UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM

10-Q

(Mark One)

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

For the quarterly period ended September 30, ~~2019~~

2020

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

For the transition period from

Commission file number

001-09341

iCAD, Inc.

(Exact name of registrant as specified in its charter)


Delaware		02-0377419
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



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

(603)

882-5200

(Registrant’s telephone number, including area code)

Not Applicable

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

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


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	ICAD	The ~~NASDAQ~~Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, an emerging growth company or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule

12b-2

of the Exchange Act.


Large Accelerated filer	☐		Accelerated filer	☒

Non-accelerated filer	☐		Smaller reporting company	☒
		~~Accelerated filer~~
		☐

~~Non-accelerated filer~~	☒		~~Smaller reporting company~~	☒

			Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act) YES ☐ NO ☒.

As of the close of business on November ~~8, 2019~~1, 2020, there were ~~19,359,320~~

22,993,102

shares outstanding of the registrant’s Common Stock, $0.01 par value.

Table of Contents

iCAD, Inc.

INDEX


			Page
PART I	FINANCIAL INFORMATION
~~Page~~
~~PART I~~	~~FINANCIAL INFORMATION~~

Item 1	Financial Statements (unaudited)


	Condensed Consolidated Balance Sheets as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019			3
						3

		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2019~~2020 and September 30, ~~2018~~2019			4
						4

		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2019~~2020 and September 30, ~~2018~~2019			5
						5

		Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~September 30, 2019			6-7
						6

		Notes to Condensed Consolidated Financial Statements			8-35
						~~8-38~~

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations			35-51
						~~38-50~~

Item 3	Quantitative and Qualitative Disclosures about Market Risk			52

Item 4	Controls and Procedures			52

PART II	OTHER INFORMATION				51

Item 1	Legal Proceedings			53
~~Item 4~~	~~Controls and Procedures~~
51 Item 1A	Risk Factors			54

Item 6	Exhibits			56
~~PART II~~	~~OTHER INFORMATION~~

~~Item 1~~	~~Legal Proceedings~~						52

~~Item 1A~~	~~Risk Factors~~			52

~~Item 5~~	~~Other Information~~			52

~~Item 6~~	~~Exhibits~~			53

	Signatures			54 57

Table of Contents

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands except for share data)

   September 30, December 31,
   2019 2018
   Unaudited Audited
Assets
Current assets:

Cash and cash equivalents
   $ 17,427 $ 12,185
Trade accounts receivable, net of allowance for doubtful accounts of $181 in 2019 and $177 in 2018
   8,002 6,403
Inventory, net
   2,387 1,587
Prepaid expenses and other current assets
   1,389 1,045


Total current assets
   29,205 21,220


Property and equipment, net of accumulated depreciation of $6,433 in 2019 and $6,214 in 2018
   543 552
Operating lease assets
   2,131 —
Other assets
   53 53
Intangible assets, net of accumulated amortization of $8,092 in 2019 and $7,809 in 2018
   1,274 1,550
Goodwill
   8,362 8,362


Total assets
   $ 41,568 $ 31,737


Liabilities and Stockholders’ Equity
Current liabilities:

Accounts payable
   $ 1,255 $ 1,154
Accrued and other expenses
   6,376 5,060
Notes payable - current portion
   3,250 1,851
Lease payable - current portion
   656 15
Deferred revenue
   5,016 5,165


Total current liabilities
   16,553 13,245


Lease payable, long-term portion
   1,548 38
Notes payable, long-term portion
   2,564 4,254
Convertible debentures payable tonon-related parties, at fair value
   11,197 6,300
Convertible debentures payable to related parties, at fair value
   1,113 670
Deferred revenue, long-term portion
   398 331
Deferred tax
   3 3


Total liabilities
   33,376 24,841


Commitments and Contingencies (Note 5 and 7)

Stockholders’ equity:

Preferred stock, $ .01 par value: authorized 1,000,000 shares; none issued.
   —   —
Common stock, $ .01 par value: authorized 30,000,000 shares; issued 19,500,301 in 2019 and 17,066,510 in 2018; outstanding 19,314,470 in 2019 and 16,880,679 in 2018
   195 171
Additionalpaid-in capital
   230,389 218,914
Accumulated deficit
   (220,977 ) (210,774 )
Treasury stock at cost, 185,831 shares in 2019 and 2018
   (1,415 ) (1,415 )


Total stockholders’ equity
   8,192 6,896


Total liabilities and stockholders’ equity
   $ 41,568 $ 31,737

September 30,

December 31,

Assets

2020

2019

Current assets:

Cash and cash equivalents
   $ 22,633 $ 15,313
Trade accounts receivable, net of allowance for doubtful accounts of $216 in 2020 and $136 in 2019
   8,376 9,819
Inventory, net
   3,146 2,611
Prepaid expenses and other current assets
   1,662 1,453


Total current assets
   35,817 29,196


Property and equipment, net of accumulated depreciation of $6,716 in 2020 and $6,510 in 2019
   620 551
Operating lease assets
   1,945 2,406
Other assets
   101 50
Intangible assets, net of accumulated amortization of $8,418 in 2020 and $8,186 in 2019
   962 1,183
Goodwill
   8,362 8,362


Total assets
   $ 47,807 $ 41,748


Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable
   $ 2,084 $ 1,990
Accrued and other expenses
   4,679 6,590
Notes payable - current portion
   994 4,250
Lease payable - current portion
   822 758
Deferred revenue
   5,644 5,248


Total current liabilities
   14,223 18,836


Lease payable, long-term portion
   1,287 1,837
Notes payable, long-term portion
   6,729 2,003
Convertible debentures payable to
non-related
parties, at fair value
   —   12,409
Convertible debentures payable to related parties, at fair value
   —   1,233
Deferred revenue, long-term portion
   219 356
Deferred tax
   4 3


Total liabilities
   22,462 36,677


Commitments and Contingencies (Note 7)

Stockholders’ equity:

Preferred stock, $0.01 par value: authorized 1,000,000 shares; NaN issued.
   —   —
Common stock, $
0.01
par value: authorized 30,000,000 shares; issued 23,155,482 as of
September
30, 2020

and 19,546,151 as of December 31, 2019. Outstanding 22,969,651 as of September 30, 2020 and 19,360,320

as of December 31, 2019.
   231 195
Additional
paid-in
capital
   266,861 230,615
Accumulated deficit
   (240,332 ) (224,324 )
Treasury stock at cost, 185,831 shares in 2020 and 2019
   (1,415 ) (1,415 )


Total stockholders’ equity
   25,345 5,071


Total liabilities and stockholders’ equity
   $ 47,807 $ 41,748

See accompanying notes to condensed consolidated financial statements.

Table of Contents

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,
   2019 2018 2019 2018
Revenue:

Products
   $ 5,156 $ 3,093 $ 13,331 $ 9,301
Service and supplies
   2,701 3,099 8,628 9,366


Total revenue
   7,857 6,192 21,959 18,667
Cost of revenue:

Products
   809 603 2,134 1,598
Service and supplies
   891 752 2,466 2,743
Amortization and depreciation
   103 99 297 306


Total cost of revenue
   1,803 1,454 4,897 4,647


Gross profit
   6,054 4,738 17,062 14,020


Operating expenses:

Engineering and product development
   2,485 2,035 6,751 7,431
Marketing and sales
   3,588 2,100 9,281 6,272
General and administrative
   1,872 1,778 5,276 5,419
Amortization and depreciation
   69 74 206 234


Total operating expenses
   8,014 5,987 21,514 19,356


Loss from operations
   (1,960 ) (1,249 ) (4,452 ) (5,336 )
Interest expense
   (193 ) (118 ) (604 ) (373 )
Other income
   103 28 226 79
Loss on fair value of convertible debentures
   (900 ) —   (5,340 ) —


Other expense, net
   (990 ) (90 ) (5,718 ) (294 )
Loss before income tax expense
   (2,950 ) (1,339 ) (10,170 ) (5,630 )


Tax expense
   (6 ) (26 ) (33 ) (43 )


Net loss and comprehensive loss
   $ (2,956 ) $ (1,365 ) $ (10,203 ) $ (5,673 )


Net loss per share:

Basic
   $ (0.15 ) $ (0.08 ) $ (0.57 ) $ (0.34 )


Diluted
   $ (0.15 ) $ (0.08 ) $ (0.57 ) $ (0.34 )


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

Basic
   19,284 16,700 18,049 16,652


Diluted
   19,284 16,700 18,049 16,652

Three Months Ended
September
30,

Nine Months Ended September 30,


2020

2019

2020

2019

Revenue:

Products
   $ 4,538 $ 5,156 $ 11,220 $ 13,331
Service and supplies
   2,591 2,701 8,027 8,628


Total revenue
   7,129 7,857 19,247 21,959
Cost of revenue:

Products
   1,345 809 2,899 2,134
Service and supplies
   667 891 2,169 2,466
Amortization and depreciation
   92 103 287 297


Total cost of revenue
   2,104 1,803 5,355 4,897


Gross profit
   5,025 6,054 13,892 17,062


Operating expenses:

Engineering and product development
   1,849 2,485 5,938 6,751
Marketing and sales
   2,979 3,588 9,218 9,281
General and administrative
   1,834 1,872 6,476 5,276
Amortization and depreciation
   52 69 153 206


Total operating expenses
   6,714 8,014 21,785 21,514


Loss from operations
   (1,689 ) (1,960 ) (7,893 ) (4,452 )
Interest expense
   (115 ) (193 ) (360 ) (604 )
Other income
   10 103 85 226
Loss on extinguishment of debt
   —   —   (341 ) —
Loss on fair value of convertible debentures
   —   (900 ) (7,464 ) (5,340 )


Other expense, net
   (105 ) (990 ) (8,080 ) (5,718 )
Loss before income tax expense
   (1,794 ) (2,950 ) (15,973 ) (10,170 )


Tax expense
   (3 ) (6 ) (34 ) (33 )


Net loss and comprehensive loss
   $ (1,797 ) $ (2,956 ) $ (16,007 ) $ (10,203 )


Net loss per share:

Basic
   $ (0.08 ) $ (0.15 ) $ (0.73 ) $ (0.57 )


Diluted
   $ (0.08 ) $ (0.15 ) $ (0.73 ) $ (0.57 )


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

Basic
   23,173 19,284 21,827 18,049


Diluted
   23,173 19,284 21,827 18,049

See accompanying notes to
condensed
consolidated
financial statements.

Table of Contents

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

   For the nine months ended
September 30,
   2019 2018
   (in thousands)
Cash flow from operating activities:

Net loss
   $ (10,203 ) $ (5,673 )
Adjustments to reconcile net loss to net cash used for operating activities:

Amortization
   283 286
Depreciation
   220 254
Bad debt provision
   62 101
Stock-based compensation expense
   856 1,187
Amortization of debt discount and debt costs
   109 129
Deferred tax expense
   —   (13 )
Loss on disposal of assets
   —   12
Change in fair value of convertible debentures
   5,340 —
Changes in operating assets and liabilities:

Accounts receivable
   (1,672 ) 2,301
Inventory
   (800 ) 212
Prepaid and other current assets
   165 1
Accounts payable
   101 (490 )
Accrued expenses
   837 (775 )
Deferred revenue
   (70 ) 146


Total adjustments
   5,431 3,351


Net cash used for operating activities
   (4,772 ) (2,322 )


Cash flow from investing activities:

Additions to patents, technology and other
   (8 ) (9 )
Additions to property and equipment
   (211 ) (107 )


Net cash used for investing activities
   (219 ) (116 )


Cash flow from financing activities:

Stock option exercises
   1,396 —
Taxes paid related to restricted stock issuance
   (106 ) (130 )
Principal payments of capital lease obligations
   (10 ) (9 )
Principal repayment of debt financing, net
   (1,400 ) —
Proceeds from Line of Credit, net
   1,000 —
Issuance costs from common stock
   (997 ) —
Proceeds from issuance of common stock
   10,350 —


Net cash provided by (used for) financing activities
   10,233 (139 )


Increase (decrease) in cash and equivalents
   5,242 (2,577 )
Cash and equivalents, beginning of period
   12,185 9,387


Cash and equivalents, end of period
   $ 17,427 $ 6,810


Supplemental disclosure of cash flow information:

Interest paid
   $ 404 $ 215


Taxes paid
   $ 33 $ 42


Right-of-use assets obtained in exchange for new operating lease liabilities
   $ 2,641 $ —

~~See accompanying notes to consolidated financial statements.~~

~~iCAD, INC. AND SUBSIDIARIES~~

For the Nine Months ended
September 30,


2020

2019


(in thousands)

Cash flow from operating activities:

Net loss
   $ (16,007 ) $ (10,203 )
Adjustments to reconcile net loss to net cash used for operating activities:

Amortization
of Intangible Assets
   234 283
Depreciation
   206 220
Bad debt provision
   80 62
Stock-based compensation
   2,542 856
Amortization of debt discount and debt costs
   65 109
Loss on extinguishment of debt
   341 —
Deferred tax expense
   1 —
Change in fair value of convertible debentures
   7,464 5,340
Changes in operating assets and liabilities:

Accounts receivable
   1,151 (1,672 )
Inventory
   (535 ) (800 )
Prepaid and other current assets
   69 165
Accounts payable
   96 101
Accrued expenses
   (2,322 ) 837
Deferred revenue
   532 (70 )


Total adjustments
   9,924 5,431


Net cash used for operating activities
   (6,083 ) (4,772 )


Cash flow from investing activities:

Additions to patents, technology and other
   (11 ) (8 )
Additions to property and equipment
   (275 ) (211 )


Net cash used for investing activities
   (286 ) (219 )


Cash flow from financing activities:

Issuance of common stock pursuant
to
stock option plans
   415 1,396
Issuance of common stock pursuant
to
Employee Stock Purchase Plan
   209 —
Taxes paid related to restricted stock issuance
   (225 ) (106 )
Principal payments of capital lease obligations
   —   (10 )
Principal repayment of debt financing
   (4,638 ) (1,400 )
Proceeds from Line of Credit
   775 1,000
Repayment
to
Line
of
Credit
   (2,000 ) —
Proceeds from debt financing
   6,957 —
Debt issuance costs
   22 —
Proceeds from issuance of common stock, net
   12,174 9,353


Net cash provided by financing activities
   13,689 10,233


Increase
in cash and equivalents
   7,320 5,242
Cash and cash equivalents, beginning of period
   15,313 12,185


Cash and cash equivalents, end of period
   $ 22,633 $ 17,427


Supplemental disclosure of cash flow information:

Interest paid
   $ 127 $ 404


Taxes paid
   $ 34 $ 33


Issuance of stock upon conversion of debentures
   21,164 —


Right-of-use
assets obtained in exchange for new operating lease liabilities
   $ 69 $ 2,641


See accompanying notes to condensed consolidated financial statements.
5
Table of Contents

Consolidated Statements of Stockholders’ Equity Year to Date

(In thousands except shares)

   Common Stock    Additional
   Number of       Paid-in Accumulated Treasury Stockholders’
   Shares Issued    Par Value    Capital Deficit Stock Equity
Balance at December 31, 2018
   17,066,510    $ 171    $ 218,914 $ (210,774 ) $ (1,415 ) $ 6,896
Issuance of common stock relative to vesting of restricted stock shares forfeited for tax obligations
   122,993    1    (106 ) —   —   (106 )
Issuance of common stock pursuant to stock option plans
   428,980    4    1,392 —   —   1,396
Stock Issuance net of issuance costs
   1,881,818    19    9,334 9,353
Stock-based compensation
   —      —      856 —   —   856
Net loss
   —      —      —   (10,203 ) —   (10,203 )






Balance at September 30, 2019 (Unaudited)
   19,500,301    $ 195    $ 230,390 $ (220,977 ) $ (1,415 ) $ 8,192

Common Stock

Additional

Paid-in

Capital

Accumulated

Deficit

Treasury

Stock

Stockholders’

Equity


Number of

Shares Issued

Par Value

Balance at December 31, 2019
   19,546,151    $ 196    $ 230,615 $ (224,325 ) $ (1,415 ) $ 5,071
Issuance of common stock relative to vesting of restricted stock
   97,830    —      (225 ) (225 )
Issuance of common stock pursuant to stock option plans
   94,678    1    416 —   —   417
Stock Issuance Net
   1,562,500    16    12,158 —   —   12,174
Issuance of common stock pursuant Employee Stock Purchase Plan
   34,857       209 209
Issuance of stock upon conversion of Debentures
   1,819,466    18    21,146 —   —   21,164
Stock-based compensation
   —      —      2,542 2,542
Net loss
   —      —      —   (16,007 ) —   (16,007 )






Balance at September 30, 2020
   23,155,482    $ 231    $ 266,861 $ (240,332 ) $ (1,415 ) $ 25,345






Consolidated Statements of Stockholders’ Equity Quarter to Date
(In thousands except shares)

   Common Stock    Additional
   Number of       Paid-in Accumulated Treasury Stockholders’
   Shares Issued    Par Value    Capital Deficit Stock Equity
Balance at June 30, 2019 (Unaudited)
   19,447,763    $ 194    $ 230,141 $ (218,021 ) $ (1,415 ) $ 10,899
Issuance of common stock relative to vesting of restricted stock shares forfeited for tax obligations
   51,871    1    (91 ) —   —   (91 )
Issuance of common stock pursuant to stock option plans
   667    —      —   —   —   —
Stock-based compensation
         340 340
Net loss
   —      —      —   (2,956 ) —   (2,956 )






Balance at September 30, 2019 (Unaudited)
   19,500,301    $ 195    $ 230,390 $ (220,977 ) $ (1,415 ) $ 8,192

Common Stock

Additional

Paid-in

Capital

Accumulated

Deficit

Treasury

Stock

Stockholders’

Equity


Number of

Shares Issued

Par Value

Balance at June 30, 2020
   23,060,272    $ 231    $ 266,211 $ (238,535 ) $ (1,415 ) $ 26,492
Issuance of common stock relative to vesting of restricted stock
   29,106    —      (94 ) —   —   (94 )
Issuance of common stock pursuant to stock option plans
   49,712    —      185 —   —   185
Stock Issuance Net
   —      —      —   —   —   —
Issuance of common stock pursuant Employee Stock Purchase Plan
   16,392    —      94 —   —   94
Issuance of stock upon conversion of Debentures
   —      —      —   —   —   —
Stock-based compensation
   —      —      465 —   —   465
Net loss
   —      —      —   (1,797 ) —   (1,797 )






Balance at September 30, 2020
   23,155,482    $ 231    $ 266,861 $ (240,332 ) $ (1,415 ) $ 25,345






6
Table of Contents
iCAD, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity Year Toto Date
(inIn thousands except shares)

   Common Stock    Additional
   Number of       Paid-in Accumulated Treasury Stockholders’
   Shares Issued    Par Value    Capital Deficit Stock Equity
Balance at December 31, 2017
   16,711,512    $ 167    $ 217,389 $ (201,865 ) $ (1,415 ) $ 14,276
Cumulative impact from the adoption of ASC 606 (see Note 1)
   —      —      —   108 —   108
Issuance of common stock relative to vesting of restricted stock, net of 18,385 shares forfeited for tax obligations
   201,918    2    (132 ) —   —   (130 )
Stock-based compensation
   —      —      1,187 —   —   1,187
Net loss
   —      —      —   (5,673 ) —   (5,673 )






Balance at September 30, 2018 Unaudited
   16,913,430    $ 169    $ 218,444 $ (207,430 ) $ (1,415 ) $ 9,768






   Common Stock
Additional

Paid-in

Capital

Accumulated

Deficit

Treasury

Stock

Stockholders’

Equity


Number of

Shares Issued
   Par Value

Balance at December 31, 2018
   17,066,510    $ 171    $ 218,914 $ (210,774 ) $ (1,415 ) $ 6,896
Issuance of common stock relative to vesting of restricted stock shares forfeited for tax obligations
   122,993    1    (106 ) —   —   (106 )
Issuance of common stock pursuant to stock option plans
   428,980    4    1,392 —   —   1,396
Stock Issuance net of issuance costs
   1,881,818    19    9,334 9,353
Stock-based compensation
   —      —      856 —   —   856
Net loss
   —      —      —   (10,203 ) —   (10,203 )






Balance at September 30, 2019
   19,500,301    $ 195    $ 230,390 $ (220,977 ) $ (1,415 ) $ 8,192






Consolidated Statements of Stockholders’ Equity Quarter to Date
(In thousands except shares)

   Common Stock    Additional
   Number of       Paid-in Accumulated Treasury Stockholders’
   Shares Issued    Par Value    Capital Deficit Stock Equity
Balance at June 30, 2018 (Unaudited)
   16,853,885    $ 168    $ 218,099 $ (206,065 ) $ (1,415 ) $ 10,787
Issuance of common stock relative to vesting of restricted stock, net of 18,385 shares forfeited for tax obligations
   59,545    1    (68 ) —   —   (67 )
Stock-based compensation
   —      —      413 —   —   413
Net loss
   —      —      —   (1,365 ) —   (1,365 )






Balance at September 30, 2018 (Unaudited)
   16,913,430    $ 169    $ 218,444 $ (207,430 ) $ (1,415 ) $ 9,768

~~iCAD, INC. AND SUBSIDIARIES~~

   Common Stock
Additional

Paid-in

Capital

Accumulated

Deficit

Treasury

Stock

Stockholders’

Equity


Number of

Shares Issued
   Par Value

Balance at June 30, 2019
   19,447,763    $ 194    $ 230,141 $ (218,021 ) $ (1,415 ) $ 10,899
Issuance of common stock relative to vesting of restricted stock shares forfeited for tax obligations
   51,871    1    (91 ) —   —   (91 )
Issuance of common stock pursuant to stock option plans
   667    —      —   —   —   —
Stock-based compensation
         340 340
Net loss
   —      —      —   (2,956 ) —   (2,956 )






Balance at September 30, 2019
   19,500,301    $ 195    $ 230,390 $ (220,977 ) $ (1,415 ) $ 8,192
7
Table of Contents
Notes to Condensed Consolidated Financial ~~Statements~~
~~(Unaudited)~~
~~September 30, 2019~~
Statements:
Note 1 – Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements of iCAD, Inc. and subsidiaries (“iCAD” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). In the opinion of management, these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position of the Company at September 30, ~~2019,~~2020, the results of operations of the Company for the three and ~~nine month~~nine-month periods ended September 30, ~~2019~~2020 and ~~2018, and~~2019, cash flows of the Company for the ~~nine month~~nine-month periods ended September 30, 2020 and 2019 and ~~2018.~~
stockholders’ equity for the Company for the three and nine-month periods ended September 30, 2020 and 2019.
Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in the footnotes prepared in accordance with US GAAP has been omitted as permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form ~~10—~~10
-
K for the fiscal year ended December 31, ~~2018~~2019 filed with the SEC on March ~~29, 2019.~~11, 2020. The results for the three and ~~nine month~~nine-month periods ended September 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2019,~~2020, or any future period.
Segments
The Company reports the results of ~~two~~2 segments: Cancer Detection (“Detection”) and Cancer Therapy (“Therapy”). The Detection segment consists of advanced image analysis and workflow products. The Therapy segment consists of radiation therapy (“Axxent”) products.
~~Lease Accounting~~
~~Adoption~~
Risk and Uncertainty
On March 12, 2020, the World Health Organization declared
COVID-19
to be a pandemic. In an effort to contain and mitigate the spread of ~~ASC Topic 842, “Leases”~~
~~On January 1, 2019,~~the
COVID-19
pandemic, the United States, many countries in Europe, as well as Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of
COVID-19.
As a provider of devices and services to the health care industry, the Company’s operations have been materially affected in part due to
stay-at-home
and social distancing orders as well as uncertainty in the market. Significant uncertainty remains as to the continuing impact of the
COVID-19
pandemic on the Company’s operations and on the global economy as a whole.
8

Table of Contents
It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. The
COVID-19
pandemic has resulted in significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility seen in the recent past will have an adverse effect on the Company’s ability to access capital, on its business, results of operations and financial condition, and on the market price of its common stock.
The impact of the
COVID-19
pandemic is also relevant to the covenants contained in the Company’s loan and security agreement
, as amended (the “Loan Agreement”),
with Western Alliance Bank (the “Bank”), as described in Note 4(
a). The Loan Agreement
requires the Company ~~adopted~~to satisfy
a
minimum revenue covenant or maintain a ratio of (x) unrestricted cash at the ~~new accounting standards codification (“ASC”)~~Bank to (y) the aggregate total of indebtedness owed to the Bank, equal to or greater than
1.25
to
1.00
.
If at any point the Company is not in compliance with at least one of these and certain other covenants and is unable to obtain an amendment or waiver
from the Bank
, such noncompliance may result in an event of default under the Loan Agreement, which could result in acceleration of the ~~Financial Accounting Standards Board, ASC 842, “Leases”~~outstanding indebtedness and ~~all~~require the ~~related amendments (“ASC 842”)~~Company to repay such indebtedness before the scheduled due date. However, the Company believes that even if an event of default were to occur, the Company’s current liquidity and ~~has applied~~capital resources are sufficient to sustain operations through at least the next 12 months, primarily due to cash on hand of
$
22.6
million and anticipated revenue and cash collections.
However, the resurgence of the
COVID-19
pandemic could affect our liquidity.
The Company’s results for the quarter ending September 30, 2020 reflect a negative impact from the
COVID-19
pandemic, as the typical sales cycle and ordering patterns were still disrupted due to some healthcare facilities’ additional focus on
COVID-19.
Although the Company does not provide guidance to investors relating to its ~~transition provisions at~~future results of operations, its results for the ~~beginning~~quarter ending December 31, 2020, and possibly future quarters, could reflect a continuing negative impact from the
COVID-19
pandemic for similar reasons. Depending upon the duration and severity of the ~~period of adoption (i.e.,~~pandemic, the continuing effect on the ~~effective date), and so~~Company’s results over the long term is uncertain.
Although the Company did not ~~restate comparative periods. Under this transition provision,~~see any material impact to trade accounts receivable losses in the quarter ended September 30, 2020, the Company’s exposure may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current
COVID-19
pandemic, or other customer-specific factors. The Company has ~~applied~~historically not experienced significant trade account receivable losses, but it is possible that there could be a material adverse impact from potential adjustments of the ~~legacy guidance under ASC 840, “Leases” (“ASC 840”), including its disclosure requirements, in~~carrying amount of trade account receivables as hospitals’ cash flows are impacted by their response to the ~~comparative periods presented. See~~
COVID-19
pandemic.
Recently Adopted Accounting Pronouncements
There are no significant recently adopted accounting pronouncements. For a full list of the Company’s response to all relevant recent accounting pronouncements, please refer to Note ~~5 for the disclosures required upon adoption~~13 below.
9
Table of ~~ASC 842.~~
Contents
Revenue Recognition
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~~customers which are subsequently remitted to government authorities.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

Disaggregation of Revenue

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

   Three months ended September 30, 2019
   Reportable Segments
   Detection    Therapy    Total
Major Goods/Service Lines

Products
   $ 4,749    $ 841    $ 5,590
Service contracts
   $ 1,336    $ 446    1,782
Supply and source usage agreements
   —      465    465
Professional services
   —      18    18
Other
   2    —      2






   $ 6,087    $ 1,770    $ 7,857






Timing of Revenue Recognition

Goods transferred at a point in time
   $ 4,749    $ 892    $ 5,641
Services transferred over time
   1,338    878    2,216






   $ 6,087    $ 1,770    $ 7,857






Sales Channels

Direct sales force
   $ 3,467    $ 1,280    $ 4,747
OEM partners
   2,620    —      2,620
Channel partners
   —      490    490






   $ 6,087    $ 1,770    $ 7,857

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

   Nine months ended September 30, 2019
   Reportable Segments
   Detection    Therapy    Total
Major Goods/Service Lines

Products
   $ 11,347    $ 3,410    $ 14,757
Service contracts
   $ 4,012    $ 1,437    5,449
Supply and source usage agreements
   $ —      $ 1,528    1,528
Professional services
   $ —      $ 59    59
Other
   $ 105    $ 61    166






   $ 15,464    $ 6,495    $ 21,959






Timing of Revenue Recognition

Goods transferred at a point in time
   $ 11,347    $ 3,668    $ 15,015
Services transferred over time
   $ 4,117    $ 2,827    6,944






   $ 15,464    $ 6,495    $ 21,959






Sales Channels

Direct sales force
   $ 8,441    $ 4,793    $ 13,234
OEM partners
   $ 7,023    $ —      7,023
Channel partners
   $ —      $ 1,702    1,702






   $ 15,464    $ 6,495    $ 21,959

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

   Three months ended September 30, 2018
   Reportable Segments
   Detection    Therapy    Total
Major Goods/Service Lines

Products
   $ 2,394    $ 1,162    $ 3,556
Service contracts
   1,475    373    1,848
Supply and source usage agreements
   —      599    599
Professional services
   —      68    68
Other
   58    63    121






   $ 3,927    $ 2,265    $ 6,192






Timing of Revenue Recognition

Goods transferred at a point in time
   2,394    1,206    $ 3,600
Services transferred over time
   1,533    1,059    2,592






   $ 3,927    $ 2,265    $ 6,192






Sales Channels

Direct sales force
   $ 2,474    $ 1,798    $ 4,272
OEM partners
   1,453    —      1,453
Channel partners
   —      467    467






   $ 3,927    $ 2,265    $ 6,192

Three months ended September 30, 2020

Reportable Segments


Detection

Therapy

Total

Major Goods/Service Lines

Products
   $ 3,889    $ 1,038    $ 4,927
Service contracts
   1,400    347    1,747
Supply and source usage agreements
   —      444    444
Professional services
   —      9    9
Other
   2    —      2






   $ 5,291    $ 1,838    $ 7,129






Timing of Revenue Recognition

Goods transferred at a point in time
   $ 3,889    $ 1,051    $ 4,940
Services transferred over time
   1,402    787    2,189






   $ 5,291    $ 1,838    $ 7,129






Sales Channels

Direct sales force
   $ 2,904    $ 857    $ 3,761
OEM partners
   2,387    —      2,387
Channel partners
   —      981    981






   $ 5,291    $ 1,838    $ 7,129






~~iCAD, INC. AND SUBSIDIARIES~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
~~September 30, 2019~~

   Nine months ended September 30, 2018
   Reportable Segments
   Detection    Therapy    Total
Major Goods/Service Lines

Products
   $ 7,369    $ 3,406    $ 10,775
Service contracts
   4,392    1,082    5,474
Supply and source usage agreements
   —      1,686    1,686
Professional services
   —      262    262
Other
   167    303    470






   $ 11,928    $ 6,739    $ 18,667






Timing of Revenue Recognition

Goods transferred at a point in time
   $ 7,369    $ 3,676    $ 11,045
Services transferred over time
   $ 4,559    $ 3,063    7,622






   $ 11,928    $ 6,739    $ 18,667






Sales Channels

Direct sales force
   $ 6,594    $ 5,756    $ 12,350
OEM partners
   $ 5,334    $ —      5,334
Channel partners
   $ —      $ 983    983






   $ 11,928    $ 6,739    $ 18,667






10

Table of Contents

Nine months ended September 30, 2020


Reportable Segments


Detection

Therapy

Total

Major Goods/Service Lines

Products
   $ 9,690    $ 2,959    $ 12,649
Service contracts
   4,151    1,079    5,230
Supply and source usage agreements
   —      1,305    1,305
Professional services
   —      20    20
Other
   43    —      43






   $ 13,884    $ 5,363    $ 19,247






Timing of Revenue Recognition

Goods transferred at a point in time
   $ 9,731    $ 3,039    $ 12,770
Services transferred over time
   4,153    2,324    6,477






   $ 13,884    $ 5,363    $ 19,247






Sales Channels

Direct sales force
   $ 7,785    $ 3,131    $ 10,916
OEM partners
   6,099    —      6,099
Channel partners
   —      2,232    2,232






   $ 13,884    $ 5,363    $ 19,247






11
Table of Contents

Three months ended September 30, 2019


Reportable Segments


Detection

Therapy

Total

Major Goods/Service Lines


Products
   $ 4,749    $ 841    $ 5,590
Service contracts
   1,336    446    1,782
Supply and source usage agreements
   —      465    465
Professional services
   —      18    18
Other
   2    —      2






   $ 6,087    $ 1,770    $ 7,857






Timing of Revenue Recognition


Goods transferred at a point in time
   $ 4,749    $ 892    $ 5,641
Services transferred over time
   1,338    878    2,216






   $ 6,087    $ 1,770    $ 7,857






Sales Channels


Direct sales force
   $ 3,467    $ 1,280    $ 4,747
OEM partners
   2,620    —      2,620
Channel partners
   —      490    490






   $ 6,087    $ 1,770    $ 7,857






12
Table of Contents


Nine months ended September 30, 2019


Reportable Segments


Detection

Therapy

Total

Major Goods/Service Lines

Products
   $ 11,347    $ 3,410    $ 14,757
Service contracts
   4,012    1,437    5,449
Supply and source usage agreements
   —      1,528    1,528
Professional services
   —      59    59
Other
   105    61    166






   $ 15,464    $ 6,495    $ 21,959






Timing of Revenue Recognition

Goods transferred at a point in time
   $ 11,347    $ 3,668    $ 15,015
Services transferred over time
   4,117    2,827    6,944






   $ 15,464    $ 6,495    $ 21,959






Sales Channels

Direct sales force
   $ 8,441    $ 4,793    $ 13,234
OEM partners
   7,023    —      7,023
Channel partners
   —      1,702    1,702






   $ 15,464    $ 6,495    $ 21,959

Products.
Product revenue consists of sales of cancer detection products, cancer therapy systems, cancer therapy applicators ~~cancer therapy~~(including disposable ~~applicators~~applicators) and other accessories that are typically shipped with a cancer therapy system. The Company transfers control and recognizes a sale when the product is shipped from the manufacturing or warehousing facility to the customer.
Service Contracts.
The Company sells service contracts in which ~~the Company~~it provides professional services
,
including product installations, maintenance, training, and service repairs, and in certain cases leases equipment, to hospitals, imaging centers, ~~radiological~~radiology practices, ~~and~~ radiation oncologists and treatment centers. These
contracts
represent separate performance obligations to the Company. The Company allocates revenue to each performance obligation based on the Standalone Selling Price (“SSP”). Upon the Company’s adoption of ASC 842 effective January 1, 2019, the lease components of the Company’s service contracts are no longer being separately accounted for under the lease guidance. As the lease component is not considered the predominant component of these service contracts, the Company is accounting for the whole contract under ASC 606, “Revenue from Contracts with Customers.” Prior to the adoption of ASC 842, the Company accounted for the lease components of these arrangements in accordance with ASC 840, “Leases,” and the remaining consideration was allocated to the other performance obligations identified in accordance with Topic 606. The consideration allocated to the lease component was recognized as lease

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

~~revenue on a straight-line basis over the specified term of the agreement, as this is consistent with how the service is consumed.~~ Revenue for ~~the~~lease and

non-lease

components, or the entire arrangement when accounted for under ~~Topic~~ASC 606,
“Revenue from Contracts with Customers” (“ASC 606”),
is recognized on a straight-line basis over the term of the agreement. The service contracts range from 12 months to 48 months. The Company typically receives payment at the inception of the contract and recognizes revenue on a straight-line basis over the term of the agreement.

Supply and Source Usage Agreements.

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

Table of Contents
These agreements represent a separate performance obligation to the Company. The Company allocates revenue to each performance obligation based on the ~~Standalone Selling Price (“SSP”).~~
SSP.
Professional Services.
Revenue from fixed fee service contracts is recognized on a straight-line basis over the term of the agreement. Revenue from professional service contracts entered into with customers on a time and materials basis is recognized over the term of the agreement in proportion to the costs incurred in satisfying the obligations under the contract.
Other.
Other revenue consists primarily of miscellaneous products and services. The Company transfers control and recognizes a sale when the product is shipped from the manufacturing or warehousing facility to the customer
or the installation services are performed ~~or when the Company ships the product from our manufacturing or warehouse facility to the customer.~~
.
Contract Balances
Contract liabilities are a component of deferred revenue, and contract assets are a component of prepaid and other current assets. The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers (in thousands).

Contract balances    Balance at
   Setpember 30,
2019
Receivables, which are included in “Trade accounts receivable”
   $ 8,002
Contract assets, which are included in “Prepaid and other current assets”
   —
Contract liabilities, which are included in “Deferred revenue”
   5,414
Contract balances


Balance at

September 30, 2020

Receivables, which are included in “Trade accounts receivable”
   $ 8,376
Contract assets, which are included in “Prepaid and other current assets”    7
Contract liabilities, which are included in “Deferred revenue”    5,863
Timing of revenue recognition may differ from timing of invoicing to
of
customers. The Company records a receivable when revenue is recognized prior to receipt of cash ~~payments~~payment and the Company has the unconditional right to such consideration, or unearned revenue when cash payments are received or due in advance of performance. For multi-year agreements, the Company generally invoices customers annually at the beginning of each annual service period.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

The Company’s accounts receivable from contracts with customers, net of allowance for doubtful accounts, was ~~$8.1~~$8.4 million and ~~$6.4~~$9.8 million as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

The Company will record a contract asset for unbilled revenue when the Company’s performance is in excess of amounts billed or billable. The Company has classified the contract asset balance as a component of prepaid expenses and other current assets as of September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The contract asset balance was ~~$0 and $19,000~~$7,000 as of September 30, ~~2019~~2020 and $14,000 as of December 31, ~~2018, respectively.~~
2019.

Deferred revenue from contracts with customers, which is included in deferred revenue in the consolidated balance sheet, 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.~~

Table of Contents
The balance of deferred revenue at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 is as follows (in thousands):

Contract liabilities    September 30,
2019    December 31,
2018
Short term
   $ 5,016    $ 5,165
Long term
   398    331




Total
   $ 5,414    $ 5,496

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

Contract liabilities

September 30, 2020

December 31, 2019

Short term
   $ 5,644    $ 5,248
Long term
   219    356




Total
   $ 5,863    $ 5,604

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

   Nine Months
Ended
September 30,
2019
Balance at beginning of period
   $ 5,496
Deferral of revenue
   7,813
Recognition of deferred revenue
   (7,895 )


Balance at end of period
   $ 5,414



Nine Months

Ended
September 30,

2020

Balance at beginning of period
   $ 5,604
Deferral of revenue
   8,092
Recognition of deferred revenue
   (7,833 )


Balance at end of period
   $ 5,863


We expect to recognize approximately ~~$2.0~~$3.2 million of the deferred
amount
in ~~2019, $3.0~~2020, $2.5 million in ~~2020,~~2021, and ~~$0.4~~$0.2 million thereafter.
Note 2 – Net Loss per Common Share
The Company’s basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period.
15
Table of Contents
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
   September 30,    September 30,
   2019    2018    2019    2018
Net loss
   $ (2,956 )    $ (1,365 )    $ (10,203 )    $ (5,673 )








Shares used in the calculation of basic and diluted net loss per share
   19,284    16,700    18,049    16,652








Diluted shares used in the calculation of net loss per share
   19,284    16,700    18,049    16,652








Net loss per share - basic and diluted
   $ (0.15 )    $ (0.08 )    $ (0.57 )    $ (0.34 )

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

Three Months Ended

Nine Months Ended


September 30,

September 30,


2020


2019


2020


2019

Net loss

$
(1,797
)

$
(2,956
)

$
(16,007
)

$
(10,203
)









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


23,173



19,284



21,827



18,049









Diluted shares used in the calculation of net loss per share


23,173



19,284



21,827



18,049









Net loss per share - basic and dilute
d

$
(0.08
)

$
(0.15
)

$
(0.73
)

$
(0.57
)

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

   Period Ended
   September 30,
   2019    2018
Stock options
   1,509,292    1,462,439
Restricted stock
   191,909    502,868
Convertible Debentures
   1,742,500    —




Stock options and restricted stock
   3,443,701    1,965,307





As of September 30,


2020

2019

Stock options
   1,971,704    1,509,292
Restricted stock
   29,166    191,909
Convertible Debentures
   —      1,742,500




Total
   2,000,870    3,443,701




Note 3 – Inventory
Inventory is valued at the lower of cost or net realizable value, with cost determined by the
first-in,
first-out
method. The Company regularly reviews inventory quantities on hand and records a reserve for excess and/or obsolete inventory primarily based upon the estimated usage of its inventory as well as other factors. ~~Inventories~~
Inventory
consisted of the following (in thousands)~~, which~~ and
includes
an inventory reserve of approximately ~~$0.7~~$0.2 million and ~~$1.1~~$0.5 million as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

   as of September 30,    as of December
   2019    31, 2018
Raw materials
   $ 1,095    $ 606
Work in process
   145    67
Finished Goods
   1,147    914




Inventory
   $ 2,387    $ 1,587





As of September 30,
2020

As of December 31,
2019

Raw materials
   $ 1,422    $ 1,572
Work in process
   324    39
Finished Goods
   1,629    1,469




Inventory Gross
   3,375    3,080
Inventory Reserve
   (229 )    (469 )




Inventory Net
   $ 3,146    $ 2,611




16
Table of Contents
Note 4 – Financing Arrangements
(a) Loan and Security Agreement
– Western Alliance Bank
On March 30, 2020, the Company entered into
the
Loan Agreement with the Bank that provided an initial term loan (“Term Loan”) facility of $7.0 million and a $5.0 million revolving line of credit.
The Loan Agreement was amended effective June 16, 2020. The Loan Agreement requires the Company to either (i) meet a minimum revenue covenant, or (ii) maintain a ratio of unrestricted cash at the Bank to aggregate indebtedness owed to the Bank of at least 1.25 to 1.00. The Company was compliant with these covenants as of September 30, 2020 but cannot provide any assurance as to its future compliance due to, in part, the uncertainty of the effect of the
COVID-19
pandemic on the world economy and the U.S. health system.
If at any point the Company is not in compliance with certain covenants under the Loan Agreement and is unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Loan Agreement, which could permit acceleration of the outstanding indebtedness and require the Company to repay such indebtedness before the scheduled due date. The Company was required, periodically in the past, to seek modifications from its prior lender to avoid
non-compliance
with its earlier covenants.
Interest in arrears on the Term Loan began to be repaid on April 1, 2020 and will continue to be paid on the first of each successive month thereafter until the principal repayment starts. Commencing on the principal repayment date of September 1, 2021 (or March 1, 2022 if the Company achieves a specified revenue target for any trailing
six-month
period prior to December 31, 2020) and continuing on the first day of each month thereafter, the Company
will
make equal monthly payments of principal, together with applicable interest in arrears, to the Bank. The interest rate is set at 1% above the Prime Rate
,
which
is defined in the Loan Agreement as the greater of 4.25% or the Prime Rate published in the Money Rates section of the Western Edition of the Wall Street Journal. The Prime Rate as of September 30, 2020 was 3.25%.
The Company has the option to prepay all, but not less than all, of the Term Loan advanced by the Bank under the Loan Agreement. The Company prepayment is subject to payment of (1) all outstanding principal of the Term Loan plus accrued and unpaid interest thereon through the prepayment date, (2) the final payment ($122,500 or 1.75% of the original loan amount), (3) a prepayment fee (3% of the principal balance if prepaid prior to first March 30, 2021, 2%
of
principal
if
prepaid after March 30, 2021 but before June 30, 2022, or 1% of principal if prepaid after March 30, 2022) plus (4) all other obligations that are due and payable, including
the
Bank’s expenses and interest at the default rate with respect to any past due amounts.
17
Table of Contents
The Company drew $
775,000
against its revolving line of credit as of September 30, 2020. The interest rate on such borrowings is three quarters-percent
(0.75%) above the Prime Rate
as defined above or
4.0
%. The Company paid back this borrowing on October 5, 2020.
Obligations to the Bank under the Loan Agreement are secured by a first priority security interest in the Company’s assets, except for certain permitted liens that have priority to the Bank’s security interest by operation of law.
In connection with the Loan Agreement, the Company incurred approximately $141,000 of closing costs. The closing costs have been deduced from the carrying value of the debt and will be amortized through March 30, 2022, the maturity date of the Term Loan.
The maturity date of the revolving loan is March 30, 2022.
(b) Loan and Security Agreement – Silicon Valley Bank
On August 7, 2017, the Company entered into a Loan and Security Agreement, which has since been modified byseveral times through November 1, 2019 (as amended, the ~~First~~ “SVB
Loan ~~Modification~~ Agreement dated as of March 22, 2018, the Second Loan Modification Agreement dated as of August 13, 2018, the Third Loan Modification Agreement dated as of December 20, 2018, and the Fourth Loan Modification Agreement dated as of March 18, 2019 (collectively, the “Loan Agreement”
”),
with Silicon
Valley Bank ~~(the “Bank”)~~ that provided an initial term loan facility ~~(amounts borrowed~~

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

~~thereunder, the “Initial Term Loan”)~~ of $6.0 million and a $4.0 million revolving line of credit (amounts borrowed thereunder, the “Revolving Loans”). The Company also had the option to borrow an additional $3.0 million term loan under the Loan Agreement (amounts borrowed thereunder, the “Subsequent Term Loan” and together with the Initial Term Loan, the “Term Loan”), subject to meeting a Detection (as defined in the Loan Agreement) revenue minimum of at least $21.5 million for a trailing twelve month period ending on or prior to September 30, 2019. The Company did not meet the minimum Detection revenue minimum for the trailing twelve month period and accordingly is not eligible to borrow the additional $3.0 million.

~~The Company began repayment of the Initial Term Loan on~~credit.

On March ~~1, 2019, with 30 equal monthly installments of principal, based on the amended terms of the Loan Agreement. The maturity date of the Initial Term Loan is August 1, 2021.~~
~~The maturity date of the Revolving Loans is March 1, 2022. However, the maturity date will become April~~ 30, 2020, ~~or April 30, 2021 if, on or before March 15, 2020 or 2021, as applicable,~~ the Company ~~does not agree in writing~~elected to repay all outstanding obligations (including accrued interest) and retire the ~~revenue and adjusted EBITDA (as defined in the Loan Agreement) covenant levels negotiated with the Bank with respect to the upcoming 2020 or 2021 calendar year.~~
The Company drew $1.0 million of Revolving Loans during the quarter ended September 30, 2019. The outstanding amount of the revolving loan is classified as a current liability in notes payable. The outstanding Revolving Loans will accrue interest at a floating per annum rate equal to 1.50% above the prime rate (6.5% as of September 30, 2019) 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 will be 0.50% above the prime rate. Based on the measurement of the ratio at September 30, 2019, the interest rate was 5.5%. The outstanding Term Loans will accrue interest at a floating per annum rate equal to the prime rate. At September 30, 2019, the floating per annum rate was 5%.
If the Revolving Loans are paid in full and the Loan Agreement is terminated prior to the maturity date, then the Company will pay to the Bank a termination fee in an amount equal to two percent (2.0%) of the maximum revolving line of credit. If the Company prepays the Term Loans prior to the maturity date, then the Company will pay to the Bank an amount between 1.0% and 3.0% of the Term Loans, depending on when such Term Loans are repaid. In addition, the Loan Agreement requires the Company to pay a final payment of 8.5% of the Term Loans upon the earliest of the repayment of the Term Loans, the termination of the Loan Agreement and the maturity date. The Company is accruing such payment as additional interest expense. As of September 30, 2019 and December 31, 2018, the accrued final payment is approximately $260,000 and $162,000, respectively and is a component of the outstanding loan balance.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

The Loan Agreement, as amended, includes certain covenants which require the Company to maintain minimum consolidated revenues of $13.0 million and $14.5 million during the trailing six month periods ending on September 30, 2019 and December 31, 2019, respectively, as well as an adjusted EBITDA level of $(4.0 million) during the trailing six month period ending on September 30, 2019. In addition, the Company and the Bank will be required to negotiate the covenants for the 2020 and 2021 fiscal years by March 15, 2020 and March 15, 2021 respectively. A failure to agree to such covenants by the specified dates in the agreement could lead to an acceleration of the Initial Term Loan maturity date to either April 30, 2020 or April 31, 2021, respectively. The Company is in compliance with the covenants for the trailing six month period ended September 30, 2019.

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

In connection with the Loan Agreement, the Company incurred approximately $74,000 of closing costs. The closing costs have been deducted from the carrying value of the debt and will be amortized through August 1, 2021, the maturity date of the Initial Term Loan.

The Company has evaluated the accounting impact of each of the modifications noted above, and as all have occurred within a 12 month period, each successive modification has been combined and compared to the terms of the originalSVB Loan Agreement. The Company ~~has determined that modifications occurring at each modification date above are modifications~~accounted for this repayment and retirement as an extinguishment of the SVB Loan ~~Agreement for accounting purposes. As such,~~Agreement. In addition to the outstanding principal and accrued interest, the Company ~~has capitalized any~~was required to pay the $510,000 final payment, a termination fee of $114,000 and other costs totaling $10,000. The Company also wrote off unamortized original closing costs ~~paid~~as of the extinguishment date. The Company recorded a loss on extinguishment of approximately $341,000 related to the ~~Bank as part~~repayment and retirement of the ~~modifications~~SVB Loan Agreement. The loss on extinguishment was composed of approximately $185,000 for the unaccrued final payment, $114,000 termination fee, and ~~has expensed any third party costs incurred. The additional~~$42,000

unamortized and other closing ~~costs and the unamortized initial closing costs are being amortized over the remaining term of the modified Initial Term Loan.~~
costs.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

~~The carrying value of the Term Loans (net of debt issuance costs) as of September 30, 2019 and December 31, 2018 is as follows (in thousands):~~

   September 30,
2019    December 31,
2018
Principal Amount of Term Loan
   $ 4,600    $ 6,000
Unamortized closing costs
   (45 )    (57 )
Accrued Final Payment
   259    162
Amount Drawn on Line of Credit
   1,000    —




Carrying amount of Term Loan
   5,814    6,105




Less current portion of Term Loan
   (3,250 )    (1,851 )




Notes payable long-term portion
   $ 2,564    $ 4,254




~~(b)~~
(c) Convertible Debentures

On December 20, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain institutional and accredited investors (the “Investors”), including

, but not limited to, all directors and executive officers of the Company ~~(the “Investors”)~~at the time
,
pursuant to which the Investors purchased unsecured subordinated convertible debentures (the “Convertible Debentures” ~~or the “Notes”~~) with an aggregate principal amount of

approximately $7.0 million in a private placement.
~~The~~

On February 21, 2020 (the “Conversion Date”), the conditions permitting a forced conversion were met, and the Company ~~will pay interest~~elected to exercise its forced conversion right under the ~~Investors on the outstanding principal amount~~terms of the Convertible ~~Debentures at~~Debentures.

As a result of this election, all of the rate of 5.0% per annum, payable semi-annually on December 21st and June 21st, beginning on June 21, 2019, as well as on each conversion date (as to the principal amount then being converted) and on the maturity date. Theoutstanding Convertible Debentures ~~mature on December 21, 2021. The first interest payment of $174,250 was made in accordance with the schedule last quarter.~~
~~At any time prior to the maturity date, the Convertible Debentures are convertible into shares of the Company’s common stock~~were converted, at a conversion price of $4.00 per share, atinto 1,742,500 shares of the ~~Investor’s option, subject to certain anti-dilution adjustments.~~Company’s common stock. In accordance with the make-whole provisions in the Convertible Debentures,

Table of Contents
the Company also issued an additional
76,966
shares of
its
common stock. The ~~Convertible Debentures contain a cap of shares to be issued upon~~make-whole amount represented the ~~conversion~~total interest which would have accrued through the maturity date of the Convertible Debentures, ~~at 19.99% of~~less the ~~issued and outstanding shares of~~amounts previously paid, totaling $
697,000
. The conversion prices related to the ~~Company’s Common Stock~~make-whole amount were dependent on ~~December 21, 2018, unless shareholder approval of such issuance has been obtained. Upon the satisfaction of certain conditions, the Company has the right to cause~~whether the Investors ~~to convert all~~were related parties or ~~part of the then outstanding principal amount of~~unrelated third parties.
Accounting Considerations and Fair Value Measurements Related to the Convertible Debentures (a “Forced Conversion”). In connection with such Forced Conversion, the Company will be required to pay accrued but unpaid interest, an interest make whole amount determined based on the timing of the Forced Conversion and interest payments made to that date, liquidated damages and other amounts owing to the Investors under the Convertible Debentures. The conversion price in both the optional conversion and Forced Conversion provisions is subject to adjustment due to certain ‘down-round’ dilutive issuances as well for typical anti-dilutive actions, such as stock splits and stock dividends.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

The Investors also have the right to require the Company to repurchase the Convertible Debentures, at a repurchase price that would be at least 115% of the then outstanding principal, plus any accrued but unpaid interest, upon the occurrence of an event of default, as defined in the SPA. The Convertible Debentures will also accrue interest upon an event of default at a rate of the lesser of 10.0% or the maximum permitted by law.

The Convertible Debentures also include certain liquidated damages provisions, whereby the Company will be required to compensate the Investors for certain contingent events, such as the failure to timely deliver conversion shares of common stock, failure to timely pay any accrued interest when due and failure to timely report public information.

The Convertible Debentures are unsecured and structurally subordinated to the Company’s existing indebtedness. In connection with the issuance of the Convertible Debentures, the Company’s subsidiaries entered into a Subsidiary Guarantee, dated as of December 20, 2018, for the benefit of the Investors, pursuant to which the subsidiaries guaranteed the Company’s payments under the Convertible Debentures. The Company does not have any independent assets or operations that would not be part of the Subsidiary Guarantee, the guarantee is full and unconditional and joint and several and there are no restrictions on the Company’s ability to obtain funds from its subsidiaries.

In connection with the issuance, on December 20, 2018, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Investors, pursuant to which the Company agreed to file a registration statement with the SEC to register the resale of shares of common stock underlying the Convertible Debentures on or prior to January 31, 2019. The Company filed the Registration Rights Agreement with the SEC on January 31, 2019.

Certain Investors in the Convertible Debentures include directors and employees of the Company. These related parties purchased approximately 10% of the principal value of the Convertible Debentures, or $670,000. The Convertible Debentures issued to the related parties have substantially the same rights and provisions as the unrelated third party investors, with the exception of certain terms where the related parties received less favorable terms than the unrelated third parties (such as with determination of the make whole conversion rate, as defined in the Convertible Debentures; or limits on the impact of potential ‘down-round’ adjustments to the conversion price).

~~The Company~~had previously elected to make

aone-time, irrevocable

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

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

~~Because~~

As of the ~~Company elected the fair value option, the Company expensed the approximately $503,000 in issuance costs incurred related to the Convertible Debentures during the year ended~~ December 31, ~~2018.~~
~~Fair Value Measurements Related to~~2019 valuation and the ~~Convertible Debentures~~
~~The~~prior measurement dates, the Company utilized a Monte Carlo simulation model to estimate the fair value of the Convertible ~~Debentures as September 30, 2019.~~Debentures. The simulation model iswas designed to capture the potential settlement features of the Convertible Debentures, ~~(the embedded features described above),~~ in conjunction with simulated changes in the Company’s stock price and the probability of certain events occurring. The simulation ~~utilizes~~utilized 100,000 trials or simulations to determine the estimated fair value.

The simulation ~~utilizes~~utilized the assumptions that if the Company iswas able to exercise its ~~Forced Conversion~~forced conversion right (if the requirements to do so ~~are~~were met), that it ~~will~~would do so in 100% of such scenarios. Additionally, if an event of default ~~occurs~~occurred during the simulated trial (based on the Company’s probability of default), the Investors ~~will~~would opt to redeem the Convertible Debentures in 100% of such scenarios. If neither event ~~occurs~~

occurred

during a simulated trial, the simulation ~~assumes~~assumed that the Investor ~~will~~would hold the Convertible Debentures until the maturity date. The value of the cash flows associated with each potential settlement ~~are~~were discounted to present value in each trial based on either the ~~risk free~~risk-free rate (for an equity settlement) or the effective discount rate (for a redemption or cash settlement).

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

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

Input    December 31, 2018 September 30, 2019
Company’s stock price
   $ 3.70 $ 6.85
Conversion price
   $ 4.00 $ 4.00
Remaining term (years)
   2.97 2.22
Equity volatility
   54.00 % 52.00 %
Risk free rate
   2.46 % 1.60 %
Probabilty of default event¹
   0.81 % 0.55 %
Utilization of Forced Conversion (if available)¹
   100.00 % 100.00 %
Exercise of Default Redemption (if available)¹
   100.00 % 100.00 %
Effective discount rate¹
   21.90 % 19.84 %
¹
~~Represents a Level 3 unobservable input, as defined in Note 8—Fair Value Measurements, below.~~
     Input

December 31, 2019

February 21, 2020

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

1
Represents a Level 3 unobservable input, as defined in Note 8 - Fair Value Measurements, below.

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

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

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

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

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

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

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

The effective discount rate utilized at the December 31, ~~2018~~2019 valuation date was ~~solved for utilizing~~based on yields on
CCC-rated
debt instruments with terms equivalent to the ~~simulation model~~remaining term of the Convertible Debentures. The credit rating estimate was based on the principal value of the Convertible Debentures, as the transaction was determined to represent an ‘arm’s length’ transaction. The effective discount was corroborated against market yield data which implied the Company’s credit rating. The effective discount rate utilized at September 30, 2019 was based on this implied credit rating determined at issuance and ~~current market yield data as~~no changes were identified by the Company that would impact this assessment.

Table of ~~the valuation date.~~
Contents

The fair value and principal value of the Convertible Debentures as of ~~September 30,~~December 31, 2019 and ~~December 31, 2018~~the Conversion Date was as follows (in thousands):

Convertible Debentures    December 31, 2018    September 30, 2019
Fair value, in accordance with fair value option
   $ 6,970    $ 12,310




Principal value outstanding
   $ 6,970    $ 6,970

Convertible Debentures

December 31, 2019

February 21, 2020

Fair value, in accordance with fair value option
   $ 13,642    $ 21,164
Principal value outstanding
   $ 6,970    $ 6,970
The Company recorded a loss from the change in fair value of the Convertible Debentures of ~~$5.3~~approximately $7.5 million for period through the ~~nine months ended September 30, 2019. See also~~
C
onversion
D
ate which
is
described in the additional fair value disclosures related to the Convertible Debentures in Note 8.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes~~

Upon the consummation of the

forced conversion
,

the Company issued 1,816,466 shares of common stock with a fair value of approximately $21.2 million, which was reclassified to ~~Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
~~September 30, 2019~~
~~(c)~~stockholders’ equity.

(d) Principal and Interest Payments Related to Financing Arrangements

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

Fiscal Year    Amount Due
2019
   $ 832
2020
   $ 2,901
2021
   $ 9,459


Total
   $ 13,192

Fiscal Year


Amount Due

2020
   $ 94
2021
   1,238
2022
   2,875
2023
   2,735
2024
   1,003


Total
   $ 7,945


The following amounts are included in interest expense in ~~our~~
the Company’
s
consolidated
statement of operations for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 (in thousands):

   Three Months Ended
September 30, 2019    Nine Months Ended
September 30, 2019
   2019    2018    2019    2018
Cash interest expense
   $ 65    $ 78    $ 222    $ 219
Interest on convertible debentures
   87    —      261    —
Accrual of notes payable final payment
   33    31    98    129
Amortization of debt costs
   7    8    21    22
Interest expense capital lease
   1    1    2    3








Total interest expense
   $ 193    $ 118    $ 604    $ 373









Three Months Ended

Nine Months Ended


September 30,

September 30,


2020

2019

2020

2019

Cash interest expense
   $ 94    $ 65    $ 232    $ 222
Interest on convertible debentures
   0      87    49    261
Accrual of notes payable final payment
   8    34    47    98
Amortization of debt costs
   13    7    32    21
Interest expense capital lease
   0      0      0      2








Total interest expense
   $ 115    $ 193    $ 360    $ 604








21
Table of Contents
Note 5 – ~~Lease~~Le
ase Commitments
~~On January 1, 2019, the Company adopted~~
Under ASC 842, and has applied its transition provisions at the beginning of the period of adoption (i.e., on the effective date), and so did not restate comparative periods. Under this transition provision, the Company has applied the legacy guidance under “Leases” (“ASC ~~840, including its disclosure requirements, in the comparative periods presented.~~
~~Under ASC 842,~~842”), the Company determines if an arrangement contains a lease at inception. A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (i.e., an identified asset) for a period of time in exchange for consideration. Leases are classified as either operating leases or ~~financing.~~financing leases. At lease inception, the Company recognizes a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as for lease incentives. The Company ~~used~~uses its incremental borrowing rate to determine the present value of the lease payments. The Company ~~determined~~determines the incremental borrowing rates for its leases by applying its applicable, fully collateralized borrowing rate, with adjustment as appropriate for the lease term. The lease term at the lease commencement

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

date is determined based on the

non-cancellable

period for which the Company has the right to use the underlying asset, together with any periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option. The Company ~~considered~~considers a number of factors when evaluating whether the options in its lease contracts ~~were~~are reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties.
Right-of-use
assets and obligations for short-term leases (leases with an initial term of 12 months or less) are not recognized in the consolidated balance sheet. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. The Company does not sublease any of its leased assets to third parties. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. The Company has lessor agreements that contain lease and
non-lease
components. As the Company has determined that the
non-lease
component of these agreements is the predominant component, the Company ~~is accounting~~accounted for the complete agreement under ASC 606 upon adoption of ASC 842.

ASC 842 includes a number of reassessment and
re-measurement
requirements for lessees based on certain triggering events or conditions, including whether a contract is or contains a lease, assessment of lease term and purchase options, measurement of lease payments, assessment of lease classification and assessment of the discount rate. The Company reviewed the reassessment and
re-measurement
requirements and identified two lease modifications which are reflected in the table below showing the maturity of the Company’s lease liabilities as of September 30, ~~2019.~~2020. This includes an extension of an operating lease for the facility leased by the Company in San Jose, California as well as some equipment. In addition, there were no impairment indicators identified during the quarter ended September 30, ~~2019~~2020 that required an impairment test for the Company’s
right-of-use
assets or other long-lived assets in accordance with ASC~~360-10,~~ ~~Property~~ 360 10 “Property Plant and ~~Equipment~~Equipment” (“ASC 360”).

Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and certain
non-lease
components that transfer a distinct service to the Company, such as common area maintenance services. The Company has elected to not separate ~~the~~its accounting ~~for~~of lease components and
non-lease
components for real estate and equipment leases.
~~Required Disclosures under ASC 842~~

Table of Contents

Components of Le
a
ses:

The Company has leases for office space and office equipment. The leases have remaining lease terms ranging from less than one year to three years and ~~six~~
t
hree
months as of September 30, ~~2019.~~
2020.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

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

Lease Cost    Classification    Three Months Ended
September 30, 2019    Nine Months Ended
September 30, 2019
Operating lease cost
   Operating expenses    $ 208    $ 626
Finance lease costs

Amortization of leased assets
   Amortization and depreciation    4    11
Interest on lease liabilities
   Interest expense    1    2




Total
      $ 213    $ 639

Lease Cost

Classification

Three Months Ended
September 30, 2020

Year Ended
December 31, 2019

Operating lease cost
   Operating expenses    $ 217 $
804

Finance lease costs

Amortization of leased assets
   Amortization and depreciation    4
15

Interest on lease liabilities
   Interest expense    0
2


Total
      $ 221 $
821


Other information related to ~~leases~~le
a
ses was as
follows ~~(in~~
(in thousands)

   Three Months Ended
September 30, 2019    Nine Months Ended
September 30, 2019
Cash paid for operating cash flows from operating leases
   $ 208    $ 626
Cash paid for operating cash flows from finance leases
   $ 1    $ 2
Cash paid for financing cash flows from finance leases
   $ 4    $ 11
~~As of~~
~~September 30,~~
~~2019~~
~~Weighted-average remaining lease term of operating leases (in years)~~
~~3.39~~
~~Weighted-average remaining lease term of finance leases (in years)~~
~~1.00~~
~~Weighted-average discount rate for operating leases~~
~~5.3~~ %
~~Weighted-average discount rate for finance leases~~
~~11.0~~ %

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

Three Months Ended
September 30, 2020

Cash paid from operating cash flows for operating leases
   $ 229
Cash paid from operating cash flows for finance leases
   0
Cash paid from financing cash flows for finance leases
   4


As of
September
30, 2020

Weighted-average remaining lease term of operating leases (in years)
   2.45
Weighted-average remaining lease term of finance leases (in years)
   —
Weighted-average discount rate for operating leases
   5.6 %
Weighted-average discount rate for finance leases
   0
23
Table of Contents
Maturity of the Company’s lease liabilities as of September 30, ~~2019~~2020 was as follows (in thousands):

Year Ended December 31:    Operating
Leases    Finance Leases    Total
2019 (remaining period of year)
   $ 210    $ 4    $ 214
2020
   694    11    705
2021
   660    —      660
2022
   667    —      667
2023
   168    —      168






Total lease payments
   2,399    15    2,414
Less: imputed interest
   (209 )    (1 )    (210 )






Total lease liabilities
   2,190    14    2,204
Less: current portion of lease liabilities
   (642 )    (14 )    (656 )






Long-term lease liabilities
   $ 1,548    $ —      $ 1,548






~~On August 12, 2019 the Company amended its San Jose facility lease. The amendment extended the term from March 31, 2020 to March 31, 2023 and resulted in an additional obligation of $1.9 million.~~
~~The cumulative effect of the changes made to the Company’s consolidated balance sheet for the adoption of Topic 842 were as follows (in thousands):~~

Selected Balance Sheet    Balance at
December 31, 2018    Adjustments Due to
ASC 842    Balance at
January 1, 2019
Assets

Operating lease assets
   $ —      $ 907    $ 907
Liabilities

Deferred rent, current portion (within accrued expenses)
   92    (92 )    —
Deferred rent, long-term portion (within other long-term liabilities)
   27    (27 )    —
Lease payable - current portion
   15    780    795
Lease payable, long-term portion
   38    179    217
~~In connection with the adoption of ASC 842, the Company recorded an immaterial expense of $14,000 in the quarter ended March 31, 2019 which would have been an opening retained earnings adjustment.~~

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

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

   As of September 30, 2019
Selected Balance Sheet    As Reported    Balances without
Adoption of
ASC 842    Effect of Change
Increase (Decrease)
Assets

Operating lease assets
   $ 2,131    $ —      $ 2,131
Liabilities

Lease payable - current portion
   656    15    641
Lease payable, long-term portion
   1,548    8    1,540
~~Future minimum payments under our operating and capital leases as of December 31, 2018 are as follows (in thousands):~~

   Payments due by period
   Total    2019    2020    2021    2022    2023
Operating Lease Obligations
   $ 2,399    $ 210    $ 694    $ 660    $ 667    $ 168
Capital Lease Obligations
   15    4    11    —      —      —












   $ 2,414    $ 214    $ 705    $ 660    $ 667    $ 168

As of September 30, 2020:

Operating
Leases

Finance
Leases

Total

2020
   $ 228    —      228
2021
   920    —      920
2022
   899    —      899
2023
   211    —      211
2024
   5    —      5






Total lease payments
   2,263    —      2,263
Less: imputed interest
   (154 )    —      (154 )






Total lease liabilities
   2,109    —      2,109
Less: current portion of lease liabilities
   (822 )    —      (822 )






Long-term lease liabilities
   $ 1,287    $ —      $

1,287






Note 6 – Stock-Based Compensation
The Company granted options to purchase ~~48,285~~17,029 and ~~196,737~~540,886 shares of the Company’s stock during the three and nine months ended September 30, ~~2019.~~2020, 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:

   Three Months Ended    Nine Months Ended
   September 30,    September 30,
   2019    2018    2019    2018
Average risk-free interest rate
   1.60%    2.89%    1.99%    2.50%
Expected dividend yield
   None    None    None    None
Expected life
   3.5 years    3.5 years    3.5 years    3.5 years
Expected volatility
   51.04% to 51.37%    61.2%    51.04% to 54.23%    60.8% to 61.6%
Weighted average exercise price
   $6.78    $2.91    $5.69    $3.08
Weighted average fair value
   $2.63    $1.34    $2.26    $1.41

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

  Three Months Ended

  Nine Months Ended

September 30,

September 30,





  2020









20
19








   2020





       20
19




Average risk-free interest
rate    0.15%    1.60%    0.79%    1.99%
Expected dividend yield
   NaN    NaN    NaN    NaN
Expected life
   3.5 years    3.5 years    3.5 years    3.5 years
Expected volatility
   66.0% to 66.0%    51.04% to 51.37%    50.2 to 65.7%    51.04% to 54.23%
Weighted average exercise price
   $8.84    $6.78    $10.08    $5.69
Weighted average fair value
   $4.11    $2.63    $4.34    $2.26
The Company’s stock-based compensation expense, including options and restricted stock by category is as follows (in thousands):

   Three Months Ended    Nine Months Ended
   September 30,    September 30,
   2019    2018    2019    2018
Cost of revenue
   $ 1    $ 1    2    $ 3
Engineering and product development
   62    109    182    306
Marketing and sales
   62    71    178    128
General and administrative
   215    232    494    750








   $ 340    $ 413    $ 856    $ 1,187









Three Months Ended

Nine Months Ended


September 30,

September 30,




   2020







   20
19







2020




    2019



Cost of revenue
   $ 3    $ 1    $ 28    $ 2
Engineering and product development
   64    62    406    182
Marketing and sales
   61    62    608    178
General and administrative
   337    215    1,500    494








   $ 465    $ 340    $ 2,542    $ 856








24
Table of Contents
As of September 30, ~~2019,~~2020, unrecognized compensation cost (in thousands) related to ~~unexercisable~~unvested options and unvested restricted stock and the weighted average ~~remaining period~~term of such equity instruments is as follows:

Remaining expense
   $ 1,434
Weighted average term
   1.0
Remaining expense
   $ 1,060
Weighted average term
   1.0
The Company’s restricted stock awards typically vest in either one year or three equal annual installments with the first installment vesting one
year from grant date. 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 were available to be earned based on exceeding the revenue goal. On March 30, 2018, in accordance with the performance award, the Company’s Board of Directors determined that the revenue goal had been met and a total of 189,583 shares were granted, with 63,194 vesting immediately and the remainder vesting on the first and second anniversary of the award grant
date.
~~During the three and nine months ended September 30, 2019, the~~
The Company granted 0 and 14,000 shares of restricted stock ~~respectively with time based vesting.~~
during the nine-month periods ended September 30, 2020 and 2019, respectively.
The Company’s aggregate intrinsic value for stock options and restricted stock outstanding is as follows (in thousands):

   Period Ended
   September 30,
Aggregate intrinsic value
   2019    2018
Stock options
   $ 4,154    $ 204
Restricted stock
   1,315    1,463

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

As of


September 30,

Aggregate intrinsic value

2020

2019

Stock options
   $ 6,679    $ 4,154
Restricted stock
   257    1,315
The Company issued ~~667~~49,712 and ~~428,980~~94,678 shares of common stock upon the exercise of
outstanding
stock options in the three and ~~nine months~~nine-month periods ended September 30, ~~2019,~~2020, respectively. The Company received cash proceeds of approximately ~~$0.0~~$185,000 and ~~$1.4 million~~$417,000 in the three and ~~nine months~~nine-month periods ended September 30, ~~2019, respectively. The intrinsic value of restricted shares that vested in the three and nine months ended September 30, 2019 was $0.0 million and $0.5 million,~~2020, respectively. The intrinsic value of restricted shares that vested in the nine months ended September 30, ~~2018~~2020 was ~~$0.5~~$0.6 million.
38,160 restricted shares vested in the three months ended September 30, 2020 while another 3,666 were cancelled.
Employee Stock Purchase Plan
In December 2019, the 2019 Empl
o
ye
e
Stock Purchase Plan (“ESPP”) was adopted by the Company’s Board of Directors (the “Board”) and approved by stockholders, effective January 1, 2020.
The ESPP provides for the issuance of up to 950,000 shares of common stock, subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The ESPP may be terminated or amended by the Board at any time. Certain amendments to the ESPP require stockholder approval.
Substantially all of the Company’s employees whose customary employment is for more than 20 hours a week are eligible to participate in the ESPP. Any employee who owns 5% or more of the voting power or value of the Company’s shares of common stock is not eligible to participate in the ESPP.
25
Table of Contents
Any eligible employee can enroll in the ESPP as of the beginning of a respective quarterly accumulation period. Employees who participate in the ESPP may purchase shares by authorizing payroll deductions of up to 15% of their base compensation during an accumulation period. Unless the participating employee withdraws from participation, accumulated payroll deductions are used to purchase shares of common stock on the last business day of the accumulation period (the “Purchase Date”) at a price equal to 85% of the lower of the fair market value on (i) the Purchase Date or (ii) the first day of such accumulation period. Under applicable tax rules, no employee may purchase more than $25,000 worth of common stock, valued at the start of the purchase period, under the ESPP in any calendar year.
The Company issued 16,392 and 34,857 shares under the ESPP in the three and nine-month periods ended September 30, 2020, respectively. The Company recorded approximately $19,000 and $84,000 of stock-based compensation expense pursuant to ESPP for the three and nine-month periods ended September 30, 2020, respectively. The third accumulation period under the ESPP commenced on July 1, 2020 and
ended
on September 30,
2020, and the related shares purcha
s
ed by the participants were issued in October 2020. As of September 30, 2020, the Company recorded a liability of $
58,000
related to employee withholdings in connection with the ESPP accumulation period ended September 30, 2020, which was included as a component of accrued expenses and other current liabilities.
Note 7 – Commitments and Contingencies
Foreign Tax Claim
In July 2007, a dissolved former Canadian subsidiary of the Company, CADx Medical Systems Inc. (“CADx Medical”), received a tax
re-assessment
of approximately $6,800,000 from the Canada Revenue Agency (“CRA”) resulting from the CRA’s audit of CADx Medical’s Canadian federal tax return for the year ended December 31, 2002. In February 2010, the CRA reviewed the matter and reduced the tax
re-assessment
to approximately $703,000, excluding interest and penalties.
The ~~Company believes that it is~~CRA had the right to pursue the matter until July 2020 and did not ~~liable for there-assessment~~ ~~against CADx Medical~~do so, and accordingly no accrual has been recorded for this matter as of September 30, ~~2019.~~
2020.
Other Commitments
The Company is obligated to pay approximately ~~$2.7~~$4.2 million for firm purchase obligations to suppliers for future product and service deliverables.
Litigation
In December 2016, the Company entered into an Asset Purchase Agreement with Invivo ~~Corporation.~~Corporation (the “Asset Purchase Agreement”). In accordance with the ~~agreement,~~Asset Purchase Agreement, the Company sold to Invivo all right, title and interest to certain intellectual property relating to the Company’s VersaVue Software and DynaCAD product and related assets for ~~$3.2~~
$
3.2
million. The Company closed the transaction on January
30,
2017
less a holdback reserve of ~~$350,000~~ $
350,000
for a net
pr
o
ceeds
of approximately ~~$2.9~~$
2.9
million.
26
Table of Contents
On September 5, 2018, third-party Yeda Research and Development Company Ltd., (“Yeda”), filed a complaint (the “Complaint”) against the Company and Invivo ~~Corporation, (“Invivo”),~~ in the United States District Court for the Southern District of New York, captioned Yeda Research and Development Company Ltd. v. iCAD, Inc. and Invivo Corporation, Case No.
1:18-cv-08083-GBD,
related to the Company’s sale of the VersaVue software and DynaCAD product ~~to Invivo.~~under the Asset Purchase Agreement. In the Complaint, Yeda asserted claims for: (i) copyright infringement and misappropriation of trade secrets against both the Company and ~~Invivo;~~Invivo, (ii) breach of contract against the Company ~~only;~~only, and (iii) tortious interference with existing business relationships and unjust enrichment against Invivo only. The Company and Invivo filed Motions to Dismiss the Complaint on December 21, 2018. On January 18, 2019, Yeda filed Oppositions to the Motions to Dismiss. The Company and Invivo submitted responses to the Opposition to the Motion to Dismiss on February 8, 2019. The Court held oral argument on the Motions to Dismiss on March 27, 2019. On September 5, 2019, the Court granted Invivo’s Motion to Dismiss in its entirety and granted the Company’s Motion

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

to Dismiss as it relates to Yeda’s breach of contract and misappropriation of trade secrets claims. On October 22, 2019, Yeda filed an ~~amended~~Amended Complaint ~~(the “Amended Complaint”)~~ against only the Company asserting claims for (i) copyright ~~infringement;~~infringement, and (ii) a replead breach of contract claim. The Company filed its Answer to Yeda’s Amended Complaint on November 5, 2019. ~~The~~Yeda alleges, among other things, that the Company ~~will vigorously defend against~~infringed upon Yeda’s source code, which was originally licensed to the ~~claims asserted~~Company, by ~~Yeda~~using it in the ~~Amended Complaint. The amount of the loss, if any, cannot be reasonably estimated at this time. Any amounts owed by~~products that the Company ~~in connection with its indemnification obligations~~sold to Invivo ~~related~~and that it is entitled to ~~this action may reduce~~damages that could include, among other things, profits relating to the ~~$350,000 holdback under~~sales of these products. If the ~~Asset Purchase Agreement.~~

Company is found to have infringed Yeda’s copyright or breached its agreements with Yeda, the Company could be obligated to pay to Yeda substantial monetary damages.

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

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Note 8 –- Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the ~~assetor~~asset
or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
~~Level 1 - Quoted prices in active markets for identical assets or liabilities.~~
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
~~Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value.~~

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

◾

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

◾

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

◾

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

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

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and notes payable and convertible debentures. Due to their ~~short term~~short-term nature and market rates of interest, the carrying amounts of the financial instruments (except the ~~convertible debentures,~~Convertible Debentures, which ~~are~~were measured at fair value in accordance with the fair value option election) approximated fair value as of ~~September 30, 2019~~February 21, 2020 and December 31, ~~2018.~~
2019.

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

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

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

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

Fair Value Measurements as of December 31, 2018

   Level 1    Level 2    Level 3    Total
Assets

Money market accounts
   $ 12,134    $ —      $ —      $ 12,134








Total Assets
   $ 12,134    $ —      $ —      $ 12,134








Liabilities

Convertible debentures
   $ —      $ —      $ 6,970    $ 6,970








Total Liabilities
   $ —      $ —      $ 6,970    $ 6,970

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

Fair Value Measurements as of September 30, 2019

   Level 1    Level 2    Level 3    Total
Assets

Money market accounts
   $ 17,427    $ —      $ —      $ 17,427








Total Assets
   $ 17,427    $ —      $ —      $ 17,427








Liabilities

Convertible debentures
   $ —      $ —      $ 12,310    $ 12,310








Total Liabilities
   $ —      $ —      $ 12,310    $ 12,310








28
Table of Contents
Fair Value Measurements (in thousands) as of December 31, 2019


Level 1

Level 2

Level 3

Total

Assets

Money market accounts
   $ 15,313    $

—      $ —      $ 15,313








Total Assets
   $ 15,313    $ —      $ —      $ 15,313








Liabilities

Convertible debentures
   $ —      $ —      $ 13,642    $ 13,642








Total Liabilities
   $ —      $ —      $ 13,642    $ 13,642








Fair Value Measurements as of September 30, 2020
   Level 1    Level 2    Level 3    Total
Assets

Money market accounts
   $ 22,633    $

—      $

—      $ 22,633








Total Assets
   $ 22,633    $ —      $ —      $ 22,633








The following sets forth a reconciliation of the changes in the fair value of the ~~convertible debenture~~Convertible Debentures that were converted to equity during the ~~period~~nine months ended September 30, 2020 (in thousands):

   Nine months ended
September 30, 2019
Balance, December 31, 2018
   $ 6,970
Fair value adjustment
   5,340


Balance, September 30, 2019
   $ 12,310


   Convertible Debentures
Balance, December 31, 2019
   $ 13,642
Fair value adjustments
   7,522
Conversion
   (21,164 )


Balance as of September 30, 2020
   $ —


Note 9 –- Income Taxes
The Coronavirus Aid, Relief, and Economic
Security
Act was enacted on March 27, 2020 and did not have a material impact on the Company’s provision for income taxes for the three and nine months ended September 30, 2020.
The Company recorded an income tax provision of ~~$6,000~~$3,000 and ~~$26,000~~$34,000 for the three and nine months ended September 30, ~~2019~~2020, respectively, and ~~September 30, 2018, respectively. The Company recorded an income tax provision of~~$6,000 and $33,000 ~~and $43,000~~ for the three and
nine months ended September 30, 2019, ~~and September 30, 2018,~~ respectively. The Company had no0 material unrecognized tax benefits and a deferred tax liability of approximately ~~$3,000~~$4,000 related to tax amortizable goodwill.
No other adjustments were required under ASC 740, “Income ~~Taxes”.~~Taxes.” The Company does not expect that ~~the~~its 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 30, ~~2019.~~
2020.
29

Table of Contents
The Company files United States federal income tax returns and income tax returns in various states and local jurisdictions. The Company’s three preceding tax years remain subject to examination by federal and state ~~taxing~~tax 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.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

Note 10 –- Goodwill

The Company tests goodwill for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of the reporting unit is less than ~~the~~its carrying ~~value of the reporting unit.~~
value.

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

significant underperformance relative to historical or projected future operating results;

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

significant negative industry or economic trends;

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

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

The Company ~~records~~considered the goodwill impairment factors due to the uncertainty around the continuing impact of the
COVID-19
pandemic on the Company’s operations and on the global economy as a whole. Under this consideration the Company performed scenario testing as of March 31, 2020 updating the projections to the most recent impairment analysis performed as of October 1, 2019. The Company compared the scenario test again against current forecasts as of September 30, 2020 and concluded that it did not have a triggering event or impairment indicators in the quarter ended September 30, 2020.

The Company would record an impairment charge when such assessment indicates that the fair value of a reporting unit ~~was~~is 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 September 30, 2019.~~

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.

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

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

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 in similar 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,~~the Company, as well as the fact that market data may not be available for divisions within larger conglomerates or
non-public
subsidiaries that could otherwise qualify as comparable, and the specific circumstances surrounding a market transaction (e.g., synergies between the parties, terms and conditions of the transaction, etc.) may be different or irrelevant with respect to the business.

The Company corroborates the total fair values of the reporting units using a market capitalization approach; however, this approach cannot be used to determine the fair value of each reporting ~~unit value.~~unit. The blend of the income approach and market approach is more closely aligned to the business profile of the Company, including markets served and products available. In addition, required rates of return, along with uncertainties inherent in the forecast of future cash flows, are reflected in the selection of the discount rate. In addition, under the blended approach, reasonably likely scenarios and associated sensitivities can be developed for alternative future states that may not be reflected in an observable market price. The Company will assess each valuation methodology based upon the relevance and availability of the data at the time the valuation is performed and weights the methodologies appropriately.
~~Effective with the filing of the10-Q~~ ~~for the second quarter of 2013, the~~

The Company ~~disclosed~~has two operating segments, Detection and Therapy, as further discussed in ~~its SEC filings. Historically, the Company had reported its financial results as one operating segment.~~
Note 12 below.

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

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

   Consolidated
reporting unit    Detection    Therapy    Total
Accumulated Goodwill
   47,937    $ —      $ —      47,937
Accumulated impairment
   (26,828 )    —      —      (26,828 )
Fair value allocation
   (21,109 )    7,663    13,446    —
Acquisition of DermEbx and Radion
   —      —      6,154    6,154
Acquisition measurement period adjustments
   —      —      116    116
Acquisition of VuComp
   —      1,093    —      1,093
Sale of MRI assets
   —      (394 )       (394 )
Impairment
   —      —      (19,716 )    (19,716 )








Prior to December 31, 2018
   —      8,362    —      8,362








Balance at December 31, 2018
   $ —      $ 8,362    $ —      $ 8,362








Balance at September 30, 2019
   $ —      $ 8,362    $ —      $ 8,362








Accumulated Goodwill
   $ 47,937    $ 699    $ 6,270    $ 6,969
Fair value allocation
   (21,109 )    7,663    13,446    $ 21,109
Accumulated impairment
   (26,828 )    —      (19,716 )    $ (19,716 )








Balance at September 30, 2019
   $ —      $ 8,362    $ —      $ 8,362









Consolidated
reporting unit


Detection


Therapy


Total

Accumulated Goodwill
   $ 47,937    $ —      $ —      $ 47,937
Accumulated impairment


(26,828
)


—



—



(26,828
)
Fair value allocation
   (21,109 )    7,663    13,446    —
Acquisition of DermEbx and Radion
   —      —      6,154    6,154
Acquisition measurement period adjustments
   —      —      116    116
Acquisition of VuComp
   —      1,093    —      1,093
Sale of MRI assets
   —      (394 )       (394 )
Impairment
   —      —      (19,716 )    (19,716 )








Prior to December 31, 2019
   —    8,362    —      8,362








Balance at September 30, 2020
   $ —    $ 8,362    $ —      $ 8,362








Note 11 – Long-lived assets
The Company assesses long-lived assets for impairment if events and circumstances indicate it is more likely than not that the fair value of the asset group is less than ~~the~~its carrying ~~value of the asset group.~~
value.
There is no set interval or frequency for recoverability ~~evaluation rather when to determine~~evaluation. Rather, the determination of when, if at all, an asset (or asset group) is evaluated for recoverability is based on “events and ~~circumstances”.~~circumstances.” The following factors are examples of events or changes in circumstances that indicate the carrying amount of an asset ~~(asset~~(or asset group) may not be recoverable and thus is to be evaluated for recoverability.
~~A significant decrease in the market price of a long-lived asset (asset group);~~
~~A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition;~~
~~A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator;~~
~~An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group);~~
A current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group).

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

•

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

•

A significant adverse change in the extent or manner in which a long-lived asset (or 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 (or asset group), including an adverse action or assessment by a regulator;

•

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

•

A current operating period, 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 (or asset group).

The Company determined there were no such triggering events in the quarter ended September 30, ~~2019.~~
2020.

If the carrying amount of an asset or asset group (in use or under development) is evaluated and found not to be fully recoverable ~~(the~~(e.g., the carrying amount exceeds the estimated gross, undiscounted cash flows from use and disposition), then an
impairment
loss must

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be recognized. The impairment loss is measured as the excess of the carrying amount over the fair value of the asset (or asset group). The Company determined the “Asset Group” of the Company to be the assets of the Therapy segment and the Detection segment, which the Company considers to be the lowest level for which the identifiable cash flows were largely independent of the cash flows of other assets and liabilities.
A considerable amount of judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of the asset group and the reporting unit. While the Company believes ~~the~~that its judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore additional impairment charges could be required. Significant negative industry or economic trends, disruptions to the Company’s business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets may adversely impact the assumptions used in the fair value estimates and ultimately result in future impairment charges.
Note 12 – Segment Reporting
Operating segments are
defined
as components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance.
The Company’s CODM is the Chief Executive Officer. Each reportable segment generates revenue from the sale of medical equipment and related services and/or sale of supplies. The Company has determined there are two segments, Detection and Therapy.
The Detection segment consists of ~~our~~the Company’s advanced image analysis and workflow products, and the Therapy segment consists of ~~our~~the Company’s radiation therapy products, ~~which the Company refers to as Axxent,~~“Axxent,” and related services. The primary factors used by ~~our~~the Company’s CODM to allocate resources are based on revenues, gross profit, operating income, and earnings or loss before interest, taxes, depreciation, amortization, and other specific and
non-recurring
items of each segment. Included in segment operating income are stock compensation, amortization of technology and depreciation expense. There are no intersegment revenues.
The Company does not track assets by operating segment and ~~our~~the Company’s 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, 2019~~

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

   Three Months Ended    Nine Months Ended
   September 30,    September 30,
   2019    2018    2019    2018
Segment revenues:

Detection
   $ 6,087    $ 3,927    $ 15,464    $ 11,928
Therapy
   1,770    2,265    6,495    6,739








Total Revenue
   $ 7,857    $ 6,192    $ 21,959    $ 18,667








Segment gross profit:

Detection
   $ 5,051    $ 3,454    $ 12,874    $ 10,439
Therapy
   1,003    1,284    4,188    3,581








Segment gross profit
   $ 6,054    $ 4,738    $ 17,062    $ 14,020








Segment operating income (loss):

Detection
   $ 943    $ 978    $ 1,918    $ 1,984
Therapy
   (1,022 )    (435 )    (1,065 )    (1,861 )








Segment operating income (loss)
   $ (79 )    $ 543    $ 853    $ 123








General, administrative, depreciation and amortization expense
   $ (1,881 )    $ (1,792 )    $ (5,305 )    $ (5,459 )
Interest expense
   (193 )    (118 )    (604 )    (373 )
Other income
   103    28    226    79
Fair value of convertible debentures
   (900 )    —      (5,340 )    —








Loss before income tax
   $ (2,950 )    $ (1,339 )    $ (10,170 )    $ (5,630 )

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   Three Months Ended
September 30, Nine Months Ended
September 30,
   2020    2019    2020    2019
Segment revenues:


Detection
   $ 5,291    $ 6,087    $ 13,885    $ 15,464
Therapy
   1,838    1,770    5,362    6,495








Total Revenue
   $ 7,129    $ 7,857    $ 19,247    $ 21,959








Segment gross profit:


Detection
   $ 4,227    $ 5,051    $ 11,227    $ 12,874
Therapy
   798    1,003    2,665    $ 4,188








Segment gross profit
   $ 5,025    $ 6,054    $ 13,892    $ 17,062








Segment operating income (loss):


Detection
   $ 866    $ 943    $ 721    $ 1,918
Therapy
   (711 )    (1,022 )    (2,149 )    $ (1,065 )








Segment operating income (loss)
   $ 155    $ (79 )    $ (1,428 )    $ 853








General, administrative, depreciation and amortization expense
   $ (1,844 )    $ (1,881 )    $ (6,465 )    $ (5,305 )
Interest expense
   (115 )    (193 )    (360 )    (604 )
Other income
   10    103    85    226
Loss on extinguishment of debt
   —      —      (341 )    —
Fair value of convertible debentures
   —      (900 )    (7,464 )    (5,340 )








Loss before income tax
   $ (1,794 )    $ (2,950 )    $ (15,973 )    $ (10,170 )








Note 13 –- Recent Accounting Pronouncements
Recently Adopted Accounting Standards
On January 1, ~~2019,~~2020, the Company adopted ASU
2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the ~~new accounting standard~~Disclosure Requirements for Fair Value Measurement” (“ASU
2018-13”).
ASU
2018-13
removes, modifies and adds certain disclosure requirements of ASC ~~842, “Leases”~~Topic 820. ASU
2018-13
is effective for Company for the fiscal year and ~~all related amendments using~~interim periods therein beginning January 1, 2020. The Company notes that the ~~modified retrospective method~~adoption of ASU
2018-13
did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued
ASU 2016-13, “Financial
Instruments - Credit Losses (Topic 326)”
(“ASU 2016-13”), which
requires the measurement and recognition of expected credit losses for ~~all lease arrangements~~financial assets held at amortized cost.
ASU 2016-13 replaces
the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking
34
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information to calculate
credit loss estimates. These changes will result in ~~place as~~earlier recognition of credit losses. In November 2019, the FASB elected to defer the adoption date of ASU
2016-13
for public business entities that meet the definition of a smaller reporting company to fiscal years beginning after December 15, 2022. Early adoption of the ~~date of adoption.~~guidance in ASU
2016-13
is permitted. The Company ~~recognized~~is currently evaluating the ~~cumulative effect~~impact that the adoption of ~~initially applying~~ASU
2016-13
will have on its consolidated financial statements.
In December 2019, the ~~new standard as an expense in~~FASB issued ASU
2019-12,
“Income Taxes (Topic 740): Simplifying the ~~quarter ended September 30, 2019 as~~Accounting for Income Taxes” (“ASU
2019-12”).
ASU
2019-12
is intended to simplify the ~~amount was immaterial~~accounting for income taxes by removing certain exceptions to the ~~financial statements.~~general principles in Topic 740. The ~~comparative information has not been restated~~amendments also improve consistent application of and ~~continues to be reported under~~simplify US GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU
2019-12
is effective for the ~~accounting standards in effect~~Company for ~~those periods. Results for reporting~~the fiscal year and interim periods therein beginning ~~after~~ January 1, ~~2019 are presented under ASC 842, while prior period amounts are not~~
2021. The Company will adopt ASU
2019-12

~~iCAD, INC. AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~September 30, 2019~~

~~adjusted~~on January 1, 2021 and ~~continue to be reported~~will account for income taxes in accordance with ~~our historic accounting under Topic 840.~~ ASU

2019-12

at that time.

In ~~addition, upon electing~~March 2020, the ~~practical expedient~~FASB issued ASU
2020-04,
“Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU
2020-04”). ASU
2020-04
was issued because the London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities, and at the end of 2021, banks will no longer be required to ~~combine lease andnon-lease~~ ~~components under ASC 842, the Company does not expect the changes~~report information that is used to ~~lessor accounting to impact the amount or timing of revenue recognition, but will~~determine LIBOR. As a result, ~~in revenue~~LIBOR is expected to be ~~recognized under ASC 606 because~~discontinued as a benchmark interest rate. Other interest rates used globally could also be discontinued for similar reasons. ASU
2020-04
provides companies with optional guidance to ease the~~non-lease~~ ~~component~~ potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022). The Company is currently evaluating the ~~predominant component in~~impact that the ~~arrangement. See Note 1 for details of the Company’s~~ adoption of ~~ASC 842. There are no other new or pending pronouncements that impact the Company.~~
~~Note 14 – Subsequent Events~~
~~On November 13, 2019, the Company entered into a Fifth Loan Modification Agreement with the Bank. The Fifth Loan Modification Agreement amended the EBITDA covenant for thesix-month~~ ~~period ending December 31, 2019 to not more than $(4.0 million) from not more than $(2.0 million). All other terms of the Loan Agreement remained the same.~~
~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~
ASU
2020-04
will have on its consolidated financial statements.

Item 2.

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

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: Certain information included in this Item 2 and elsewhere in this Form
10-Q
that are not historical facts contain forward looking statements that involve a number of known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward looking statements. These risks and uncertainties include, but are not limited to following: the impact of the
COVID-19
pandemic on our business and the global economy; uncertainty of future sales and expense levels, protection of patents and other proprietary rights, the impact of supply and manufacturing constraints or difficulties, regulatory changes and requirements applicable to our products, product market acceptance, possible technological obsolescence of products, increased competition, integration of ~~the~~ acquired businesses, the impact of litigation and/or government regulation, changes in Medicare reimbursement policies,

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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.
Except as required by law, we undertake no obligation to update any such forward-looking statements to reflect events or circumstances after the date of such statements.

Results of Operations

Overview

iCAD, Inc. is a ~~provider of advanced image analysis, workflow solutions~~global medical technology company providing innovative cancer detection and ~~radiation~~ therapy ~~for the early identification and treatment of cancer.~~solutions. The Company reports in two ~~segments –Cancer~~segments: Detection ~~(“Detection”)~~ and ~~Cancer Therapy (“Therapy”).~~
Therapy.

In the Detection segment, ~~our~~the Company’s solutions include (i) advanced image analysis and workflow solutions that enable healthcare professionals to better serve patients by identifying pathologies and pinpointing the most prevalent cancers earlier, and (ii) a comprehensive range of high-performance, ~~upgradeable~~Artificial Intelligence and Computer-Aided Detection (CAD) systems and workflow solutions for 2D and 3D 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 the Therapy segment, the Company offers ~~an isotope-free cancer treatment platform technology~~ the Xoft Electronic Brachytherapy System (“Xoft System”)., an isotope-free cancer treatment platform technology. The Xoft System can be used for the treatment of ~~early- stage~~early-stage breast cancer, endometrial cancer, cervical cancer, glioblastoma, and skin cancer. We believe the Xoft System platform indications represent strategic opportunities in the United States and international markets to offer differentiated treatment alternatives. In addition, the Xoft System generates additional recurring revenue ~~for~~from the sale of consumables and related accessories which the Company expects will continue to drive growth in this segment.

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

COVID-19

Impact

On March 12, 2020 the World Health Organization declared
COVID-19
to be a pandemic. In an effort to contain and mitigate the spread of the
COVID-19
pandemic, the United States, many countries in Europe, as well as Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of
COVID-19.
As a provider of devices and services to the health care industry, our operations have been materially affected. Significant uncertainty remains as to the continuing impact of the
COVID-19
pandemic on our operations and on the global economy as a whole. It is currently not

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possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. The
COVID-19
pandemic has resulted in significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility seen in the recent past will have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our common stock. Our results for the quarter ending September 30, 2020 reflect a negative impact from the
COVID-19
pandemic, as the typical sales cycle and ordering patterns were disrupted due to some healthcare facilities’ additional focus on
COVID-19.
Although we do not provide guidance to investors relating to our results of operations, our results for the quarter ending December 31, 2020, and possibly future quarters, could reflect a continuing negative impact from the
COVID-19
pandemic for similar reasons. The Company continued to follow steps taken during the second quarter to reduce operating expenses during the three-month period ended September 30, 2020, including cutting
non-essential
travel, implementing employee furloughs and terminations, reducing employee salaries by 10%, and cancelling most
in-person
trade shows. Depending upon the duration and severity of the pandemic, the continuing effect on our results over the long term is uncertain. We will continue to evaluate the nature and extent of the impact of
COVID-19
on our business and cost structure.
During the first quarter of fiscal 2020 the Company entered into an equity distribution agreement with JMP Securities to provide for an
at-
the-market
offering program to provide additional potential liquidity through the sale of common stock having a value of up to $25.0 million. The Company did not make any sales under this equity distribution agreement in the three months ended September 30, 2020. The Company believes that its current liquidity and capital resources are sufficient to sustain operations through at least the next 12 months, primarily due to cash on hand of $22.6 million and anticipated revenue and cash collections. However, the resurgence of the
COVID-19
pandemic could affect our liquidity.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. The Company received an Employee Retention Credit of $0.3 million associated with the CARES Act. The Company does not currently expect any material impact on its financial statements from other provisions under the CARES Act.
37
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Critical Accounting Policies
The Company’s discussion and analysis of its financial condition, results of operations, and cash flows are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an~~on-going~~ ongoing basis, the Company evaluates these estimates, including those related to revenue recognition, allowance for doubtful accounts, inventory valuation and obsolescence, intangible assets, goodwill, income taxes, contingencies and litigation. Additionally, the Company uses assumptions and estimates in calculations to determine stock-based compensation, the fair value of convertible ~~notes,~~debentures, and evaluation of litigation. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As
Due to the
COVID-19
pandemic, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of ~~January 1, 2019, we adopted accounting standards codification (“ASC”) Topic 842. Refer~~any specific event or circumstance that would require an update to ~~Note 1~~its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this Quarterly Report on Form~~10-Q~~ ~~for disclosure of the changes related to this adoption.~~
~~There~~
10-Q.
These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Other than as described herein, there have been no additional material changes to our critical accounting policies as discussed in our ~~2018~~2019 Annual Report on Form
10-K ~~(the “2018~~
(the “2019
10-K”).
For a comprehensive list of the Company’s critical accounting policies, reference should be made to the ~~2018~~2019
10-K.

~~Revenue: (in thousands)~~

   Three months ended September 30,
   2019    2018    Change    % Change
Detection revenue

Product revenue
   $ 4,749    $ 2,394    $ 2,355    98.4 %
Service revenue
   1,338    1,533    (195 )    (12.7 )%








Subtotal
   6,087    3,927    2,160    55.0 %








Therapy revenue

Product revenue
   407    699    (292 )    (41.8 )%
Service revenue
   1,363    1,566    (203 )    (13.0 )%








Subtotal
   1,770    2,265    (495 )    (21.9 )%








Total revenue
   $ 7,857    $ 6,192    $ 1,665    26.9 %








~~Total revenue increased by approximately $1.7 million, or 26.9%, from $6.2 million for the three~~

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Three and nine months ended September 30, ~~2018~~2020 compared to three and nine months ended September 30, 2019.
Revenue: (in thousands)
Three months ended September 30, 2020 and 2019:


Three months ended September 30,


2020


2019


Change


% Change

Detection revenue








Product revenue

$
3,889


$
4,749


$
(860
)


(18.1
)%
Service revenue


1,402



1,338



64



4.8
%









Subtotal


5,291



6,087



(796
)


(13.1
)%









Therapy revenue








Product revenue


649



407



242



59.5
%
Service revenue


1,189



1,363



(174
)


(12.8
)%









Subtotal


1,838



1,770



68



3.8
%









Total revenue

$
7,129


$
7,857


$
(728
)


(9.3
)%









Total revenue decreased by approximately $0.7 million, or 9.3%, from $7.9 million for the three months ended September 30, ~~2019. The increase in revenue is due~~2019 to ~~an increase in Detection revenue of approximately $2.2 million offset by a decrease in Therapy revenue of $0.5 million.~~
~~Detection product revenue increased by approximately $2.4 million, or 98.4%, from $2.4~~$7.1 million for the three months ended September 30, ~~2018~~2020. The decrease is due to a decrease in Detection revenue of approximately $0.8 million offset by an increase in Therapy revenue of $0.1 million. The Company believes that Detection product revenue was adversely affected in the third quarter of 2020 by the
COVID-19
pandemic, as the typical sales cycle and ordering patterns were disrupted due to some healthcare facilities’ additional focus on
COVID-19.
The Company is not able to predict how the
COVID-19
pandemic will affect future revenue and order volume.
Detection product revenue decreased by approximately $0.9 million, or 18.1%, from $4.8 million for the three months ended September 30, ~~2019.~~2019 to $3.9 million for the three months ended September 30, 2020. The ~~increase~~decrease is due primarily to decreases in ~~Detection product~~(i) direct customer revenue isof $0.5 million. and (ii) OEM customer revenue of $0.4 million, in each case relating primarily ~~driven by growth in both direct and OEM customers with~~to revenue ~~earned primarily on the Company’s~~from 3D imaging and density assessment products.
Detection service and supplies revenue increased by $0.1 million, from $1.3 million in the three months ended September 30, 2019 to $1.4 million in the three months ended September 30, 2020. The increase is due primarily to an increase in service revenue from direct customers. The Company did not see a significant impact of the COVID-19 pandemic on Detection service and supplies revenue in the third quarter of 2020 but is not able to predict how the COVID-19 pandemic will affect future Detection service and supplies revenue.
39
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Therapy product revenue increased by approximately $0.2 million, or 59.5%, from $0.4 million for the three months ended September 30, 2019 to $0.6 million for the three months ended September 30, 2020. Therapy product revenue is related to the sale of our Axxent systems and can vary significantly from quarter to quarter due to changes in the number of units sold, and the average selling price.
Therapy service and supplies revenue decreased by approximately $0.2 million, or ~~12.7%~~12.8%, from ~~approximately $1.5~~$1.4 million for the three months ended September 30, ~~2018~~2019 to $1.2 million for the three months ended September 30, 2020. The Company believes that Therapy service and supplies revenue, specifically the use of balloons for procedures, was adversely affected by the
COVID-19
pandemic, due to
stay-at-home
and social distancing orders as well as the uncertainty in the market. The Company is not able to predict how the
COVID-19
pandemic will affect future Therapy service and supplies revenue.
Nine months ended September 30, 2020 and 2019:

Nine months ended September 30,


2020

2019

Change

% Change

Detection revenue

Product revenue
   $ 9,691    $ 11,347    $ (1,656 )    (14.6 )%
Service revenue
   4,194    4,117    77    1.9 %








Subtotal
   13,885    15,464    (1,579 )    (10.2 )%








Therapy revenue

Product revenue
   1,529    1,984    (455 )    (22.9 )%
Service revenue
   3,833    4,511    (678 )    (15.0 )%








Subtotal
   5,362    6,495    (1,133 )    (17.4 )%








Total revenue
   $ 19,247    $ 21,959    $ (2,712 )    (12.4 )%








Total revenue decreased by approximately $2.7 million, or 12.4%, from $22.0 million for the nine months ended September 30, 2019 to $19.3 million for the nine months ended September 30, 2020. The decrease is due to a decrease in Therapy revenue of approximately $1.1 million and a decrease in Detection revenue of approximately $1.6 million. The Company believes that Detection product revenue and order volume, and both Therapy product and Therapy service and supplies revenue were adversely affected in the nine months ended September 30, 2020, by the
COVID-19
pandemic, as the typical sales cycle and ordering patterns were disrupted due to some healthcare facilities’ additional focus on
COVID-19.
This was particularly evident in the second quarter but also impacted the third quarter of 2020. The Company is not able to predict how the
COVID-19
pandemic will affect future revenue and order volume.
40
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Detection product revenue decreased by approximately $1.7 million, or 14.6%, from $11.4 million for the nine months ended September 30, 2019 to $9.7 million for the nine months ended September 30, 2020. The decrease is due primarily to decreases in (i) direct customer revenue of $1.0 million. and (ii) OEM customer revenue of $0.7 million, in each case relating primarily to revenue from 3D imaging and density assessment products.
Detection service and supplies revenue increased by approximately $0.1 million, or 1.9%, from $4.1 million for the nine months ended September 30, 2019 to $4.2 million for the nine months ended September 30, 2020. The increase is due primarily to an increase in service revenue from direct customers. The Company did not see a significant impact of the
COVID-19
pandemic on Detection service and supplies revenue for the nine months ended September 30, 2020 but is not able to predict how the
COVID-19
pandemic will affect future Detection service and supplies revenue.
Therapy product revenue decreased by approximately $0.5 million, or 22.9%, from $2.0 million for the nine months ended September 30, 2019 to $1.5 million for the nine months ended September 30, 2020. Although Therapy product revenue increased in the three months ended September 30, 2019, Therapy product revenue for the nine months ended September 30, 2020 was adversely affected by the
COVID-19
pandemic, due to
stay-at-home
and social distancing orders as well as the uncertainty in the market. Therapy product revenue is related to the sale of our Axxent systems and can vary significantly from quarter to quarter due to changes in the number of units sold, and the average selling price.
Therapy service and supplies revenue decreased by approximately $0.7 million, or 15%, from $4.5 million for the nine months ended September 30, 2019 to $3.8 million for the nine months ended September 30, 2020. The Company believes that Therapy service and supplies revenue was adversely affected by the
COVID-19
pandemic, due to
stay-at-home
and social distancing orders as well as the uncertainty in the market. The Company is not able to predict how the
COVID-19
pandemic will affect future Therapy service and supplies revenue.
Cost of Revenue and Gross Profit: (in thousands)
Three months ended September 30, 2020 and 2019:

Three months ended September 30,


2020

2019

Change

% Change

Products
   $ 1,345    $ 809    $ 536    66.3 %
Service and supplies
   667    891    (224 )    (25.1 )%
Amortization and depreciation
   92    103    (11 )    (10.7 )%








Total cost of revenue
   $ 2,104    $ 1,803    $ 301    16.7 %








Gross profit
   $ 5,025    $ 6,054    $ (1,029 )    (17.0 )%
41
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Three months ended September 30,


2020

2019

Change

% Change

Detection gross profit
   $ 4,227    $ 5,051    $ (824 )    (16.3 %)
Therapy gross profit
   798    1,003    (205 )    (20.4 %)








Gross profit
   $ 5,025    $ 6,054    $ (1,029 )    (17.0 %)








Gross profit for the three months ended September 30, 2020 was approximately $5.0 million, or 70.5% of revenue, as compared to $6.0 million, or 77.1% of revenue, for the three months ended September 30, 2019. The
COVID-19
pandemic adversely affected revenues from Detection products and the Therapy segment in the three months ended September 30, 2020, and as a result, lower gross profit in both segments. This was particularly evident in the second quarter but also impacted the third quarter of 2020. However, the Company continued to follow steps taken during the second quarter to reduce operating expenses during the three months ended September 30, 2020, including cutting
non-essential
travel, implementing employee furloughs and terminations and reducing employee salaries by 10%. These measures offset some of the impact on gross profit caused by the lower than expected revenue numbers.
Cost of products increased by approximately $0.5 million, or 66.3%, from $0.8 million for the three months ended September 30, 2019 to $1.3 million for the three months ended September 30, ~~2019. Service revenue has lagged as the introduction of new products cannibalize service revenue for customers who receive aone-year~~ ~~warranty when they purchase our new products. Service and supplies revenue reflects the sale of service contracts to our installed base of customers and can vary from quarter to quarter.~~
Therapy product revenue decreased by approximately $0.3 million, or 41.8%, from $0.7 million for the three months ended September 30, 2018 to $0.4 million for the three months ended September 30, 2019. Therapy product revenue related to the sale of our radiation therapy (“Axxent”) systems can vary significantly from quarter to quarter due to an increase or decrease in the number of units sold, as well as changes in average selling price based on our current inventory of controllers.

Therapy service and supply revenue decreased by approximately $0.2 million, or 13%, from $1.6 million for the three months ended September 30, 2018 to $1.4 million for the three months ended September 30, 2019. Source, service and disposable applicators saw a slight decline, and remain a significant component of Therapy service revenue.

   Nine months ended September 30,
   2019    2018    Change    % Change
Detection revenue

Product revenue
   $ 11,347    $ 7,369    $ 3,978    54.0 %
Service revenue
   4,117    $ 4,559    (442 )    (9.7 )%








Subtotal
   15,464    11,928    3,536    29.6 %








Therapy revenue

Product revenue
   1,984    1,932    52    2.7 %
Service revenue
   4,511    4,807    (296 )    (6.2 )%








Subtotal
   6,495    6,739    (244 )    (3.6 )%








Total revenue
   $ 21,959    $ 18,667    $ 3,292    17.6 %








Total revenue increased by approximately $3.3 million, or 17.6%, from $18.7 million for the nine months ended September 30, 2018 to $22.0 million for the nine months ended September 30, 2019. The increase in revenue is due to an increase in Detection revenues of approximately $3.5 million offset by a slight decreased in Therapy revenue of $0.2 million.
Detection product revenue increased by approximately $4.0 million, or 54.0%, from $7.4 million for the nine month period ending September 2018 to $11.4 million for the nine month period ended September 30, 2019. The increase in Detection product revenue is due primarily to an increase in both direct and OEM customers with revenue from the Company’s 2D and Profound AI 3D imaging products.
Detection service and supplies revenue decreased $0.4 million, or 9.7%, from approximately $4.5 million for the nine months ended September 30, 2018 to $4.1 million for the nine months ended September 30, 2019. Detection service and supplies revenue reflects the sale of service contracts to our installed base of customers, and can vary from quarter to quarter.
Therapy product revenue was $1.9 million for the nine months ended September 30, 2018 and 2019. However, product revenue from the sale of our Axxent systems can vary significantly due to an increase or decrease in the number of units sold.
Therapy service and supply revenue decreased by approximately $0.3 million, or 6.2%, from $4.8 million for the nine months ended September 30, 2018 to $4.5 million for the nine months ended September 30, 2019 due to a slight decrease in source, service, and disposable applicator sales.

2020. Cost ~~of Revenue and Gross Profit: (in thousands)~~

   Three months ended September 30,
   2019 2018 Change    % Change
Products
   $ 809 $ 603 $ 206    34.2 %
Service and supplies
   891 752 139    18.5 %
Amortization and depreciation
   103 99 4    4.0 %




Total cost of revenue
   $ 1,803 $ 1,454 $ 349    24.0 %




Gross profit
   $ 6,054 $ 4,738 $ 1,316    27.8 %
Gross profit %
   77.1 % 76.5 %    0.5 %
   Three months ended September 30,
   2019 2018 Change    % Change
Detection gross profit
   $ 5,051 $ 3,454 $ 1,597    46.2 %
Therapy gross profit
   1,003 1,284 (281 )    (21.9 %)




Gross profit
   $ 6,054 $ 4,738 $ 1,316    27.8 %




Gross profit %
   77.1 % 76.5 %    0.5 %
   Nine months ended September 30,
   2019 2018 Change    % Change
Products
   $ 2,134 $ 1,598 $ 536    33.5 %
Service and supplies
   2,466 2,743 (277 )    (10.1 )%
Amortization and depreciation
   297 306 (9 )    (2.9 )%




Total cost of revenue
   $ 4,897 $ 4,647 $ 250    5.4 %




Gross profit
   $ 17,062 $ 14,020 $ 3,042    21.7 %
Gross profit %
   77.7 % 75.1 %    2.6 %

   Nine months ended September 30,
   2019 2018 Change    % Change
Detection gross profit
   $ 12,874 $ 10,439 $ 2,435    23.3 %
Therapy gross profit
   4,188 3,581 607    17.0 %




Gross profit
   $ 17,062 $ 14,020 $ 3,042    21.7 %




Gross profit %
   77.7 % 75.1 %    2.6 %
Gross profit for the three month period ended September 30, 2019 was $6.1 million, or 77.1% of revenue, as compared to $4.7 million, or 76.5% of revenue, in the three month period ended September 30, 2018.
Gross profit for the nine month period ended September 30, 2019 was $17.1 million, or 77.7% of revenue, as compared to $14.0 million, or 75.1% of revenue, in the nine month period ended September 30, 2018. Gross profit percent changes are primarily due to changes in the mix of business, additional manufacturing investments and amortization of acquired intangibles.
Cost of products increased by approximately $0.2 million from approximately $0.6 million for the three months ended September 30, 2018 to approximately $0.8 million for the three months ended September 30, 2019. The cost of product revenue as a percentage of product revenue was approximately ~~19.5% for the three months ended September 30, 2018 as compared to~~ 15.7% for the three months ended September 30, 2019. Cost of products increased by approximately $0.5 million from approximately $1.6 million for the nine months ended September 30, 2018 to approximately $2.1 million for the nine months ended September 30, 2019. The cost of product revenue as a percentage of product revenue was approximately 17.2% for the nine months ended September 30, 20182019 as compared to 16.0% for the nine months ended September 30, 2019. The decrease in gross profit percentage in the three and nine months ended September 30, 2019 is due primarily to the increased cost of server hardware to support larger 3D images.
~~The cost of service and supplies was $0.8 million~~29.6% for the three months ended September 30, ~~2018 as compared~~2020. The increase in cost of products is primarily due to a hardware upgrade sale for the Detection business with a lower than standard average selling price and the mix of sales on the Therapy business with lower margins on sales outside of the United States.

Cost of service and supplies decreased by approximately $0.2 million, or 25.1%, from $0.9 million for the three months ended September 30, ~~2019. The cost~~2019 to $0.7 million for the three months ended September 30, 2020. Cost of service and supplies revenue as a percentage of service and supplies revenue was approximately ~~24.3% for the three months ended September 30, 2018 as compared to 33.0%~~34.4% for the three months ended September 30, 2019 ~~which~~as compared to 25.7% for the three months ended September 30, 2020. The decrease in service and supplies costs is due primarily to ~~product mix.~~a decrease in personnel costs.

Amortization and depreciation, which relates primarily to acquired intangible assets and depreciation of machinery and equipment, was approximately $0.1 million for each of the three months ended September 30, 2020 and 2019.

Table of Contents
Nine months ended September 30, 2020 and 2019:

Nine months ended September 30,


2020

2019

Change

% Change

Products
   $ 2,899    $ 2,134    $ 765    35.8 %
Service and supplies
   2,169    2,466    (297 )    (12.0 )%
Amortization and depreciation
   287    297    (10 )    (3.4 )%








Total cost of revenue
   $ 5,355    $ 4,897    $ 458    9.4 %








Gross profit
   $ 13,892    $ 17,062    $ (3,170 )    (18.6 )%

Nine months ended September 30,


2020

2019

Change

% Change

Detection gross profit
   $ 11,227    $ 12,874    $ (1,647 )    (12.8 %)
Therapy gross profit
   2,665    4,188    (1,523 )    (36.4 %)








Gross profit
   $ 13,892    $ 17,062    $ (3,170 )    (18.6 %)








Gross profit for the nine months ended September 30, 2020 was approximately $13.9 million, or 72.2% of revenue, as compared to $17.1 million, or 77.7% of revenue, for the nine months ended September 30, 2019. The ~~cost~~
COVID-19
pandemic adversely affected revenues from Detection products and the Therapy segment in the nine months ended September 30, 2020, and as a result, gross profit in both segments. This was particularly evident in the second quarter but also impacted the third quarter of ~~service~~2020. However, the Company continued to follow steps taken during the second quarter to reduce operating expenses, including cutting
non-essential
travel, implementing employee furloughs and ~~supplies was $2.7~~terminations, reducing employee salaries by 10%, and cancelling most
in-person
trade shows. These measures offset some of the impact on gross profit caused by the impact of
COVID-19.
Cost of products increased by approximately $0.8 million, or 35.8%, from $2.1 million for the nine months ended September 30, ~~2018~~2019 to $2.9 million for the nine months ended September 30, 2020. Cost of product revenue as a percentage of product revenue was approximately 16.0% for the nine months ended September 30, 2019 as compared to 25.8% for the nine months ended September 30, 2020. The increase in cost of products is due primarily to increased personnel costs in the three months ended period March 31, 2020 prior to the
COVID-19
cost cutting measures, a hardware upgrade sale in the three months ended September 30, 2020 for the Detection business with a lower than standard average selling price and the mix of sales in the Therapy business with lower margins on sales outside of the United States.
Cost of service and supplies decreased by approximately $0.3 million, or 12.0%, from $2.5 million for the nine months ended September 30, ~~2019. The cost~~2019 to $2.2 million for the nine months ended September 30, 2020. Cost of service and supplies revenue as a percentage of service and supplies revenue was approximately ~~29.3% for the nine months ended September 30, 2018 as compared to~~ 28.6% for the nine months ended September 30, 2019 ~~which reflects the decrease of the cost of sales related~~as compared to ~~the wind-down of the Xoft System subscription business during 2018.~~
~~Amortization and depreciation was approximately $0.1 million for the three month period ended September 30, 2018 and 2019. It was $0.3 million~~27.0% for the nine months ended September 30, ~~2018~~2020. The decrease in service and supplies costs is due primarily to decreased personnel costs in cost of sales.
43
Table of Contents
Amortization and depreciation, which relates primarily to acquired intangible assets and depreciation of machinery and equipment, was approximately $0.3 million for each of the nine months ended September 30, 2020 and 2019.

Operating Expenses: (in thousands)

   Three months ended September 30,
   2019    2018    Change    Change %
Operating expenses:

Engineering and product development
   $ 2,485    $ 2,035    $ 450    22.1 %
Marketing and sales
   3,588    2,100    1,488    70.9 %
General and administrative
   1,872    1,778    94    5.3 %
Amortization and depreciation
   69    74    (5 )    (6.8 )%








Total operating expenses
   $ 8,014    $ 5,987    $ 2,027    33.9 %

The Company’s investments in its business and the resulting operating expenses continued to grow throughout 2019. The Company had similar revenue expectations for 2020 due to the expectation of continued levels of sales orders, shipments, and overall revenue, which would have necessitated similar levels of operating expenses in 2020. Although the
COVID-19
pandemic impacted revenue throughout the nine months ended September 30, 2020, the Company began to implement significant reductions to operating expenses in April 2020. Steps taken thereafter to reduce operating expenses included cutting
non-essential
travel, implementing employee furloughs and terminations, reducing employee salaries by 10%, and cancelling most
in-person
trade shows. The Company will continue to monitor and manage the cost structure based on the impact that
COVID-19
has on the Company’s revenues.

Three months ended September 30, 2020 and 2019:

Three months ended September 30,

Operating expenses:
2020

2019

Change

Change %

Engineering and product development
   $ 1,849    $ 2,485    $ (636 ) (25.6 )%
Marketing and sales
   2,979    3,588    (609 ) (17.0 )%
General and administrative
   1,834    1,872    (38 ) (2.0 )%
Amortization and depreciation
   52    69    (17 ) (24.6 )%






Total operating expenses
   $ 6,714    $ 8,014    $ (1,300 ) (16.2 )%






Operating expenses ~~increased~~decreased by approximately ~~$2.0~~$1.3 million, or ~~33.9%~~16.2%, from $8.0 million in the three months ended September 30, 2019 ~~compared~~ to $6.7 million in the three months ended September 30, ~~2018~~
2020. The Company took steps during the second quarter of 2020 to reduce operating expenses, including cutting
non-essential
travel, implementing employee furloughs and terminations, reducing employee salaries by 10%, and cancelling most
in-person
trade shows.
Engineering and Product ~~Development.~~Development
. Engineering and product development costs ~~increased~~decreased by ~~$0.5~~approximately $0.6 million, or ~~22.1% to~~25.6%, from $2.5 million for the three months ended September 30, 2019 ~~from $2.0~~to $1.9 million for the three months ended September 30, ~~2018.~~2020. Detection engineering and product development costs ~~increased~~decreased by $0.5 million, from $1.8 million for the three months ended September 30, 2019 to $1.3 million for the three months ended September 30, 2020. Therapy engineering and product development costs decreased $0.1 million, from $0.7 million in the three months ended September 30, 2019 to $0.6 million for the three months ended September 30, 2020. The decreases were due primarily to decreased personnel costs as a result of the Company’s
COVID-19
related cost-cutting efforts.
44
Table of Contents
Marketing and Sales
. Marketing and sales expenses decreased by approximately $0.6 million, or 17.0%, from $3.6 million in the three months ended September 30, 2019 to $3.0 million in the three months ended September 30, 2020. Detection marketing and sales expense decreased by $0.2 million, from $2.3 million in the three months ended September 30, 2019 to $2.1 million in the three months ended September 30, 2020. Therapy marketing and sales expense decreased by $0.4 million, from $1.3 million in the three months ended September 30, 2019 to $0.9 million in the three months ended September 30, 2020. The decrease in both Detection and Therapy marketing and sales expense is due primarily to decreased personnel costs, commissions, travel, and reduced trade show costs as a result of the Company’s COVID-19 related cost-cutting efforts.
General and Administrative
. General and administrative expenses decreased by approximately $0.1 million, or ~~28.6%~~3.0%, from $1.9 million in the three months ended September 30, 2019 to $1.8 million for the three months ended September 30, ~~2019~~2020. The decrease is due primarily to a decrease in and personnel costs as a result of the Company’s
COVID-19
related cost-cutting efforts.
Amortization and Depreciation.
Amortization and depreciation, which relates primarily to acquired intangible assets and depreciation of machinery and equipment, decreased by approximately $17,000, or 24.6% from $1.4 million for three months ended September 30, 2018. The increase was due to personnel expenses. Therapy engineering and product development costs remained relatively flat at approximately $0.7 million$69,000 for the three months ended September 30, 2019 to $52,000 for the three months ended September 30, 2020.
Nine months ended September 30, 2020 and ~~2018 respectively.~~
2019:


Nine months ended September 30,

Operating expenses:
2020

2019

Change

Change %

Engineering and product development
   $ 5,938    $ 6,751    $ (813 ) (12.0 )%
Marketing and sales
   9,218    9,281    (63 ) (0.7 )%
General and administrative
   6,476    5,276    1,200 22.7 %
Amortization and depreciation
   153    206    (53 ) (25.7 )%






Total operating expenses
   $ 21,785    $ 21,514    $ 271 1.3 %






Operating expenses increased by approximately $0.3 million, or 1.3%, from $21.5 million in the nine months ended September 30, 2019 to $21.8 million in the nine months ended September 30, 2020. Although the Company implemented cost-cutting measures related to
COVID-19
and was able to achieve a reduction in operating expenses in the three months ended September 30, 2020, there were still no such measures related to
COVID-19
in the three months ended March 31, 2020, resulting in an overall increase in operating expenses for the nine months ended September 30, 2020. The increase in operating expenses was also offset by the $0.3 million Employee Retention Credit that the Company recorded in the second quarter of 2020, pursuant to the CARES Act.
45

Table of Contents
Engineering and Product Development
. Engineering and product development costs decreased by approximately $0.8 million, or 12.0%, from $6.7 million for the nine months ended September 30, 2019 to $5.9 million for the nine months ended September 30, 2020. Detection engineering and product development costs decreased by $0.8 million, from $4.8 million for the nine months ended September 30, 2019 to $4.0 million for the nine months ended September 30, 2020, due primarily to decreased personnel costs. Therapy engineering and product development costs remained at approximately $1.9 million in the nine months ended September 30, 2019 and 2020. The decreases were due primarily to decreased personnel costs as a result of the Company’s
COVID-19
related cost-cutting efforts.
Marketing and ~~Sales.~~Sales
. Marketing and sales expenses ~~increased~~decreased by ~~$1.4~~approximately $0.1 million, or ~~70.9%~~0.7%, from ~~$2.1~~$9.3 million in the ~~three month period~~nine months ended September 30, ~~2018~~2019 to ~~$3.5~~$6.2 million in the ~~three month period~~nine months ended September 30, ~~2019.~~2020. Detection marketing and sales expense increased by ~~$1.2~~$0.4 million, ~~or 110%,~~ from ~~$1.1~~$6.1 million in the ~~three~~nine months ended September 30, ~~2018~~2019 to ~~$2.3~~$6.5 million in the ~~three~~nine months ended September 30, ~~2019.~~2020. Therapy marketing and sales expense ~~increased~~decreased by ~~$0.2~~$0.3 million, ~~or 20%,~~ from ~~$1.0~~$3.2 million in the ~~three~~nine months ended September 30, ~~2018~~2019 to ~~$1.2~~$2.9 million in the ~~three~~nine months ended September 30, ~~2019.~~ 2020.
The increase in Detection marketing and sales expense is due primarily to ~~an increase in~~increased personnel costs, ~~and commissions as~~which were incurred prior to implementation of cost-cutting measures prompted by the
COVID-19
pandemic. This increase was especially prevalent in the first three months of the year when the Company ~~has~~ invested in additional commercial resources to help drive sales of the new Detection ~~products.~~products prior to the
COVID-19
pandemic. The ~~increase~~decrease in Therapy marketing and sales expense is primarily due ~~primarily~~ to a decrease in costs related to trade shows and personnel. The decrease in total marketing and sales expense also included the ~~timing~~Employee Retention Credit of ~~trade shows.~~
$0.1 million in Marketing and sales between the Detection and Therapy segments.
General and ~~Administrative.~~Administrative
. General and administrative expenses increased by ~~$0.1~~approximately $1.2 million, or ~~5.3%~~22.4%, from ~~$1.8~~$5.3 million in the three months ended September 30, 2018 as compared to approximately $1.9 million for the three months ended September 30, 2019. The increase in general and administrative expenses is due primarily to an increase in personnel costs.

~~Amortization and Depreciation.~~Amortization and depreciation was primarily related to acquired intangible assets and depreciation related to machinery and equipment. Amortization and depreciation decreased by $5,000, or 6.8%, to approximately $69,000 for the threenine months ended September 30, 2019 ~~from $74,000 for the three months ended September 30, 2018.~~

   Nine months ended September 30,
   2019    2018    Change    Change %
Operating expenses:

Engineering and product development
   $ 6,751    $ 7,431    $ (680 )    (9.2 )%
Marketing and sales
   9,281    6,272    3,009    48.0 %
General and administrative
   5,276    5,419    (143 )    (2.6 )%
Amortization and depreciation
   206    234    (28 )    (12.0 )%








Total operating expenses
   $ 21,514    $ 19,356    $ 2,158    11.1 %








~~Operating expenses increased by $2.2 million, or 11.1%, in the nine-month period ended September 30, 2019 compared~~ to ~~nine month period ended September 30, 2019.~~
~~Engineering and Product Development.~~Engineering and product development costs were approximately $6.8 million for the nine-month period ended September 30, 2019 down from $7.5 million for the same period last year, a reduction of $0.7 million, or 9.2%. Detection engineering and product development costs were $4.7 million and $5.0$6.5 million for the nine months ended September 30, 2019 and 2018, respectively for a decrease of $0.3 million, or 6%. Therapy engineering and product development costs were $2.0 million and $2.4 million for the nine months ended September 30, 2019 and 2018, respectively for a decrease of $0.4 million, or 16.7%.2020. The ~~decrease in Detection engineering and product development costs for the nine months ended September 30, 2019~~increase is due primarily to ~~clinical expenses~~increases in ~~the first quarter of 2018 related to the development of the Company’s breast tomosynthesis product. The decrease in Therapy engineering~~stock compensation expense and ~~product development costs for the nine months ended September 30, 2019 is due primarily to decreases in personnel and clinical trial costs that were higher in 2018.~~
~~Marketing and Sales.~~Marketing and sales expenses increased by $3.0 million, or 48.0%, from $6.3 million in the nine-month period ended September 30, 2018 to $9.3 million in the nine- month period ended September 30, 2019. Detection marketing and sales expense increased by $2.8 million, or 84.6%, from $3.3 million in the nine months ended September 30, 2018 to $6.1 million in the nine months ended September 30, 2019. Therapy marketing and sales expense increased by $0.2 million, or 6.7%, from $3.0 million in the nine months ended September 30, 2018 to $3.2 million in the nine months ended September 30, 2019. The increase in Detection marketing and sales expense is due primarily to an increase in personnellegal costs and ~~commissions as~~was offset by cost-cutting measures prompted by the ~~Company has invested in additional commercial resources to help drive sales of the new Detection products. The increase in Therapy marketing and sales is due primarily to trade shows costs.~~
~~General and Administrative.~~General and administrative expenses decreased by $0.1 million, or 2.6%, from $5.4 million in the nine months ended September 30, 2018 as compared to approximately $5.3 million for the nine months ended September 30, 2019. The decrease in general and administrative expenses is due primarily to a decrease in personnel costs.
COVID-19
pandemic.

Amortization and Depreciation.

Amortization and depreciation, ~~was~~which relates primarily ~~related~~ to acquired intangible assets and depreciation ~~related to~~of machinery and ~~equipment. Amortization and depreciation~~equipment, decreased by ~~$28,000,~~approximately $53,000, or ~~12%, to approximately~~25.7% from $206,000 for the nine months ended September 30, 2019 ~~from $234,000~~to $153,000 for the nine months ended September 30, ~~2018.~~
2020.

Table of Contents
Other Income and Expense: (in thousands)

   Three months ended September 30,
   2019    2018    Change    Change %
Interest expense
   $ (193 )    $ (118 )    (75 )    63.6 %
Interest income
   103    28    75    267.9 %
Loss on fair value of debentures
   (900 )    —      (900 )    0.0 %








   $ (990 )    $ (90 )    $ (900 )    1000.0 %








Tax benefit (expense)
   $ (6 )    $ (26 )    $ 20    (76.9 )%
   Nine months ended September 30,
   2019    2018    Change    Change %
Interest expense
   $ (604 )    $ (373 )    $ (231 )    61.9 %
Interest income
   226    79    147    186.1 %
Loss on fair value of debentures
   (5,340 )    —      (5,340 )    0.0 %








   $ (5,718 )    $ (294 )    $ (5,424 )    1844.9 %








Tax benefit (expense)
   $ (33 )    $ (43 )    $ 10    (23.3 )%
Three months ended September 30, 2020 and 2019:


Three months ended September 30,


2020

2019

Change

Change %

Interest expense
   $ (115 )    $ (193 )    $ 78    (40.4 )%
Other income
   10    103    (93 )    (90.3 )%
Loss on fair value of debentures
   —      (900 )    900    (100.0 )%








   $ (105 )    $ (990 )    $ 885    (89.4 )%








Tax benefit (expense)
   $ (3 )    $ (6 )    $ 3    (50.0 )%
Interest expense
. Interest expense ~~of $193,000 increased~~decreased by ~~$75,000,~~approximately $0.1 million, or ~~63.6%~~40.4%, from $0.2 million for the three-month period ended September 30, 2019 as compared to interest expense of $118,000 for the three-month period ended September 30, 2018. Interest expense of $604,000 increased by $231,000, or 61.9%, for the nine month period ended September 30, 2019 as compared to interest expense of $373,000 for the nine month period ended September 30, 2018. The increase in interest expense is due to the interest expense associated with the convertible debentures issued in December 2018 and a higher interest rate under the Company’s loan with Silicon Valley Bank in the ninethree months ended September 30, 2019 ~~as compared~~ to $0.1 million for the ~~nine~~three months ended September 30, ~~2018.~~
~~Interest income.~~ ~~Interest~~2020. The decrease is due primarily to the interest on the Company’s loans with Silicon Valley Bank (“SVB”) and Western Alliance Bank (the “Bank”).
Other income ~~was~~
. Other income decreased by approximately $93,000, or 90.3%, from $103,000 ~~and $28,000, respectively,~~ for the ~~three-month periods~~three months ended September 30, 2019 ~~and 2018, reflecting higher cash balances during 2019. Interest income was $226,000 and $79,000, respectively,~~to $10,000 for the ~~nine-month periods~~three months ended September 30, ~~2019~~2020. The decrease resulted primarily from lower cash balances in interest-generating accounts and ~~2018.~~
investments as well as lower interest rates during the
COVID-19

pandemic.
Loss on fair value of ~~debentures.~~debentures
. The Company recorded a loss of approximately $0.9 million in the ~~quarter~~three months ended September 30, 2019, which ~~reflects~~reflected an increase in the fair value of the unsecured subordinated convertible debentures ~~issues~~issued in December 2018 (the “Convertible Debentures”) from ~~approximately~~ $11.4 million at ~~June 30,~~March 31, 2019 to $12.3 million at September 30, 2019. Upon the consummation of the forced conversion, the Company issued 1,816,466 shares of common stock with a fair value of approximately $21.2 million, which was reclassified to stockholders’ equity during the three-month ending March 31, 2020. As a result of the forced conversion there was no fair value adjustment for the three months ended September 30, 2020.
Tax expense
. Tax expense decreased by approximately $3,000, or 50.0%, from $6,000 for the three months ended September 30, 2019 to $3,000 for the three months ended September 30, 2020. Tax expense is due primarily to state
non-income
and franchise-based taxes.
47
Table of Contents
Nine months ended September 30, 2020 and 2019:

Nine months ended September 30,


2020

2019

Change

Change %

Interest expense
   $ (360 )    $ (604 )    $ 244    (40.4 )%
Other income
   85    226    (141 )    (62.4 )%
Loss on extinguishment of debt
   (341 )    —      (341 )    0.0 %
Loss on fair value of debentures
   (7,464 )    (5,340 )    (2,124 )    39.8 %








   $ (8,080 )    $ (5,718 )    $ (2,362 )    41.3 %








Tax benefit (expense)
   $ (34 )    $ (33 )    $ (1 )    3.0 %
Interest expense
. Interest expense decreased by approximately $0.2 million, or 40.4%, from $0.6 million for the nine months ended September 30, 2019 to $0.4 million for the nine months ended September 30, 2020. The decrease is due primarily to the interest on the Company’s loans with SVB and the Bank.
Other income
. Other income decreased by approximately $141,000, or 62.4%, from $226,000 for the nine months ended September 30, 2019 to $85,000 for the nine months ended September 30, 2020. The decrease resulted primarily from lower cash balances in interest-generating accounts and investments as well as lower interest rates during the
COVID-19
pandemic.
Loss on fair value of debentures
. The Company recorded a loss of approximately $7.5 million in the nine months ended September 30, 2020, which reflected an increase in the fair value of the Convertible Debentures from $13.7 million at December 31, 2019 to $21.2 million as of February 21, 2020. The Company recorded a loss of approximately $5.3 million in the nine months ended September 30, 2019, which ~~reflects~~reflected an increase in the fair value of ~~the~~ Convertible Debentures from ~~approximately~~ $7.0 million at December 31, 2018 to $12.3 million at September 30, 2019. ~~The~~Upon the consummation of the forced conversion, the Company ~~expects changes in the~~issued 1,816,466 shares of common stock with a fair value of approximately $21.2 million, which was reclassified to stockholders’ equity.
Loss on extinguishment of debt
: The Company recorded a loss on extinguishment of approximately $341,000 related to the ~~Convertible Debentures to change from quarter to quarter as changes in the stock price~~repayment and retirement of the ~~Company drive changes in the underlying fair value~~loan with SVB. The loss on extinguishment was composed of ~~the instruments.~~
~~Tax expense.~~ ~~The Company had tax expense of $6,000~~approximately $185,000 for the ~~three-month period~~unaccrued final payment, the $114,000 termination fee, and $42,000 for the unamortized and other closing costs. There were no such costs in 2019.
Tax expense
. Tax expense increased by approximately $1,000, or 3.0%, from $33,000 for the nine months ended September 30, 2019 ~~as compared~~ to ~~tax expense of $26,000~~$34,000 for the ~~three-month period~~nine months ended September 30, ~~2018. The Company had tax expense of $33,000 for the nine-month period ended September 30, 2019 as compared to tax expense of $43,000 for the nine-month period ended September 30, 2018.~~2020. Tax expense is due primarily to state
non-income
and ~~franchise based~~franchise-based taxes.
48
Table of Contents
Liquidity and Capital Resources
~~We believe~~
The Company’s cash on hand includes proceeds from the Loan and Security Agreement entered into with the Bank on March 31, 2020. The Company and the Bank amended the Loan and Security Agreement on June 22, 2020 (as amended, the “Loan Agreement”). The Loan Agreement includes certain financial covenants tied to minimum revenue and the ratio of the Company’s unrestricted cash at the Bank to its indebtedness under the Loan Agreement. The
COVID-19
pandemic has resulted in significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on the Company’s ability to maintain compliance with the covenants under the Loan Agreement. If at any point the Company is not in compliance with certain covenants and is unable to obtain an amendment or waiver from the Bank, such noncompliance may result in an event of default under the Loan Agreement, which could permit acceleration of the outstanding indebtedness and require the Company to repay such indebtedness before the scheduled due date.
Even if an event of default were to occur under the Loan Agreement, the Company believes that ~~our~~its current liquidity and capital resources are sufficient to sustain operations through at least the next 12 months, primarily due to cash on ~~hand.~~ hand of $22.6 million and anticipated revenue and cash collections. However, the resurgence of the
COVID-19
pandemic could affect our liquidity. The Company has also entered into an
at-the-market
offering program with JMP Securities (the “ATM”) to provide for additional potential liquidity. The Company’s ATM facility provides for the sale of common stock having a value of up to $25.0 million. As of September 30, 2020, no sales had been made pursuant to the ATM facility and $25.0 million in capacity remains under the facility.
On April 27, 2020, the Company issued 1,562,500 shares of common stock to several institutional investors at a price of $8.00 per share in a registered direct offering. The gross proceeds of the offering were approximately $12.5 million, and the Company received net proceeds of approximately $12.3 million.
Our projected cash needs include planned capital expenditures, loan ~~repayments,~~interest payments, lease commitments, and other long-term obligations. The Company’s ability to generate cash adequate to meet its future capital requirements will depend primarily on operating cash flow. If sales or cash collections are reduced from current expectations, or if expenses and cash requirements are increased, the Company may require additional financing, although there are no guarantees that the Company will be able to obtain necessary financing at all or on terms favorable or acceptable to it.
As of September 30, 2020, the Company had 22,969,651 shares of common stock issued and outstanding, 1,971,704 shares reserved for future issuance upon the exercise of options granted, and 950,000 shares reserved for issuance under the ESPP, out of 30,000,000 authorized shares of
49
Table of Contents
common stock. Given this relatively limited number of shares available for issuance in a capital markets transaction, the Company may not be able to raise significant financing ~~if necessary.~~through a capital markets transaction and accordingly, the Company will seek approval from its stockholders to amend its Certificate of Incorporation to increase its authorized shares of common stock at a later date and subject to the filing with the SEC of a proxy statement and solicitation of stockholder approval. The Company will incur additional costs and expenses in seeking approval for such amendment and as a result of the failure to obtain valid approval of a related amendment at its earlier stockholder meeting. The Company will continue to closely monitor its liquidity and the capital and credit markets.
As of September 30, ~~2019,~~2020, the Company had current assets of ~~$29.2~~$35.8 million including ~~$17.4~~$22.6 million of cash and cash equivalents. Current liabilities are ~~$16.6~~$14.2 million and working capital is ~~$12.7~~$21.6 million. The ratio of current assets to current liabilities is ~~1.76:~~2.52:1.
In March 2019, in connection with the Fourth Loan Modification Agreement, the Company and Silicon Valley Bank (the “Bank”) agreed to covenant levels for minimum revenue and EBITDA covenants (the “Covenants”) under the Loan Agreement for fiscal year 2019. The Company is in compliance with the Covenants for the quarter ended September 30, 2019. On November 13, 2019, the Company entered into a Fifth Loan Modification Agreement with the Bank. The Fifth Loan Modification Agreement amended the EBITDA covenant for the trailing~~six-month~~ ~~period ending December 31, 2019 to not more than $(4.0 million) from not more than $(2.0 million). All other terms of the Loan Agreement remained the same.~~

   For the nine months ended September 30,
   2019    2018
   (in thousands)
Net cash used for operating activities
   $ (4,772 )    $ (2,322 )
Net cash used for investing activities
   (219 )    (116 )
Net cash provided by (used for) financing activities
   10,233    (139 )




Increase (decrease) in cash and equivalents
   $ 5,242    $ (2,577 )

For the nine-months ended September 30,


2020

2019

   (in thousands)
Net cash used for operating activities
   $ (6,083 )    $ (4,772 )
Net cash used for investing activities
   (286 )    (219 )
Net cash provided by financing activities
   13,689    10,233




Increase in cash and equivalents
   $ 7,320    $ 5,242




Net cash used for operating activities for the ~~nine-month period~~nine months ended September 30, ~~2019~~2020 was ~~$4.8~~$6.1 million, compared to ~~net cash used for operating activities of $2.3~~$4.8 million for the ~~nine-month period~~nine months ended September 30, ~~2018.~~2019. The net cash used for operating activities for the ~~nine-month period~~nine months ended September 30, ~~2019~~2020 resulted primarily from our net loss as adjusted for
non-cash
items, and was offset by working capital changes resulting from ~~increases~~decreases in ~~cash and cash equivalents,~~ accounts receivable ~~prepaid expenses~~ and ~~inventory,~~an increase in deferred revenue, offset by increases in ~~accounts payable,~~inventory and decreases in accrued ~~expenses and notes and lease payable.~~expenses. We expect that net cash used for or provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the timing of when we recognize revenue, collections of accounts receivable and the timing of other payments.
Net cash used for investing activities for the ~~nine-month period~~nine months ended September 30, ~~2019~~2020 was ~~$219,000~~$286,000, compared to ~~$116,000~~$219,000 for the ~~nine-month period~~nine months ended September 30, ~~2018.~~2019. The net cash used for investing activities for the ~~nine-month period~~nine months ended September 30, 2020 and 2019 ~~was~~is primarily for purchases of property and equipment.
Net cash provided by financing activities for the ~~nine-month period~~nine months ended September 30, ~~2019~~2020 was ~~$10.2~~$13.7 million, as compared to ~~cash used for financing activities of $139,000~~$10.2 million for the nine ~~month period~~months ended September 30, ~~2018.~~2019. Net cash provided by financing activities for the nine months ended September 30, 2020 is primarily from the $12.3 million in net proceeds from the issuance of common stock in the April 2020 registered direct offering, $7.0 million from the Loan Agreement with the Bank and $775,000 from the revolving line of credit with the Bank, offset by $4.6 million in repayment of the term loan with SVB and $2.0 million in repayment of the revolving loan with SVB. Cash provided by financing activities for the nine months ended September 30, 2019 is due primarily to cash from the issuance of common stock. In June 2019, the Company completed an underwritten public offering of approximately 1.9 million shares of common stock. The Company received net proceeds of approximately $9.4 million after deducting underwriting and other offering expenses. ~~The Company also drew $1.0 million~~
50
Table of revolving line of credit provided by the Bank during the quarter ended September 30, 2019. Cash used for financing activities for the nine months ended September 30, 2018 is due primarily to taxes paid on the issuance of restricted stock to employees.
Contents

Contractual Obligations
~~In accordance with the transition disclosure requirements under ASC 840, the~~

The Company had the following commitments as of September 30, ~~2019:~~

Contractual Obligations    Payments due by period
   Total    Less than 1
year    1-3 years    3-5 years    5+ years
Operating Lease Obligations
   $ 2,320    $ 694    $ 1,293    $ 333    $ —
Capital Lease Obligations
   17    17    —      —      —
Settlement Obligations
   463    463    —      —      —
Notes Payable - principal and interest
   5,331    2,573    2,758    —      —
Convertible Debentures - principal and interest
   7,842    349    7,493    —      —
Other Commitments
   2,745    2,605    63    29    48










Total Contractual Obligations
   $ 18,718    $ 6,701    $ 11,607    $ 362    $ 48










2020:

Contractual Obligations

Payments due by period


Total

Less than
1 year

1-3 years

3-5 years

5+ years

Operating Lease Obligations
   $ 2,262    $ 918    $ 1,337    $ 7    $ —
Capital Lease Obligations
   1    1    —      —      —
Settlement Obligations
   463    463    —      —      —
Notes Payable - principal and interest
   7,946    590    5,682    1,674    —
Other Commitments
   4,179    4,179    —      —










Total Contractual Obligations

$
14,851


$
6,151


$
7,019


$
1,681


$
—











Operating Lease and Capital Lease Obligations are the minimum payments due under these obligations.
Settlement Obligations represent the remaining payments under ~~the~~a settlement agreement with Hologic, ~~Inc.~~
Inc which are reflected in accounts payable and accrued liabilities.
Notes Payable – principal and interest represents the payments due under the term loan from the Bank.
~~Convertible Debentures – principal and interest represents the payments due related to the 5.0% convertible notes due 2021 that were issued by the Company in December 2018.~~
Other Commitments represent firm purchase obligations to suppliers for future product and service deliverables.
Recent Accounting Pronouncements
See Note 13 to the Condensed Consolidated Financial Statements.

Table of Contents~~Item 3.Quantitative and Qualitative Disclosures about Market Risk~~
~~We believe we are~~
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
The Company believes that it is not subject to material foreign currency exchange rate fluctuations, as substantially all of ~~our~~its sales and expenses are denominated in the U.S. dollar. ~~We do~~The Company does not hold derivative securities and ~~have~~has not entered into contracts embedded with derivative instruments, such as foreign currency and interest rate swaps, options, forwards, futures, collars or warrants, either to hedge existing risks or for speculative purposes. The Company is subject to a ~~8.5%~~19% fluctuation in interest expense on for every 1% change in interest rate on ~~our~~its floating rate Term ~~Loan. For~~Loan with the ~~nine-months ended September 30, 2019, a 1% change in the interest rate would have equated to approximately a $19,000 fluctuation in interest expense.~~
~~Item~~4.~~Controls and Procedures~~
~~Our~~Bank.
Item
4.
Controls and Procedures
The Company’s management, with the participation of ~~our~~its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of ~~our~~its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, as of September 30, ~~2019,~~2020, the principal executive officer and principal financial officer concluded that ~~our~~the Company’s disclosure controls and procedures (as defined in Rule13a-15(e) of the Securities Exchange Act of 1934 ~~(“Exchange~~(the “Exchange Act”)) were effective at ~~the~~a 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~~The Company conducts periodic evaluations to enhance, where necessary, ~~our procedures~~its controls and ~~controls.~~
~~Our~~procedures.
The Company’s principal executive officer and principal financial officer conducted an evaluation of ~~our~~the Company’s internal control over financial reporting (as defined in Exchange Act Rule
13a-15(f))
and have determined there are no changes in ~~our~~its internal controls over financial reporting during the quarter ended September 30, ~~2019,~~2020 that have materially affected or which are reasonably likely to materially affect internal control over financial reporting.
~~Beginning January 1, 2019, the Company implemented ASC 842, “Leases.” In relation to the adoption~~
52
Table of this new standard, the Company implemented changes to our processes related to lessee and lessor accounting under the leasing guidance and the control activities within them. These included the development of new policies related to the identification of leases, including embedded leases, new training programs, ongoing lease contract review requirements, and the gathering of information necessary to provide for expanded disclosures.
Contents

PART II OTHER INFORMATION

~~PART II~~

Item 1.

~~OTHER INFORMATION~~

Legal Proceedings

~~Item 1. Legal Proceedings.~~

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

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

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

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

Table of Contents~~Item 1A. Risk Factors.~~
Item 1A.
Risk Factors:
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially adversely affect our operations. ~~Factors~~In addition to the risk factor below, factors that have affected our Company are described in Part I, Item 1A of our Annual Report on Form
10-K ~~filed with the SEC~~
for the year ended December 31, ~~2018~~2019 as filed with the SEC on March ~~29, 2019,~~11, 2020 and are incorporated by reference herein.
~~Item 5. Other Information.~~
~~Given~~
We expect the ~~timing~~novel coronavirus
(COVID-19)
pandemic to have a significant effect on our results of operations. In addition, it has resulted in significant financial market volatility, and its impact on the global economy appears to be significant. A continuation or worsening of the ~~event,~~pandemic will have a material adverse impact on our business, results of operations and financial condition and on the ~~following information~~market price of our common stock.
On March 12, 2020, the World Health Organization declared
COVID-19
to be a pandemic. In an effort to contain and mitigate the spread of the
COVID-19
pandemic, the United States, many countries in Europe, as well as Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of
COVID-19.
As a provider of devices and services to the health care industry, our operations have been materially affected. Significant uncertainty remains as to the continuing impact of the
COVID-19
pandemic on our operations and on the global economy as a whole. It is ~~included~~currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. The
COVID-19
pandemic has resulted in ~~this Form10-Q~~ ~~pursuant~~significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility seen in the recent past will have an adverse effect on our ability to ~~Item 1.01 “Entry into~~access capital, on our business, results of operations and financial condition, and on the market price of our common stock. Our results for the quarter ending September 30, 2020 reflect a ~~Material Definitive Agreement”~~negative impact from the
COVID-19
pandemic, as the typical sales cycle and ordering patterns were still disrupted due to some healthcare facilities’ additional focus on
COVID-19.
Although we do not provide guidance to investors relating to our results of ~~Form8-K~~ ~~in lieu of filing a From8-K.~~
~~On November 13, 2019,~~operations, our results for the ~~Company entered into a Fifth Loan Modification Agreement with the Bank. The Fifth Loan Modification Agreement amended the EBITDA covenant for thesix-month~~ ~~period~~quarter ending December 31, ~~2019~~2020, and possibly future quarters, could reflect a continuing negative impact from the
COVID-19
pandemic for similar reasons. Depending upon the duration and severity of the pandemic, the continuing effect on our results over the long term is uncertain.
The impact of the
COVID-19
pandemic on our future revenue is also relevant to the minimum revenue covenant under our Loan and Security Agreement with Western Alliance Bank. If at any point the Company is not ~~more than $(4.0 million)~~in compliance with such covenant and is unable to obtain an amendment or waiver from ~~not more than $(2.0 million). All other terms~~Western Alliance Bank, such noncompliance may result in an event of default under the Loan Agreement, ~~remained the same.~~
~~The Foregoing description~~which could permit acceleration of the ~~Fifth Loan Modification Agreement does~~outstanding indebtedness and require the Company to repay such indebtedness before the scheduled due date. The Company was required, historically, to seek modifications from its prior lender to avoid
non-compliance
with certain earlier covenants. With the
COVID-19
pandemic affecting the world economy, the company cannot assure that it will be able to continue to satisfy the applicable minimum revenue covenant.
54
Table of Contents
The Company’s exposure to trade accounts receivable losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current
COVID-19
pandemic, or other customer-specific factors. The Company has historically not ~~purport~~experienced significant trade account receivable losses, but it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade account receivables as hospitals’ cash flows are impacted by their response to ~~be complete and is qualified in its entirety by reference to~~ the ~~full text thereof, which is attached as an exhibit to this Quarterly Report on Form10-Q~~ ~~and is incorporated herein by reference.~~
COVID-19

pandemic.
55

Table of Contents~~Item~~6.~~Exhibits~~
Item 6.
Exhibits
Exhibit No.

Description
10.1 * ~~Fifth Loan Modification Agreement, dated as of November 13, 2019, among Silicon Valley Bank, iCAD, Inc., Xoft, Inc. and Xoft Solutions, LLC.~~
31.1 * Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 * Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 ** Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 ** Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 * The following materials formatted in XBRL (eXtensible Business Reporting Language); (i) ~~Condensed~~ Consolidated Balance Sheets as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019, (iv) Condensed Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and September 30, 2019 and ~~2018, and (iv)~~(v) Notes to ~~Condensed~~ Consolidated Financial Statements.
104 * Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101).
*
Filed herewith
**
Furnished herewith

Table of Contents
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
iCAD, Inc.
(Registrant)
~~iCAD, Inc.~~
~~(Registrant)~~
~~Date:~~Date
: November ~~14, 2019~~6, 2020
By:
/s/ Michael Klein
Name: Michael Klein
Title:
Chief Executive Officer
(Principal Executive Officer)
~~Date:~~Date
: November ~~14, 2019~~6, 2020
By:
/s/ R. Scott Areglado
Name: R. Scott Areglado
Title:
Chief Financial Officer
(Principal Financial Officer)
54


	September 30,			December 31,
	2019			2018
	Unaudited			Audited
Assets
Current assets:
Cash and cash equivalents	$	17,427		$	12,185
Trade accounts receivable, net of allowance for doubtful accounts of $181 in 2019 and $177 in 2018		8,002			6,403
Inventory, net		2,387			1,587
Prepaid expenses and other current assets		1,389			1,045

Total current assets		29,205			21,220

Property and equipment, net of accumulated depreciation of $6,433 in 2019 and $6,214 in 2018		543			552
Operating lease assets		2,131			—
Other assets		53			53
Intangible assets, net of accumulated amortization of $8,092 in 2019 and $7,809 in 2018		1,274			1,550
Goodwill		8,362			8,362

Total assets	$	41,568		$	31,737

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,255		$	1,154
Accrued and other expenses		6,376			5,060
Notes payable - current portion		3,250			1,851
Lease payable - current portion		656			15
Deferred revenue		5,016			5,165

Total current liabilities		16,553			13,245

Lease payable, long-term portion		1,548			38
Notes payable, long-term portion		2,564			4,254
Convertible debentures payable tonon-related parties, at fair value		11,197			6,300
Convertible debentures payable to related parties, at fair value		1,113			670
Deferred revenue, long-term portion		398			331
Deferred tax		3			3

Total liabilities		33,376			24,841

Commitments and Contingencies (Note 5 and 7)
Stockholders’ equity:
Preferred stock, $ .01 par value: authorized 1,000,000 shares; none issued.		—			—
Common stock, $ .01 par value: authorized 30,000,000 shares; issued 19,500,301 in 2019 and 17,066,510 in 2018; outstanding 19,314,470 in 2019 and 16,880,679 in 2018		195			171
Additionalpaid-in capital		230,389			218,914
Accumulated deficit		(220,977	)		(210,774	)
Treasury stock at cost, 185,831 shares in 2019 and 2018		(1,415	)		(1,415	)

Total stockholders’ equity		8,192			6,896

Total liabilities and stockholders’ equity	$	41,568		$	31,737


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue:
Products	$	5,156		$	3,093		$	13,331		$	9,301
Service and supplies		2,701			3,099			8,628			9,366

Total revenue		7,857			6,192			21,959			18,667
Cost of revenue:
Products		809			603			2,134			1,598
Service and supplies		891			752			2,466			2,743
Amortization and depreciation		103			99			297			306

Total cost of revenue		1,803			1,454			4,897			4,647

Gross profit		6,054			4,738			17,062			14,020

Operating expenses:
Engineering and product development		2,485			2,035			6,751			7,431
Marketing and sales		3,588			2,100			9,281			6,272
General and administrative		1,872			1,778			5,276			5,419
Amortization and depreciation		69			74			206			234

Total operating expenses		8,014			5,987			21,514			19,356

Loss from operations		(1,960	)		(1,249	)		(4,452	)		(5,336	)
Interest expense		(193	)		(118	)		(604	)		(373	)
Other income		103			28			226			79
Loss on fair value of convertible debentures		(900	)		—			(5,340	)		—

Other expense, net		(990	)		(90	)		(5,718	)		(294	)
Loss before income tax expense		(2,950	)		(1,339	)		(10,170	)		(5,630	)

Tax expense		(6	)		(26	)		(33	)		(43	)

Net loss and comprehensive loss	$	(2,956	)	$	(1,365	)	$	(10,203	)	$	(5,673	)

Net loss per share:
Basic	$	(0.15	)	$	(0.08	)	$	(0.57	)	$	(0.34	)

Diluted	$	(0.15	)	$	(0.08	)	$	(0.57	)	$	(0.34	)

Weighted average number of shares used in computing loss per share:
Basic		19,284			16,700			18,049			16,652

Diluted		19,284			16,700			18,049			16,652


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenue:
Products	$	4,538		$	5,156		$	11,220		$	13,331
Service and supplies		2,591			2,701			8,027			8,628

Total revenue		7,129			7,857			19,247			21,959
Cost of revenue:
Products		1,345			809			2,899			2,134
Service and supplies		667			891			2,169			2,466
Amortization and depreciation		92			103			287			297

Total cost of revenue		2,104			1,803			5,355			4,897


Gross profit		5,025			6,054			13,892			17,062


Operating expenses:
Engineering and product development		1,849			2,485			5,938			6,751
Marketing and sales		2,979			3,588			9,218			9,281
General and administrative		1,834			1,872			6,476			5,276
Amortization and depreciation		52			69			153			206

Total operating expenses		6,714			8,014			21,785			21,514

Loss from operations		(1,689	)		(1,960	)		(7,893	)		(4,452	)

Interest expense		(115	)		(193	)		(360	)		(604	)
Other income		10			103			85			226
Loss on extinguishment of debt		—			—			(341	)		—
Loss on fair value of convertible debentures		—			(900	)		(7,464	)		(5,340	)

Other expense, net		(105	)		(990	)		(8,080	)		(5,718	)
Loss before income tax expense		(1,794	)		(2,950	)		(15,973	)		(10,170	)

Tax expense		(3	)		(6	)		(34	)		(33	)

Net loss and comprehensive loss	$	(1,797	)	$	(2,956	)	$	(16,007	)	$	(10,203	)

Net loss per share:
Basic	$	(0.08	)	$	(0.15	)	$	(0.73	)	$	(0.57	)

Diluted	$	(0.08	)	$	(0.15	)	$	(0.73	)	$	(0.57	)

Weighted average number of shares used in computing loss per share:
Basic		23,173			19,284			21,827			18,049

Diluted		23,173			19,284			21,827			18,049


	For the nine months ended September 30,
	2019			2018
	(in thousands)
Cash flow from operating activities:
Net loss	$	(10,203	)	$	(5,673	)
Adjustments to reconcile net loss to net cash used for operating activities:
Amortization		283			286
Depreciation		220			254
Bad debt provision		62			101
Stock-based compensation expense		856			1,187
Amortization of debt discount and debt costs		109			129
Deferred tax expense		—			(13	)
Loss on disposal of assets		—			12
Change in fair value of convertible debentures		5,340			—
Changes in operating assets and liabilities:
Accounts receivable		(1,672	)		2,301
Inventory		(800	)		212
Prepaid and other current assets		165			1
Accounts payable		101			(490	)
Accrued expenses		837			(775	)
Deferred revenue		(70	)		146

Total adjustments		5,431			3,351

Net cash used for operating activities		(4,772	)		(2,322	)

Cash flow from investing activities:
Additions to patents, technology and other		(8	)		(9	)
Additions to property and equipment		(211	)		(107	)

Net cash used for investing activities		(219	)		(116	)

Cash flow from financing activities:
Stock option exercises		1,396			—
Taxes paid related to restricted stock issuance		(106	)		(130	)
Principal payments of capital lease obligations		(10	)		(9	)
Principal repayment of debt financing, net		(1,400	)		—
Proceeds from Line of Credit, net		1,000			—
Issuance costs from common stock		(997	)		—
Proceeds from issuance of common stock		10,350			—

Net cash provided by (used for) financing activities		10,233			(139	)

Increase (decrease) in cash and equivalents		5,242			(2,577	)
Cash and equivalents, beginning of period		12,185			9,387

Cash and equivalents, end of period	$	17,427		$	6,810

Supplemental disclosure of cash flow information:
Interest paid	$	404		$	215

Taxes paid	$	33		$	42

Right-of-use assets obtained in exchange for new operating lease liabilities	$	2,641		$	—


See accompanying notes to condensed consolidated financial statements.


	Common Stock				Additional
	Number of				Paid-in			Accumulated			Treasury			Stockholders’
	Shares Issued		Par Value		Capital			Deficit			Stock			Equity
Balance at December 31, 2018		17,066,510	$	171	$	218,914		$	(210,774	)	$	(1,415	)	$	6,896
Issuance of common stock relative to vesting of restricted stock shares forfeited for tax obligations		122,993		1		(106	)		—			—			(106	)
Issuance of common stock pursuant to stock option plans		428,980		4		1,392			—			—			1,396
Stock Issuance net of issuance costs		1,881,818		19		9,334									9,353
Stock-based compensation		—		—		856			—			—			856
Net loss		—		—		—			(10,203	)		—			(10,203	)

Balance at September 30, 2019 (Unaudited)		19,500,301	$	195	$	230,390		$	(220,977	)	$	(1,415	)	$	8,192


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

Balance at December 31, 2019		19,546,151	$	196	$	230,615		$	(224,325	)	$	(1,415	)	$	5,071

Issuance of common stock relative to vesting of restricted stock		97,830		—		(225	)								(225	)

Issuance of common stock pursuant to stock option plans		94,678		1		416			—			—			417

Stock Issuance Net		1,562,500		16		12,158			—			—			12,174

Issuance of common stock pursuant Employee Stock Purchase Plan		34,857				209									209

Issuance of stock upon conversion of Debentures		1,819,466		18		21,146			—			—			21,164

Stock-based compensation		—		—		2,542									2,542

Net loss		—		—		—			(16,007	)		—			(16,007	)


Balance at September 30, 2020		23,155,482	$	231	$	266,861		$	(240,332	)	$	(1,415	)	$	25,345


	Three months ended September 30, 2019
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	4,749	$	841	$	5,590
Service contracts	$	1,336	$	446		1,782
Supply and source usage agreements		—		465		465
Professional services		—		18		18
Other		2		—		2

	$	6,087	$	1,770	$	7,857

Timing of Revenue Recognition
Goods transferred at a point in time	$	4,749	$	892	$	5,641
Services transferred over time		1,338		878		2,216

	$	6,087	$	1,770	$	7,857

Sales Channels
Direct sales force	$	3,467	$	1,280	$	4,747
OEM partners		2,620		—		2,620
Channel partners		—		490		490

	$	6,087	$	1,770	$	7,857


	Nine months ended September 30, 2019
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	11,347	$	3,410	$	14,757
Service contracts	$	4,012	$	1,437		5,449
Supply and source usage agreements	$	—	$	1,528		1,528
Professional services	$	—	$	59		59
Other	$	105	$	61		166

	$	15,464	$	6,495	$	21,959

Timing of Revenue Recognition
Goods transferred at a point in time	$	11,347	$	3,668	$	15,015
Services transferred over time	$	4,117	$	2,827		6,944

	$	15,464	$	6,495	$	21,959

Sales Channels
Direct sales force	$	8,441	$	4,793	$	13,234
OEM partners	$	7,023	$	—		7,023
Channel partners	$	—	$	1,702		1,702

	$	15,464	$	6,495	$	21,959


	Three months ended September 30, 2018
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	2,394	$	1,162	$	3,556
Service contracts		1,475		373		1,848
Supply and source usage agreements		—		599		599
Professional services		—		68		68
Other		58		63		121

	$	3,927	$	2,265	$	6,192

Timing of Revenue Recognition
Goods transferred at a point in time		2,394		1,206	$	3,600
Services transferred over time		1,533		1,059		2,592

	$	3,927	$	2,265	$	6,192

Sales Channels
Direct sales force	$	2,474	$	1,798	$	4,272
OEM partners		1,453		—		1,453
Channel partners		—		467		467

	$	3,927	$	2,265	$	6,192


	Three months ended September 30, 2020
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	3,889	$	1,038	$	4,927
Service contracts		1,400		347		1,747
Supply and source usage agreements		—		444		444
Professional services		—		9		9
Other		2		—		2

	$	5,291	$	1,838	$	7,129

Timing of Revenue Recognition
Goods transferred at a point in time	$	3,889	$	1,051	$	4,940
Services transferred over time		1,402		787		2,189

	$	5,291	$	1,838	$	7,129

Sales Channels
Direct sales force	$	2,904	$	857	$	3,761
OEM partners		2,387		—		2,387
Channel partners		—		981		981

	$	5,291	$	1,838	$	7,129


	Nine months ended September 30, 2018
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	7,369	$	3,406	$	10,775
Service contracts		4,392		1,082		5,474
Supply and source usage agreements		—		1,686		1,686
Professional services		—		262		262
Other		167		303		470

	$	11,928	$	6,739	$	18,667

Timing of Revenue Recognition
Goods transferred at a point in time	$	7,369	$	3,676	$	11,045
Services transferred over time	$	4,559	$	3,063		7,622

	$	11,928	$	6,739	$	18,667

Sales Channels
Direct sales force	$	6,594	$	5,756	$	12,350
OEM partners	$	5,334	$	—		5,334
Channel partners	$	—	$	983		983

	$	11,928	$	6,739	$	18,667


	Nine months ended September 30, 2020
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	9,690	$	2,959	$	12,649
Service contracts		4,151		1,079		5,230
Supply and source usage agreements		—		1,305		1,305
Professional services		—		20		20
Other		43		—		43

	$	13,884	$	5,363	$	19,247

Timing of Revenue Recognition
Goods transferred at a point in time	$	9,731	$	3,039	$	12,770
Services transferred over time		4,153		2,324		6,477

	$	13,884	$	5,363	$	19,247

Sales Channels
Direct sales force	$	7,785	$	3,131	$	10,916
OEM partners		6,099		—		6,099
Channel partners		—		2,232		2,232

	$	13,884	$	5,363	$	19,247


Contract balances	Balance at
Contract balances	Setpember 30, 2019
Receivables, which are included in “Trade accounts receivable”	$	8,002
Contract assets, which are included in “Prepaid and other current assets”		—
Contract liabilities, which are included in “Deferred revenue”		5,414


Contract balances
	Balance at September 30, 2020
Receivables, which are included in “Trade accounts receivable”	$	8,376
Contract assets, which are included in “Prepaid and other current assets”		7
Contract liabilities, which are included in “Deferred revenue”		5,863


Contract liabilities	September 30, 2019		December 31, 2018
Short term	$	5,016	$	5,165
Long term		398		331

Total	$	5,414	$	5,496


Contract liabilities	September 30, 2020		December 31, 2019
Short term	$	5,644	$	5,248
Long term		219		356

Total	$	5,863	$	5,604


	Nine Months Ended September 30, 2019
Balance at beginning of period	$	5,496
Deferral of revenue		7,813
Recognition of deferred revenue		(7,895	)

Balance at end of period	$	5,414


	Nine Months Ended September 30, 2020
Balance at beginning of period	$	5,604
Deferral of revenue		8,092
Recognition of deferred revenue		(7,833	)

Balance at end of period	$	5,863


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net loss	$	(2,956	)	$	(1,365	)	$	(10,203	)	$	(5,673	)

Shares used in the calculation of basic and diluted net loss per share		19,284			16,700			18,049			16,652

Diluted shares used in the calculation of net loss per share		19,284			16,700			18,049			16,652

Net loss per share - basic and diluted	$	(0.15	)	$	(0.08	)	$	(0.57	)	$	(0.34	)


	Period Ended
	September 30,
	2019		2018
Stock options		1,509,292		1,462,439
Restricted stock		191,909		502,868
Convertible Debentures		1,742,500		—

Stock options and restricted stock		3,443,701		1,965,307


	As of September 30,
	2020		2019
Stock options		1,971,704		1,509,292
Restricted stock		29,166		191,909
Convertible Debentures		—		1,742,500

Total		2,000,870		3,443,701


	as of September 30,		as of December
	2019		31, 2018
Raw materials	$	1,095	$	606
Work in process		145		67
Finished Goods		1,147		914

Inventory	$	2,387	$	1,587


	As of September 30, 2020			As of December 31, 2019
Raw materials	$	1,422		$	1,572
Work in process		324			39
Finished Goods		1,629			1,469

Inventory Gross		3,375			3,080
Inventory Reserve		(229	)		(469	)

Inventory Net	$	3,146		$	2,611


	September 30, 2019			December 31, 2018
Principal Amount of Term Loan	$	4,600		$	6,000
Unamortized closing costs		(45	)		(57	)
Accrued Final Payment		259			162
Amount Drawn on Line of Credit		1,000			—

Carrying amount of Term Loan		5,814			6,105

Less current portion of Term Loan		(3,250	)		(1,851	)

Notes payable long-term portion	$	2,564		$	4,254


Input	December 31, 2018			September 30, 2019
Company’s stock price	$	3.70		$	6.85
Conversion price	$	4.00		$	4.00
Remaining term (years)		2.97			2.22
Equity volatility		54.00	%		52.00	%
Risk free rate		2.46	%		1.60	%
Probabilty of default event¹		0.81	%		0.55	%
Utilization of Forced Conversion (if available)¹		100.00	%		100.00	%
Exercise of Default Redemption (if available)¹		100.00	%		100.00	%
Effective discount rate¹		21.90	%		19.84	%


Input	December 31, 2019			February 21, 2020
Company’s stock price	$	7.77		$	11.64
Conversion price		4.00			4.00
Remaining term (years)		1.97			0.00
Equity volatility		49.00	%		N/A
Risk free rate		1.57	%		N/A
1 Probabilty of default event		0.45	%		N/A
1 Utilization of Forced Conversion (if available)		100.00	%		100.00	%
1 Exercise of Default Redemption (if available)		100.00	%		N/A
1 Effective discount rate		18.52	%		N/A

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


Convertible Debentures	December 31, 2018		September 30, 2019
Fair value, in accordance with fair value option	$	6,970	$	12,310

Principal value outstanding	$	6,970	$	6,970


Fiscal Year	Amount Due
2019	$	832
2020	$	2,901
2021	$	9,459

Total	$	13,192


Fiscal Year	Amount Due
2020	$	94
2021		1,238
2022		2,875
2023		2,735
2024		1,003

Total	$	7,945