Stock-Based Compensation (Policies)

6 Months Ended

Jun. 30, 2020

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 June 30, 2020, the results of operations of the Company for the three and

six-month

periods ended June 30, 2020 and 2019, cash flows of the Company for the

six-month

periods ended June 30, 2020 and 2019 and stockholders’ equity for the Company for the three and

six-month

periods ended June 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-K

for the fiscal year ended December 31, 2019 filed with the SEC on March 11, 2020. The results for the three and

six-month

periods ended June 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020, or any future period.

Segments

The Company reports the results of two segments: Cancer Detection (“Detection”) and Cancer Therapy (“Therapy”). The Detection segment consists of advanced image analysis and workflow products. The Therapy segment consists of radiation therapy (“Axxent”) products.

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

COVID-19,

many countries, including the United States, 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 in part due to

stay-at-home

and social distancing orders as well as uncertainty in the market. Significant uncertainty remains as to the potential impact of the

COVID-19

pandemic on our continuing operations and on the global economy as a whole. 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 could 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.

The potential impact of the

COVID-19

pandemic on the Company’s future revenue could affect our ability to access capital in future quarters due to the covenants contained in the Company’s loan agreement with Western Alliance Bank (the “Bank”), as described in Note 4(b). Effective June 16, 2020 the loan agreement requires the Company to satisfy the minimum revenue covenant or maintain a ratio of (x) unrestricted cash at the Bank to (y) the aggregate total of indebtedness owed to the Bank, equal to or greater

than

1.25

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, such noncompliance may result in an event of default under the Loan and Security Agreement, which could result in acceleration of the outstanding indebtedness and require the Company to repay such indebtedness before the scheduled due date.

How

ever

he Company believes that even if an event of default were to occur, the Company’s current liquidity and capital resources are sufficient to sustain operations through at least the next 12 months, primarily due to cash on hand of $

24.2

million and anticipated revenue and cash collections

Our results for the quarter ending June 30, 2020 reflect a negative impact from the

COVID-19

pandemic as the typical sales cycle and ordering patterns were still disrupted due to healthcare facilities’ additional focus on

COVID-19.

Although we do not provide guidance to investors relating to our future results of operations, our results for the quarter ending September 30, 2020, and possibly future quarters, could reflect a 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.

Although the Company did not see any material impact to trade accounts receivable losses in the quarter ended June 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. Although the Company has historically not experienced significant trade account receivable losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade account receivables as hospitals’ cash flows are impacted by their response to the

COVID-19

pandemic.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. The Company is continuing to analyze the impact of the CARES Act on its business. For the three months ended June 30, 2020, the Company recorded a benefit of $0.3 million from the Employee Retention Credit, a component of the CARES Act. This was reflected in the Company’s statement of operations.

Recently Adopted Accounting Pronouncements

There are no significant recently adopted accounting pronouncements. For a full list of the Company’s response to all recent accounting pronouncements please refer to Note 13 below.

Revenue Recognition

Disaggregation of Revenue

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


	Three months ended June 30, 2020
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	2,702	$	575	$	3,277
Service contracts		1,403		385		1,788
Supply and source usage agreements		—		490		490
Other		12		—		12

	$	4,117	$	1,450	$	5,567

Timing of Revenue Recognition
Goods transferred at a point in time	$	2,714	$	605	$	3,319
Services transferred over time		1,403		845		2,248

	$	4,117	$	1,450	$	5,567

Sales Channels
Direct sales force	$	2,709	$	805	$	3,514
OEM partners		1,408		—		1,408
Channel partners		—		645		645

	$	4,117	$	1,450	$	5,567


	Six months ended June 30, 2020
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	5,802	$	1,921	$	7,723
Service contracts		2,750		732		3,482
Supply and source usage agreements		—		861		861
Professional services		—		11		11
Other		41		—		41

	$	8,593	$	3,525	$	12,118

Timing of Revenue Recognition
Goods transferred at a point in time	$	5,843	$	1,988	$	7,831
Services transferred over time		2,750		1,537		4,287

	$	8,593	$	3,525	$	12,118

Sales Channels
Direct sales force	$	4,881	$	2,274	$	7,155
OEM partners		3,712		—		3,712
Channel partners		—		1,251		1,251

	$	8,593	$	3,525	$	12,118


	Three months ended June 30, 2019
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	3,808	$	1,050	$	4,858
Service contracts		1,354		475		1,829
Supply and source usage agreements		—		526		526
Professional services		—		8		8
Other		47		61		108

	$	5,209	$	2,120	$	7,329

Timing of Revenue Recognition
Goods transferred at a point in time	$	3,808	$	1,144	$	4,952
Services transferred over time		1,401		976		2,377

	$	5,209	$	2,120	$	7,329

Sales Channels
Direct sales force	$	2,863	$	1,701	$	4,564
OEM partners		2,346		—		2,346
Channel partners		—		419		419

	$	5,209	$	2,120	$	7,329


	Six months ended June 30, 2019
	Reportable Segments
	Detection		Therapy		Total
Major Goods/Service Lines
Products	$	6,598	$	2,569	$	9,167
Service contracts		2,676		991		3,667
Supply and source usage agreements		—		1,063		1,063
Professional services		—		41		41
Other		103		61		164

	$	9,377	$	4,725	$	14,102

Timing of Revenue Recognition
Goods transferred at a point in time	$	6,598	$	2,776	$	9,374
Services transferred over time		2,779		1,949		4,728

	$	9,377	$	4,725	$	14,102

Sales Channels
Direct sales force	$	4,974	$	3,513	$	8,487
OEM partners		4,403		—		4,403
Channel partners		—		1,212		1,212

	$	9,377	$	4,725	$	14,102

Products.

Product revenue consists of sales of cancer detection products, cancer therapy systems, cancer therapy applicators (including disposable applicators) and other accessories that are typically shipped with a cancer therapy system. The Company transfers control and recognizes a sale when the product is shipped from the manufacturing or warehousing facility to the customer.

Service Contracts.

The Company sells service contracts in which it provides professional services including product installations, maintenance, training, and service repairs, and in certain cases leases equipment, to hospitals, imaging centers, radiology practices, radiation oncologists and treatment centers. These represent separate performance obligations to the Company. The Company allocates revenue to each performance obligation based on the Standalone Selling Price (“SSP”). Revenue for lease and

non-lease

components, or the entire arrangement when accounted for under 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. These agreements represent a separate performance obligation to the Company. The Company allocates revenue to each performance obligation based on the 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 installation services are performed or when the product is shipped from the manufacturing or warehousing 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 June 30, 2020
Receivables, which are included in ‘Trade accounts receivable’	$	6,658
Contract assets, which are included in “Prepaid and other current assets”		21
Contract liabilities, which are included in “Deferred revenue”		5,664

Timing of revenue recognition may differ from timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to receipt of cash 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.

The Company’s accounts receivable from contracts with customers, net of allowance for doubtful accounts, was $6.7 million and $9.8 million as of June 30, 2020 and December 31, 2019, respectively.

The balance of deferred revenue at June30, 2020 and December 31, 2019 is as follows (in thousands):


Contract liabilities	June 30, 2020		December 31, 2019
Short term	$	5,466	$	5,248
Long term		198		356

Total	$	5,664	$	5,604

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


	Six Months Ended
	June 30, 2020
Balance at beginning of period	$	5,604
Deferral of revenue		5,078
Recognition of deferred revenue		(5,018	)

Balance at end of period	$	5,664

We expect to recognize approximately $4.5 million of the deferred amount in 2020, $1.0 million in 2021, and $0.2 million thereafter.

Litigation

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.

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 pending against it the ultimate resolution of which would have a material adverse effect on its financial condition or results of operations, other than as set forth above. However, should the Company fail to prevail in any legal matter or should several legal matters be resolved against the Company in the same reporting period, such matters could have a material adverse effect on our 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. Legal costs are expensed as incurred.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset

or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

•

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

•

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

•

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

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

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

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

The Convertible Debentures were recorded as a separate component of the Company’s consolidated balance 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 (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 (in thousands) as of June 30, 2020
	Level 1		Level 2		Level 3		Total
Assets
Money market accounts	$	24,225	$	—	$	—	$	24,225

Total Assets	$	24,225	$	—	$	—	$	24,225

The following sets forth a reconciliation of the changes in the fair value of the Convertible Debentures that were converted to equity during the six month period ended June 30, 2020 (in thousands):


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

Balance, June 30, 2020	$	—

Income Taxes

The Company recorded an income tax provision of $5,000 and $31,000 for the three and six months ended June 30, 2020, respectively, and $19,000 and $27,000 for the three and six months ended June 30, 2019, respectively. The Company had no material unrecognized tax

benefits and a deferred tax liability of approximately $4,000 related to tax amortizable goodwill. No other adjustments were required under ASC 740, “Income Taxes”. The Company does not expect that the unrecognized tax benefits will materially increase within the next 12 months. The Company did not recognize any interest or penalties related to uncertain tax positions at June 30, 2020.

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 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.

Intangibles - Goodwill and Other

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

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

•

significant underperformance relative to historical or projected future operating results;

•

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

•

significant negative industry or economic trends;

•

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

•

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

The Company considered the goodwill impairment factors due to the uncertainty around the potential impact of the

COVID-19

pandemic on the Company’s continuing 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 June 30, 2020 and concluded that it did not have a triggering event or impairment indicators in the quarter ended June 30, 2020.

The Company would record an impairment charge when such assessment indicates that the fair value of a reporting unit was less than the carrying value. In evaluating potential impairments outside of the annual measurement date, judgment is required in determining whether an event has occurred that may impair the value of goodwill or intangible assets.

The Company utilizes either discounted cash flow models or other valuation models, such as comparative transactions and market multiples, to determine the fair value of reporting units. The Company makes assumptions about future cash flows, future operating plans, discount rates, comparable companies, market multiples, purchase price premiums and other

factors in those models. Different assumptions and judgment determinations could yield different conclusions that would result in an impairment charge to income in the period that such change or determination was made.

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

In the market approach, the Company uses a valuation technique in which values are derived based on market prices of publicly traded companies with similar operating characteristics and industries. A market approach allows for comparison to actual market transactions and multiples. It can be somewhat limited in its application because the population of potential comparable publicly-traded companies can be limited due to differing characteristics of the comparative business and ours, as well as market data may not be available for divisions within larger conglomerates or

non-public

subsidiaries that could otherwise qualify as comparable, and the specific circumstances surrounding a market transaction (e.g., synergies between the parties, terms and conditions of the transaction, etc.) may be different or irrelevant with respect to the business.

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

The Company has two operating segments, Detection and Therapy, as further discussed in Note 12 below.

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, 201 9		—			8,362			—			8,362

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

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 carrying value of the asset group.

There is no set interval or frequency for recoverability evaluation rather when to determine when, if at all, an asset (or asset group) is evaluated for recoverability is based on “events and circumstances.” The following factors are examples of events or changes in circumstances that indicate the carrying amount of an asset (asset group) may not be recoverable and thus is to be evaluated for recoverability.

•

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

•

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

•

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

•

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

•

A current period operating, or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group).

The Company determined there were no triggering events in the quarter ended June 30, 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 carrying amount exceeds the estimated gross, undiscounted cash flows from use and disposition), then an impairment loss must be recognized. The impairment loss is measured as the excess of the carrying amount over the

fair value of the asset (or asset group). The Company determined the “Asset Group” of the Company to be the assets of the Cancer Therapy segment and the Cancer 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

that

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

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.