Item
1A.
Risk Factors.
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially adversely affect our operations. The following highlights some of the factors that have affected, and/or in the future could affect, our operations.
The following is a summary of certain important factors that may make an investment in our company speculative or risky. You should carefully consider the fuller risk factor disclosure set forth in this Annual Report, in addition to the other information herein, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes.
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We have incurred significant losses from inception through 2020 and there can be no assurance that we will be able to achieve and sustain future profitability.
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Our quarterly and annual operating and financial results and our gross margins are likely to fluctuate significantly in future periods.
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We expect the 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 pandemic will have a material adverse impact on our business, results of operations and financial condition and on the market price of our common stock.
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The markets for our products and treatments and newly introduced enhancements to our existing products and treatments may not develop as expected, we continue to face barriers to broad market acceptance.
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An unfavorable resolution of the Yeda litigation could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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Sales and market acceptance of our products is dependent upon the coverage and reimbursement decisions made by third-party payers, including carve-out
radiology benefits managers. The failure of third-party payers to provide appropriate levels of coverage and reimbursement, and/or meeting prior authorization and other requirements for approval to use our products and treatments facilitated by our products could harm our business and prospects.
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A limited number of customers account for a significant portion of our total revenue. The loss of a principal customer could seriously hurt our business.
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The markets for many of our products are subject to changing technology.
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We distribute our products in highly competitive markets and our sales may suffer as a result.
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We rely on intellectual property and proprietary rights to maintain our competitive position and may not be able to protect these rights.
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Our future prospects depend on our ability to retain current key employees and attract additional qualified personnel.
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The market price of our common stock has been, and may continue to be volatile, which could reduce the market price of our common stock.
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Future issuances of shares of our common stock may cause significant dilution of equity interests of existing holders of common stock and decrease the market price of shares of our common stock.
Risks Related to our Financial Position, Operating Results and Need for Additional Capital
We have incurred significant losses from inception through 2020 and there can be no assurance that we will be able to achieve and sustain future profitability.
We have incurred significant losses since our inception. We incurred a net loss of $17.6 million in 2020 and have an accumulated deficit of $241.9 million at December 31, 2020. We may not be able to achieve profitability.
Our quarterly and annual operating and financial results and our gross margins are likely to fluctuate significantly in future periods.
Our quarterly and annual operating and financial results are difficult to predict and may fluctuate significantly from period to period. Our revenue and results of operations may fluctuate as a result of a variety of factors that are outside of our control including, but not limited to, general economic conditions, the timing of orders from our OEM partners, our OEM partners ability to manufacture and ship their digital mammography systems, our timely receipt by the FDA for the clearance or approval to market our products, our ability to timely engage other OEM partners for the sale of our products, the timing of product enhancements and new product introductions by us or our competitors, the pricing of our products, changes in customers’ budgets, competitive conditions and the possible deferral of revenue under our revenue recognition policies.
Risks Related to Our Business and Our Company
We expect the 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 pandemic will have a material adverse impact on our business, results of operations and financial condition and on the 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 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 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 year ending December 31, 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 we do not provide guidance to investors relating to our results of operations, our results for 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 (“Loan Agreement”) with Western Alliance Bank (the “Bank”). If at any point the Company is not in compliance with this covenant 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. 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.
The Company’s exposure to trade accounts receivable losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty
associated with local or global economic recessions, disruption associated with the current COVID-19
pandemic, or other customer-specific factors. The Company has historically not experienced significant trade account receivable losses, but it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade account receivables as hospitals’ cash flows are impacted by their response to the COVID-19
pandemic.
The markets for our products and treatments and newly introduced enhancements to our existing products and treatments may not develop as expected, we continue to face barriers to broad market acceptance.
The successful commercialization of our newly developed products and treatments and newly introduced enhancements to our existing products and treatments are subject to numerous risks, both known and unknown, including:
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market acceptance of our products;
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uncertainty of the development of a market for such product or treatment;
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trends relating to, or the introduction or existence of, competing products, technologies or alternative treatments or therapies that may be more effective, safer or easier to use than our products, technologies, treatments or therapies;
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the perceptions of our products or treatments as compared to other products and treatments;
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recommendation and support for the use of our products or treatments by influential customers, such as hospitals, radiological practices, breast surgeons and radiation oncologists and treatment centers and U.S. and international medical professional societies;
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the availability and extent of data demonstrating the clinical efficacy of our products or treatments;
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competition, including the presence of competing products sold by companies with longer operating histories, more recognizable names and more established distribution networks; and
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other technological developments.
Often, the development of a significant market for a product or treatment will depend upon the establishment of appropriate reimbursement for use of the product or treatment. Moreover, even if addressed, such reimbursement levels frequently are not established until after a product or treatment is developed and commercially introduced, which can delay the successful commercialization of a product or treatment.
If we are unable to successfully commercialize and create a significant market for our newly developed products and treatments and newly introduced enhancements to our existing products and treatments, our business and prospects could be harmed.
Unfavorable results of legal proceedings could materially adversely affect our financial results
From time to time, we are a party to or otherwise involved in legal proceedings, claims and government inspections or investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of our business or otherwise. Legal proceedings are often lengthy, taking place over a period of years with interim motions or judgments subject to multiple levels of review (such as appeals or rehearings) before the outcome is final. Litigation is subject to significant uncertainty and may be expensive, time-consuming, and disruptive to our operations. For these and other reasons, we may choose to settle legal proceedings and claims, regardless of their actual merit.
A legal proceeding finally resolved against us, could result in significant compensatory damages, and in certain circumstances, punitive or trebled damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief. If our existing insurance does not cover the amount or types of damages awarded, or if other resolutions or actions taken as a result of the legal proceeding were to restrain our ability to market one or more of our material products or services, our consolidated financial position, results of operations or cash flows could be materially adversely affected. In addition, legal proceedings, and any adverse resolution thereof, can result in adverse publicity and damage to our reputation, which could adversely impact our business.
An unfavorable resolution of the Yeda litigation could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In December 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation (“Invivo”). On September 5, 2018, a third-party, Yeda Research and Development Company Ltd., filed a complaint (the “Yeda Litigation”) against the Company and Invivo in the United States District Court for the Southern District of New York, asserting various claims against the Company and Invivo. The Company and Invivo filed motions to dismiss the complaint. 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. We cannot predict the outcome of the Yeda Litigation or the amount of time and expense that will be required to resolve the lawsuit. If such litigation were to be determined adversely to our interests, or if we were forced to settle such matter for a significant amount, such resolution or settlement could have a material adverse effect on our business, results of operations and financial condition. Please refer to the detailed discussion regarding litigation set forth in Part I, Item 3 of this Annual Report on Form 10-K.
We may be exposed to significant product liability for which we may not have sufficient insurance coverage or be able to procure sufficient insurance coverage.
Our product and general liability insurance coverage may be inadequate with respect to potential claims and adequate insurance coverage may not be available in sufficient amounts or at a reasonable cost in the future. If available at all, product liability insurance for the medical device industry generally is expensive. Future product liability claims could be costly to defend and/or costly to resolve and could harm our reputation and business.
Sales and market acceptance of our products is dependent upon the coverage and reimbursement decisions made by third-party payers, including carve-out
radiology benefits managers. The failure of third-party payers to provide appropriate levels of coverage and reimbursement, and/or meeting prior authorization and other requirements for approval to use our products and treatments facilitated by our products could harm our business and prospects.
Sales and market acceptance of our medical products and the treatments facilitated by our products in the United States and other countries is dependent upon the coverage decisions and reimbursement policies established by government healthcare programs and private health insurers. Market acceptance of our products
and treatments has and will continue to depend upon our customers’ ability to obtain an appropriate level of coverage for, and reimbursement from third-party payers for, these products and treatments. In the United States, CMS establishes coverage and reimbursement policies for healthcare providers treating Medicare and Medicaid beneficiaries. Under current CMS policies, varying reimbursement levels have been established for our products and treatments. In the absence of a national coverage determination, coverage policies for Medicare patients may vary by regional Medicare Administrative Contractors. Reimbursement rates for treatments vary based on the geographic price index, the site of service, and other factors. Coverage and reimbursement policies and rates applicable to patients with private insurance are dependent upon individual private payer decisions which may not follow the policies and rates established by CMS. The use of our products and treatments outside the United States is similarly affected by coverage and reimbursement policies adopted by foreign governments and, to a lesser extent, private insurance carriers. On September 18, 2020, CMS finalized a rule regarding its new RO Model, designed, according to CMS, to improve the quality of care for cancer patients receiving radiotherapy and reduce Medicare expenditures through bundled payments. In the final notice, CMS did not include IORT treatments (including CPT codes 77424 and 77425) within the new alternative payment model for radiation oncology. As a result, whether or not a particular physician practice or hospital is subject to the new radiation oncology payment model, IORT services covered by Medicare will continue to be subject to the existing payment systems for physician services and hospital outpatient services. On December 2, 2020, CMS announced the interim final rule related to CMS’s new RO Model, which will take effect no earlier than January 1, 2022. We cannot provide assurance that government or private third-party payers will continue to reimburse our products or services, nor can we provide assurance that the payment rates will be adequate. If providers and physicians are unable to obtain adequate reimbursement for our products or services, this could have a material adverse effect on our business and operations. In addition, in the event that the current methodology for calculating payment for these products or services changes, this could have a material adverse effect on our business and business operations. We cannot guarantee that providers and physicians will be able to obtain adequate reimbursement for our products or services under the RO model as proposed, or at all.
Our business is dependent upon future market growth of full field digital mammography systems, digital computer aided detection products, and tomosynthesis as well as advanced image analysis and workflow solutions for use with MRI and CT and the market growth of electronic brachytherapy. This growth may not occur or may occur too slowly to benefit us
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Our future business is substantially dependent on the continued growth in the market for electronic brachytherapy, full field digital mammography systems, digital computer aided detection products and tomosynthesis as well as advanced image analysis and workflow solutions for use with MRI and CT. The market for these products may not continue to develop or may develop at a slower rate than we anticipate due to a variety of factors, including, general economic conditions, delays in hospital spending for capital equipment, the significant costs associated with the procurement of full field digital mammography systems and CAD products and MRI and CT systems and the reliance on third party insurance reimbursement. If the market for the products and technologies upon which our products are dependent does not grow or grows too slowly, this could have a material adverse effect on our business.
A limited number of customers account for a significant portion of our total revenue. The loss of a principal customer could seriously hurt our business.
A limited number of major customers have in the past and may continue in the future to account for a significant portion of our revenue. Our principal
sales distribution channel for our digital products is through our OEM partners. In 2020, our OEM partners accounted for 28% of our total revenue, with one major customer, GE Healthcare, accounting for 17% of our revenue. In addition, in 2020, five customers, consisting of both OEM and direct customers, accounted for 37% of our total revenue. The loss of our relationships with principal customers or a decline in sales to principal customers could materially adversely affect our business and operating results.
If goodwill and/or other intangible assets that we have recorded in connection with our acquisitions become impaired, we could have to take significant charges against earnings.
In connection with the accounting for our acquisitions, we have recorded a significant amount of goodwill and other intangible assets. We have recorded multiple impairments in the past: $26.8 million in September 2011, $14.0 million in June 2015, $4.7 million in September 2017 and $2.0 million in December 2017. Under current accounting, we must assess, at least annually and potentially more frequently, whether the value of our goodwill of $8.4 million at December 31, 2020 and our other intangible assets have been impaired. Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings which could materially adversely affect our reported results of operations in future periods.
Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of amounts that have been accrued.
As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. In preparing our financial statements, we record the amount of tax payable in each of the countries, states and other jurisdictions in which we operate. Our future effective tax rate, however, may be lower or higher than prior years due to numerous factors, including a change in our geographic earnings mix, changes in the measurement of our deferred taxes, and recently enacted and future tax law changes in jurisdictions in which we operate. We are also subject to ongoing tax audits in various jurisdictions, and tax authorities may disagree with certain positions we have taken and assess additional taxes. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations, which could adversely affect our business, results of operations and cash flows.
Our ability to use our net operating loss carryovers and certain other tax attributes may be limited.
Under the Internal Revenue Code of 1986, as amended (the “Code”), a corporation is generally allowed a deduction for net operating losses (“NOLs”) carried over from a prior taxable year. Under that provision, we can carryforward our NOLs to offset our future taxable income, if any, until such NOLs are used or expire. The same is true of other unused tax attributes, such as tax credits. Under the Tax Cut and Jobs Act of 2017 (the “Tax Act”), federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. It is uncertain if and to what extent various states will conform to the federal Tax Act.
In addition, under Section 382 of the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 percent change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change
net operating loss carryforwards and other pre-change
tax attributes to offset its post-change income or taxes may be limited. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our net operating loss carryforwards or other tax attributes is materially limited, it would harm our future operating results by effectively increasing our future tax obligations.
Acquisitions may not result in the benefits and revenue growth we expect.
We integrate companies that we acquire including the operations, services, products and personnel of each company within our management policies, procedures and strategies. We cannot be sure that we will achieve the benefits of revenue growth that we expect from these acquisitions or that we will not incur unforeseen additional costs or expenses in connection with these acquisitions. To effectively manage our expected future growth, we must continue to successfully manage our integration of these companies and continue to improve our operational systems, internal procedures, working capital management, and financial and operational controls. If we fail in any of these areas, our business could be adversely affected.
The markets for many of our products are subject to changing technology.
Our business depends on our ability to adapt to evolving technologies and industry standards and introduce new technology solutions and services accordingly. If we cannot adapt to changing technologies, our technology solutions and services may become obsolete, and our business may suffer. Because the healthcare information technology market is constantly evolving, our existing technology may become obsolete and fail to meet the requirements of current and potential customers. Our success will depend, in part, on our ability to continue to enhance our existing technology solutions and services, develop new technology that addresses the increasingly sophisticated and varied needs of our customers, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our proprietary technology entails significant technical and business risks. We may not be successful in developing, using, marketing, selling, or maintaining new technologies effectively or adapting our proprietary technology to evolving customer requirements or emerging industry standards, and, as a result, our business and reputation could suffer. We may not be able to introduce new technology solutions on schedule, or at all, or such solutions may not achieve market acceptance. Moreover, competitors may develop competitive products that could adversely affect our results of operations. Our failure to introduce new products or to introduce these products on schedule could have an adverse effect on our business, financial condition and results of operations.
We depend upon a limited number of suppliers and manufacturers for our products, and certain components in our products may be available from a sole or limited number of suppliers.
Our products are generally either manufactured and assembled for us by a sole manufacturer, by a limited number of manufacturers or assembled by us from supplies we obtain from a limited number of suppliers. Critical components required to manufacture our products, whether by outside manufacturers or directly by us, may be available from a sole or limited number of component suppliers. We generally do not have long-term arrangements with any of our manufacturers or suppliers. The loss of a sole or key manufacturer or supplier could materially impair our ability to deliver products to our customers in a timely manner and would adversely affect our sales and operating results. Our business would be harmed if any of our manufacturers or suppliers could not meet our quality and performance specifications and quantity and delivery requirements.
Additionally, our suppliers and manufacturers are, and will continue to be, subject to extensive government regulation in connection with the manufacture of any medical devices. Our suppliers and manufacturers must ensure that they are compliant with applicable quality system and other regulatory requirements, as mandated by the FDA and other regulatory authorities. If our materials suppliers or manufacturers face manufacturing or quality control problems this may lead to delays in product production or shipment or our supplier or manufacturer no longer being able to continue operations. Our business would be harmed if any of our manufacturers or suppliers could not meet our quality and performance specifications and quantity and delivery requirements.
We distribute our products in highly competitive markets and our sales may suffer as a result.
We operate in highly competitive and rapidly changing markets that contain competitive products available from nationally and internationally recognized companies. Many of these competitors have significantly greater financial, technical and human resources than us and are well established. In addition, some companies have developed or may develop technologies or products that could compete with the products we manufacture and distribute or that would render our products obsolete or noncompetitive. Our competitors may achieve patent protection, regulatory approval, or product commercialization that would limit our ability to compete with them. These and other competitive pressures could have a material adverse effect on our business.
Disruptions in service or damage to our third-party providers’ data centers could adversely affect our business.
We rely on third parties who provide access to data centers. Our information technologies and systems are vulnerable to damage or interruption from various causes, including (i) acts of God and other natural disasters, war and acts of terrorism and (ii) power losses, computer systems failures, internet and telecommunications or data network failures, operator error, losses of and corruption of data and similar events. We conduct business continuity planning and work with our third-party providers to protect against fires, floods, other natural disasters and general business interruptions to mitigate the adverse effects of a disruption, relocation or change in operating environment at the data centers we utilize. In addition, the occurrence of any of these events could result in interruptions, delays or cessations in service to our customers. Any of these events could impair or prohibit our ability to provide our services, reduce the attractiveness of our services to current or potential customers and adversely impact our financial condition and results of operations.
In addition, despite the implementation of security measures, our infrastructure, data centers, or systems that we interface with, including the Internet and related systems, may be vulnerable to physical break-ins,
hackers, improper employee or contractor access, computer viruses, programming errors, denial-of-service
attacks or other attacks by third-parties seeking to disrupt operations or misappropriate information or similar physical or electronic breaches of security. Any of these can cause system failure, including network, software or hardware failure, which can result in service disruptions. As a result, we may be required to expend significant capital and other resources to protect against security breaches and hackers or to alleviate problems caused by such breaches.
If our products fail to perform properly due to errors or similar problems, our business could suffer.
Despite testing, complex software; may contain defects or errors. Addressing software errors may delay development of our solutions, and if discovered after deployment, may require the expenditure of substantial time and resources to correct. Errors in our software could result in:
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harm to our reputation;
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lost sales;
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delays in commercial releases;
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product liability claims;
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delays in or loss of market acceptance of our solutions;
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license terminations or renegotiations;
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unexpected expenses and diversion of resources to remedy errors; and
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privacy and security vulnerabilities.
Furthermore, our customers might use our software together with products from other companies or those that they have developed internally. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our solution development efforts; impact our reputation and cause significant customer relations problems.
We rely on intellectual property and proprietary rights to maintain our competitive position and may not be able to protect these rights.
We rely heavily on proprietary technology that we protect primarily through licensing arrangements, patents, trade secrets, proprietary know-how
and non-disclosure
agreements. There can be no assurance that any pending or future patent applications will be granted or that any current or future patents, regardless of whether we are an owner or a licensee of the patent, will not be challenged, rendered unenforceable, invalidated, or circumvented or that the rights will provide a competitive advantage to us. There can also be no assurance that our trade secrets or non-disclosure
agreements will provide meaningful protection of our proprietary information. Further, we cannot assure you that others will not independently develop similar technologies or duplicate any technology developed by us or that our technology will not infringe upon patents or other rights owned by others. Unauthorized third parties may infringe our intellectual property rights or copy or reverse engineer portions of our technology. In addition, because patent applications in the United States are not generally publicly disclosed until eighteen months after the application is filed, applications may have been filed by third parties that relate to our technology. Moreover, there is a risk that foreign intellectual property laws will not protect our intellectual property rights to the same extent as intellectual property laws in the United States. The rights provided by a patent are finite in time. The Company has certain patents that expire between 2021 and 2029. In the absence of significant patent protection, we may be vulnerable to competitors who attempt to copy our products, processes or technology.
In addition, in the future, we may be required to assert infringement claims against third parties, and there can be no assurance that one or more parties will not assert infringement claims against us. Any resulting litigation or proceeding could result in significant expense to us and divert the efforts of our management personnel, whether or not such litigation or proceeding is determined in our favor. In addition, if any of our intellectual property and proprietary rights are deemed to violate the proprietary rights of others, we may be prevented from using those intellectual property or proprietary rights, which could prevent us from being able to sell our products. Litigation could also result in a judgment or monetary damages being levied against us.
Healthcare industry consolidation could impose pressure on our prices, reduce potential customer base and reduce demands for our systems.
Many hospitals and imaging centers have consolidated to create larger healthcare enterprises with greater market and purchasing power. When hospitals and imaging centers combine, they often consolidate infrastructure, and consolidation of our customers could result in fewer overall customers. If this consolidation trend continues, it could reduce the size of our potential customer base, reduce demand for our systems, give the resulting enterprises greater bargaining or purchasing power, and may lead to erosion of the prices for our systems or decreased margins for our systems, all of which would adversely affect our ability to generate revenue.
Clinical trials are very expensive, lengthy, and difficult to design and implement and have uncertain outcomes, and, as a result, we may suffer delays or suspensions in current or future trials which would have a material adverse effect on our ability to obtain regulatory approvals timely or at all, and if we fail to receive such approvals, our ability to generate revenues.
Clinical trials involve a time-consuming and expensive process with an uncertain outcome, and the results of earlier trials are not necessarily predictive of future results. Human clinical trials are difficult to design and implement and very expensive, due in part to being subject to rigorous regulatory requirements.
Additionally, we may encounter problems at any stage of the trials that cause us to abandon or repeat clinical trials. The commencement and completion of clinical trials may be delayed by several factors, including:
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non-approval
of an investigational device exemption (IDE), which is required by the FDA for the study in humans of a significant risk device that is not approved for the indication being studied;
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failure to reach an agreement with contract research organizations or clinical trial sites;
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failure of third-party contract research organizations to properly implement or monitor the clinical trial protocols;
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failure of IRBs to approve our clinical trial protocols or suspension or termination of our clinical trial by the IRB, DSMB, or the FDA;
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slower than expected rates of patient recruitment and enrollment, which may be further negatively impacted by the COVID-19
global pandemic;
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inability to retain patients in clinical trials, which may be further negatively impacted by the COVID-19
global pandemic;
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lack of effectiveness during clinical trials;
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unforeseen safety issues;
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inability or unwillingness of medical clinical investigators and institutional review boards to follow our clinical trial protocols;
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failure of clinical investigators or sites to maintain necessary licenses or permits or comply with good clinical practices, or GCP, or other regulatory requirements; and
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lack of sufficient funding to finance the clinical trials.
In addition, we or regulatory authorities may suspend our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the regulatory authorities find deficiencies in our regulatory submissions or the conduct of these trials. Any suspension of clinical trials will delay possible regulatory approval, increase costs, and adversely impact our ability to develop products and generate revenue.
Our future prospects depend on our ability to retain current key employees and attract additional qualified personnel.
Our success depends in large part on the continued service of our executive officers and other key employees. We may not be able to retain the services of our executive officers and other key employees. The loss of executive officers or other key personnel could have a material adverse effect on us.
In addition, in order to support our continued growth, we will be required to effectively recruit, develop and retain additional qualified personnel. If we are unable to attract and retain additional necessary personnel, it could delay or hinder our plans for growth. Competition for such personnel is intense, and there can be no assurance that we will be able to successfully attract, assimilate or retain sufficiently qualified personnel. The failure to retain and attract necessary personnel could have a material adverse effect on our business, financial condition and results of operations.
Our international operations expose us to various risks, any number of which could harm our business.
Our revenue from sales outside of the United States represented approximately 20% of our revenue for 2020. We are subject to the risks inherent in conducting business across national boundaries, any one of which could adversely impact our business. In addition to currency fluctuations, these risks include, among other things: economic downturns; changes in or interpretations of local law, governmental policy or regulation; changes in healthcare practice patterns; restrictions on the transfer of funds into or out of the country; varying tax systems; and government protectionism. One or more of the foregoing factors could impair our current or future operations and, as a result, harm our overall business.
Our existing and future debt obligations could impair our liquidity and financial condition, and our lenders could foreclose on our assets in the event we are unable to meet our debt obligations.
In connection with our Loan Agreement, the Bank agreed to provide up an initial term loan facility of $7.0 million and a $5.0 million revolving line of credit. 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 December 31, 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.
The Loan Agreement
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requires us to dedicate a portion of our cash flow to payments on our debt obligations, which reduces the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements;
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imposes restrictions on our ability to incur indebtedness, other than permitted indebtedness, and could impede us from obtaining additional financing in the future for working capital, capital expenditures, mergers, acquisitions and general corporate purposes;
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imposes restrictions on us with respect to the use of our available cash, including in connection with future acquisitions;
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requires us to agree by a certain date with the Bank regarding minimum revenue levels for the 2021 calendar year. Failure to agree will result in acceleration of the indebtedness under the Loan Agreement; and
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requires us to provide certain financial information on a monthly and annual basis. Failure to do so will result in acceleration of the indebtedness under the Loan Agreement.
In addition, the Loan Agreement
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could impair our liquidity;
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could make it more difficult for us to satisfy our other obligations;
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make us more vulnerable in the event of a downturn in our business prospects and could limit our flexibility to plan for, or react to, changes in our licensing markets;
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could result in a prepayment or make-whole premium if we elected to prepay the indebtedness under the Loan Agreement prior to its maturity date; and
•
could place us at a competitive disadvantage when compared to our competitors who have less debt.
We have pledged substantially all of our assets to secure our obligations under the Loan Agreement. If we were to fail in the future to make any required payment under the Loan Agreement or fail to comply with the financial and operating covenants contained in the therein, in some cases subject to applicable cure periods, we would be in default regarding the Loan Agreement. Such default would enable the lenders under the Loan Agreement to foreclose on the assets securing such debt and could significantly diminish the market value and marketability of our common stock and could result in the acceleration of the payment obligations under our indebtedness.
Risks Related to Regulation of our Industry
The healthcare industry is highly regulated, and government authorities may determine that we have failed to comply with applicable laws, rules or regulations. Additionally, we may incur substantial costs defending our interpretations of U.S. federal and state government regulations, and if we lose, the government could force us to restructure our operations and subject us to fines, monetary penalties and possibly exclude us from participation in U.S. government-sponsored health care programs such as Medicare and Medicaid.
Both in the United States and in other jurisdictions, the healthcare industry is subject to extensive and complex federal, state and local laws, rules and regulations, compliance with which imposes substantial costs on us. Such laws and regulations include those that are directed at payment for services and the conduct of operations, preventing fraud and abuse, and prohibiting general business corporations, such as ours, from engaging in practices that may influence professional decision-making, such as splitting fees with physicians. In addition, we believe that our business will continue to be subject to increasing regulation as legislatures and governmental agencies periodically consider proposals to revise or create new requirements, particularly in response to and following the COVID-19
pandemic, the scope and effect of which we cannot predict. Such proposals, if implemented, could impact our operations, the use of our services, and our ability to market new services, and could create unexpected liabilities for us.
Many healthcare laws are complex, and their application to specific services and relationships may not be clear. The laws often have related rules and regulations that are subject to interpretation and may not provide definitive guidance as to their application to our operations, including our arrangements with physicians and professional corporations. Further, healthcare laws differ from jurisdiction to jurisdiction and it is difficult to ensure our business complies with evolving laws in all jurisdictions.
Consequently, our operations, including our arrangements with healthcare providers, are subject to audits, inquiries and investigations from government agencies from time to time. We believe we are in substantial compliance with these laws, rules and regulations based upon what we believe are reasonable and defensible interpretations of these laws, rules and regulations. However, U.S. federal and state laws are broadly worded and may be interpreted or applied by prosecutorial, regulatory or judicial authorities in ways that we cannot predict. Accordingly, we may in the future become the subject of regulatory or other investigations or proceedings, and our interpretations of applicable laws, rules and regulations may be challenged. Any challenge to our operations or arrangements with third parties that we have structured based upon our interpretation of these laws, rules and regulations could potentially disrupt business operations and lead to substantial defense
costs and a diversion of management’s time and attention, even if we successfully defend our interpretation. In addition, if the government successfully challenges our interpretation of the applicability of these laws, rules and regulations as they relate to our operations and arrangements, it may have a material adverse effect on our business, financial condition, results of operations, cash flows, and the trading price of our common stock.
In the event regulatory action were to limit or prohibit us from carrying on our business as we presently conduct it or from expanding our operations into certain jurisdictions, we may need to make structural, operational and organizational modifications to our Company or our contractual arrangements with physicians and professional corporations. Our operating costs could increase significantly as a result. We could also lose contracts, or our revenues could decrease under existing contracts. Any restructuring would also negatively impact our operations because our management’s time and attention would be diverted from running our business in the ordinary course.
Compliance with the many laws and regulations governing the healthcare industry could restrict our sales and marketing practices, and other relationships with healthcare professionals.
Once our products are sold, we must comply with various U.S. federal and state healthcare fraud and abuse laws, rules and regulations pertaining false claims, kickbacks and physician self-referral. Violations of the fraud and abuse laws are punishable by criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs, workers’ compensation programs and TRICARE. Compliance with these laws could restrict our sales and marketing practices, and any challenge to our practices could disrupt our operations and lead to substantial defense costs and a diversion of management’s time and attention, even if we successfully defend our practices. If we are unable to successfully defend our practices, in addition to incurring significant expense in defending ourselves, we could be subject to a significant settlement, monetary penalties, and costs related to implementation of changes to our practices, which could have a material adverse effect on our business.
Healthcare reform legislation in the United States may adversely affect our business and/or results of operations.
In March 2010, significant reforms to the U.S. healthcare system were adopted in the form of the ACA. The ACA includes provisions that, among other things, reduce and/or limit Medicare reimbursement, require all individuals to have health insurance (with limited exceptions) and impose new and/or increased taxes. While the ACA is intended to expand health insurance coverage to uninsured persons in the United States, other elements of this legislation, such as Medicare provisions aimed at improving quality and decreasing costs, comparative effectiveness research, an independent payment advisory board, and pilot programs to evaluate alternative payment methodologies, make it difficult to determine the overall impact on sales of, and reimbursement for, our products. We are unable to predict what additional legislation or regulation relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on our business. Any cost containment measures or other health care system reforms that are adopted could have a material and adverse effect on our ability to commercialize our existing and future products successfully. We cannot predict whether the ACA will be repealed, replaced, or modified or how such repeal, replacement or modification may be timed or structured. As a result, we cannot quantify or predict the effect of such repeal, replacement, or modification might have on our business and results of operations. However, any changes that lower reimbursement for our products or reduce medical procedure volumes could adversely affect our business and results of operations.
Our products and manufacturing facilities are subject to extensive regulation with potentially significant costs for compliance.
In the United States, our CAD systems and Xoft Systems are medical devices subject to extensive regulation by the FDA under the FDCA. The FDA’s regulation of our products includes our manufacturing operations, product labeling, adverse event reporting, and the FDA’s general prohibition against promoting products for unapproved or “off-label”
uses.
Our failure to fully comply with applicable regulations could result in the issuance of warning letters, non-approvals,
suspensions of existing approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions, injunctions, and criminal prosecution. Moreover, unanticipated changes in existing regulatory requirements or adoption of new requirements could increase our operating and compliance burdens and adversely affect our business, financial condition and results of operations.
Sales of our products in certain countries outside of the United States are also subject to extensive regulatory approvals. Obtaining and maintaining foreign regulatory approvals is an expensive and time-consuming process. We cannot be certain that we will be able to obtain the necessary regulatory approvals timely or at all in any foreign country in which we plan to market our CAD products and Xoft Systems, and if we fail to receive such approvals, our ability to generate revenue may be significantly diminished.
We may not be able to obtain regulatory approval for any of the other products that we may consider developing.
We have received the required premarket approvals from FDA or the equivalent foreign authority in the relevant jurisdictions in which we currently offer our products. Before we are able to commercialize any new product or promote a new indicated use of an existing product, we must obtain the required regulatory approvals. The process for satisfying these regulatory requirements is lengthy and costly and will require us to comply with complex standards for research and development, clinical trials, testing, manufacturing, quality control, labeling, and promotion of products. Additionally, even if we receive regulatory approval for a new product or indicated use in one jurisdiction, our products may be subject to separate regulatory approval in each country or jurisdiction in which we plan to market our products. We cannot be certain that we will be able to obtain the necessary regulatory approvals timely or at all in any country or jurisdiction. Successfully obtaining regulatory approval in one jurisdiction does not guarantee approval in another; however, a delay or failure to obtain regulatory approval in one jurisdiction may negatively affect the regulatory process in another. If we are unable to obtain regulatory approval for other products or indicated uses, our ability to generate sufficient revenue to continue our business may be significantly impacted.
Our products may be recalled even after we have received FDA or other governmental approval or clearance.
If the safety or efficacy of any of our products is called into question, we may initiate or the FDA and similar governmental authorities in other countries may press us to implement or even require a product recall, even if our product received approval or clearance by the FDA or a similar governmental body. Such a recall would divert the focus of our management and our financial resources and could materially and adversely affect our reputation with customers and our financial condition and results of operations.
We are subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. We may be subject to criminal or civil sanctions if we fail to comply with privacy and security regulations regarding the use and disclosure of sensitive personally identifiable information.
Numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability and integrity of personally identifiable information, including HIPAA. In the provision of services to our customers, we and our third-party vendors may collect, use, maintain and transmit patient health information in ways that are subject to many of these laws and regulations. We are also subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may be more onerous than corresponding U.S. laws, including in particular the laws of Europe.
Our customers are covered entities, and we are a business associate of our customers under HIPAA as a result of our contractual obligations to perform certain functions on behalf of and provide certain services to those customers. In the ordinary course of our business, we collect and store sensitive data, including personally identifiable information received from of our customers. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures and business controls, our information technology and infrastructure may be vulnerable to attacks by hackers, breached due to employee error, malfeasance or other disruptions or subject to the inadvertent or intentional unauthorized release of information. Any such occurrence could compromise our networks and the information stored thereon could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information by us or our subcontractors could (i) result in legal claims or proceedings, liability under laws that protect the privacy of personal information and regulatory penalties, (ii) disrupt our operations and the services we provide to our customers and (iii) damage our reputation, any of which could adversely affect our profitability, revenue and competitive position.
Federal and state consumer laws are being applied increasingly by the Federal Trade Commission and state attorneys general to regulate the collection, use and disclosure of personal or patient health information, through web sites or otherwise, and to regulate the presentation of web site content. Numerous other federal and state laws protect the confidentiality, privacy, availability, integrity and security of personally identifiable information. These laws in many cases are more restrictive than, and not preempted by, HIPAA and may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our customers and potentially exposing us to additional expense, adverse publicity and liability. We may not remain in compliance with the diverse privacy requirements in each of the jurisdictions in which we do business.
HIPAA and federal and state laws and regulations may require users of personally identifiable information to implement specified security measures. Evolving laws and regulations in this area could require us to incur significant additional costs to re-design
our products in a timely manner to reflect these legal requirements, which could have an adverse impact on our results of operations.
New personally identifiable information standards, whether implemented pursuant to HIPAA, congressional action or otherwise, could have a significant effect on the manner in which we must handle healthcare related data, and the cost of complying with standards could be significant. If we do not properly comply with existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions.
Data protection laws in the United States, Europe and around the world may restrict our activities and increase our costs.
Various statutes and rules in the United States, Europe and around the world regulate privacy and data protection which may affect our collection, use, storage, and transfer of information both abroad and in the United States. New laws and regulations are being enacted, so that this area remains in a state of flux. Monitoring and complying with these laws require substantial financial resources. Failure to comply with these laws may result in, among other things, civil and criminal liability, negative publicity, restrictions on further use of data, and/or liability under contractual warranties. In addition, changes in these laws (including newly released interpretations of these laws by courts and regulatory bodies) may limit our data access, use and disclosure, and may require increased expenditures by us.
The European Union’s General Data Protection Regulation (“GDPR”) requires us to meet new and more stringent requirements regarding the handling of personal data about EU residents. Failure to meet the GDPR requirements could result in penalties of up to 4% of worldwide revenue.
Risk Related to our Common Stock
A substantial number of shares of our common stock are eligible for future sale, and the sale of shares of common stock into the market, or the perception that such sales may occur, may depress our stock price.
Sales of substantial additional shares of our common stock in the public market, or the perception that these sales may occur, may significantly lower the market price of our common stock. We are unable to estimate the amount, timing or nature of future sales of shares of our common stock. We have previously issued a substantial number of shares of common stock, which are eligible for resale under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), and may become freely tradable. We have also registered shares that are issuable upon the exercise of options and warrants. If holders of options, or warrants choose to exercise or convert their securities and sell shares of common stock issued upon the such exercise or conversion in the public market, or if holders of currently restricted common stock choose to sell such shares of common stock in the public market under Rule 144 or otherwise, or attempt to publicly sell such shares all at once or in a short time period, the prevailing market price for our common stock may decline.
We have a limited number of shares of common stock available for future issuance which could adversely affect our ability to raise capital or consummate acquisitions.
We are currently authorized to issue 30,000,000 shares of common stock under our amended Certificate of Incorporation (“Certificate of Incorporation”). As of December 31, 2020, we had issued 23,508,575 shares of common stock and had approximately 1,869,507 shares of common stock reserved for issuance upon exercise of options granted, 29,166 shares of common stock reserved for vesting of restricted stock and 907,394 shares of common stock reserved for issuance under our Employee Stock Purchase Plan. On March 5, 2021, we closed an underwritten public offering of 1,393,738 shares of common stock at a public offering price of $18.00 per share, such that as the date of this Annual Report on Form 10-K
we have issued 24,918,458 shares of common stock.
Due to the limited number of authorized shares of common stock available for issuance, we may not be able to raise additional equity capital or complete a merger, other business combination or partnership unless we increase the number of shares we are authorized to issue. We intend to seek stockholder approval to increase the number of our authorized shares of common stock at our 2021 annual meeting of stockholders, but we can provide no assurance that we will succeed in amending our Certificate of Incorporation to increase the number of shares of common stock we are authorized to issue.
If we do not receive the requisite stockholder approval, our operations could be materially adversely impacted. In addition, an increase in the authorized number of shares of common stock and the subsequent issuance of such shares could have the effect of delaying or preventing a change in control of the Company without further action by our stockholders.
Provisions in our Certificate of Incorporation and in Delaware law could make it more difficult for a third party to acquire us, discourage a takeover and adversely affect existing stockholders.
Our Certificate of Incorporation authorizes the Board of Directors to issue up to 1,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our Board of Directors, without further action by stockholders, and may include, among other things, voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions. Although there are currently no shares of preferred stock outstanding, future holders of preferred stock may have rights superior to our common stock and such rights could also be used to restrict our ability to merge with or sell our assets to a third party.
We
are
also subject to the provisions of Section 203 of the Delaware
General Corporation Law,
which could prevent us
from engaging in a “business combination” with
a 15% or greater
stockholder” for a period of three years
from the date such person acquired that status unless appropriate board or stockholder approvals are obtained.
These provisions could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over the then current market price. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in their best interests.
The market price of our common stock has been, and may continue to be volatile, which could reduce the market price of our common stock.
The publicly traded shares of our common stock have experienced, and may experience in the future, significant price and volume fluctuations.
This market volatility
could reduce the market price of our common stock without regard to our operating performance. In addition, the trading price of our common stock could change significantly in response to actual or anticipated variations in our quarterly operating results, announcements by us or our competitors, factors affecting the medical imaging industry generally, changes in national or regional economic conditions, changes in securities analysts’ estimates for us or our competitors’ or industry’s future performance or general market conditions,
making it more difficult for shares of our common stock to be sold at a favorable price or at all. The market price of our common stock could also be reduced by general market price declines or market volatility in the future or future declines or volatility in the prices of stocks for companies in our industry.
General Risk Factors
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer and could subject us to substantial liabilities.
If our security measures are breached or fail and unauthorized access is obtained to a customer’s data, our service may be perceived as insecure, the attractiveness of our services to current or potential customers may be reduced, and we may incur significant liabilities.
Our services involve the storage and transmission of customers’ proprietary information and patient information, including health, financial, payment and other personal or confidential information. We rely on proprietary and commercially available systems, software, tools and monitoring, as well as other processes, to provide security for processing, transmission and storage of such information. Because of the sensitivity of this information and due to requirements under applicable laws and regulations, the effectiveness of such security efforts is very important. However, there can be no assurance that we will not be subject to cybersecurity incidents that bypass our security measures, impact the integrity, availability or privacy of personally identifiable information or other data subject to privacy laws or disrupt our information systems, devices or business, including our ability to deliver services to our customers. As a result, cybersecurity, physical security and the continued development and enhancement of our controls, processes and practices designed to protect our enterprise, information systems and data from attack, damage or unauthorized access remain a priority for us. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any cybersecurity vulnerabilities. The occurrence of any of these events could result in (i) harm to customers; (ii) business interruptions and delays; (iii) the loss, misappropriation, corruption or unauthorized access of data; (iv) litigation, including potential class action litigation, and potential liability under privacy, security and consumer protection laws or other applicable laws; (v) reputational damage; and (vi) federal and state governmental inquiries, any of which could have a material, adverse effect on our financial position and results of operations and harm our business reputation.
Changes in interpretation or application of Generally Accepted Accounting Principles may adversely affect our operating results.
We prepare our financial statements to conform to GAAP. These principles are subject to interpretation by the Financial Accounting Standards Board (“FASB”), American Institute of Certified Public Accountants, the SEC and various other regulatory or accounting bodies. A change in interpretations of, or our application of, these principles can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. In addition, when we are required to adopt new accounting standards, our methods of accounting for certain items may change, which could cause our results of operations to fluctuate from period to period and make it more difficult to compare our financial results to prior periods.
As our operations evolve over time, we may introduce new products or new technologies that require us to apply different accounting principles, including ones regarding revenue recognition, than we have applied in past periods. The application of different types of accounting principles and related potential changes may make it more difficult to compare our financial results from quarter to quarter, and the trading price of our common stock could suffer or become more volatile as a result.
We cannot be certain of the future effectiveness of our internal controls over financial reporting or the impact of the same on our operations or the market price for our common stock.
Pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”),
we are required to
include in our Annual Report on Form 10-K
our assessment of
the effectiveness of our internal controls over financial reporting.
We have dedicated a significant amount of time and resources to ensure compliance with this legislation for the year ended December 31, 2020 and will continue to do so for future fiscal periods. Although we believe that we currently have adequate internal control procedures in place, we cannot be certain that our
internal controls over financial reporting will continue to be effective. If we cannot adequately maintain the effectiveness of our internal controls over financial reporting, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and the market price of our common stock.
Changes in credit markets or to our credit rating could impact our ability to obtain financing for business operations or result in increased borrowing costs and interest expense.
Our credit ratings reflect each credit rating agency’s opinion of our financial strength, operating performance and ability to meet our debt obligations at the time such opinion is issued. We utilize the short- and long-term debt markets to obtain capital from time to time. Adverse changes in our credit ratings may result in increased borrowing costs for future long-term debt or short-term borrowing facilities and may limit financing options, including access to the unsecured borrowing market. Such changes may also breach restrictive covenants under current or future debt facilities or instruments, which could reduce our operating flexibility. Macroeconomic conditions, such as continued or increased volatility or disruption in the credit markets, may adversely affect our ability to refinance existing debt or obtain additional financing for working capital, capital expenditures or fund new acquisitions.
Future issuances of shares of our common stock may cause significant dilution of equity interests of existing holders of common stock and decrease the market price of shares of our common stock.
We have previously issued options that are exercisable or convertible into a significant number of shares of our common stock. Should existing holders of options exercise their options for shares of our common stock, it may cause significant dilution of equity interests of existing holders of our common stock and reduce the market price of shares of our common stock.
Item
1B.
Item
1B.
Unresolved Staff Comments.
Not applicable.
Item
2.
Item
2.
Properties.
The Company’s executive offices are leased pursuant to a lease originally entered into in December 2006. The lease covers approximately 11,000 square feet of office space located at 98 Spit Brook Road, Suite 100 in Nashua, New Hampshire. As amended, the lease expires in February 2023 and the annual base rent is $214,812. Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses and obtain insurance for the facility.
The Company leases a facility consisting of approximately 24,350 square feet of office, manufacturing and warehousing space located at 101 Nicholson Lane, San Jose, CA. The operating lease commenced September 2012. As amended, the lease expires in March 2023, with annual payments of $628,260 until March 2021, $645,792 from April 2021 to March 2022 and $666,240 from April 2022 to March 2023. Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses and obtain insurance for the facility.
In addition to the foregoing leases relating to its principal properties, the Company also has a lease for an additional facility in Nashua, New Hampshire used for product repairs, manufacturing and warehousing.
If the Company is required to seek additional or replacement facilities, it believes there are adequate facilities available at commercially reasonable rates.
Item
3.
Item
3.
Legal Proceedings.
In December 2016, the Company entered into an Asset Purchase Agreement with Invivo Corporation (the “Asset Purchase Agreement”). In accordance with the Asset Purchase Agreement, the Company sold to Invivo all right, title and interest to certain intellectual property relating to the Company’s VersaVue Software and DynaCAD product and related assets for $3.2 million. The Company closed the transaction on January 30, 2017 less a holdback reserve of $350,000 for net proceeds of approximately $2.9 million.
On September 5, 2018, third-party Yeda Research and Development Company Ltd. (“Yeda”), filed a complaint (the “Complaint”) against the Company and Invivo in the United States District Court for the Southern District of New York, captioned Yeda Research and Development Company Ltd. v. iCAD, Inc. and Invivo Corporation, Case No. 1:18-cv-08083-GBD,
related to the Company’s sale of the VersaVue software and DynaCAD product under the Asset Purchase Agreement. 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, the Company may be a party to various legal proceedings and claims arising out of the ordinary course of its business. Although the final results of all such matters and claims cannot be predicted with certainty, the Company currently believes that there are no current proceedings or claims pending against it the ultimate resolution of which would have a material adverse effect on its financial condition or results of operations, other than as set forth above. However, should the Company fail to prevail in any legal matter or should several legal matters be resolved against the Company in the same reporting period, such matters could have a material adverse effect on the Company’s operating results and cash flows for that particular period. The Company may be party to certain actions that have been filed against the Company which are being vigorously defended. The Company has determined that potential losses in these matters are neither probable or reasonably possible at this time. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450, “Contingencies.” Legal costs are expensed as incurred.
Item
4.
Item
4.
Mine Safety Disclosures.
Not applicable.
PART II
Item
5.
Item
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock is traded on the NASDAQ Capital Market under the symbol “ICAD”.
As of March 8, 2021, there were 96 holders of record of the Company’s common stock.
The Company has not paid any cash dividends on its common stock to date, and the Company does not expect to pay cash dividends in the foreseeable future. Future dividend policy will depend on the Company’s earnings, capital requirements, financial condition, and other factors considered relevant by the Company’s Board of Directors. The Company’s Loan and Security Agreement with Western Alliance Bank restricts the Company’s present ability to pay dividends.
Information with respect to the Company’s equity compensation plans in effect at December 31, 2020 will be included in the Company’s 2021 Proxy Statement and is incorporated herein by reference.
Issuer’s Purchases of Equity Securities
. For the majority of restricted stock units granted to employees under the applicable stock incentive plan, the number of shares issued on the date that the restricted stock units vest is net of the minimum statutory tax withholding requirements that we pay in cash to the appropriate tax authorities on behalf of our employees. The Company did not have any repurchases of securities in the quarter ended December 31, 2020.
Item
.
Selected Financial Data
.
Not applicable.
Item
.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
.
Results of Operations
Overview
iCAD, Inc. is a global medical technology company providing innovative cancer detection and therapy solutions. The Company reports in two segments: Detection and Therapy.
In the Detection segment, the Company’s solutions include (i) advanced image analysis and workflow solutions that enable healthcare professionals to better serve patients by identifying pathologies and pinpointing the most prevalent cancers earlier, and (ii) a comprehensive range of high-performance, Artificial Intelligence and Computer-Aided Detection (CAD) systems and workflow solutions for 2D and 3D mammography, Magnetic Resonance Imaging (MRI) and Computed Tomography (CT).
In the Therapy segment, the Company offers the Xoft System, an isotope-free cancer treatment platform technology. The Xoft System can be used for the treatment of early-stage breast cancer, endometrial cancer, cervical cancer and nonmelanoma skin cancer.
On January 30, 2017, the Company completed the sale of certain intellectual property relating to the VersaVue Software and the DynaCAD product and related assets to Invivo for $3,200,000 in cash with a holdback amount of $350,000. The Company is currently involved in litigation with a third-party relating to this transaction, as further described in “Item 3 - Legal Proceedings.”
The Company’s headquarters are located in Nashua, New Hampshire, with a manufacturing facility in New Hampshire and an operations, research, development, manufacturing and warehousing facility in San Jose, California.
Critical Accounting Estimates
The Company’s discussion and analysis of its financial condition, results of operations, and cash flows are based on its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an 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 debentures and the 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 of January 1, 2019, the Company adopted ASC Topic 842. Refer to Note 1 to the consolidated financial statements for disclosure of the changes related to this adoption.
The Company’s critical accounting policies include:
•
Revenue recognition;
•
Valuation of long-lived and intangible assets;
•
Goodwill;
•
Stock based compensation; and
•
Income taxes;
Revenue Recognition
On January 1, 2018, the Company adopted FASB ASC Topic 606, “Revenue from Contracts with Customers” and all the related amendments (“Topic 606”) using the modified retrospective method for all contracts not completed as of the date of adoption. The Company recognized the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings at the adoption date. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The Company recognizes revenue primarily from the sale of products and from the sale of services and supplies. Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities. To achieve this core principle, the Company applies the following five steps:
1) Identify the contract(s) with a customer
-A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to those goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.
2) Identify the performance obligations in the contract
-Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company must apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation. If options to purchase additional goods or services are included in customer contracts, the Company evaluates the option in order to determine if the Company’s arrangement include promises that may represent a material right and needs to be accounted for as a performance obligation in the contract with the customer.
3) Determine the transaction price
-The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration; the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
4) Allocate the transaction price to the performance obligations in the contract
-If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation.
5) Recognize revenue when (or as) the Company satisfies a performance obligation
-The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.
The Company recognizes revenue from its contracts with customers primarily from the sale of products and from the sale of services and supplies. Revenue is recognized when control of the promised goods or services is transferred to a customer, in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. For product revenue, control has transferred upon shipment provided title and risk of loss have passed to the customer. Services and supplies are considered to be transferred as the services are performed or over the term of the service or supply agreement.
The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For arrangements with multiple performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers when each of the products and services are sold separately. If the standalone selling price of a product or service is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
The Company’s hardware is generally highly dependent on, and interrelated with, the underlying license. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to the customer.
Upon the adoption of ASC 842, effective January 1, 2019, the lease components of certain fixed fee service contracts are no longer being separately accounted for under the lease guidance, and the entire contract is being accounted for under ASC 606. Upon the adoption of ASC 606, effective January 1, 2018, and until the adoption of ASC 842 referred to above, these lease components were accounted for as a lease in accordance with ASC 840, “Leases” (“ASC 840”), and the remaining consideration was allocated to the other performance obligations identified in accordance with ASC 606.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of revenue.
The Company also recognizes an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year, in accordance with ASC Topic 340-40,
“Other Assets and Deferred Costs: Contracts with Customers.” The Company has determined that certain commissions programs meet the requirements to be capitalized.
See Note 1 to the consolidated financial statements for details of the Company’s accounting policies related to revenue recognition.
Goodwill
In accordance with FASB ASC Topic 350-20,
“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 Company is less than the carrying value of the Company.
Factors the Company considers important, which could trigger an impairment of such asset, include the following:
•
significant underperformance relative to historical or projected future operating results;
•
significant changes in the manner or use of the assets or the strategy for the Company’s overall business;
•
significant negative industry or economic trends;
•
significant decline in the Company’s stock price for a sustained period; and
•
a decline in the Company’s market capitalization below net book value.
The Company’s Chief Operating Decision Maker (“CODM”) is the Chief Executive Officer. The Company determined that it has two reporting units and two reportable segments based on the information that is provided to the CODM. The two segments and reporting units are Detection and Therapy. Each reportable segment generates revenue from the sale of medical equipment and related services and/or sale of supplies. Upon initial adoption, goodwill was allocated to the reporting units based on the relative fair value of the reporting units.
The Company records an impairment charge if such an assessment were to indicate that the fair value of a reporting unit was less than the carrying value. When the Company evaluates potential impairments outside of its annual measurement date, judgment is required in determining whether an event has occurred that may impair the value of goodwill or intangible assets. The Company utilizes either discounted cash flow models or other valuation models, such as comparative transactions and market multiples, to determine the fair value of its reporting units. The Company makes assumptions about future cash flows, future operating plans, discount rates, comparable companies, market multiples, purchase price premiums and other factors in those models. Different assumptions and judgment determinations could yield different conclusions that would result in an impairment charge to income in the period that such change or determination was made.
Other significant assumptions include terminal value margin rates, future capital expenditures, and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to the application of these assumptions to this analysis, the income approach provides a reasonable estimate of the fair value of the reporting units.
The Company determines the fair value of reporting units based on the present value of estimated future cash flows, discounted at an appropriate risk adjusted rate. This approach was selected as it measures the income producing assets, primarily technology and customer relationships. This method estimates the fair value based upon the ability to generate future cash flows, which is particularly applicable when future profit margins and growth are expected to vary significantly from historical operating results.
Fair values for the reporting units are based on a weighting of the income approach and the market approach. For purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk adjusted rate. The Company uses internal forecasts to estimate future cash flows and includes estimates of long-term future growth rates based on our most recent views of the long-term forecast for each segment. Accordingly, actual results can differ from those assumed in our forecasts. Discount rates are derived from a capital asset pricing model and by analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts.
In the market approach, the Company uses a valuation technique in which values are derived based on market prices of publicly traded companies with similar operating characteristics and industries. A market approach allows for comparison to actual market transactions and multiples. It can be somewhat limited in its application because the population of potential comparable publicly-traded companies can be limited due to differing characteristics of the comparative business and ours, as well as the fact that market data may not be available for divisions within larger conglomerates or non-public
subsidiaries that could otherwise qualify as comparable, and the specific circumstances surrounding a market transaction (e.g., synergies between the parties, terms and conditions of the transaction, etc.) may be different or irrelevant with respect to our business.
The Company corroborates the total fair values of the reporting units using a market capitalization approach; however, this approach cannot be used to determine the fair value of each reporting unit value. The blend of the income approach and market approach is more closely aligned to our business profile, including markets served and products available. In addition, required rates of return, along with uncertainties inherent in the forecast of future cash flows, are reflected in the selection of the discount rate. Equally important, under the blended approach, reasonably likely scenarios and associated sensitivities can be developed for alternative future states that may not be reflected in an observable market price. The Company assesses each valuation methodology based upon the relevance and availability of the data at the time the valuation is performed and weights the methodologies appropriately.
The Company performed the annual impairment assessment at October 1, 2020 and compared the fair value of each of reporting unit to its carrying value as of this date. Fair value of the Detection reporting unit exceeded the carrying value by approximately 2,044%. Goodwill for the Therapy reporting unit was fully impaired prior to the year ended December 31, 2017. The carrying values of the reporting units were determined based on an allocation of our assets and liabilities through specific allocation of certain assets and liabilities, to the reporting units and an apportionment of the remaining net assets based on the relative size of the reporting units’ revenues and operating expenses compared to the Company as a whole. The determination of reporting units also requires management judgment.
Long Lived Assets
In accordance with FASB ASC Topic 360, “Property, Plant and Equipment” (“ASC 360”), the Company assesses long-lived assets for impairment if events and circumstances indicate it is more likely than not that the fair value of the asset group is less than the carrying value of the asset group.
ASC 360-10-35
uses “events and circumstances” criteria to determine when, if at all, an asset (or asset group) is evaluated for recoverability. Thus, there is no set interval or frequency for recoverability evaluation. In accordance with ASC 360-10-35-21
the following factors are examples of events or changes in circumstances that indicate the carrying amount of an asset (asset group) may not be recoverable and thus is to be evaluated for recoverability.
•
A significant decrease in the market price of a long-lived asset (asset group);
•
A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition;
•
A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator;
•
An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group);
•
A current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group).
In accordance with ASC 360-10-35-17,
if the carrying amount of an asset or asset group (in use or under development) is evaluated and found not to be fully recoverable (the carrying amount exceeds the estimated gross, undiscounted cash flows from use and disposition), then an impairment loss must be recognized. The impairment loss is measured as the excess of the carrying amount over the assets (or asset group’s) fair value.
The Company did not record any impairment charges for the years ended December 31, 2020 or December 31, 2019.
A considerable amount of judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of the Asset Group and the reporting unit. While the Company believes the judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore additional impairment charges could be required. Significant negative industry or economic trends, disruptions to the Company’s business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets may adversely impact the assumptions used in the fair value estimates and ultimately result in future impairment charges.
Intangible assets subject to amortization consist primarily of patents, technology intangibles, trade names, customer relationships and distribution agreements purchased in the Company’s previous acquisitions. These assets are amortized on a straight-line basis or the pattern of economic benefit over their estimated useful lives of 5 to 10 years.
Stock-Based Compensation
The Company maintains stock-based incentive plans, under which it provides stock incentives to employees, directors and contractors. The Company grants to employees, directors and contractors, options to purchase common stock at an exercise price equal to the market value of the stock at the date of grant. The Company may grant restricted stock to employees and directors. The underlying shares of the restricted stock grant are not issued until the shares vest, and compensation expense is based on the stock price of the shares at the time of grant. The Company follows ASC 718, “Compensation - Stock Compensation”
, (“ASC 718”), for all stock-based compensation. The Company has granted performance based restricted stock based on achievement of certain revenue targets. Compensation cost for performance based restricted stock requires significant judgment regarding probability of the performance objectives and compensation cost is re-measured
at every reporting period. As a result, compensation cost could vary significantly during the performance measurement period.
The Company uses the Black-Scholes option pricing model to value stock options which requires extensive use of accounting judgment and financial estimates, including estimates of the expected term participants will retain their vested stock options before exercising them, the estimated volatility of its common stock price over the expected term, and the number of options that will be forfeited prior to the completion of their vesting requirements. Fair value of restricted stock is determined based on the stock price of the underlying option on the date of the grant. Application of alternative assumptions could produce significantly different estimates of the fair value of stock-based compensation and consequently, the related amounts recognized in the Consolidated Statements of Operations.
Income Taxes
The Company follows the liability method under ASC 740, “Income Taxes” (“ASC 740”). The primary objectives of accounting for taxes under ASC 740 are to (a) recognize the amount of tax payable for the current year and (b) recognize the amount of deferred tax liability or asset for the future tax consequences of events that have been reflected in the Company’s financial statements or tax returns. The Company has provided a full valuation allowance against its deferred tax assets at December 31, 2020 and 2019 as it is more likely than not that the deferred tax asset will not be realized. Any subsequent changes in the valuation allowance will be recorded through operations in the provision (benefit) for income taxes.
ASC 740-10
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10
also provides guidance on de-recognition,
classification, interest and penalties, disclosure and transition.
Discussion of Operating Results:
Year Ended December 31, 2020 compared to Year Ended December 31, 2019
Revenue.
Revenue for the year ended December 31, 2020 was $29.7 million compared with revenue of $31.3 million for the year ended December 31, 2019, a decrease of $1.6 million, or 5.2%. Detection revenue decreased by $0.3 million and Therapy revenue decreased by $1.3 million.
The table below presents the components of revenue for 2020 and 2019 (in thousands):
Detection revenues decreased by $0.3 million, or 1.4%, from $22.3 million for the year ended December 31, 2019 to $22.0 million for the year ended December 31, 2020.
Detection product revenue decreased by $0.5 million and Detection service revenue increased by $0.2 million. The Company believes that Detection product revenue was adversely affected in 2020 by the COVID-19
pandemic, as the typical sales cycle and ordering patterns were disrupted due to some healthcare facilities’ additional focus on COVID-19.
The primary impact occurred during the second and third quarters of 2020. The total impact was partially offset by an increase in revenue in the fourth quarter of 2020 as compared to the fourth quarter of 2019. The Company is not able to predict how the COVID-19
pandemic will affect future revenue and order volume. The $0.2 million increase in Detection service revenue was due primarily to an increase in service revenue from direct customers. The Company did not see a significant impact of the COVID-19
pandemic on Detection service revenue in 2020 as compared to 2019 but is not able to predict how the COVID-19
pandemic could affect future Detection service revenue.
Therapy revenue decreased 14.6%, or $1.3 million, to $7.7 million for the year ended December 31, 2020 from $9.0 million in the year ended December 31, 2019.
Therapy product revenue decreased by $0.4 million and Therapy service revenue decreased by $1.0 million. Therapy product revenue for the year ended December 31, 2020 was adversely affected by the COVID-19
pandemic, due to stay-at-home
and social distancing orders as well as the uncertainty in the market. Therapy product revenue is related to the sale of our Xoft Systems and can vary significantly from quarter to quarter due to changes in the number of units sold, and the average selling price. We expect Therapy sales to continue to vary as the sales of controller units can represent a significant component of Therapy product revenue. We believe Therapy service revenue was negatively impacted primarily due to the lack of ability to treat patients, mostly in the second and third quarters, due to the additional focus by healthcare professionals on the COVID-19
pandemic.
Gross Profit
. Gross profit was $21.3 million for the year ended December 31, 2020 compared to $24.2 million for the year ended December 31, 2019, a decrease of $2.9 million, or 11.9%. Detection gross profit decreased by $0.8 million from $18.6 million in the year ended December 31, 2019 to $17.8 million in the year ended December 31, 2020. Detection gross profit as a percentage of Detection revenue decreased to 81.2% in the year ended December 31, 2020 from 84% in the year ended December 31, 2019. The decrease was due primarily to higher installation costs and equipment costs to support processing of higher resolution and increased volume of 3D images. Therapy gross profit decreased by $2.1 million from $5.6 million in the year ended December 31, 2019 to $3.5 million in the year ended December 31, 2020. This decrease is largely due to Therapy revenue being adversely affected by the COVID-19
pandemic, due to stay-at-home
and social distancing orders as well as the uncertainty in the market. Therapy gross profit as a percentage of Therapy revenue decreased to 45% in the year ended December 31, 2020 from 62% in the year ended December 31, 2019.
Gross profit as a percentage of revenue was 71.9% for the year ended December 31, 2020 compared to 77.3% for the year ended December 31, 2019. Gross profit as a percentage of revenue will fluctuate due to the costs related to manufacturing, amortization and the impact of product mix in each segment.
The COVID-19
pandemic adversely affected revenues from Detection products and the Therapy segment in the year ended December 31, 2020, and as a result, gross profit in both segments. The primary impact of the COVID-19
pandemic was felt during the second and third quarters of 2020. However, the Company continued to follow steps taken during the second and third quarters of 2020 to reduce operating expenses, including cutting non-essential
travel, implementing employee furloughs and terminations, reducing employee salaries by 10%, and cancelling most in-person
trade shows. These measures offset some of the impact on gross profit caused by COVID-19.
Salary reductions, employee furloughs, and certain other of these measures were ended in the fourth quarter of 2020.
Cost of revenue and gross profit for 2020 and 2019 were as follows (in thousands):
Operating Expenses:
Operating expenses for 2020 and 2019 were as follows (in thousands):
Operating expenses were $30.7 million for the year ended December 31, 2020, compared to $30.6 million for the year ended December 31, 2019, an increase of $0.1 million or 0.4%. The Company was able to keep operating expenses relatively flat after implementing ongoing cost-cutting measures prompted by the COVID-19
pandemic in the second quarter of 2020. These cost-cutting measures followed increased expenditures in the year ended December 31, 2019 as the Company invested in additional commercial resources prior to the onset of the COVID-19
pandemic.
Engineering and Product Development.
Engineering and product development costs for the year ended December 31, 2020 decreased by $1.2 million, or 12.5%, from $9.3 million in 2019 to $8.1 million in 2020.The decrease was largely due to decreased personnel as a result of the cost-cutting measures prompted by the COVID-19
pandemic.
Marketing and Sales.
Marketing and sales expense for the year ended December 31, 2020 decreased by $0.3 million, or 2.4%, from $13.6 million in 2019 to $13.3 million in 2020. The decrease in marketing and sales expense was due primarily to decreased personnel and trade show costs through the implementation of cost-cutting measures prompted by the COVID-19
pandemic. The decrease was offset by an increase in costs in the first three months of the year when the Company invested in additional commercial resources to help drive sales of new Detection products prior to the onset of the COVID-19
pandemic.
General and Administrative.
General and administrative expenses for the year ended December 31, 2020 increased by $1.7 million, or 22.5%, from $7.4 million in 2019 to $9.1 million in 2020. The increase was due primarily to an increase in stock compensation and legal expenses and was offset by cost-cutting measures prompted by the COVID-19
pandemic.
Amortization and Depreciation.
Amortization and depreciation expenses for the year ended December 31, 2020 decreased by $0.1 million, or 27.9%, from $0.3 million in 2019 to $0.2 million in 2020. The Company’s depreciable and amortizable assets have remained relatively consistent between 2020 and 2019.
Other Income, Tax and Expense (in thousands)
Interest Expense.
The Company recorded $0.5 million of interest expense in the year ended December 31, 2020 as compared with $0.8 million of interest expense in the year ended December 31, 2019.
Interest income.
Interest income of $0.1 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively, reflects income earned from our money market accounts.
Loss on fair value of debentures.
The Company recorded a loss of $7.5 million in 2020, which reflected an increase in the fair value of the unsecured subordinated convertible debentures (the “Convertible Debentures”) liability from approximately $13.7 million at December 31, 2019 to $21.2 million at February 21, 2020, the forced conversion date. Upon the consummation of the forced conversion, the Company issued 1,816,466 shares of common stock with a fair value of approximately $21.2 million, and the Convertible Debenture liability was reclassified to stockholders’ equity.
Tax expense.
The Company had tax expense of $38,000 for the year ended December 31, 2020 as compared to tax expense of $43,000 for the year ended December 31, 2019.
Discussion of Operating Results:
Year Ended December 31, 2019 compared to Year Ended December 31, 2018
Revenue.
Revenue for the year ended December 31, 2019 was $31.3 million compared with revenue of $25.6 million for the year ended December 31, 2018, an increase of $5.7 million, or 22.3%. Detection revenue increased by $5.4 million and Therapy revenue increased by $0.3 million.
The table below presents the components of revenue for 2019 and 2018 (in thousands):
Detection revenues increased 32.3%, or $5.4 million, from $16.9 million for the year ended December 31, 2018 to $22.3 million for the year ended December 31, 2019. Detection product revenue increased by $6.0 million and Detection service revenue decreased by $0.6 million. The $6.0 million increase in Detection product revenue was due primarily to a $2.1 million increase in OEM system sales and a $3.9 million increase in direct product sales. Detection service revenue decreased by $0.6 million, which was due primarily to a decrease of approximately $0.8 million primarily due to the conversion and upgrade cycle from Secondlook digital to Tomosynthesis 3D CAD offset by an increase of $0.2 million of service related to our 3D products.
Therapy revenue increased 3.0%, or $0.3 million, to $9.0 million for the year ended December 31, 2019 from $8.7 million in the year ended December 31, 2018. The increase in Therapy revenue was due to an increase in Therapy product revenue of $0.7 million offset by a decrease in Therapy service revenue of $0.4 million.
The increase in Therapy product revenue for the year ended December 31, 2019 was due primarily to an increase of $0.6 million related to sales outside of the United States (“OUS”) controller sales in 2019. The decrease in Therapy service revenue was due to reductions in source agreements and disposable applicators in the United States. Overall, the Therapy business increased by $1.1 million, or 67% OUS, offset by decreases in the U.S. business of $0.8 million, or 12%. We expect Therapy sales to continue to vary as the sales of controller units can represent a significant component of Therapy product revenue.
Gross Profit.
Gross profit was $24.2 million for the year ended December 31, 2019 compared to $19.4 million for the year ended December 31, 2018, an increase of $4.8 million, or 24.8%. Detection gross profit increased by $3.9 million from $14.7 million in the year ended December 31, 2018 to $18.6 million in the year ended December 31, 2019. Detection gross profit increased due primarily to the increase in Detection revenue. Detection gross profit as a percentage of Detection revenue decreased to 84% in the year ended December 31, 2019 from 87% in the prior year as a result of higher equipment costs to support processing higher resolution 3D images. Therapy gross profit increased by $0.9 million from $4.7 million in the year ended December 31, 2018 to $5.6 million in the year ended December 31, 2019. Therapy gross profit as a percentage of Therapy revenue improved to 62% in the year ended December 31, 2019 from 54% in the prior year. The improvement in Therapy gross profit as a percentage of revenue was due to the reduced cost of services and cost structure improvements related to the exit of the skin subscription business in January 2018.
Gross profit percent was 77.3% for the year ended December 31, 2019 compared to 75.8% for the year ended December 31, 2018. Gross profit will fluctuate due to the costs related to manufacturing, amortization and the impact of product mix in each segment. Cost of revenue and gross profit for 2019 and 2018 were as follows (in thousands):
Operating Expenses:
Operating expenses for 2019 and 2018 were as follows (in thousands):
Engineering and Product Development.
Engineering and product development costs for the year ended December 31, 2019 decreased by $0.2 million, or 1.9%, from $9.5 million in 2018 to $9.3 million in 2019. Detection engineering and product development costs increased by $0.2 million. The increase in Detection research and development expense was due to an increase in personnel and data collection costs offset by decreases in clinical expenses and consulting costs. Therapy engineering and product development costs decreased by approximately $0.4 million. The decrease in the Therapy segment was due primarily to a decrease in personnel expenses and clinical expenses. Engineering and product development costs support the Company’s strategy to build improved and larger datasets to train the Detection algorithm and support for clinical data in the Therapy segment.
Marketing and Sales.
Marketing and sales expense for the year ended December 31, 2019 increased by $4.9 million, or 56.8%, from $8.7 million in 2018 to $13.6 million in 2019. Detection marketing and sales expenses increased by $4.6 million. The increase in Detection marketing and sales expense was due to increases in personnel costs, commissions and tradeshow expenses. Therapy marketing and sales expenses increased approximately $0.3 million. The increase in Therapy marketing and sales expense was due primarily to an increase in personnel expenses, and travel. The Company made significant investments in the commercial infrastructure to support its strategy to grow top line revenue.
General and Administrative.
General and administrative expenses for the year ended December 31, 2019 decreased by $1.7 million, or 18.4%, from $9.1 million in 2018 to $7.4 million in 2019. The decrease in general and administrative expenses was due primarily to $1.0 million of severance costs incurred in the year ended December 31, 2018, legal settlement costs of $0.4 million and decreases in stock compensation and bad debt.
Amortization and Depreciation.
Amortization and depreciation expenses were consistent between 2019 and 2018 at $0.3 million. The Company’s depreciable and amortizable assets have remained relatively consistent between 2019 and 2018.
Other Income and Expense (in thousands)
Interest Expense.
The Company recorded $0.8 million of interest expense in 2019 as compared with $0.5 million of interest expense during the year ended December 31, 2018. In December 2018, the Company issued the unsecured subordinated convertible debentures (the “Convertible Debentures”) and as a result, interest expense increased.
Interest income.
Interest income of $0.3 million and $0.1 million for the years ended December 31, 2019 and 2018, respectively, reflects income earned from our money market accounts.
Financing costs.
The Company recorded $0.5 million of expenses in 2018 in connection with the issuance of the Convertible Debentures in December 2018.
Loss on fair value of debentures.
The Company recorded a loss of $6.7 million in 2019, which reflects an increase in the fair value of the Convertible Debentures liability from approximately $7.0 million at December 31, 2018 to $13.6 million at December 31, 2019. The Company expects the fair value of the Convertible Debentures to change from quarter to quarter as changes in the underlying stock price of the Company drive changes in the fair value of these instruments.
Tax expense.
The Company had tax expense of $43,000 for the year ended December 31, 2019 as compared to tax expense of $42,000 for the year ended December 31, 2018. Tax expense for both the years ended December 31, 2019 and 2018 was due primarily to state non-income
and franchise-based taxes.
Segment Analysis
The Company operates in and reports results for two segments: Detection and Therapy. Segment operating income (loss) includes cost of sales, engineering and product development, marketing and sales, and depreciation and amortization for the respective segment. A summary of Segment revenues, segment gross profit and segment operating income (loss) for the fiscal years ended December 31, 2020, 2019, and 2018 are below (in thousands):
Detection gross profit decreased to approximately $17.9 million, or 81% of revenue, for the year ended December 31, 2020 from $18.6 million, or 84% of revenue, for the year ended December 31, 2019. The decrease in Detection gross profit was due primarily to the decrease in Detection revenue. Detection segment operating income for the year ended December 31, 2020 increased by $0.1 million to $2.7 million from $2.6 million for the year ended December 31, 2019. The increase in Detection segment operating income was due primarily to a decrease in operating expenses. Detection operating expenses decreased by $1.0 million to $15.1 million for the year ended December 31, 2020 from $16.1 million for the year ended December 31, 2019.
Detection gross profit increased to approximately $18.6 million, or 83% of revenue, for the year ended December 31, 2019 from $14.7 million, or 87% of revenue, for the year ended December 31, 2018. The increase in Detection gross profit was due primarily to the increase in Detection revenue. Detection segment operating income for the year ended December 31, 2019 decreased by $0.8 million to $2.6 million from $3.4 million for the year ended December 31, 2018. The decrease in Detection segment operating income for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was due primarily to increased operating expenses for the year ended December 31, 2019 compared to the year ended December 31, 2018. Detection operating expenses increased by $4.8 million to $16.1 million for the year ended December 31, 2019 compared to $11.3 million for the year ended December 31, 2018, reflecting increased research and development and increased marketing and sales expenses, primarily due to clinical development costs, personnel related expenses and consulting costs.
Therapy gross profit decreased by approximately $2.1 million to $3.5 million, or 45% of revenue, for the year ended December 31, 2020 from approximately $5.6 million or 62% of revenue for the year ended December 31, 2019. The decrease in Therapy gross profit was partly due to the $1.3 million reduction in revenue and increased costs incurred prior to the implementation of cost-cutting measures in response to the COVID-19
pandemic. Therapy operating expenses decreased by $0.5 million to $6.6 million for the year ended December 31, 2020 from $7.1 million for the year ended December 31, 2019. Therapy segment operating loss increased to $3.0 million for the year ended December 31, 2020 from $1.5 million for the year ended December 31, 2019. The increase in Therapy segment operating loss was due primarily to the decreased revenue of $1.3 million.
Therapy gross profit increased by approximately $0.9 million to $5.6 million, or 62% of revenue, for the year ended December 31, 2019 from approximately $4.7 million or 54% of revenue for the year ended December 31, 2018. The increase in Therapy gross profit was due to decreased manufacturing costs of $0.5 million and increased revenue of $0.3 million. Therapy operating expenses for both the years ended December 31, 2019 and 2018 were approximately $7.1 million, respectively. Therapy segment operating loss decreased to a loss of $1.5 million for the year ended December 31, 2019 from a loss of $2.4 million for the year ended December 31, 2018. The decrease in loss was due primarily to the decreased manufacturing costs of $0.5 million and increased revenue of $0.3 million.
Liquidity and Capital Resources
The Company believes that its cash and cash equivalents balance of $27.2 million as of December 31, 2020, and projected cash balances are sufficient to sustain operations through at least the next 12 months. The Company’s ability to generate cash adequate to meet its future capital requirements will depend primarily on operating cash flow. If sales or cash collections are reduced from current expectations, or if expenses and cash requirements are increased, the Company may require additional financing, although there are no guarantees that the Company will be able to obtain the financing if necessary. The Company will continue to closely monitor its liquidity and the capital and credit markets.
The Company’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 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 $27.2 million and anticipated revenue and cash collections. However, the resurgence of the COVID-19
pandemic could affect our liquidity.
On April 27, 2020, the Company issued 1,562,500 shares of common stock to several institutional investors at a price of $8.00 per share in a registered direct offering. The gross proceeds of the offering were approximately $12.5 million, and the Company received net proceeds of approximately $12.3 million. The Company 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. On December 17, 2020 the company sold 470,704 shares of common stock under the ATM facility. The gross proceeds were approximately $6.6 million, and the Company received net proceeds of approximately $6.1 million. As of December 31, 2020, $18.4 million in capacity remains under the ATM facility. On March 2, 2021, the Company terminated the ATM.
The Company had net working capital of $25.6 million at December 31, 2020. The ratio of current assets to current liabilities at December 31, 2020 and 2019 was 2.53 and 1.55, respectively.
Net cash used for operating activities for the year ended December 31, 2020 was $7.0 million, compared to $7.1 million for 2019.
The net cash used for investing activities for the year ended December 31, 2020 was $0.5 million compared to $0.3 million for the year ended December 31, 2019. The cash used for investing activities in both 2020 and 2019 was due primarily to purchases of fixed assets.
Net cash provided by financing activities for the year ended December 31, 2020 was $19.3 million, which was primarily related to the registered direct offering resulting in net proceeds of $12.3 million and the sale of stock related to the ATM resulting in net proceeds of $6.1 million. Net cash provided by financing activities for the year ended December 31, 2019 was $10.5 million which was primarily related to $9.4 million in net proceeds from an issuance of common stock and $1.4 million received from the exercise of employee stock options.
The CARES Act allowed employers to defer the depot and payment of employers share of Social Security payroll taxes that would otherwise have been owed from the date of enactment of the legislation through December 31, 2020. The legislation requires that the deferred taxes be paid over the two-year period, with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. As of December 31, 2020, the Company has recorded the $0.4 million payment deferral within “Accrued and other benefits.”
On March 2, 2021, the Company entered into an underwriting agreement with Guggenheim Securities, LLC, as representative of the several underwriters thereto, in connection with an underwritten public offering of 1,393,738 shares of the Company’s common stock at an offering price of $18.00 per share. The Offering closed on March 5, 2021 and resulted in net proceeds of approximately $23.2 million to the Company.
Lease Obligations:
Operating Leases:
As of December 31, 2020, the Company had three lease obligations related to its facilities.
The Company’s executive offices are leased pursuant to a five-year lease that commenced on December 15, 2006, consisting of approximately 11,000 square feet of office space located at 98 Spit Brook Road, Suite 100 in Nashua, New Hampshire. As amended, the lease expires in February 2023 and the annual base rent is $214,812. Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses and obtain insurance for the facility.
The Company leases a facility consisting of approximately 24,350 square feet of office, manufacturing and warehousing space located at 101 Nicholson Lane, San Jose, CA. The operating lease commenced September 2012. As amended, the lease expires in March 2023, with annual payments of $628,260 until March 2021, $645,792 from April 2021 to March 2022 and $666,240 from April 2022 to March 2023. Additionally, the Company is required to pay its proportionate share of the building and real estate tax expenses and obtain insurance for the facility.
In addition to the foregoing leases relating to its principal properties, the Company also has a lease for an additional facility in Nashua, New Hampshire used for product repairs, manufacturing and warehousing.
Finance Leases:
In August 2017, the Company assumed an equipment lease obligation with payments, including interest payable, totaling $50,000. The lease was determined to be a capital lease and, accordingly, the equipment was capitalized and a liability of $42,000 was recorded. The equipment is being depreciated over the expected life of 3 years. The lease term expired in August of 2020.
Settlement Obligations:
As a result of the acquisition of Xoft, the Company recorded a royalty obligation pursuant to a settlement agreement entered into between Xoft and Hologic, in August 2007. Xoft received a nonexclusive, irrevocable, perpetual, worldwide license, including the right to sublicense certain Hologic patents, and a non-compete
covenant as well as an agreement not to seek further damages with respect to the alleged patent violations. In return the Company had a remaining obligation to pay a minimum annual royalty payment of $250,000 payable through 2016. In addition to the minimum annual royalty payments, the litigation settlement agreement with Hologic also provided for payment of royalties based upon a specified percentage of future net sales on any products that practice the licensed rights. The estimated fair value of the patent license and non-compete
covenant is $100,000 and was amortized over the estimated useful life of approximately four years. As of December 31, 2020, the remaining liability for minimum royalty obligations totaling $0.1 million is recorded within accrued expenses and accounts payable.
Notes Payable:
On March 30, 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Western Alliance Bank (the “Bank”) that provided an initial term loan (“Term Loan”) facility of $7.0 million and a $5.0 million revolving line of credit.
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 December 31, 2020.
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 March 1, 2022 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 December 31, 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.
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 and there was no outstanding amount as of December 31, 2020.
Loan and Security Agreement - Silicon Valley Bank
On August 7, 2017, the Company entered into a Loan and Security Agreement with Silicon Valley Bank, which was subsequently amended several times (as amended, the “SVB Loan Agreement”). The SVB Loan Agreement provided an initial term loan facility of $6.0 million and a $4.0 million revolving line of credit.
On March 30, 2020, the Company elected to repay all outstanding obligations (including accrued interest) and retire the SVB Loan Agreement. The Company accounted for this repayment and retirement as an extinguishment of the SVB Loan Agreement. In addition to the outstanding principal and accrued interest, the Company was required to pay the $510,000 final payment, a termination fee of $114,000 and other costs totaling $10,000. The Company also wrote off unamortized original closing costs as of the extinguishment date. The Company recorded a loss on extinguishment of approximately $341,000 related to the repayment and retirement of the SVB Loan Agreement. The loss on extinguishment was composed of approximately $185,000 for the unaccrued final payment, the $114,000 termination fee, and $42,000 of unamortized and other closing costs.
Convertible Debentures
On December 20, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain institutional and accredited investors (the “Investors”), including, but not limited to, all directors and executive officers of the Company at the time, pursuant to which the Investors purchased Convertible Debentures with an aggregate principal amount of approximately $7.0 million in a private placement.
On February 21, 2020 (the “Conversion Date”), the conditions permitting a forced conversion were met, and the Company elected to exercise its forced conversion right under the terms of the Convertible Debentures.
As a result of this election, all of the outstanding Convertible Debentures were converted, at a conversion price of $4.00 per share, into 1,742,500 shares of the Company’s common stock. In accordance with the make-whole provisions in the Convertible Debentures, the Company also issued an additional 76,966 shares of its common stock. The make-whole amount represented the total interest which would have accrued through the maturity date of the Convertible Debentures, less the amounts previously paid, totaling $697,000. The conversion prices related to the make-whole amount were dependent on whether the Investors were related parties or unrelated third parties.
Accounting Considerations and Fair Value Measurements Related to the Convertible Debentures
The Company had previously elected to make a one-time, irrevocable
election to utilize the fair value option to account for the Convertible Debentures as a single hybrid instrument at its fair value, with changes in fair value from period to period being recorded either in current earnings, or as an element of other comprehensive income (loss), for the portion of the change in fair value determined to relate to the Company’s own credit risk. The Company believed that the election of the fair value option allowed for a more meaningful representation of the total fair value of its obligation under the Convertible Debentures and allowed for a better understanding of how changes in the external market environment and valuation assumptions impact such fair value.
As of the December 31, 2019 valuation and the prior measurement dates, the Company utilized a Monte Carlo simulation model to estimate the fair value of the Convertible Debentures. The simulation model was designed to capture the potential settlement features of the Convertible Debentures, in conjunction with simulated changes in the Company’s stock price and the probability of certain events occurring. The simulation utilized 100,000 trials or simulations to determine the estimated fair value.
The simulation utilized the assumptions that if the Company was able to exercise its forced conversion right (if the requirements to do so were met), that it would do so in 100% of such scenarios. Additionally, if an event of default occurred during the simulated trial (based on the Company’s probability of default), the Investors would opt to redeem the Convertible Debentures in 100% of such scenarios. If neither event occurred during a simulated trial, the simulation assumed that the Investor would hold the Convertible Debentures until the maturity date. The value of the cash flows associated with each potential settlement were discounted to present value in each trial based on either the risk-free rate (for an equity settlement) or the effective discount rate (for a redemption or cash settlement).
The Company also recorded a final adjustment to the Convertible Debentures based on their fair value on the Conversion Date, just prior to the forced conversion being completed. Given that the Company’s prior simulation model included the assumption that the Company would elect to force conversion in 100% of scenarios when the requirements were met, the final valuation was based on the actual results of the forced conversion. As such, the Company based the final fair value adjustment of approximately $7.5 million to the Convertible Debentures just prior to conversion on the number of shares of common stock that were issued to the Investors upon conversion and the fair value of the Company’s common stock as of the Conversion Date.
Other Commitments
Other Commitments include non-cancelable
purchase orders with key suppliers executed in the normal course of business.
Effect of New Accounting Pronouncements
See note 1 (t) in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Item
7A.
Item
7A.
Quantitative and Qualitative Disclosures about Market Risk.
We believe we are not subject to material foreign currency exchange rate fluctuations, as most of our sales and expenses are domestic and therefore are denominated in the U.S. dollar. We do not hold derivative securities and have not entered into contracts embedded with derivative instruments, such as foreign currency and interest rate swaps, options, forwards, futures, collars, and warrants, either to hedge existing risks or for speculative purposes.
Item
8.
Item
8.
Financial Statements and Supplementary Data.
See Financial Statements and Schedule attached hereto.
Item
9.
Item
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item
9A.
Item
9A.
Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K.
Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Exchange Act) were effective as of December 31, 2020.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations to enhance, where necessary its procedures and controls.
(b) Management’s Annual Report on Internal Control Over Financial Reporting.
The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, is responsible for the preparation and integrity of the Company’s Consolidated Financial Statements, establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f))
for the Company and all related information appearing in this Annual Report on Form 10-K.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on its assessment, our Chief Executive Officer and our Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 2020.
(c) Changes in Internal Control Over Financial Reporting
.
The Company’s principal executive officer and principal financial officer conducted an evaluation of the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f))
to determine whether any changes in internal control over financial reporting occurred during the quarter ended December 31, 2020, that have materially affected or which are reasonably likely to materially affect internal control over financial reporting. Based on that evaluation there has been no such change during such period.
Item 9B.
Item 9B.
Other Information.
Not applicable.
PART III
Item
.
Directors, Executive Officers and Corporate Governance
.
The information required by this Item 10