical data, VuCOMP’s key personnel and the customer base that existed at closing of the transaction. The acquisition of the key personnel and clinical data is expected to contribute to the ongoing development of the Company’s CAD technology which will be used for future cancer detection research and patents. As the Company considered this to be a business combination, the assets were valued in accordance with ASC Topic 805, “~~Business Combinations~~~~” (“ASC 805”).~~

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~September~~June 30, ~~2017~~

~~The Company acquired VuComp’sM-Vu~~ Breast Density product in April 2015. In connection with the diligence of the January 2016 acquisition, VuComp disclosed that it had previously entered into a license agreement pursuant to which it issued an irrevocable, royalty-free worldwide license to a third party. On December 24, 2015, iCAD notified VuComp of a claim under the April 2015 asset purchase agreement based on the disclosure of the third party license agreement, which iCAD believed constituted a breach of VuComp’s representation as to its exclusive ownership of its intellectual property at the time of the April 2015 transaction. In connection with the purchase of the VuComp cancer detection portfolio, the Company provided a release of the aforementioned claim. The Company determined that this claim was a component of the purchase price. The Company determined the value of litigation settlement as the excess of the fair value of the business acquired over the cash consideration paid. As a result the Company recorded a gain on litigation settlement of $249,000 in general and administrative expenses during the first quarter of 2016, which is a component of the purchase price as noted below:

   Amount (000’s)
Cash
   $ 6
Acquisition litigation settlement
   249


Purchase price
   $ 255

The amount allocated to the acquired assets was estimated primarily through the use of discounted cash flow valuation techniques. Appraisal assumptions utilized under this method include a forecast of estimated future net cash flows, as well as discounting the future net cash flows to their present value. The following is a summary of the preliminary allocation of the total purchase price based on the estimated fair values as of the date of the acquisition and the amortizable life:

   Amount (000’s)    Estimated amortizable
life
Current assets
   $ 84
Property and equipment
   65    3 Years
Identifiable intangible assets
   699    1-10 Years
Goodwill
   293
Current liabilities
   (280 )
Long-term liabilities
   (606 )



Purchase price
   $ 255

~~The assets obtained in the acquisition of VuComp’sM-Vu~~ ~~Cancer detection portfolio (including theM-Vu~~ breast density product) and the anticipated future revenues are included in the Detection segment and, accordingly, the goodwill resulting from the purchase price allocation is included in goodwill of the Detection segment.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~

2018

Note ~~4 -~~ 3—Sale of MRI Assets

In December 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation. In accordance with the agreement, the Company sold to Invivo all right, title and interest to certain intellectual property relating to the Company’s VersaVue Software and DynaCAD product and related assets for $3.2 million. The Company closed the transaction on January 30, 2017 less a holdback reserve of $350,000 for a net of approximately $2.9 million. The holdback reserve of $350,000 has been recorded as an asset in prepaid and other current assets and will be paid to the Company within eighteen months from the closing date, less any amounts, if any, due and payable or reserved under the indemnification provisions in the Asset Purchase agreement. A third party has made a claim against Invivo and the Company, for which the Company is required to indemnify Invivo. The Company is disputing such third party claim and the amount of the claim the Company may be required to pay is not determinable at this time. Any amounts owed by the Company in connection with such indemnification obligations will reduce the $350,000 holdback.

The Company determined the sale constituted the sale of a business in accordance with ASC 805. The Company performed an evaluation to determine if the sale constituted discontinued operations and concluded that the sale did not represent a major strategic shift, and accordingly it was not considered to be discontinued operations. In connection with the transaction, the Company allocated $394,000 of goodwill which was a component of the gain on the sale. The allocation was based on the fair value of the assets sold relative to the fair value of the Detection reporting unit as of the date of the agreement, based on the guidance from ASC350-20-40-3.

The value of the net assets sold is as follows (in thousands):


Assets
Accounts Receivable	$	116
Intangible assets		810
Allocated Goodwill		394

Total Assets	$	1,320

Liabilities
Deferred Revenue	$	746

Total Liabilities	$	746

Net Assets Sold	$	574

In connection with the sale the Company agreed to provide certain transition services to Invivo. The fair value of the transition services were determined based on the cost to provide plus a reasonable profit margin and have been recognized as revenue over the term of approximately ninety days from the closing date. The Company recorded a gain of $2.5 million as of January 30, 2017. The components of the gain on the sale are as follows (in thousands):

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~September~~June 30, ~~2017~~

2018


Gain on Sale
Cash received	$	2,850
Holdback reserve		350
Fair value of transition services		(118	)
Net Assets sold		(574	)

Total	$	2,508

Note ~~5 -~~ 4—Inventory

Inventory is valued at the lower of cost or net realizable value, with cost determined by thefirst-in,first-out method. The ~~components of~~Company regularly reviews inventory ~~net of~~quantities on hand and records an allowance for excess and/or obsolete ~~unmarketable or slow-moving inventories, are summarized~~inventory primarily based upon the estimated usage of its inventory as ~~follows~~well as other factors. Inventories consisted of the following (in thousands):, which includes an inventory reserve of approximately $1.2 million as of June 30, 2018 and December 31, 2017.


	as of September 30, 2017		as of December 31, 2016		as of June 30, 2018		as of December 31, 2017
Raw materials	$	2,033	$	2,503	$	873	$	992
Work in process		139		75		97		63
Finished Goods		1,168		1,149		1,131		1,068

Inventory	$	3,340	$	3,727	$	2,101	$	2,123

Note ~~6 -~~ 5—Debt financing

On August 7, 2017, the Company entered into a Loan and Security Agreement, which has been modified by the First Loan Modification Agreement dated as of March 22, 2018 and the Second Loan Modification Agreement dated as of August 13, 2018 (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) that ~~provides~~provided an initial term loan facility ~~(the “Term~~(amounts borrowed thereunder, the “Initial Term Loan”) of $6.0 million and a $4.0 million revolving line of credit ~~(the~~(amounts borrowed thereunder, the “Revolving ~~Loan”~~Loans”). The Company also has the option to ~~secure~~borrow an additional $3.0 million term loan under the Loan Agreement ~~for a total of $9.0 million in 2018,~~(amounts borrowed thereunder, the “Subsequent Term Loan” and together with the Initial Term Loan, the “Term Loan”), subject to meeting a ~~net~~Detection revenue minimum of at least ~~$35.0~~$21.5 million for a trailing twelve month period ending prior on or prior to ~~July~~June 30, 2019.

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

As of June 30, 2018, the Company met the minimum 3 month trailing EBITDA threshold of $(750,000) for a trailing three month period ending between March 22, 2018 and July 31, 2018 (the ~~“Revenue Milestone”~~“Adjusted EBITDA Event”).

~~The~~ and thus will begin repayment of the first tranche of the Term Loan ~~accrues interest at prime rate.~~ on March 1, 2019. The Company will make 30 equal monthly installment payments of principal.

The Company will begin repayment of the second tranche of the Term Loan if drawn on ~~Sept~~October 1, ~~2018 in 36~~2019 and make 30 equal monthly installments of ~~principal. Subject to meeting the Revenue Milestone,~~principal, if the Company ~~could elect to defer repayment of~~meets the ~~Term Loan to March 1, 2019 in 30 equal monthly payments.~~Detection revenue minimum.

~~The outstanding~~Outstanding Revolving ~~Advances~~Loans will accrue interest at a floating per annum rate equal to 1.50% above the prime rate for periods when the ratio of the Company’s unrestricted cash to the Company’s outstanding liabilities to the Bank plus the amount of the Company’s total liabilities that mature within one year is at least 1.25 to 1.0. At all other times, the interest rate shall be 0.50% above the prime rate. The outstanding Term ~~Loan Advances~~Loans will accrue interest at a floating per annum rate equal to the prime rate.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~

The maturity date of the Revolving ~~Advances~~Loans and the Term ~~Loan Advances~~Loans is ~~August 7, 2021.~~March 1, 2022. However, the maturity date will become April 30, 2019, April 30, 2020 or April 30, 2021 if, on or before ~~October 30, 2018, or~~March 15, 2019, or 2020 or 2021, as applicable, the Company does not agree in writing to the ~~net~~Detection revenue and adjusted EBITDA covenant levels proposed by the Bank with respect to the upcoming applicable calendar year.

If the Revolving ~~Advances~~Loans are paid in full and the Loan Agreement is terminated prior to the maturity date, then the Company will pay to the Bank a termination fee in an amount equal to ~~two percent~~ (2.0%) of the maximum revolving line of credit. If the Company prepays the Term ~~Loan Advances~~Loans prior to the maturity date, then the Company will pay to the Bank an amount equal to1.0%-3.0% of the Term ~~Loan Advances,~~Loans, depending on when such Term ~~Loan Advances~~Loans are repaid. ~~The~~In addition, the Loan Agreement requires the Company to pay a final payment of 8.5% of the Term Loan, which was increased by the Second Loan Modification Agreement from 8% upon the earliest of the repayment of the Term Loans, the termination of the Loan agreement and the maturity date. The Company is accruing such payment as interest expense. As of June 30, 2018, the accrued final payment is approximately $98,000 and is a component of the outstanding loan balance.

As part of the Second Loan Modification Agreement dated August 13, 2018, the Company revised the Detection Revenue Covenant (the “Covenant”) for the quarter ended June 30, 2018 to maintain ~~net~~compliance with the Covenant. The Second Loan Modification Agreement requires the Company to maintain minimum detection revenues during the trailing six month period ending on the last day of each calendar quarter as follows: June 30, ~~2017~~2018 - ~~$10.25~~$7.5 million; September 30, ~~2017 - $11.5 million; December 31, 2017 - $14 million; March 31,~~ 2018 - ~~$15 million; June 30, 2018 - $15.25 million; and September 30, 2018~~$7.5 million and December 31, 2018 - ~~$15.5~~$8.75 million. AsThe Second Loan Modification Agreement requires the Company to maintain adjusted EBITDA during the trailing six month period ending on the last day of each calendar quarter as follows: June 30, 2018 - $(4.5 million); June 30, 2018 - $(3.75 million); September 30, ~~2017~~2018 - $(1 million) and December 31, 2018 - $1.00. For the quarter ended June 30, 2018 the Company iswas in compliance with the ~~revenue~~ covenants inas modified by the Second Loan Modification Agreement.

Obligations to the Bank under the Loan ~~Agreement.~~Agreement are secured by a first priority security interest in substantially all of the assets, including intellectual property, accounts, receivables, equipment, general intangibles, inventory and investment property, and all of the proceeds and products of the foregoing, of each of the Company and Xoft, Inc. and Xoft Solutions LLC, wholly-owned subsidiaries of the Company.

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

In connection with the ~~credit line,~~Loan Agreement, the Company incurred approximately $74,000 of closing costs. In accordance with ASU2015-03 the closing costs have been deducted from the carrying value of the debt and will be amortized over the expected term of 36 months.

The current repayment schedule for the ~~term loan~~Term Loan is based on repayment beginning on ~~September~~March 1, ~~2018. If~~2019, as the ~~Revenue Milestone is~~Company met the ~~Company could elect to defer repayment until March 2019.~~EBITDA minimum as of June 30, 2018. The carrying value of the Term Loan (net of debt issuance costs) as of ~~September~~June 30, 2018 and December 31, 2017 is as follows (in thousands):

   September 30,
2017
Short-term
   $ 317
Long-term
   5,612


Total
   $ 5,929


	June 30, 2018			December 31, 2017
Principal Amount of Term Loan	$	6,000		$	6,000
Unamortized closing costs		(60	)		(64	)
Accrued Final Payment		98			—

Carrying amount of Term Loan		6,038			5,936

Less current portion of Term Loan		(652	)		(817	)

Notes payable long-term portion	$	5,386		$	5,119

~~Interest expense related to the loan for the three~~Principal and ~~nine month periods ended September 30, 2017 is~~interest payments are as follows (in thousands):

   September 30,
2017
Three months ended
   $ 33
Nine month ended
   33


Fiscal Year	Amount Due
2018	$	150
2019		2,452
2020		2,534
2021		1,933

Total	$	7,069

The following amounts are included in interest expense in our consolidated statement of operations for the three and six months ended June 30, 2018 and 2017 (in thousands):

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~September~~June 30, ~~2017~~

2018


	Three Months Ended					Six Months Ended
	June 30, 2018		June 30, 2017			June 30, 2018		June 30, 2017
Cash interest expense	$	73	$	—		$	141	$	—
Final Payment accrual		32		—			98		—
Amortization of debt costs		7		—			14		—
Amortization of settlement obligations		—		12			—		26
Interest expense capital lease		1		—			2		—
Capital lease—fair value amortization		—		(2	)		—		(11	)

Total interest expense	$	113	$	10		$	255	$	15

Note ~~7 -~~ 6—Lease Commitments

Operating leases

Facilities are leased under operating leases expiring at various dates through March 2020. Certain of these leases contain renewal options. Rent expense under operating leases was ~~$229,000~~$228,000, $221,000, $450,000 and ~~$665,000~~$436,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, respectively~~2018 and ~~$178,000 and $516,000 for the three and nine months ended September 30, 2016,~~2017, respectively.

Future minimum lease payments as of ~~September~~June 30, ~~2017~~2018 under operating leases are as follows: (in thousands)


Fiscal Year	Operating Leases		Operating Leases
2017	$	318
2018		738	$	384
2019		746		755
2020		174		174

Total	$	1,976	$	1,313

Capital leases

In August 2017, the Company assumed an equipment lease obligation with payments totaling $50,000. The leases were determined to be capital leases and accordingly the equipment was capitalized and a liability of $42,000 was recorded. The equipment will be depreciated over the expected life of 3 years. Minimum lease payments are as follows (in thousands):

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~September~~June 30, ~~2017~~

2018

Fiscal Year
   Capital
Lease
2017
   4
2018
   16
2019
   17
2020
   13


subtotal minimum lease obligation
   50
less interest
   (8 )


Total, net
   42
less current portion
   (12 )


long term portion
   $ 30

In connection with the Radion/DermEbx Acquisition which closed in July 2014, the Company assumed two separate equipment lease obligations with payments totaling approximately $2.6 million through May 2017. The leases were determined to be capital leases and accordingly the equipment was capitalized and a liability of $2.5 million was recorded. In connection with the acquisition, the Company recorded a fair value adjustment to interest expense and amortized the adjustment over the life of the related lease. As of September 30, 2017, there was no further liability for the acquired equipment leases.

~~Related Party Lease:~~

Kamal Gogineni is an employee of one of the Company’s subsidiaries and a stockholder of the Company’s common stock. Additionally, Mr. Gogineni is a shareholder of Radion Capital Partners (“RCP”). RCP was the lessor under a lease between RCP and DermEbx (the “Lease”). In connection with the Company’s acquisition of assets of Radion, Inc. and DermEbx that closed in July 2014, one of the assets and obligations that the Company acquired was the Lease. Pursuant to the Lease, the Company paid approximately $76,000 to RCP in 2017. As of September 30, 2017, there is no further obligation.


Fiscal Year	Capital Lease
2018	$	8
2019		16
2020		13

subtotal minimum lease obligation		37
less interest		(5	)

Total, net		32
less current portion		(14	)

long term portion	$	18

Note ~~8 -~~ 7—Stock-Based Compensation

The Company follows the guidance in ASC Topic 718, “Compensation – Stock Compensation”, (“ASC 718”).

The Company granted options to purchase ~~57,352~~75,937 and 141,268 shares of the Company’s stock in the three and six months ended ~~September~~June 30, ~~2017.~~2018, respectively. Options granted under the Company’s stock incentive plans were valued utilizing the Black-Scholes model using the following assumptions and had the following fair values:

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~


					Three Months Ended						Six Months Ended
	Three Months Ended September 30,		Nine Months Ended September 30,		June 30,						June 30,
	2017	2016	2017	2016	2018			2017			2018			2017
Average risk-free interest rate	1.56%	0.84%	1.52%	0.87%		2.62	%		1.50	%		2.50	%		1.49	%
Expected dividend yield	None	None	None	None		None			None			None			None
Expected life	3.5 years	3.5 years	3.5 years	3.5 years		3.5 years			3.5 years			3.5 years			3.5 years
Expected volatility	64.2% to 67.0%	68.6% to 75.3%	64.2% to 72.0%	68.6% to 75.3%		61.6	%		64.9% to 67.0	%		60.8% to 61.6	%		64.9% to 72.0	%
Weighted average exercise price	$4.28	$5.49	$4.39	$5.57	$	3.08		$	4.21		$	3.08		$	4.46
Weighted average fair value	$2.02	$2.67	$2.12	$2.71	$	1.42		$	1.98		$	1.41		$	2.19

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


										Three Months Ended				Six Months Ended
	Three Months Ended September 30,					Nine Months Ended September 30,				June 30,				June 30,
	2017		2016			2017		2016		2018		2017		2018		2017
Cost of revenue	$	1	$	1			5	$	5	$	1	$	2		2	$	4
Engineering and product development		76		82			633		289		100		352		197		557
Marketing and sales		132		162			854		476		57		499		57		722
General and administrative		294		201	��		1,581		878		224		748		517		1,287

	$	503	$	446		$	3,073	$	1,648	$	382	$	1,601	$	773	$	2,570

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

As of ~~September~~June 30, ~~2017,~~2018, unrecognized compensation cost (in thousands) related to unexercisable options and unvested restricted stock and the weighted average remaining period is as follows:


Remaining expense	$	2,504	$	1,638
Weighted average term		1.1 years		1.1

The Company’s restricted stock awards typically vest in either one year or three equal annual installments with the first installment vesting one year from grant date. The Company granted a total of 162,500 shares of performance based restricted stock during 2016 with performance measured on meeting a revenue target based on growth for fiscal year 2017 and vesting in three equal installments with the first installment vesting upon measurement of the goal. In addition, a maximum of 108,333 additional shares ~~are~~were available to be earned based on exceeding the revenue goal. On March 30, 2018, in accordance with the performance award, the Board of Directors deemed that the award had been earned and a total of 189,583 shares were granted, with 63,194 immediately vesting and the remainder vesting on the first and second anniversary of the award date. On March 22, 2018, the Company granted a total of 112,500 shares of performance based restricted stock with performance measured on meeting a revenue target based on growth for fiscal year 2018 and vesting in three equal installments with the first installment vesting upon measurement of the goal. The Company also granted a total of 112,500 shares of time based restricted stock.

During the three months ended June 30, 2018 the Company did not grant any shares of restricted stock. Assumptions used to determine the value of performance based grants of restricted stock include the probability of achievement of the specified revenue targets. Compensation cost for performance based restricted stock requires significant judgment regarding probability of achieving the performance objectives and compensation cost isre-measured at every reporting period. As a result compensation cost could vary significantly during the performance measurement period. The Company granted 153,480 and 392,055 shares of restricted stock with either time based or immediate vesting in the three and nine months ended September 30, 2017, respectively. Included in the restricted shares granted in the second quarter of 2017 are 172,668 shares that were issued in lieu of cash bonus payments and was approved by the Board of Directors in February 2017. The number of shares granted were determined based the amount of approved bonus divided by the stock price of the Company at the date of issuance.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~

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


					Period Ended
	Period Ended September 30,				June 30,
Aggregate intrinsic value	2017		2016		2018		2017
Stock options	$	1,050	$	1,748	$	261	$	966
Restricted stock		2,242		2,039		1,789		1,610

~~The intrinsic value of~~There were no stock options exercised during the three ~~and nine~~ months ended ~~September~~June 30, ~~2017 was $12,000 and $50,000, respectively. The intrinsic value of stock options exercised during the three and nine months September 30, 2016 was $189,000 and $195,000, respectively.~~2018. The intrinsic value of restricted shares that vested in the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2018 was ~~$0.2 million and $1.7 million, respectively.~~$23,000. The intrinsic value of restricted shares that vested in the three ~~and nine~~ months ended ~~September~~June 30, ~~2016~~2017 was ~~$0.0 million and $1.0 million, respectively.~~$1.2 million.

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

Note ~~9 -~~ 8—Commitments and Contingencies

Foreign Tax Claim

In July 2007, a dissolved former Canadian subsidiary of the Company, CADx Medical Systems Inc. (“CADx Medical”), received a taxre-assessment of approximately $6,800,000 from the Canada Revenue Agency (“CRA”) resulting from CRA’s audit of CADx Medical’s Canadian federal tax return for the year ended December 31, 2002. In February 2010 the CRA reviewed the matter and reduced the taxre-assessment to approximately $703,000, excluding interest and penalties. The Company believes that it is not liable for there-assessment against CADx Medical and no accrual has been recorded for this matter as of ~~September~~June 30, ~~2017.~~

~~Settlement Obligations~~

In connection with the acquisition of Xoft in 2010, 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 to Hologic, 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

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~

any products that utilize the licensed rights. The Company has a liability within accounts payable and accrued expenses for future payment and for the remaining minimum royalty obligations totaling $448,000 as of September 30, 2017. The Company recorded interest expense of approximately $10,000 and $30,000 in the three and nine months September 30, 2016, respectively, related to this obligation.

In December, 2011, the Company agreed to a settlement related to litigation with Carl Zeiss Meditec AG. In July 2017, the Company paid the remaining $500,000 due and there is no further obligation to Zeiss. The Company recorded interest expense of approximately $0 and $26,000 in the three and nine months ended September 30, 2017, respectively and $13,000 and $39,000 in the three and nine months ended September 30, 2016, respectively related to this obligation.2018.

Other Commitments

The Company is obligated to pay approximately ~~$0.8~~$1.0 million for firm purchase obligations to suppliers for future product and service deliverables.

Litigation

The Company is a party to various legal proceedings and claims arising out of the ordinary course of its business. Although the final results of all such matters and claims cannot be predicted with certainty, the Company currently believes that there are no current proceedings or claims pending against it the ultimate resolution of which would have a material adverse effect on its financial condition or results of operations. However, should the Company fail to prevail in any legal matter or should several legal matters be resolved against the Company in the same reporting period, such matters could have a material adverse effect on our operating results and cash flows for that particular period. 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 ~~10 -~~ 9—Fair Value Measurements

The Company follows the provisions of ASC Topic 820, “Fair Value Measurement and Disclosures”, (“ASC 820”). This topic defines fair value, establishes a framework for measuring fair value under US GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the assetor liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~September~~June 30, ~~2017~~

2018

Level ~~1 -~~ 1—Quoted prices in active markets for identical assets or liabilities.

Level ~~2 -~~ 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 -~~ 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable certain accrued liabilities and debt. The carrying amounts of our cash and cash equivalents (which are composed primarily of deposit and overnight sweep accounts), accounts receivable, accounts payable and certain accrued liabilities approximate fair value due to the short maturity of these instruments. The carrying value of our term loan approximates fair value due to the market rate of the stated interest rate.

The Company’s assets that are measured at fair value on a recurring basis relate to the Company’s money market accounts.

The Company’s money market funds are included in cash and cash equivalents in the accompanying balance sheets and are considered a Level 1 investment as they are valued at quoted market prices in active markets.

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


Fair value measurements using: (000’s) as of December 31, 2016
Fair value measurements using: (000’s) as of December 31, 2017									Fair value measurements using: (000’s) as of December 31, 2017
	Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Assets
Money market accounts	$	6,622	$	—	$	—	$	6,622		$	8,853	$	—	$	—	$	8,853

Total Assets	$	6,622	$	—	$	—	$	6,622		$	8,853	$	—	$	—	$	8,853


Fair value measurements using: (000’s) as of September 30, 2017
Fair value measurements using: (000’s) as of June 30, 2018									Fair value measurements using: (000’s) as of June 30, 2018
	Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Assets
Money market accounts	$	10,054	$	—	$	—	$	10,054		$	7,381	$	—	$	—	$	7,381

Total Assets	$	10,054	$	—	$	—	$	10,054		$	7,381	$	—	$	—	$	7,381

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~September~~June 30, ~~2017~~

2018

~~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. The Company recorded a $4.7 million impairment in the quarter ended September 30, 2017 which consisted of $4.0 million related to goodwill and $0.7 million related to long-lived assets as discussed in Note 12 and Note 13 and remeasured long-lived assets and goodwill of the Therapy reporting unit at fair value as of the impairment date as noted in the following table. The fair values of long-lived assets and goodwill were measured using Level 3 inputs.

Fair value measurements using: (000’s) as of September 30, 2017

   Level 1    Level 2    Level 3    Total
Non-recurring assets

Long-lived and intangible assets
   $ —      $ —      $ 780    $ 780
Goodwill
   —      —      1,766    1,766








Total Assets
   $ —      $ —      $ 2,546    $ 2,546

~~Note 11 -~~ 10—Income Taxes

The Company recorded an income tax ~~benefit~~provision of ~~$42,000~~$4,000 and ~~$28,000~~$17,000 for the three and ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, ~~respectively, as compared to a provision of $10,000 and $55,000 for the three and nine months ended September~~respectively. At June 30, 2016, respectively. The tax benefit for the three and nine months ended September 30, 2017 is the result of applying for research and development credits in New Hampshire. In the second quarter of 2017, the Company applied for $50,000 of research and development credits from New Hampshire. The Company anticipates the credits to be allocated for the 2016 tax year as well as the 2017 tax year. The research and development credits have been utilized to decrease the New Hampshire~~non-income~~ ~~tax liability to zero. The $42,000 benefit for the quarter is a result of the utilization of these credits and the decrease of the overall state tax.. At September 30, 2017,~~2018, the Company had no material unrecognized tax benefits and a deferred tax liability of ~~$12,400~~approximately $2,000 related to tax amortizable goodwill. The Company recorded a decrease in the deferred tax liability of approximately ~~$1,900~~$4,000 through ~~September~~June 30, ~~2017.~~2018. For the three and six months ended June 30, 2017, the Company recorded an income tax benefit of $3,000 and a provision of $14,000, respectively. The tax benefit for the quarter ended June 30, 2017 was the result of receiving research and development credits in New Hampshire. No other adjustments were required under ASC 740, “Income Taxes”. The Company does not expect that the unrecognized tax benefits will materially increase within the next 12 months. The Company did not recognize any interest or penalties related to uncertain tax positions at ~~September~~June 30, ~~2017.~~2018.

~~On January 1, 2017, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)No. 2016-09,~~~~Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~ ~~(“ASU2016-09”).~~ ~~Under ASU2016-09,~~ excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement, and excess tax benefits are recognized regardless of whether the benefit reduces taxes payable in the current period. The ~~tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. As a result~~Company’s estimate of the ~~adoption,~~Tax Cut and Jobs Act (“TCJA”) and the ~~net operating loss~~remeasurement of our deferred tax assets ~~increased by $2.1 million~~ and ~~are offset by a corresponding increase~~liabilities is subject to the finalization of the Company’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of the Company’s tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TCJA may require further adjustments and changes in the ~~valuation allowance.~~ Company’s estimates. The final determination of the TCJA and there-measurement of the Company’s deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA. For the six months ended June 30, 2018, there were no changes to the Company’s analysis performed as of December 31, 2017.

The Company files United States federal income tax returns and

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~

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

Note ~~12 -~~ 11—Goodwill

In accordance with FASB ~~ASC~~Accounting Standards Codification (“ASC”) Topic350-20, ~~“Intangibles -~~ “Intangibles—Goodwill and Other”, (“ASC350-20”), the Company tests goodwill for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of the reporting unit is less than the carrying value of the reporting unit. ~~The Company’s annual test date is October 1~~^st ~~of each year.~~

Factors the Company considers important, which could trigger an impairment of such asset, include the following:

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

significant underperformance relative to historical or projected future operating results;

significant changes in the manner or use of the assets or the strategy for the Company’s overall business;

significant negative industry or economic trends;

significant decline in the Company’s stock price for a sustained period; and

a decline in the Company’s market capitalization below net book value.

The Company ~~would record~~records an impairment charge ifwhen such an assessment ~~were to indicate~~indicates that the fair value of a reporting unit was less than the carrying value. In evaluating potential impairments outside of the annual measurement date, judgment is required in determining whether an event has occurred that may impair the value of goodwill or intangible assets. The Company did not have any triggering events in the quarter ended June 30, 2018.

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

In January 2018 the Company adopted a plan to discontinue offering radiation therapy professional services to practices that provide the Company’s electronic brachytherapy solution for the treatment ofnon-melanoma skin cancer under the subscription service model within the Therapy Segment. As result, the Company will no longer offer the subscription service model to customers. Based on the decision to discontinue offering radiation therapy professional services within the Therapy Segment, the Company revised its forecasts related to the Therapy segment, which the Company deemed to be a triggering event for the quarter ended December 31, 2017.

The Company elected to early adopt ASU2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU2017-04”) as of September 30, 2017 which affected both the third quarter and fourth quarter impairment tests. ASU2017-04 specifies that goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. In accordance with the standard, the fair value of the Therapy reporting unit as of the fourth quarter was $0.1 million and the carrying value was $2.1 million. The deficiency exceeded the carry value of goodwill and the balance of $1.7 million was recorded as an impairment charge in the quarter ended December 31, 2017.

As a result of the underperformance of the Therapy reporting unit as compared to expected future results, the Company determined there was a triggering event in the third quarter of 2017. As a result, the Company completed an interim impairment assessment. The interim

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

test resulted in the fair value of the Therapy reporting unit being less than the carrying value of the reporting unit. The ~~Company did not identify a triggering event within the Detection reporting unit and accordingly did not perform an interim test.~~

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~

~~The Company elected to early adopt ASU2017-04,~~ ~~Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU2017-04”).~~ ~~ASU2017-04~~ specifies that goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. In accordance with the standard, the fair value of the Therapy reporting unit was $3.5 million and the carrying value was $7.5 million. The deficiency of $4.0 million was recorded as an impairment charge in the third quarter ended September 30, 2017. The Company did not identify a triggering event within the Detection reporting unit and accordingly did not perform an interim test.

The Company performed the annual impairment assessment at October 1, 2017 and compared the fair value of each of reporting unit to its carrying value as of this date. Fair value exceeded the carrying value for the Detection reporting unit, and the carrying value approximated fair value of the Therapy reporting unit after the impairment as of September 30, 2017. The carrying values of the reporting units were determined based on an allocation of our assets and liabilities through specific allocation of certain assets and liabilities, to the reporting units and an apportionment of the remaining net assets based on the relative size of the reporting units’ revenues and operating expenses compared to the Company as a whole. The determination of reporting units also requires management judgment.

The Company ~~determined~~determines the fair values for each reporting unit using a weighting of the income approach and the market approach. For purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk adjusted rate. The Company ~~used~~uses internal forecasts to estimate future cash flows and includes ~~an estimate~~estimates of long-term future growth rates based on ~~the~~our most recent views of the long-term forecast for each segment. Accordingly, actual results can differ from those assumed in ~~the~~our forecasts. ~~The discount rate of approximately 18% is~~Discount rates are derived from a capital asset pricing model and by analyzing published rates for industries relevant to ~~the~~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 ~~the~~our internally developed forecasts.

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

The Company ~~corroborated~~corroborates the total fair values of the reporting units using a market capitalization approach; however, this approach cannot be used to determine the fair value of each reporting unit value. The blend of the income approach and market approach is more closely aligned to the business profile of the Company, including markets served and

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

products available. In addition, required rates of return, along with uncertainties inherent in the forecast of future cash flows, are reflected in the selection of the discount rate. In addition, under the blended approach, reasonably likely scenarios and associated

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~

sensitivities can be developed for alternative future states that may not be reflected in an observable market price. The Company will assess each valuation methodology based upon the relevance and availability of the data at the time the valuation is performed and ~~weight~~weights the methodologies appropriately.

~~As discussed in Note 3, in April 2015, the Company acquired VuComp’sM-Vu~~^® Breast Density product for $1.7 million. The product was integrated into the Company’s Powerlook AMP system, which is a component of the Detection reporting unit. The Company determined that the acquisition was a business combination and recorded goodwill of $0.8 million to the Detection segment. In January 2016, the Company completed the acquisition of VuComp’s~~M-Vu~~ CAD and other assets for $6,000. The customers, related technology and clinical data acquired are being used for the Company’s Cancer Detection products and the Company recorded goodwill of $293,000 to the Detection segment.

In December 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation. The Company sold and conveyed to Buyer all right, title and interest to certain intellectual property relating to the VersaVue Software and the DynaCAD product and related assets. As a result of the Asset Purchase Agreement, the Company determined that the sale constituted the sale of a business and the Company allocated $394,000 of goodwill to assets held for sale as of December 31, 2016. The allocation was based on the fair value of the assets sold relative to the fair value of the Detection reporting unit as of the date of the Asset Purchase Agreement. The Company closed the transaction on January 30, 2017, and goodwill was a component of the net assets sold as of the closing date.

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

   Detection    Therapy    Total
Balance at December 31, 2016
   8,362    5,735    14,097






Impairment
   —      (3,969 )    (3,969 )






Balance at September 30, 2017
   $ 8,362    $ 1,766    $ 10,128






Accumulated Goodwill
   699    6,270    54,906
Fair value allocation
   7,663    13,446    —
Accumulated impairment
   —      (17,950 )    (44,778 )






Balance at September 30, 2017
   $ 8,362    $ 1,766    $ 10,128


	Detection		Therapy			Total
Balance at December 31, 2017	$	8,362	$	—		$	8,362

Balance at June 30, 2018	$	8,362	$	—		$	8,362

Accumulated Goodwill	$	699	$	6,270		$	54,906
Fair value allocation		7,663		13,446			—
Accumulated impairment		—		(19,716	)		(46,544	)

Balance at June 30, 2018	$	8,362	$	—		$	8,362

Note ~~13 -~~ 12—Long-lived assets

In accordance with FASB ASC Topic 360, “Property, Plant and Equipment”, (“ASC 360”), the Company assesses long-lived assets for impairment if events and circumstances indicate it is more likely than not that the fair value of the asset group is less than the carrying value of the asset group.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~

ASC360-10-35 uses “events and circumstances” criteria to determine when, if at all, an asset (or asset group) is evaluated for recoverability. Thus, there is no set interval or frequency for recoverability evaluation. In accordance with ASC360-10-35-21, the following factors are examples of events or changes in circumstances that indicate the carrying amount of an asset (asset group) may not be recoverable and thus is to be evaluated for recoverability.

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

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

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

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

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 ASC360-10-35-17, 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~~asset’s (or asset group’s) fair value. The Company determined the “Asset Group” to be the assets of the Therapy segment, which the Company considered to be the lowest level for which the identifiable cash flows were largely independent of the cash flows of other assets and liabilities.

The Company completed an interim goodwill impairment assessment for the Therapy reporting unit in the third quarter of 2017 and noted that there was ~~a goodwill~~an impairment ~~(see Note 13).~~of goodwill. As a result, the Company determined this was a triggering event to review long-lived assets for ~~long-lived assets.~~impairment. Accordingly, the Company completed an analysis pursuant to ASC360-10-35-17 and determined that the carrying value of the asset group exceeded the undiscounted cash flows, and that long-lived assets were impaired. The Company recorded long-lived asset impairment charges of approximately $0.7 million in the third quarter ended September 30, 2017 based on the deficiency between the book value of the assets and the fair value as determined in the analysis. ~~At September 30,~~

The Company also completed a goodwill assessment for the fourth quarter of 2017, and in connection with that assessment, the ~~long lived assets in~~Company completed an analysis pursuant to ASC360-10-35-17 and determined that the undiscounted cash flows exceeded the carrying value of the asset group ~~are recorded at their current fair values.~~and that long-lived assets were not impaired. The Company determined there were no triggering events in the quarter ended June 30, 2018.

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

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~September~~June 30, ~~2017~~

2018

Note ~~14 -~~ 13—Segment Reporting

In accordance with FASB Topic ASC 280, “Segments”, operating segments, are defined as components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance.

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

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

Our CODM does not use asset information by segment to allocate resources or make operating decisions.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~

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):

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Segment revenues:

Detection
   $ 4,346    $ 4,134    $ 13,066    $ 12,961
Therapy
   2,654    1,869    7,134    6,449








Total Revenue
   $ 7,000    $ 6,003    $ 20,200    $ 19,410








Segment gross profit:

Detection
   $ 3,822    $ 3,586    $ 11,553    $ 11,429
Therapy
   821    515    2,282    2,560








Segment gross profit
   $ 4,643    $ 4,101    $ 13,835    $ 13,989








Segment operating income (loss):

Detection
   1,475    1,250    4,261    4,494
Therapy
   (6,451 )    (2,055 )    (10,627 )    (5,398 )








Segment operating income (loss)
   $ (4,976 )    $ (805 )    $ (6,366 )    $ (904 )








General, administrative, depreciation and amortization expense
   $ (1,966 )    $ (1,847 )    $ (6,143 )    $ (5,774 )
Interest expense
   (36 )    (15 )    (51 )    (59 )
Gain on sale of MRI assets
   —      —      2,508    —
Other income
   3    2    3    9








Loss before income tax
   $ (6,975 )    $ (2,665 )    $ (10,049 )    $ (6,728 )

~~Note 15 - Recent Accounting Pronouncements~~

~~In May 2014, the FASB issued ASUNo. 2014-09,~~ ~~“Revenue from Contracts with Customers” (Topic 606), or ASU2014-09,~~ ~~which superseded nearly all existing revenue recognition guidance under U.S. GAAP. Since then, the FASB has also issued ASU2016-08,~~ ~~Revenue from Contracts with Customers (Topic 606), Principals versus Agent Considerations and ASU2016-10,~~ ~~Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, which further elaborate on the original ASUNo. 2014-09.~~ The core principle of these updates is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled for those goods or services. ASU~~2014-09~~ defines a five step process to achieve this core principle and, in doing so, more judgments and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In July 2015, the FASB approved a~~one-year~~ deferral of the effective date to January 1, 2018, with early adoption to be permitted as of the original effective date of January 1, 2017. Once this standard becomes effective, companies may use either of the following transition methods: (i) a full retrospective approach

iCAD, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~September~~June 30, ~~2017~~

2018


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Segment revenues:
Detection	$	3,990		$	4,231		$	8,001		$	8,720
Therapy		2,172			2,178			4,474			4,480

Total Revenue	$	6,162		$	6,409		$	12,475		$	13,200

Segment gross profit:
Detection	$	3,456		$	3,730		$	6,985		$	7,731
Therapy		1,328			773			2,297			1,461

Segment gross profit	$	4,784		$	4,503		$	9,282		$	9,192

Segment operating income (loss):
Detection	$	1,019		$	1,284		$	1,006		$	2,786
Therapy		(360	)		(1,793	)		(1,426	)		(4,176	)

Segment operating income (loss)	$	659		$	(509	)	$	(420	)	$	(1,390	)

General, administrative, depreciation and amortization expense	$	(1,598	)	$	(2,115	)	$	(3,667	)	$	(4,177	)
Interest expense		(113	)		(10	)		(255	)		(15	)
Gain on sale of MRI assets		—			—			—			2,508
Other income		29			—			51			—

Loss before income tax	$	(1,023	)	$	(2,634	)	$	(4,291	)	$	(3,074	)

~~reflecting~~Note 14—Recent Accounting Pronouncements

ASU2014-09, “Revenue from Contracts with Customers.”

On January 1, 2018, the ~~application~~Company adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers” and all the related amendments (Topic 606) using the modified retrospective method for all contracts not completed as of the ~~standard~~date of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in ~~each reporting period~~accordance with practical expedient ASC606-10-65-1-(f)-4, which did not have a material effect on the ~~option to elect certain practical expedients, or (ii) a retrospective approach with~~Company’s assessment of the cumulative effect adjustment upon adoption. The Company recognized the cumulative effect of initially ~~adopting ASU2014-09~~ ~~recognized at the date of adoption (which includes additional footnote disclosures).~~

The Company has performed an assessment of its revenue streams and customer classes. The Company has used this information to develop an implementation plan which it expects to complete during the fourth quarter of 2017. The Company does not expect that its revenue recognition will be materially impacted byapplying the new ~~guidance.~~standard as an adjustment to the opening balance of retained earnings. The ~~Company is also assessing~~comparative information has not been restated and continues to be reported under the ~~impact~~accounting standards in effect for those periods. See Note 1 for details of the guidance on its contract costs in order to determine the magnitude of impact. The Company currently expects to adopt the guidance using the modified retrospective approach, and will finalize this selection along with completion of the implementation plan.

There are also certain considerations related to internal control over financial reporting that are associated with implementing Topic 606. The Company is evaluating its internal control framework over revenue recognition to identify any changes that may need to be made in relation to the implementation process, as well as uponCompany’s adoption of ~~the new guidance.~~

In addition, disclosure requirements under the new guidance in Topic 606 have been significantly expanded in comparison to the disclosure requirements under the current guidance. The Company’s implementation phase includes designing and implementing the appropriate internal controls to obtain and disclose the information required under Topic 606.

~~The Company expects~~

iCAD, INC. AND SUBSIDIARIES

Notes to adopt certain practical expedients and make certain policy elections related to the accounting for significant finance components, sales taxes, shipping and handling, costs to obtain a contract and immaterial promised goods or services, which will mitigate certain impacts of adopting Topic 606. The Company also expects to review the tax impact, if any, that Topic 606 will have on the financial statements.Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2018

ASU2016-02, “Leases”

In February 2016, the FASB issued ASUNo. 2016-02, “Leases”. The standard establishes aright-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements, however the adoption of the standard is expected to increase both assets and liabilities for leases that would previously have beenoff-balance sheet operating leases.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2017~~

~~On January 1, 2017, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)No. 2016-09,~~ ~~“Compensation—Stock Compensation” (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU2016-09”),~~ which simplifies several aspects of the accounting for employee share-based payment transactions, including income taxes consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. Under ASU~~2016-09,~~ excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement, and excess tax benefits are recognized regardless of whether the benefit reduces taxes payable in the current period. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. As a result of the adoption, the net operating loss deferred tax assets increased by $2.1 million and are offset by a corresponding increase in the valuation allowance.

~~In August 2016, the FASB issued ASU2016-15,~~ “Statement of Cash Flows (Topic 230)”, a consensus of the FASB’s Emerging Issues Task Force. This update is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The update requires cash payments for debt prepayment or debt extinguishment costs to be classified as cash outflows for financing activities. It also requires cash payments made soon after an acquisition’s consummation date (approximately three months or less) to be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities. The amendment is effective for annual periods beginning after December 15, 2017, and interim periods thereafter. Early adoption is permitted. The Company does not expect the adoption of this amendment will have a material impact on our consolidated financial statements.

~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: Certain information included in this Item 2 and elsewhere in this Form10-Q that are not historical facts contain forward looking statements that involve a number of known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward looking statements. These risks and uncertainties include, but are not limited to, uncertainty of future sales and expense levels, protection of patents and other proprietary rights, the impact of supply and manufacturing constraints or difficulties, regulatory changes and requirements applicable to our products, product market acceptance, possible technological obsolescence of products, increased competition, integration of the acquired businesses, the impact of litigation and/or government regulation, changes in Medicare reimbursement policies, competitive factors, the effects of a decline in the economy in markets served by the Company and other risks detailed in the Company’s other filings with the Securities and Exchange Commission. The words “believe”, “plan”, “intend”, “expect”, “estimate”, “anticipate”, “likely”, “seek”, “should”, “would”, “could” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date the statement was made.

Results of Operations

Overview

iCAD delivers innovative cancer detection and radiation therapy solutions and services that enable clinicians to find and treat cancers earlier and while enhancing patient care. iCAD offers a comprehensive range of upgradeable computer aided detection (CAD) and workflow solutions to support rapid and accurate detection of breast and colorectal cancers. iCAD’s Xoft^® Axxent^® Electronic Brachytherapy (eBx^®) System^® is a painless,non-invasive technology that delivers high dose rate, low energy radiation, which targets cancer while minimizing exposure to surrounding healthy tissue. The Xoft System is FDA cleared and CE marked for use anywhere in the body, including treatment ofnon-melanoma skin cancer, early-stage breast cancer and gynecological cancers. The comprehensive iCAD technology platforms include advanced hardware and software as well as management services designed to support cancer detection and radiation therapy treatments.

The Company has grown primarily through acquisitions including CADx, Qualia Computing, CAD Sciences, Xoft, DermEbx, Radion and VuComp. The Radion/DermEbx acquisition extended the Company’s position as a larger player in the oncology market, including the components that enable dermatologists and radiation oncologists to develop, launch and manage their electronic brachytherapy (“eBx”) programs for the treatment ofnon-melanoma skin cancer (“NMSC”). The VuComp acquisition included an extensive library of related clinical data which we use for cancer detection research and patents, as well as key personnel and expanded our customer base.

In the Detection segment, our industry-leading solutions include advanced image analysis and workflow solutions that enable healthcare professionals to better serve patients by identifying pathologies and pinpointing the most prevalent cancers earlier, a comprehensive range of high-performance, upgradeable Computer-Aided Detection (CAD) systems and workflow solutions for mammography, Magnetic Resonance Imaging (MRI) and Computed Tomography (CT).

The Company intends to continue the extension of its image analysis and clinical decision support solutions for mammography and CT imaging. The Company believes that advances in digital imaging techniques, such as 3D mammography, should bolster its efforts to develop additional commercially viable CAD/advanced image analysis and workflow products. ~~In January 2016, the Company completed the acquisition of VuComp’sM-Vu~~ ~~cancer detection portfolio includingM-Vu~~ CAD for $6,000. The acquisition provided clinical data for research and an additional customer install base to sell the Company’s cancer detection solutions. In December 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation. The Company sold and conveyed to Invivo all right, title and interest to certain intellectual property relating to the VersaVue Software and the DynaCAD product and related assets. The Company closed the transaction on January 30, 2017, and recorded a gain on the sale of approximately $2.5 million as of the closing date. In March 2017, the Company announced that it received Premarket Approval from the U.S. Food and Drug Administration (the “FDA”) for the Powerlook Tomo Detection product.

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

On January 4, 2018, the Company adopted a plan to discontinue offering radiation therapy professional services to practices that ~~enable dermatologists and radiation oncologists to develop, launch and manage their eBx programs~~provide the Company’s electronic brachytherapy solution for the treatment of ~~NMSC.~~NMSC under the subscription service model within the Therapy Segment. As a result, the Company will no longer offer the subscription service model to customers. The Company will continue to offer its capital sales model for both skin cancer treatment and IORT, which provides a brachytherapy system and related source and service agreements. The discontinuance of the subscription service model is expected to reduce radiation therapy professional services delivery costs, decrease cash burn, andre-focus the Company on the higher margin capital product and service offerings.

In May 2018, the Company submitted Version 2.0 of its PowerLook Tomo Detection product for FDA approval.

As we have discussed in our risk factors noted in our Annual Report on Form10-K filed with the SEC for the year ended December 31, ~~2016,~~2017, our business can be affected by coverage policies adopted by federal and state governmental authorities, such as Medicare and Medicaid, as well as private payers, which often follow the coverage policies of these public programs. Such policies may affect which products customers purchase and the prices customers are willing to pay for those products in a particular jurisdiction.

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

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition, results of operations, and cash flows are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The

preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On anon-going basis, the Company evaluates these estimates, including those related to accounts receivable allowance, inventory valuation and obsolescence, intangible assets, income taxes, warranty obligations, contingencies and litigation. Additionally, the Company uses assumptions and estimates in calculations to determine stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As of January 1, 2018, we adopted ASC Topic 606. Refer to Note 1 of this Form10-Q for disclosure of the changes related to this adoption. There have been no additional material changes to our critical accounting policies as discussed in our 2017 Annual Report on Form10-K.For a comprehensive list of the Company’s critical accounting policies, reference should be made to the Annual Report on Form10-K for the year ended December 31, ~~2016~~2017 filed on March ~~24, 2017.~~30, 2018.

Three months ended ~~September~~June 30, ~~2017~~2018 compared to the three months ended ~~September~~June 30, ~~2016~~2017

Revenue: (in thousands)


	Three months ended September 30,										Three months ended June 30,
	2017		2016		Change			% Change			2018		2017		Change			% Change
Detection revenue
Product revenue	$	2,758	$	1,991	$	767			38.5	%	$	2,486	$	2,545	$	(59	)		(2.3	)%
Service revenue		1,588		2,143		(555	)		(25.9	)%		1,504		1,686		(182	)		(10.8	)%

Subtotal		4,346		4,134		212			5.1	%		3,990		4,231		(241	)		(5.7	)%

Therapy revenue
Product revenue		668		23		645			2804.3	%		708		123		585			475.6	%
Service revenue		1,986		1,846		140			7.6	%		1,464		2,055		(591	)		(28.8	)%

Subtotal		2,654		1,869		785			42.0	%		2,172		2,178		(6	)		(0.3	)%

Total revenue	$	7,000	$	6,003	$	997			16.6	%	$	6,162	$	6,409	$	(247	)		(3.9	)%

Three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016:~~2017:

Total revenue for the three month period ended ~~September~~June 30, ~~2017~~2018 was ~~$7.0~~$6.2 million compared with revenue of ~~$6.0~~$6.4 million for the three month period ended ~~September~~June 30, ~~2016, an increase~~2017, a decrease of approximately ~~$1.0~~$0.2 million, or ~~16.6%~~3.9%. The ~~increase~~decrease in revenue was due to ~~increases~~the decrease in Detection revenues of approximately $0.2 ~~million and an increase in Therapy revenue of approximately $0.8~~ million.

Detection product revenue ~~increased~~decreased by approximately ~~$0.8 million from $2.0 million to $2.8 million~~$59,000 or ~~38.5%~~2.3% in the three months ended ~~September~~June 30, ~~2017~~2018 as compared to the three months ended ~~September~~June 30, ~~2016.~~2017. The ~~increase~~decrease in Detection product revenue is due ~~primarily~~ to a decrease in sales of Secondlook of approximately $0.5 million offset by an increase in ~~digital systems driven by increases~~sales of Powerlook of approximately $0.4 million, as well as a slight increase in ~~sales to our OEM partners.~~Colon revenue.

Detection service and supplies revenue decreased by approximately ~~$0.6~~$0.2 million from ~~$2.1~~$1.7 million in the three months ended ~~September~~June 30, ~~2016~~2017 to ~~$1.6~~$1.5 million in the three months ended ~~September~~June 30, ~~2017.~~2018. The decrease in Detection service and supplies revenue is due ~~primarily~~ to ~~the~~a decrease in service revenue associated with the MRI ~~business.~~business and a decrease in service contracts related to the Company’s legacy TotalLook product which has been sunset. Service and supplies revenue reflects the sale of service contracts to our installed base of customers. Service and supplies revenue related to our installed base of customers and can vary from quarter to quarter.

Therapy product revenue increased by approximately $0.6 million from $0.1 million for the three months ended June 30, 2017 to $0.7 million for the three months ended June 30, 2018. Product revenue from the sale of our Axxent eBx systems can vary significantly due to an increase or decrease in the number of units sold which can cause a significant fluctuation in product revenue in the period.

Therapy service and supply revenue decreased by approximately $0.6 million from $2.1 million for the three months ended June 30, 2017 to $1.5 million for the three months ended June 30, 2018. Therapy service and supplies revenue related to electronic brachytherapy fornon-melanoma skin cancer (“NMSC”) for the three months ended June 30, 2017 was approximately $0.6 million as compared to $40,000 for the three months ended June 30, 2018, reflecting the wind-down of the customers using the subscription service model which the Company discontinued offering in early 2018. Source, service and disposable applicators remain a significant component of Therapy service revenue.

Cost of Revenue and Gross Profit: (in thousands)


	Three months ended June 30,
	2018			2017			Change			% Change
Products	$	537		$	293		$	244			83.3	%
Service and supplies		739			1,327			(588	)		(44.3	)%
Amortization and depreciation		102			286			(184	)		(64.3	)%

Total cost of revenue	$	1,378		$	1,906		$	(528	)		(27.7	)%

Gross profit	$	4,784		$	4,503		$	281			6.2	%
Gross profit %		77.6	%		70.3	%					7.4	%

	Three months ended June 30,
	2018			2017			Change			% Change
Detection gross profit	$	3,456		$	3,730		$	(274	)		(7.3	%)
Therapy gross profit		1,328			773			555			71.8	%

Gross profit		4,784			4,503			281			6.2	%

Gross profit %		77.6	%		70.3	%					7.4	%

Gross profit for the three month period ended June 30, 2018 was $4.8 million, or 77.6% of revenue as compared to $4.5 million or 70.3% of revenue in the three month period ended June 30, 2017. Gross profit percent changes are primarily due to changes in the mix of business, consulting costs related tonon-recurring engineering revenue, additional manufacturing investments and amortization of acquired intangibles.

Cost of products increased by approximately $244,000 from approximately $293,000 for the three months ended June 30, 2017 to approximately $537,000 for the three months ended June 30, 2018. The increase is due primarily to the increase in therapy product revenue for the second quarter of 2018. The cost of product revenue as a percentage of product revenue was approximately 17% for the three months ended June 30, 2018 as compared to 11% for the three months ended June 30, 2017. The increase in cost of product revenue as a percentage of product revenue is primarily due to the increase in Therapy product revenue.

The cost of service and supplies was $1.3 million for the three months ended June 30, 2017 as compared to $0.7 million for the three months ended June 30, 2018. The cost of service and supplies revenue as a percentage of service and supplies revenue was approximately 25% for the quarter ended June 30, 2018 as compared to 35% for the quarter ended June 30, 2017, which reflects the decrease of the cost of sales related to the exit from the Xoft subscription business

Amortization and depreciation decreased from $0.3 million for the three month period ended June 30, 2017 to $0.1 million for the three months ended June 30, 2018, as a result of the impairment recorded during the third quarter of 2017.

Operating Expenses: (in thousands)


	Three months ended June 30,
	2018		2017		Change			Change %
Operating expenses:
Engineering and product development	$	2,057	$	2,232	$	(175	)		(7.8	)%
Marketing and sales		2,006		2,690		(684	)		(25.4	)%
General and administrative		1,583		2,089		(506	)		(24.2	)%
Amortization and depreciation		77		116		(39	)		(33.6	)%

Total operating expenses	$	5,723	$	7,127	$	(1,404	)		(19.7	)%

Operating expenses decreased by approximately $1.4 million, or 19.7%, in the three months ended June 30, 2018.

Engineering and Product Development.Engineering and product development costs were approximately $2.1 million for the three month period ended June 30, 2018 as compared to $2.2 million for the three month periods ended June 30, 2017. Detection engineering and product development costs were $1.3 million for each of the three months ended June 30, 2018 and 2017. Therapy engineering and product development costs decreased by $0.2 million to $0.8 million for the three months ended June 30, 2018 from $1.0 million for the three months ended June 30, 2017. The decrease in Therapy engineering and product development costs for the three months ended June 30, 2018 is due primarily to decreases in personnel, consulting and clinical expenses.

Marketing and Sales.Marketing and sales expenses decreased by $0.7 million or 25.4%, from $2.7 million in the three month period ended June 30, 2017 to $2.0 million in the three month period ended June 30, 2018. Detection marketing and sales expense was $1.1 million in each of the three month periods ended June 30, 2017 and 2018. Therapy marketing and sales expense decreased by $0.7 million from $1.6 million in the three months ended June 30, 2017 to $0.9 million in the three months ended June 30, 2018. The decrease in Therapy marketing and sales is due primarily to decreases in personnel costs, consulting, stock compensation, trade shows and travel, which are due to expense controls as well as reductions related to the exit from the Xoft subscription business.

General and Administrative.General and administrative expenses decreased by $0.5 million or 24.2%, from $2.1 million in the three months ended June 30, 2017 as compared to $1.6 million for the three months ended June 30, 2018. The decrease in General and administrative expenses is due primarily to a decrease of approximately $0.5 million related to stock compensation expense. In the quarter ended June 30, 2017, restricted shares were issued in lieu of cash bonuses, which increased stock compensation expense.

Other Income and Expense: (in thousands)


	Three months ended June 30,
	2018			2017			Change			Change %
Interest expense	$	(113	)	$	(10	)	$	(103	)		1030.0	%
Interest income		29			—			29			0.0	%

	$	(84	)	$	(10	)	$	(74	)		740.0	%

Tax benefit (expense)		(4	)		3			(7	)		(233.3	)%

Interest expense. Interest expense of $113,000 increased by $103,000 for the three month period ended June 30, 2018 as compared to interest expense of $10,000 in the three month period ended June 30, 2017. The increase in interest expense is due to the interest expense associated with the Silicon Valley Bank term loan signed in August 2017.

Interest income. Interest income was $29,000 and $0, respectively, for the three month periods ended June 30, 2018 and 2017.

Tax expense. The Company had tax expense of $4,000 for the three month period ended June 30, 2018 as compared to a tax benefit of $3,000 for the three month period ended June 30, 2017. Tax expense is due primarily to statenon-income and franchise based taxes.

Six months ended June 30, 2018 compared to the six months ended June 30, 2017

Revenue: (in thousands)


	Six months ended June 30,
	2018		2017		Change			% Change
Detection revenue
Product revenue	$	4,975	$	5,212	$	(237	)		(4.5	)%
Service revenue		3,026		3,508		(482	)		(13.7	)%

Subtotal		8,001		8,720		(719	)		(8.2	)%

Therapy revenue
Product revenue		1,233		587		646			110.1	%
Service revenue		3,241		3,893		(652	)		(16.7	)%

Subtotal		4,474		4,480		(6	)		(0.1	)%

Total revenue	$	12,475	$	13,200	$	(725	)		(5.5	)%

Six months ended June 30, 2018 and 2017:

Total revenue for the six month period ended June 30, 2018 was $12.5 million compared with revenue of $13.2 million for the six month period ended June 30, 2017, a decrease of approximately $0.7 million, or 5.5%. The decrease in revenue was due to the decrease in Detection revenues of approximately $0.7 million.

Detection product revenue decreased by approximately $0.2 million from $5.2 million to $5.0 million or 4.5% in the six months ended June 30, 2018 as compared to the six months ended June 30, 2017. The decrease in Detection product revenue is due to a decrease in sales of Secondlook of approximately $1.1 million offset by an increase in sales of Powerlook of approximately $1.0 million, reflecting the transition of Detection product revenue from 2D to 3D. The remaining decrease is due primarily to a decrease in MRI revenue and Colon revenue. The MRI business was sold in January 2017.

Detection service and supplies revenue decreased by approximately $0.5 million from $3.5 million in the six months ended June 30, 2017 to $3.0 million in the six months ended June 30, 2018. The decrease in service and supplies revenue is due to a decrease in service revenue associated with the MRI business and a decrease in service contracts related to the Company’s legacy TotalLook product which has been sunset. Service and supplies revenue reflects the sale of service contracts to our installed base of customers. Service and supplies revenue related to our installed base of customers and can vary from quarter to quarter.

Therapy product revenue was approximately ~~$0.7~~$1.2 million for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2018 as compared to ~~$23,000~~$0.6 million for the ~~three~~six months ended ~~September~~June 30, ~~2016. The increase in product revenue for the quarter ended September 30, 2017 is due to the sale of Axxent eBx systems in the quarter.~~2017. Product revenue from the sale of our Axxent eBx systems can vary significantly due to an increase or decrease in the number of units sold which can cause a significant fluctuation in product revenue in the period.

Therapy service and supply revenue was approximately ~~$2.0~~$3.9 million for the ~~three~~six months ended

~~September~~ June 30, ~~2017~~2018 as compared to ~~$1.9~~$3.2 million for the ~~three~~six months ended ~~September~~June 30, ~~2016.~~2017. Therapy service and supplies revenue ~~is primarily the services~~ related to electronic brachytherapy for~~non-melanoma~~ ~~skin cancer (“NMSC”).~~ NMSC for the six months ended June 30, 2017 was approximately $1.1 million as compared to $0.3 million for the six months ended June 30, 2018, reflecting the wind-down of the customers using the subscription service model which the Company discontinued offering in early 2018. Source, service and disposable applicators continue to be a significant component of Therapy service revenue.

Cost of Revenue and Gross Profit: (in thousands)


	Three months ended September 30,												Six months ended June 30,
	2017			2016			Change			% Change			2018			2017			Change			% Change
Products	$	636		$	236		$	400			169.5	%	$	995		$	713		$	282			39.6	%
Service and supplies		1,458			1,370			88			6.4	%		1,991			2,711			(720	)		(26.6	)%
Amortization and depreciation		263			296			(33	)		(11.1	)%		207			584			(377	)		(64.6	)%

Total cost of revenue	$	2,357		$	1,902		$	455			23.9	%	$	3,193		$	4,008		$	(815	)		(20.3	)%

Gross profit	$	4,643		$	4,101		$	542			13.2	%	$	9,282		$	9,192		$	90			1.0	%
Gross profit %		66.3	%		68.3	%					(2.0	)%		74.4	%		69.6	%					4.8	%

	Three months ended September 30,												Six months ended June 30,
	2017			2016			Change			% Change			2018			2017			Change			% Change
Detection gross profit	$	3,822		$	3,586		$	236			6.6	%	$	6,985		$	7,731		$	(746	)		(9.6	%)
Therapy gross profit		821			515			306			59.4	%		2,297			1,461			836			57.2	%

Gross profit	$	4,643		$	4,101		$	542			13.2	%		9,282			9,192			90			1.0	%

Gross profit %														74.4	%		69.6	%					4.8	%

Gross profit for the ~~three~~six month period ended ~~September~~June 30, ~~2017~~2018 was ~~$4.6~~$9.3 million, or ~~66.3%~~74.4%, of revenue as compared to ~~$4.1~~$9.2 million or ~~68.3%~~69.6% of revenue in the ~~three~~six month period ended ~~September~~June 30, ~~2016.~~2017. Gross profit percent changes are primarily due to changes in the mix of business, consulting costs related tonon-recurring engineering revenue, additional manufacturing investments and amortization of acquired intangibles.

Cost of products increased by approximately ~~$0.4 million~~$282,000 from approximately ~~$0.2 million~~$713,000 for the ~~three~~six months ended ~~September~~June 30, ~~2016~~2017 to approximately ~~$0.6million~~$995,000 for the ~~three~~six months ended ~~September~~June 30, ~~2017.~~2018. The increase is due primarily to the increase in therapy product revenue for the ~~third quarter of 2017.~~sixth months ended June 30, 2018. The cost of product revenue as a percentage of product revenue was approximately ~~19%~~16% for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2018 as compared to 12% for the ~~three~~six months ended ~~September~~June 30, ~~2016.~~2017. The increase in cost of product revenue as a percentage of product revenue is due primarily to ~~the sale~~sales of ~~Axxent eBx controllers~~Therapy products which have a higher cost of ~~revenue~~sales than Detection products.

The cost of service and supplies was ~~$1.5~~$2.7 million for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2018 as compared to ~~$1.4~~$2.0 million for the ~~three~~six months ended ~~September~~June 30, ~~2016.~~2017. The cost of service and supplies revenue as a percentage of service and supplies revenue was approximately ~~41%~~32% for the ~~quarter~~six months ended ~~September~~June 30, ~~2017 and 34%~~2018 as compared to 37% for the ~~quarter~~six months ended ~~September~~June 30, ~~2016.~~2017. The decrease in service and supplies cost of sales is due primarily to discontinuing the Xoft subscription business.

Amortization and depreciation ~~was approximately $0.3~~decreased from $0.4 million for the six month period ended June 30, 2017 to $207,000 for the six months ended June 30, 2018, which reflects the reduction in ~~each~~depreciation and amortization as a result of the ~~three month periods ended September 30, 2016 and September 30,~~impairment recorded during the third quarter of 2017.

Operating Expenses: (in thousands)


	Three months ended September 30,										Six months ended June 30,
	2017		2016		Change			Change %			2018		2017			Change			Change %
Operating expenses:
Engineering and product development	$	2,254	$	2,360	$	(106	)		(4.5	)%	$	5,396	$	4,806		$	590			12.3	%
Marketing and sales		2,580		2,322		258			11.1	%		4,172		5,592			(1,420	)		(25.4	)%
General and administrative		1,944		1,783		161			9.0	%		3,641		4,123			(482	)		(11.7	)%
Amortization and depreciation		107		288		(181	)		(62.8	)%		160		238			(78	)		(32.8	)%
Goodwill and long-lived asset impairment		4,700		—		4,700			0.0	%
Gain from sale of MRI assets												—		(2,508	)		2,508			(100.0	)%

Total operating expenses	$	11,585	$	6,753	$	4,832			71.6	%	$	13,369	$	12,251		$	1,118			9.1	%

Operating expenses increased by approximately ~~$4.8~~$1.1 million or ~~71.6%~~9.1% in the ~~three~~six months ended ~~September~~June 30, ~~2017. The increase is due primarily to~~2018. Operating expenses for the ~~goodwill and long lived asset impairment~~six months ended June 30, 2017 include a gain from the sale of ~~$4.7~~MRI assets of $2.5 million.

Engineering and Product Development.Engineering and product development costs were approximately ~~$2.3~~$5.4 million for the ~~three~~six month period ended ~~September~~June 30, ~~2017~~2018 as compared to ~~$2.4~~$4.8 million for the ~~three~~six month ~~periods~~period ended ~~September~~June 30, ~~2016.~~2017. Detection engineering and product development costs ~~were~~increased by $1.1 million to $2.4 million for the six months ended June 30, 2018 as compared to $1.3 million for ~~each of~~ the ~~three month periods~~six months ended ~~September~~June 30, ~~2017 and September 30, 2016.~~2017. Therapy engineering and product development costs decreased by ~~$0.1~~$0.3 million to $1.0 million for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2018 from ~~$1.1~~$1.3 million for the ~~three~~six months ended ~~September~~June 30, ~~2016.~~2017. The ~~Company continues~~increase in Detection engineering and product development costs for the six months ended June 30, 2018 is due to ~~invest in strategic initiatives such as~~costs related to the development of ~~clinical evidence in both Detection and Therapy, development~~the next version of the Company’s breast tomosynthesis ~~products and ongoing enhancements to our electronic brachytherapy products.~~product.

Marketing and Sales.Marketing and sales expenses ~~increased~~decreased by ~~$0.3~~$1.4 million or ~~11.1%~~25.4%, from ~~$2.3~~$5.6 million in the ~~three~~six month period ended ~~September~~June 30, ~~2016~~2017 to ~~$2.6~~$4.2 million in the ~~three~~six month period ended ~~September~~June 30, ~~2017.~~2018. Detection marketing and sales expense ~~increased $0.2 million from $0.9~~was $2.2 million in each of the ~~three months~~six month periods ended ~~September~~June 30, ~~2016 to $1.1 million for the three months ended September 30, 2017. The increase in Detection marketing~~2017 and ~~sales expenses was due primarily to increases in commissions and stock compensation.~~2018. Therapy marketing and sales expense ~~increased~~decreased by ~~$0.1~~$1.4 million from ~~$1.5~~$3.4 million in the ~~three~~six months ended ~~September~~June 30, ~~2016~~2017 to ~~$1.6~~$2.0 million in the ~~three~~six months ended ~~September~~June 30, ~~2017.~~2018. The decrease in Therapy marketing and sales is due primarily to decreases in personnel costs, stock compensation, trade shows and travel, which is due to expense controls as well as reductions related to the Xoft subscription business.

General and Administrative.General and administrative expenses ~~increased~~decreased by ~~$0.2~~$0.5 million or ~~9.0%~~11.7%, from ~~$1.8~~$4.1 million in the ~~three~~six month period ended ~~September~~June 30, ~~2016~~2017 to ~~$1.9~~$3.6 million in the ~~three~~six month period ended ~~September~~June 30, ~~2017.~~2018. The ~~increase was~~decrease in general and administrative expenses is due primarily to ~~an increase~~a decrease of approximately $0.5 million related to stock compensation expense in ~~consulting and personnel costs.~~the prior year quarter. In the quarter ended June 30, 2017, restricted shares were issued in lieu of cash bonuses, which increased stock compensation expense.

Amortization and Depreciation.Amortization and depreciation is primarily related to acquired intangible assets and depreciation related to machinery and equipment. Amortization and depreciation decreased to approximately ~~$0.1 million in the quarter ended September 30, 2017 from $0.3 million~~$160,000 for the ~~quarter~~six months ended ~~September~~June 30, ~~2016. The decrease is due primarily to~~2018 from $238,000 for the ~~sale of MRI assets in January~~six months ended June 30, 2017.

~~Goodwill and long-lived asset impairment.~~In the third quarter of 2017, the Company determined there was a triggering event, and accordingly completed an interim goodwill and long-lived asset impairment In the quarter ended September 30, 2017, the Company recorded an impairment charge of $4.0 million related to goodwill and $0.7 million related to intangible assets.

Other Income and Expense: (in thousands)


	Three months ended September 30,												Six months ended June 30,
	2017			2016			Change			Change %			2018			2017			Change			Change %
Interest expense	$	(36	)	$	(15	)		(21	)		140.0	%	$	(255	)	$	(15	)	$	(240	)		1600.0	%
Interest income		3			2			1			50.0	%		51			—			51			0.0	%

	$	(33	)	$	(13	)	$	(20	)		153.8	%	$	(204	)	$	(15	)	$	(189	)		1260.0	%

Tax benefit (expense)	$	42		$	(10	)	$	52			(520.0	)%
Tax expense													$	(17	)	$	(14	)	$	(3	)		21.4	%

Interest expense. Interest expense of ~~$36,000~~$255,000 increased by ~~$21,000 or 140.0%~~$240,000 for the ~~three~~six month period ended ~~September~~June 30, ~~2017~~2018 as compared to interest expense of $15,000 in the ~~three~~six month period ended ~~September~~June 30, ~~2016.~~2017. The increase in interest expense is due ~~primarily~~ to the interest expense associated with the Silicon Valley Bank term loan signed in August 2017.

~~Other~~Interest income. Other income was ~~$3,000~~$51,000 and ~~$2,000,~~$0, respectively, for the ~~three~~six month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017.

Tax ~~benefit (expense).~~expense. The Company had a tax ~~benefit~~expense of ~~$42,000~~$17,000 for the ~~three~~six month period ended ~~September~~June 30, ~~2017~~2018 as compared to tax expense of ~~$10,000~~$14,000 for the ~~three~~six month period ended September 30, 2016. The tax benefit for the quarter ended September 30, 2017 is the result of applying for New Hampshire research and development credits. Tax expense for the quarter ended September 30, 2016 is due primarily to state~~non-income~~ ~~and franchise based taxes.~~

~~Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016~~

~~Revenue: (in thousands)~~

   Nine months ended September 30,
   2017    2016    Change    % Change
Detection revenue

Product revenue
   $ 7,970    $ 6,580    $ 1,390    21.1 %
Service revenue
   5,096    6,381    (1,285 )    (20.1 )%








Subtotal
   13,066    12,961    105    0.8 %








Therapy revenue

Product revenue
   1,255    880    375    42.6 %
Service revenue
   5,879    5,569    310    5.6 %








Subtotal
   7,134    6,449    685    10.6 %








Total revenue
   $ 20,200    $ 19,410    $ 790    4.1 %

~~Nine months ended September 30, 2017 and 2016:~~

Total revenue for the nine month period ended September 30, 2017 was $20.2 million compared with revenue of $19.4 million for the nine month period ended September 30, 2016, an increase of approximately $0.8 million, or 4.1%. The increase in revenue was due to a $0.7 million increase in Therapy revenue and an increase in Detection revenues of approximately $0.1 million.

Detection product revenue increased by approximately $1.4 million from $6.6 million to $8.0 million or 21.1% in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. The increase is due primarily to an increase in CAD revenues of $2.2 million offset by decreases in MRI revenue of approximately $0.7 million and $0.1 million in colon revenue. The decrease in MRI revenue is due primarily to the sale of the Company’s MRI assets in January 2017.

~~Detection service and supplies revenue decreased by approximately $1.3 million from $6.4 million in the nine months ended September 30, 2016 to $5.1 million in the nine months ended September~~June 30, 2017. The decrease in service and supplies is due primarily to the sale of the Company’s MRI assets in January 2017. Service and supplies revenue reflects the sale of service contracts to our installed base of customers. We expect service and supplies revenue related to our installed base of customers to vary from quarter to quarter as customers transition from 2D CAD to digital tomosynthesis.

Therapy product revenue was approximately $1.3 million for the nine months ended September 30, 2017 as compared to $0.9 million for the nine months ended September 30, 2016. Product revenue from the sale of our Axxent eBx systems can vary significantly due to an increase or decrease in the number of units sold which can cause a significant fluctuation in product revenue in the period.

Therapy service and supplies revenue increased approximately $0.3 million from $5.6 million in the nine months ended September 30, 2016 to $5.9 million for the nine months ended September 30, 2017. The increase in Therapy service and supplies revenue is due primarily to an increase in the services related to electronic brachytherapy for NMSC.

~~Cost of Revenue and Gross Profit: (in thousands)~~

   Nine months ended September 30,
   2017 2016 Change    % Change
Products
   $ 1,349 $ 611 $ 738    120.8 %
Service and supplies
   4,169 3,911 258    6.6 %
Amortization and depreciation
   847 899 (52 )    (5.8 )%




Total cost of revenue
   $ 6,365 $ 5,421 $ 944    17.4 %




Gross profit
   $ 13,835 $ 13,989 $ (154 )    (1.1 )%
Gross profit %
   68.5 % 72.1 %    (3.6 )%
   Nine months ended September 30,
   2017 2016 Change    % Change
Detection gross profit
   $ 11,553 $ 11,429 $ 124    1.1 %
Therapy gross profit
   2,282 2,560 (278 )    (10.9 %)




Gross profit
   $ 13,835 $ 13,989 $ (154 )    (1.1 %)

Gross profit for the nine month period ended September 30, 2017 was $13.9 million, or 68.5% of revenue as compared to $14.0 million or 72.1% of revenue in the nine month period ended September 30, 2016. Gross profit percent changes are primarily due to changes in the mix of business, consulting costs related to~~non-recurring~~ engineering revenue, additional manufacturing investments and amortization of acquired intangibles. Gross profit for the nine months ended September 30, 2016 includes a recovery of the medical device excise tax of approximately $0.5 million due to a refund.

Cost of products increased by approximately $0.7 million to $1.3 million for the nine months ended September 30, 2017 from approximately $0.6 million for the nine months ended September 30, 2016, which is due primarily to an increase in Detection product revenue as well as a recovery of medical device excise tax in cost of product revenue of $0.3 million in 2016. The cost of product revenue as a percentage of product revenue was approximately 15% for the nine months ended September 30, 2017 as compared to 8% for the nine months ended September 30, 2016. The increase in cost of product revenue as a percentage of product revenue is due primarily to the recovery of medical device excise tax in 2016. Cost of product revenue can vary due to product mix.

The cost of service and supplies increased by $0.3 million from $3.9 million in the nine months ended September 30, 2016 to $4.2 million in the nine months ended September 30, 2017. The cost of service and supplies revenue as a percentage of service and supplies revenue was approximately 38% for the quarter ended September 30, 2017 and 33% for the quarter ended September 30, 2016. The increase in cost of service supplies is due primarily to the recovery of medical device excise tax of $0.2 million in 2016, which also decreased the cost of service and supplies revenue as a percentage of revenue in 2016.

~~Amortization and depreciation was approximately $0.9 million in each of the nine months ended September 30, 2016 and September 30, 2017.~~

~~Operating Expenses: (in thousands)~~

   Nine months ended September 30,
   2017    2016    Change    Change %
Operating expenses:

Engineering and product development
   $ 7,060    $ 6,835    $ 225    3.3 %
Marketing and sales
   8,172    7,379    793    10.7 %
General and administrative
   6,067    5,586    481    8.6 %
Amortization and depreciation
   345    867    (522 )    (60.2 )%
Goodwill and long-lived asset impairment
   4,700    —      4,700    0.0 %
Gain from sale of MRI assets
   (2,508 )    —      (2,508 )    0.0 %








Total operating expenses
   $ 23,836    $ 20,667    $ 3,169    15.3 %

Operating expenses increased by approximately $3.2 million or 15.3% in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. In the first quarter of 2017, the Company sold certain MRI assets to Invivo and recorded a gain on the sale of $2.5 million, which was offset by the goodwill and long lived asset impairment of $4.7 million, recorded in the third quarter of 2017.

~~Engineering and Product Development.~~Engineering and product development costs were approximately $7.1 million for the nine month period ended September 30, 2017 as compared to $6.8 million for the nine month period ended September 30, 2016, an increase of $225,000 or 3.3%. Therapy engineering and product development costs increased from $3.1 million in the nine months ended September 30, 2016 to $3.2 million for the nine months ended September 30, 2017. Detection engineering and product development costs increased by $0.2 million to $3.9 million for the nine month period ended September 30, 2017 from $3.7 million for the nine month period ended September 30, 2016. The Company continues to invest in strategic initiatives such as the development of ongoing clinical evidence, development of breast tomosynthesis products and additional enhancements to our electronic brachytherapy products.

~~Marketing and Sales.~~Marketing and sales expenses increased by $0.8 million or 10.7%, from $7.4 million in the nine month period ended September 30, 2016 to $8.2 million in the nine month period ended September 30, 2017. Therapy marketing and sales expense increased $0.2 million from $4.7 million in the nine months ended September 30, 2016 to $4.9 million for the nine months ended September 30, 2017. Detection marketing and sales costs increased by $0.5 million from $2.7 million in the nine months ended September 30, 2016 to $3.2 million for the nine months ended September 30, 2017. The increase in Detection marketing and sales costs is due primarily to increases in commissions and stock compensation.

~~General and Administrative.~~General and administrative expenses increased by $0.5 million from $5.6 million in the nine month period ended September 30, 2016 to $6.1 million in the nine month period ended September 30, 2017. The increase was due primarily to an increase in stock compensation costs and a $249,000 gain on settlement of litigation related to the acquisition of VuComp~~M-Vu~~ ~~CAD in January 2016.~~

~~Amortization and Depreciation.~~Amortization and depreciation is primarily related to acquired intangible assets and depreciation related to machinery and equipment. Amortization and depreciation decreased by $0.5 million from $0.9 million in the nine month period ended September 30, 2016 to $0.3 million in the nine month period ended September 30, 2017. The decrease is due primarily to the sale of MRI assets in January 2017.

~~Gain from sale of MRI assets.~~The Company entered into an Asset Purchase Agreement with Invivo Corporation to sell certain MRI assets in December 2016 and the transaction closed on January 30, 2017. As a result, the Company recorded a gain on sale from MRI assets of $2.5 million in the first quarter of 2016.

~~Other Income and Expense: (in thousands)~~

   Nine months ended September 30,
   2017    2016    Change    Change %
Interest expense
   $ (51 )    $ (59 )    $ 8    (13.6 )%
Interest income
   3    9    (6 )    (66.7 )%








   $ (48 )    $ (50 )    $ 2    (4.0 )%








Tax benefit (expense)
   $ 28    $ (55 )    $ 83    (150.9 )%

~~Interest expense~~. Interest expense of $51,000 decreased by $8,000 or 13.6% for the nine month period ended September 30, 2017 as compared to interest expense of $59,000 in the nine month period ended September 30, 2016. Interest expense for the nine months ended September 30, 2017 relates primarily to notes payable. Interest expense in for the nine months ended September 30, 2016 related primarily to capital leases which were paid in 2017.

~~Interest income.~~ ~~Interest income was $3,000 and $9,000 for the nine month period ended September 30, 2017 and September 30, 2016, respectively which reflected income earned from our money market accounts.~~

~~Tax benefit (expense).~~ The Company had a tax benefit of $28,000 for the nine month period ended September 30, 2017 as compared to tax expense of $55,000 for the nine month period ended September 30, 2016. The tax benefit for the nine months ended September 30, 2017 is the result of applying for New Hampshire research and development credits. Tax expense ~~for the nine months ended September 30, 2016~~ is due primarily to statenon-income and franchise based taxes.

Liquidity and Capital Resources

We believe that our current liquidity and capital resources are sufficient to sustain operations through at least the next 12 months, primarily due to cash on hand. Our projected cash needs include planned capital expenditures, lease and settlement commitments, and other long-term obligations.

As of ~~September~~June 30, ~~2017,~~2018, the Company has current assets of ~~$22.4~~$17.3 million which includes ~~$11.3~~$7.8 million of cash and cash equivalents. Current liabilities are ~~$11.6~~$11.0 million and working capital is ~~$10.8~~$6.4 million. The ratio of current assets to current liabilities was ~~1.92:~~1.58:1. ~~In January 2017,~~As part of the Second Loan Modification Agreement dated August 13, 2018, the Company ~~received $2.8 million from~~revised the ~~sale of MRI assets~~Detection Revenue Covenant (the “Covenant”) for the quarter ended June 30, 2018 to ~~Invivo. In August 2017~~maintain compliance with the Covenant. If the Company ~~entered into~~does not meet the Covenant in future quarters, there is no guarantee that the Bank would be willing to revise the Covenant, which could have a ~~debt facility that provides an initial term loan of $6.0 million~~significant impact on the Company’s cash position and ~~a $4.0 million revolving line of credit. The Company also has the option to secure an additional $3.0 million in term loan in 2018, subject to meeting certain revenue milestones.~~liquidity.

     For the nine months
ended September 30,
         2017            2016
     (in thousands)
Net cash used for operating activities
     $ (5,565 )    $ (3,862 )
Net cash provided by (used for) investing activities
     2,486    (262 )
Net cash provided by (used for) financing activities
     5,755    (673 )




Increase (decrease) in cash and equivalents
     $ 2,676    $ (4,797 )


	For the six months ended June 30,
	2018			2017
	(in thousands)
Net cash used for operating activities	$	(1,463	)	$	(3,250	)
Net cash (used for) provided by investing activities		(64	)		2,518
Net cash used for financing activities		(69	)		(169	)

Decrease in cash and equivalents	$	(1,596	)	$	(901	)

Net cash used for operating activities for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 was ~~$5.6~~$1.5 million, compared to net cash used for operating activities of ~~$3.9~~$3.3 million for the ~~nine~~six month period ended ~~September~~June 30, ~~2016.~~2017. The cash used for operating activities for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 resulted primarily from our net loss ~~and from~~offset by working capital changes resulting from ~~increases~~decreases in accounts receivable, ~~decreases~~increases in accounts payable and accrued ~~expenses offset by the cash provided due to the decrease in prepaid~~ expenses. We expect that cash used for or provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, specifically the timing of when we recognize revenue, our accounts receivable collections and the timing of other payments.

The net cash used for investing activities for the six month period ended June 30, 2018 of $64,000 was primarily for purchases of property and equipment. Cash provided by investing activities for the ~~nine~~six month period ended ~~September~~June 30, 2017 ~~of $2.5 million~~ was due to the cash received from the sale of MRI assets offset by purchases of property and equipment. ~~Cash used for investing activities for the nine month period ended September 30, 2016 was $0.3 million, which represents primarily purchases of property and equipment.~~

Net ~~cash provided by financing activities for the nine month period ended September 30, 2017 was $5.8 million as compared to net~~ cash used for financing activities ~~of $0.7 million~~ for the ~~nine~~six month period ended ~~September~~June 30, ~~2016.~~2018 was $69,000 as compared to $169,000 for the six month period ended June 30, 2017. Cash ~~provided by~~used for financing activities for the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017 is due primarily to ~~proceeds from the $6.0 million term loan and~~ taxes paid on the issuance of restricted stock to employees. ~~Cash used for financing activities for the nine month period ended September 30, 2016 represents primarily repayments of capital leases.~~

Contractual Obligations

The following table summarizes, for the periods presented, our future estimated cash payments under existing contractual obligations (in thousands).


Contractual Obligations	Payments due by period										Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		5+ years		Total		Less than 1 year		1-3 years		3-5 years		5+ years
Operating Lease Obligations	$	1,848	$	742	$	1,106	$	—	$	—	$	1,313	$	764	$	549	$	—	$	—
Capital lease obligations		42	$	12		30		—		—		32		14		18		—		—
Settlement Obligations		500		500		—		—		—		463		463		—		—		—
Notes Payable		6,615		591		4,324		1,700		—
Notes Payable - principal and interest												7,069		1,289		5,069		711		—
Other Commitments		825		632		84		32		77		1,032		865		65		28		74

Total Contractual Obligations	$	9,830	$	2,477	$	5,544	$	1,732	$	77	$	9,909	$	3,395	$	5,701	$	739	$	74

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

Settlement obligations represent the remaining payments of the ~~obligations~~obligation to Hologic. ~~The Company paid $0.5 million in July 2017 which represented~~

Notes Payable – principal and interest represents the ~~remaining settlement obligation to Zeiss.~~payments due under the term loan from Silicon Valley Bank.

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

Recent Accounting Pronouncements

See Note 1413 to the Condensed Consolidated Financial Statements.

~~Item 3.~~

~~Quantitative and Qualitative Disclosures about Market Risk~~

Item 3.Quantitative and Qualitative Disclosures about Market Risk

We believe we are not subject to material foreign currency exchange rate fluctuations, as substantially all of our sales and expenses are denominated in the U.S. dollar. We do not hold derivative securities and have not entered into contracts embedded with derivative instruments, such as foreign currency and interest rate swaps, options, forwards, futures, collars or warrants, either to hedge existing risks or for speculative purposes.

Item4.Controls and Procedures

~~Item 4.~~

~~Controls and Procedures~~

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, as of ~~September~~June 30, ~~2017,~~2018, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rule13a-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) were effective at the reasonable level of assurance.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We conduct periodic evaluations to enhance, where necessary our procedures and controls.

Our principal executive officer and principal financial officer conducted an evaluation of our internal control over financial reporting (as defined in Exchange Act Rule13a-15(f)) to determine whether any changes in internal control over financial reporting occurred during the quarter ended ~~September~~June 30, ~~2017,~~2018, that have materially affected or which are reasonably likely to materially affect internal control over financial reporting. ~~Based~~

Beginning January 1, 2018, the Company implemented ASC 606, Revenue from Contracts with Customers. Although the new revenue standard did not have a material impact on ~~that evaluation, there has been no such change during such period.~~consolidated financial statements, the Company did implement changes to our processes related to revenue recognition and the control activities within them. These included the development of new policies based on the five-step model provided in the new revenue standard, new training, ongoing contract review requirements, and the gathering of information necessary provided for expanded disclosures.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Please refer to the detailed discussion regarding litigation set forth in Note 8 of the Notes to Condensed Consolidated Financial Statements in this Form10-Q.

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

Item 1A. Risk Factors:

We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially adversely affect our operations. Our risk factors are described in Part I, Item 1A of our Annual Report on Form10-K filed with the SEC for the year ended December 31, ~~2016~~2017 as filed with the SEC on March ~~24, 2017.~~30, 2018. There have been no material changes in the risks affecting iCAD since the filing of our Form10-K.

Item2.Unregistered Sales of Equity Securities and Use of Proceeds

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

Month of purchase
   Total number
of shares
purchased (1)    Average
price paid per
share    Total number of
shares
purchased as
part of publicly
announced plans
or programs    Maximum dollar
value of shares
that may yet be
purchaed under
the plans or
programs
July 1 - July 31, 2017
   —      $ —      $ —      $ —
August 1 - August 30, 2017
   7,629    3.77    —      —
September 1 - September 31, 2017
   —      —      —      —








Total
   7,629    $ 3.77    $ —      $ —


Month of purchase	Total number of shares purchased (1)		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Maximum dollar value of shares that may yet be purchaed under the plans or programs
April 1 - April 30, 2018		—	$	—	$	—	$	—
May 1 - May 31, 2018		—		—		—		—
June 1 - June 30, 2018		1,606		3.41		—		—

Total		1,606	$	3.41	$	—	$	—

(1)	Represents shares of common stock surrendered by employees to the Company to pay employee withholding taxes due upon the vesting of restricted stock.

Item5.Other Information.

~~Item 6.~~

~~Exhibits~~

On August 13, 2018, the Company entered into a Second Loan Modification Agreement (the “Amendment”) to the Company’s August 7, 2017 Loan and Security Agreement, as amended by the First Loan Modification Agreement dated as of March 22, 2018 (the “Amended Loan Agreement”) with Silicon Valley Bank. The Amendment, among other things, reduced the required minimumsix-month trailing net revenue covenant with respect to the Company’s detection business for each of the last three fiscal quarters in 2018 and increased the final payment fee from 8% to 8.5% of the original principal amount of the loans advanced under the Amended Loan Agreement.

Item6.Exhibits


Exhibit No.		Description

10.1		Second Loan Modification Agreement, dated as of August 13, 2018 by and among Silicon Valley Bank, the Company, Xoft, Inc. and Xoft Solutions, LLC.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
101    The following materials formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, (ii) Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, (iii) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, and (iv) Notes to Consolidated Financial Statements.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	iCAD, Inc.
			~~iCAD, Inc.~~
		(Registrant)

Date:~~November~~ August 14, ~~2017~~2018	By:	/s/ Kenneth M. Ferry
		Kenneth M. Ferry
		Chief Executive Officer,
		Director

Date:~~November~~ August 14, ~~2017~~ 2018	By:	/s/ Richard Christopher
		Richard Christopher
		Chief Financial Officer

4553


	Amount (000’s)
Cash	$	6
Acquisition litigation settlement		249

Purchase price	$	255


	Amount (000’s)			Estimated amortizable life
Current assets	$	84
Property and equipment		65			3 Years
Identifiable intangible assets		699			1-10 Years
Goodwill		293
Current liabilities		(280	)
Long-term liabilities		(606	)

Purchase price	$	255


	For the nine months ended September 30,
	2017			2016
	(in thousands)
Net cash used for operating activities	$	(5,565	)	$	(3,862	)
Net cash provided by (used for) investing activities		2,486			(262	)
Net cash provided by (used for) financing activities		5,755			(673	)

Increase (decrease) in cash and equivalents	$	2,676		$	(4,797	)



32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

101		The following materials formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, (ii) Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, (iii) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, and (iv) Notes to Consolidated Financial Statements.

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