ICAD INC - Quarter Report: 2023 September (Form 10-Q)

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except for share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except for per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except shares)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

iCAD, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

iCAD, INC. AND SUBSIDIARIES

(In thousands, except for share and per share data or as noted)

Notes to Condensed Consolidated Financial Statements:

Note 1 – Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of iCAD, Inc. and its subsidiaries (together “iCAD” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), which requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. It is reasonably possible that changes may occur in the near term that would affect management’s estimates with respect to assets and liabilities. In the opinion of the Company’s management, these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position of the Company at September 30, 2023, the results of operations of the Company for the three and nine months ended September 30, 2023 and 2022, cash flows of the Company for the nine months ended September 30, 2023 and 2022, and stockholders’ equity of the Company for the three and nine months ended September 30, 2023 and 2022.

As discussed in Note 2, the Company completed the sale of its Xoft business line on October 23, 2023. The applicable assets and liabilities of the Xoft business have been classified as held for sale in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, and the results of its operations for all periods presented are reflected as discontinued operations in the Condensed Consolidated Statements of Operations. Unless otherwise indicated, all disclosures and amounts in the Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations.

Although the Company believes that the disclosures made in these interim financial statements are adequate to make the information presented not misleading, certain information normally included in the footnotes prepared in accordance with US GAAP has been omitted as permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”). The accompanying interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 31, 2023. The results for the three and nine months ended September 30, 2023, are not necessarily indicative of the results that may be expected for fiscal year ending December 31, 2023, or any interim or any future period.

Principles of Consolidation and Business Segments

The condensed consolidated financial statements include the accounts of iCAD, Inc. and its wholly owned subsidiaries: Xoft, Inc., Xoft Solutions, LLC, iCAD France, LLC and iCAD Italy, LLC. All material inter-company transactions and balances have been eliminated in consolidation.

The Company previously reported the results of two segments: Cancer Detection (“Detection”) and Cancer Therapy (“Therapy”). The Detection segment consists of advanced image analysis and workflow products for the detection of cancer. The Therapy segment consists of radiation therapy (“Xoft”, “Axxent”) products for the treatment of certain cancers.  As discussed in Note 2, the Company completed the sale of its Xoft business line on October 23, 2023. The applicable assets and liabilities of the Xoft business have been classified as held for sale in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, and the results of its operations for all periods presented are reflected as discontinued operations in the Condensed Consolidated Statements of Operations. Unless otherwise indicated, all disclosures and amounts in the Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations, or its Detection segment.

Assets and Liabilities Held for Sale

The Company classifies its assets and liabilities as held for sale when management commits to a plan to sell the assets, the assets are ready for immediate sale in their present condition, an active program to locate buyers has been initiated, the sale of the assets is probable and expected to be completed within one year, the assets are marketed at reasonable prices in relation to their fair value and it is unlikely that significant changes will be made to the plan to sell the assets. The Company measures the value of its assets and liabilities held for sale at the lower of the carrying amount or fair value, less cost to sell.

Assets and liabilities held for sale in the Condensed Consolidated Balance Sheets pertain to applicable assets and liabilities of the Xoft business. See Note 2 for additional information.

Risk and Uncertainty

On  March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, the United States and most countries of the world imposed some level of unprecedented restrictions such as travel bans and business closures which caused substantial reductions in economic activity. As a provider of devices and services to the health care industry, the Company believes its operations have been materially affected in all periods presented. While the worst of the disruptions appear to have subsided as of June 30, 2023, the Company continues to be impacted by slowness in the overall economic recovery. The Company’s expected results for future periods could reflect a continuing negative impact from the COVID-19 pandemic for similar or additional reasons.

In late  February 2022, Russian military forces launched significant military action against Ukraine. In early October 2023, an armed conflict between Hamas-led Palestinian militant groups and Israeli military forces broke out with a Hamas attack on southern Israel, to which Israeli military forces retaliated. Sustained conflict and disruption in the regions has continued and is likely to continue. Economic, civil, military and political uncertainty  may arise or increase in regions where the Company operates or derives revenue. Further, countries from which the Company derives revenue  may experience military action and/or civil and political unrest;  may be subject to government export controls, economic sanctions, embargoes, or trade restrictions; and experience currency, inflation, and interest rate uncertainties. While the impact to the Company has been limited to date, it is not possible to predict the potential outcome should the conflict expand and/or additional sanctions be imposed. For the three and nine months ended September 30, 2023, approximately 16% and 14%, respectively, of the Company's revenue was derived from customers located outside the United States.

Recently Adopted Accounting Pronouncements

In  June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)” (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaced the then-existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. These changes will result in earlier recognition of credit losses. In  November 2019, the FASB elected to defer the adoption date of ASU 2016-13 for public business entities that meet the definition of a smaller reporting company to fiscal years beginning after  December 15, 2022.  Early adoption of the guidance in ASU 2016-13 was permitted.  The Company adopted ASU 2016-13 effective  January 1, 2023.  Adoption caused the Company to modify its approach to estimating its allowance for potentially uncollectable accounts receivable. Specifically, the Company began applying an expected credit loss model that uses historical loss rates of its accounts receivable for the previous twelve months as well as expectations about the future where the Company has been able to develop forecasts to support its estimates.  Adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial statements.

Note 2 – Discontinued Operations

On October 22, 2023, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”), by and among (i) the Company, Xoft Solutions, LLC, a Delaware limited liability company, and Xoft, Inc., a Delaware corporation, each a wholly owned subsidiary of the Company (collectively with the Company, the “Sellers” and each, a “Seller”), and (ii) Elekta Inc., a Georgia corporation, and Nucletron Operations B.V., a company organized under the laws of the Netherlands (together, “Buyers” and each a “Buyer”), pursuant to which the Company agreed to transfer to the Buyers substantially all of the assets and liabilities primarily related to the Company’s Xoft business lines (the “Business”), including with respect to employees, contracts, intellectual property and inventory, for a cash payment of approximately $5.76 million dollars from the Buyers to the Company payable no later than November 6, 2023, and the assumption by Buyers of all liabilities relating to the Business (the “Transaction”). This payment is guaranteed by Elekta AB, a company organized under the laws of Sweden, the ultimate parent company of the Buyers. 

The closing of the Transaction occurred simultaneously with the execution of the Purchase Agreement.

In connection with the Transaction, the parties entered into a transition services agreement pursuant to which the Company will provide certain migration and transition services to facilitate an orderly transition of the operation of the Business to the Buyers during the 5-month period following consummation of the Transaction, extendable at the option of the parties.

The Purchase Agreement contains certain representations, warranties, covenants and indemnification provisions, including for breaches of covenants and for losses resulting from the Company’s liabilities specifically excluded from the Transaction.

The Business, which had previously been presented as a separate reporting segment, meets the criteria for being reported as a discontinued operation and has been segregated from continuing operations. The following table summarizes the results from discontinued operations:

Total operating expenses presented in the table above exclude amounts that had previously been allocated to the Business for certain shared marketing expenses.  The previously allocated amounts were less than $0.1 million and $0.2 million for the three months ended September 30, 2023 and 2022, respectively.  The previously allocated amounts were $0.3 million and $0.5 million for the nine months ended September 30, 2023 and 2022, respectively.  The previously allocated expenses are included in the Marketing and sales line for all periods presented in the Condensed Consolidated Statements of Operations.

The following table summarizes the assets and liabilities held for sale in the Company's Consolidated Balance Sheets:

The Business is included in the Company's Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023.  Estimated cash provided by the Business during the nine months ended September 30, 2023 was approximately $0.1 million given the previously announced furlough and limited investment during that time.  Estimated cash used by the Business during the nine months ended September 30, 2022 was approximately $3 million, primarily from operating activities.   

Note 3 – Fair Value Measurements

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

Fair Value Measurements as of September 30, 2023

Fair Value Measurements as of December 31, 2022

There were no Level 2 or 3 instruments measured at fair value as of  September 30, 2023 or December 31, 2022.

Note 4 - Revenue

Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration 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.

Disaggregation of Revenue

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

Products. Product revenue consists of sales of cancer detection systems and perpetual licenses. The Company transfers control and recognizes a sale when the product is shipped from the manufacturing or warehousing facility to the customer.

Service. The Company sells service contracts in which the Company provides professional services including product installations, maintenance, training and service repairs. The service contracts range from 12 months to 48 months. The Company typically receives payment at the inception of the contract and recognizes revenue on a straight-line basis over the term of the agreement.

As discussed in Note 2, the Company completed the sale of its Xoft (Therapy) business line on October 23, 2023.

Contract Balances

Contract liabilities are a component of deferred revenue, current contract assets are a component of prepaid and other assets and non-current contract assets are a component of other assets. The following table provides information about receivables, current and non-current contract assets, and contract liabilities from contracts with customers.

Contract balances

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

The Company records net contract assets or contract liabilities on a contract-by-contract basis. The Company records a contract asset for unbilled revenue when the Company’s performance is in excess of amounts billed or billable. The Company classifies the net contract asset as either a current or non-current based on the expected timing of the Company’s right to bill under the terms of the contract. The current contract asset balance primarily relates to the net unbilled revenue balances with two significant customers, which the Company expects to be able to bill for within one year. The non-current contract asset balance consists of net unbilled revenue balances with one customer which the Company expects to be able to bill for in more than one year.

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

As of September 30, 2023, the aggregate amount of unsatisfied, or partially satisfied, performance obligations from contracts with customers was $4.2 million. The Company expects to recognize approximately $3.3 million of its remaining performance obligations as revenue over the next 12 months. The remainder of the balance is expected to be recognized over the next two to three years.

Note 5– Net Loss per Common Share

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

A summary of the Company’s calculation of loss per share is as follows (in 000s, except for Net loss per share):

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

Note 6 – Inventories

The Company values its inventory at the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead and is determined using the first-in, first-out (FIFO) method. On a quarterly basis, management reviews inventory quantities on hand and analyzes the provision for excess and obsolete inventory based primarily on product expiration dating and estimated sales forecast, which is based on sales history and anticipated future demand. Inventory consisted of the following and includes an inventory reserve of $45,000 at both September 30, 2023 and December 31, 2022.

Note 7 – Goodwill

The Company tests goodwill for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of the reporting unit is less than its carrying value. Factors the Company considers important, which could trigger an impairment of such asset, include the following:

•         significant underperformance relative to historical or projected future operating results;

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

•         significant negative industry or economic trends;

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

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

The Company considered indicators of impairment, and there were no triggering events identified, no indication of impairment of the Company’s goodwill and no impairment charges recorded during the three months ended September 30, 2023 or 2022.

Note 8 – Long-lived Assets

The Company assesses long-lived assets for impairment if events and circumstances indicate it is more likely than not that the fair value of the asset group is less than its carrying value.

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

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

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

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

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

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

The Company determined there were no such triggering events in the period ended September 30, 2023.

Note 9 – Lease Commitments

In accordance with ASC Topic 842, "Leases" ("ASC 842"), the Company determines if an arrangement contains a lease at inception. A lease is an operating or financing contract, or part of a contract, that conveys the right to control the use of an identified tangible asset for a period of time in exchange for consideration.

At lease inception, the Company recognizes a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as for lease incentives. In determining the present value of the lease payments, the Company calculates an incremental borrowing rate, which is determined by estimating the Company’s applicable, fully collateralized borrowing rate, with adjustment as appropriate for lease term. The lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an extension option if the Company is reasonably certain to exercise that option.

Assumptions made by the Company at the commencement date of each lease are re-evaluated upon occurrence of certain events, including a lease modification. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease.

Right-of-use assets and obligations for leases with an initial term of 12 months or less are considered short term and are a) not recognized in the consolidated balance sheet and b) recognized as an expense on a straight-line basis over the lease term. The Company does not sublease any of its leased assets to third parties and the Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. The Company has lessor agreements that contain lease and non-lease components, but the Company is accounting for the complete agreement under ASC 606 after determining that the non-lease component is the predominant component of these agreements.

ASC 842 includes a number of reassessment and remeasurement requirements for lessees based on certain triggering events or conditions. There were no impairment indicators identified during the three and nine months ended September 30, 2023 that would require impairment testing of the Company’s right-of-use assets.

Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as common area maintenance services. The Company has elected to separate the accounting for lease components and non-lease components for real estate and equipment leases.

Components of Leases:

The Company has leases for office space and office equipment. The leases expire at various dates through 2028.

Other information related to leases was as follows:

Maturity of the Company’s lease liabilities as of September 30, 2023 was as follows:

Note 10– Stockholders Equity

Stock-Based Compensation

The Company granted options to purchase 562,774 and 1,103,916 shares of the Company’s stock during the three and nine months ended September 30, 2023 , respectively. The full amount of options were granted in the first nine months of 2023.

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

During the three months ended March 31, 2023, the Company recorded incremental stock-based compensation of approximately $0.23 million as a result of modifications of certain stock option awards.  The modifications related to extending the contractual life of certain stock options by five years for four grantees whose awards were scheduled to expire during 2023.  In addition, the amount of time to exercise vested stock options upon termination for one grantee was extended from 90 days to 24 months.   

As of September 30, 2023, there was approximately $1.2 million of total unrecognized compensation cost related to unvested options. That cost is expected to be recognized over a weighted average period of 1.70 years.  

Options granted under the Company’s stock incentive plans were valued utilizing the Black-Scholes model using the following assumptions and had the following fair values:

* The Company granted no options during the three months ended September 30, 2022.

The Company’s 2023 and 2022 average expected volatility and average expected life is based on the average of the Company’s historical information. The risk-free rate is based on the rate of U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of option grants. The Company has paid no dividends on its common stock in the past and does not anticipate paying any dividends in the future.

The Company did not grant any shares of restricted stock during the three-months ended September 30, 2023 or 2022.  The Company’s restricted stock awards typically vest in either one year or three equal annual installments with the first installment vesting one year from the grant date. The grant date fair value for restricted stock awards is based on the quoted market value of Company stock on the grant date.

A summary of stock option activity for all stock option plans for the period ended September 30, 2023 is as follows:

Employee Stock Purchase Plan

In December 2019, the Company’s Board of Directors adopted, and the stockholders approved the 2019 Employee Stock Purchase Plan (“ESPP”), effective January 1, 2020. The ESPP provides for the issuance of up 950,000 shares of common stock, subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The ESPP may be terminated or amended by the Board of Directors at any time. Certain amendments to the ESPP require stockholder approval.  In October 2022, the Company suspended the ESPP such that the accumulation period from October 1, 2022 through December 31, 2022 and beyond will not occur.

Prior to the Company's suspension of the ESPP, any eligible employee could enroll as of the beginning of a respective quarterly accumulation period. Employees who participated in the ESPP were able to purchase shares by authorizing payroll deductions of up to 15% of their base compensation during an accumulation period. Unless the participating employee withdrew from participation, accumulated payroll deductions were used to purchase shares of common stock on the last business day of the accumulation period (the “Purchase Date”) at a price equal to 85% of the lower of the fair market value on (i) the Purchase Date or (ii) the first day of such accumulation period. Under applicable tax rules, no employee was able to purchase more than $25,000 worth of common stock, valued at the start of the purchase period, under the ESPP in any calendar year.  Substantially all of the Company’s employees whose customary employment is for more than 20 hours a week are eligible to participate in the ESPP. Any employee who owns 5% or more of the voting power or value of the Company’s shares of common stock is not eligible to purchase shares under the ESPP.

The Company issued 8,683 and 18,064 shares under the ESPP in the three and nine months ended September 30, 2022, respectively. The Company recorded approximately $12,000 and $22,000 of stock-based compensation expense pursuant to ESPP for the three and nine months ended September 30, 2022, respectively. 

Note 11– Income Taxes

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income in each tax jurisdiction in which the Company operates and the development of tax planning strategies during the year. As such, there can be significant volatility in interim tax provisions. 

Income tax expense was approximately $4,000 and approximately $13,000 for the three and nine months ended September 30, 2023, respectively. The effective tax rates for the three and nine months ended September 30, 2023 and 2022 were less than 1% in each period. The difference between the Company’s effective tax rates in 2023 and 2022 compared to the U.S. statutory tax rate of 21% is primarily due to changes in valuation allowances associated with the Company’s assessment of the likelihood of the recoverability of deferred tax assets. The Company has valuation allowances against substantially all of its net operating loss carryforwards and tax credit carryforwards.

Note 12 – Commitments and Contingencies

Other Commitments

The Company is obligated to pay approximately $1.1 million for firm purchase obligations to suppliers for future product and service deliverables and $0.4 million for minimum royalty obligations.

Litigation

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. 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. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450, “Contingencies.” Legal costs are expensed as incurred.

Note 13 – Restructuring

On March 20, 2023, the Company committed to a restructuring plan intended to support its long-term strategic goals and reduce operating expenses by further aligning its cost structure to focus on areas the Company believes are more likely to generate the best long-term results, in light of current industry and macroeconomic environments (the “RIF”). The Company reduced its workforce by approximately 28%, decreasing its headcount by approximately 23 employees, predominantly from the Company’s detection business unit. Xoft, Inc., a wholly-owned subsidiary of the Company, furloughed 12 of its employees, or approximately 50% of its workforce. As discussed in Note 2, the Company completed the sale of its Xoft business line on October 23, 2023.   

The Company has incurred charges of $0.2 million related to the RIF, all of which were recognized during the nine months ended September 30, 2023.  All of the incurred charges are one-time, cash expenses and were recorded primarily in Cost of revenue and Marketing and sales in the Company's Condensed Consolidated Statements of Operations.  While the Company does not expect to record additional charges related to the RIF, the amounts are subject to change until finalized and the Company may incur additional costs during the remainder of 2023.  

The Company's accrual for restructuring charges for the nine months ended September 30, 2023 was follows (in thousands):

Note 14 – Issuances of Common Stock

As previously disclosed, on August 11, 2023, the Company entered into an at-the-market issuance sales agreement (the “Sales Agreement”) with Craig-Hallum Capital Group LLC whereby the Company, at its discretion, may issue and sell up to $25 million of shares of the Company's common stock, from time to time, by any method deemed to be an “at-the-market” offering, as defined in Rule 415 of the Securities Act, or any method specified in the Sales Agreement.  During the three months ended September 30, 2023, the Company sold 958,248 shares of its common stock at a weighted average price of $2.26 per share resulting in cash proceeds of $1.8 million, net of issuance costs, pursuant to the Sales Agreement.  In addition, subsequent to September 30, 2023, the Company has sold 37,266 shares of its common stock at a weighted average price of $1.46 per share resulting in cash proceeds of approximately $53,000, net of issuance costs, pursuant to the Sales Agreement.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the accompanying notes included in Part I, Item 1 of this Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 31, 2023.  Some of the information contained in this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. As a result of many factors, including those factors set forth in the section titled “Risk Factors,” our actual results could differ materially from those discussed in or implied by these forward-looking statements. Please also refer to the section titled “Special Note Regarding Forward Looking Statements.”

Special Note Regarding Forward Looking Statements

Certain information included in this Item 2 and elsewhere in this Form 10-Q that are not historical facts contain statements that may be deemed “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements involve or may involve a number of known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward looking statements. These risks and uncertainties include, but are not limited to the following: the continuing impact of the COVID-19 pandemic, the outcomes of our commercial and strategic arrangements (including our respective arrangements with Google Health and Radiology Partners), the continuing impact of military and political conflict in Eastern Europe and the Middle East, the ability to achieve business and strategic objectives, the risks of uncertainty of patent protection, the impact of supply and manufacturing constraints or difficulties, uncertainty of future sales levels, protection of patents and other proprietary rights, the impact of supply and manufacturing constraints or difficulties, product market acceptance, possible technological obsolescence of products, increased competition, litigation and/or government regulation, changes in Medicare reimbursement policies, risks relating to potential future debt obligations, competitive factors, the effects of a decline in the economy or markets served by the Company, and other risks detailed in this report and in the Company’s other filings with the United States Securities and Exchange Commission (the “SEC”). The words “believe”, “plan”, “intend”, “expect”, “estimate”, “anticipate”, “likely”, “seek”, “should”, “would”, “could” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date the statement was made. Except as required by law, we undertake no obligation to update any such forward-looking statements to reflect events or circumstances after the date of such statements.

Unless the context otherwise requires, the terms “iCAD”, the “Company”, “we”, “our”, “registrant”, and “us” mean iCAD, Inc. and its consolidated subsidiaries.

Results of Operations

Overview

iCAD, Inc. is a global medical technology company providing innovative cancer detection. Prior to the third quarter of 2023, the Company had two reporting segments: Detection and Therapy.  The Company completed the sale of its Xoft (Therapy) business line on October 23, 2023. The applicable assets and liabilities of the Xoft business have been classified as held for sale in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, and the results of its operations for all periods presented are reflected as discontinued operations in the Condensed Consolidated Statements of Income. Unless otherwise indicated, all disclosures and amounts in the Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations.  Accordingly, the Company now has only one reporting segment, Detection.

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 solutions suite 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) that focus on cancer detection, breast density assessment, and short-term cancer risk estimation.

The Company’s headquarters is located in Nashua, New Hampshire, with a manufacturing facility in New Hampshire and an office in Lyon, France.

COVID-19 Impact

On March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, the United States and most countries of the world imposed some level of unprecedented restrictions such as travel bans and business closures which caused substantial reductions in economic activity. As a provider of devices and services to the health care industry, we believe our operations have been materially affected in all periods presented. While the worst of the disruptions seem to have subsided as of September 30, 2023, and the pandemic emergency has been deemed to be over, we continue dealing with the impact of slowness in the overall economic recovery. Our expected results for the year ended December 31, 2023, including any interim or future periods, could reflect a continuing negative impact from continuing negative economic conditions. 

We believe that our current liquidity and capital resources are sufficient to sustain operations through at least the next 12 months, primarily due to cash on hand of $19.0 million at September 30, 2023 and anticipated revenue and cash collections as well as cost savings actions taken.

Global Conflicts Impact

In late February 2022, Russian military forces launched significant military action against Ukraine. In early October 2023, an armed conflict between Hamas-led Palestinian militant groups and Israeli military forces broke out with a Hamas attack on southern Israel, to which Israeli military forces retaliated. Sustained conflict and disruption in the regions has continued and is likely to continue. Economic, civil, military and political uncertainty may arise or increase in regions where the Company operates or derives revenue. Further, countries from which we derive revenue may experience military action and/or civil and political unrest; may be subject to government export controls, economic sanctions, embargoes, or trade restrictions; and experience currency, inflation, and interest rate uncertainties. While the impact to us has been limited to date, it is not possible to predict the potential outcome should the conflict expand and/or additional sanctions be imposed. For the three and nine months ended September 30, 2023, approximately 16% and 15%, respectively, of the Company's revenue was derived from customers located outside the United States.  No individual country outside of the United States accounted for more than 10% of revenue during those periods.

Xoft Sale

The Company completed the sale of its Xoft business line on October 23, 2023. The applicable assets and liabilities of the Xoft business have been classified as held for sale in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, and the results of its operations for all periods presented are reflected as discontinued operations in the Condensed Consolidated Statements of Income. Unless otherwise indicated, all disclosures and amounts relate to the Company’s continuing operations.  In addition, the Company now has one reporting segment, Detection.

Critical Accounting Estimates

Our discussion and analysis of financial condition, results of operations, and cash flows are based on our 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 us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, allowances for credit losses on accounts receivable, inventory valuation and obsolescence, intangible assets, goodwill, income taxes, contingencies, and litigation. Additionally, we use assumptions and estimates in calculations to determine stock-based compensation, and evaluation of litigation. We base 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.

Due to the COVID-19 pandemic and its lingering impact, global armed conflicts and related political uncertainty, as well as dramatic inflation, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur, and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Other than as described herein, there have been no additional material changes to our critical accounting estimates as discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 31, 2023. For a comprehensive list of our critical accounting estimates, reference should be made to the 2022 10-K.

Three and nine months ended September 30, 2023 compared to three and nine months ended September 30, 2022 (in thousands, except share data or as noted)

Revenue

Three months ended September 30, 2023 and 2022:

Total revenue decreased by approximately $0.3 million or (6.6%), from $4.4 million for the three months ended September 30, 2022 to $4.1 million for the three months ended September 30, 2023. The decrease is due primarily to reduced demand, a reduction in sales force in 2022, our shift to a subscription model and continued weakness in recovery to pre-pandemic levels prior to Covid-19.  During the third quarter of 2023, we have seen an increased customer demand for subscription licenses, which currently remains a small portion of the Company’s total license revenue. We believe this trend could accelerate, and we have begun to shift our marketing efforts to a subscription model. An increase in subscription revenue would negatively impact revenue in the short term, because revenue from subscription licenses are recognized over time, as opposed to being recognized upon delivery for perpetual licenses. 

Detection product revenue decreased by approximately $0.3 million, or (13.3%), from $2.5 million for the three months ended September 30, 2022 to $2.2 million for the three months ended September 30, 2023. The overall decrease is due primarily to the impact of our transition to a subscription model and ongoing challenges faced in the economy and market competition.

Detection service and supplies revenue, which is primarily sold to direct customers, was flat at approximately $1.8 million for the three months ended September 30, 2022  compared to the three months ended September 30, 2023.  

Nine Months Ended September 30, 2023 and 2022:

Total revenue decreased by approximately $2.6 million or (17.1%), from $15.1 million for the nine months ended September 30, 2022 to $12.6 million for the nine months ended September 30, 2023. The decrease is due primarily to reduced demand, a reduction in sales force in 2022, our shift to a subscription model and continued weakness in recovery to pre-pandemic levels prior to Covid-19 as well as market competition.  During the first nine months of 2023, we have seen an increased customer demand for subscription licenses, which currently remains a small portion of the Company’s total license revenue. We believe this trend could accelerate, and we have begun to shift our marketing efforts to a subscription model. An increase in subscription revenue would negatively impact revenue in the short term, because revenue from subscription licenses are recognized over time, as opposed to being recognized upon delivery for perpetual licenses. 

Detection product revenue decreased by approximately $2.9 million, or (29.4%), from $9.9 million for the nine months ended September 30, 2022 to $7.0 million for the nine months ended September 30, 2023. The overall decrease is due primarily to the impact of our transition to a subscription model and ongoing challenges faced in the economy as well as market competition.

Detection service and supplies revenue, which is primarily sold to direct customers, increased by approximately $0.3 million, or 6.0%, from $5.3 million for the nine months ended September 30, 2022 to $5.6 million in the nine months ended September 30, 2023.  The increase is due primarily to the timing of delivery on service and supply agreements.

Cost of Revenue and Gross Profit:

Three months ended September 30, 2023 and 2022:

Gross profit for the three months ended September 30, 2023 was approximately $3.5 million, or 86.4% of revenue, as compared to $3.7 million, or 85.0% of revenue, for the three months ended September 30, 2022. 

Cost of products decreased by approximately $85,000, or (24.4)%, from $348,000 for the three months ended September 30, 2022 to $263,000 for the three months ended September 30, 2023. The decrease is due primarily to lower product sales.  Cost of product revenue as a percentage of product revenue was approximately 13.7% for the three months ended September 30, 2022 as compared to 12.0% for the three months ended September 30, 2023. 

Cost of service and supplies was approximately flat for the three months ended September 30, 2022 and September 30, 2023. Cost of service and supplies revenue as a percentage of service and supplies revenue was approximately 15.4% for the three months ended September 30, 2022 as compared to 14.2% for the three months ended September 30, 2023. The cost of service and supplies as a percentage of revenue decreased primarily as a result of the relative mix of service and supplies in the comparable periods.

Amortization and depreciation, which relates primarily to acquired intangible assets and depreciation of machinery and equipment, was approximately flat for the three months ended September 30, 2023 and 2022.

Nine Months Ended September 30, 2023 and 2022:

Gross profit for the nine months ended September 30, 2023 was approximately $10.5 million, or 83.2% of revenue, as compared to $12.9 million, or 85.2% of revenue, for the nine months ended September 30, 2022. 

Cost of products decreased by approximately $0.2 million, or (12.3)%, from $1.3 million for the nine months ended September 30, 2022 to $1.1 million for the nine months ended September 30, 2023. The decrease is due primarily to lower product sales. Cost of product revenue as a percentage of product revenue was approximately 12.7% for the nine months ended September 30, 2022 as compared to 15.8% for the nine months ended September 30, 2023. The product mix in the nine-month period ended September 30, 2023 compared to the same period in 2022 included more products with a higher relative cost of sales.

Cost of service and supplies decreased by approximately flat for the nine months ended September 30, 2022  compared to the nine months ended September 30, 2023. Cost of service and supplies revenue as a percentage of service and supplies revenue was approximately 17.3% for the nine months ended September 30, 2022 as compared to 16.9% for the nine months ended September 30, 2023. The cost of service and supplies as a percentage of revenue decreased primarily as a result of the relative mix of service and supplies in the comparable periods.

Amortization and depreciation, which relates primarily to acquired intangible assets and depreciation of machinery and equipment, was less approximately flat for the nine months ended September 30, 2023 and 2022.

Operating Expenses:

Three months ended September 30, 2023 and 2022:

Operating expenses decreased by approximately $2.1 million, or (31.0)%, from $6.9 million in the three months ended September 30, 2022 to $4.7 million in the three months ended September 30, 2023.

Engineering and Product Development. Engineering and product development costs decreased by approximately $0.3 million, or (18.5)%, from $1.4 million in the three months ended September 30, 2022 to $1.1 million in the three months ended September 30, 2023.  The decrease is due primarily to cost savings actions taken by management.

Marketing and Sales. Marketing and sales expenses decreased by approximately $1.3 million, or (45.9)%, from $2.8 million in the three months ended September 30, 2022 to $1.5 million in the three months ended September 30, 2023. The decrease was primarily related to lower headcount and commission expense during the comparable periods.  

General and Administrative. General and administrative expenses decreased by approximately $0.6 million, or (22.9%), from $2.6 million in the three months ended September 30, 2022 to $2.0 million in the three months ended September 30,2023  

Amortization and Depreciation. Amortization and depreciation, which relates primarily to acquired intangible assets and depreciation of machinery and equipment, were flat for the three months ended September 30, 2023 and 2022.

Nine Months Ended September 30, 2023 and 2022:

Operating expenses decreased by approximately $3.1 million, or (15.1)%, from $20.1 million in the nine months ended September 30, 2022 to $17.4 million in the nine months ended September 30, 2023.

Engineering and Product Development.  Engineering and product development costs decreased by approximately $0.5 million, or (10.3)%, from $4.4 million in the three months ended September 30, 2022 to $3.9 million in the nine months ended September 30, 2023.  The decrease is due primarily to cost savings actions taken by management.

Marketing and Sales. Marketing and sales expenses decreased by approximately $2.5 million, or (30.7)%, from $8.2 million in the nine months ended September 30, 2022 to $5.7 million in the nine months ended September 30, 2023. The decrease was primarily related to lower headcount and commission expense during the comparable periods.  

General and Administrative. General and administrative expenses decreased by approximately $0.2 million, or (2.0%) from $7.8 million in the nine months ended September 30, 2022 to $7.6 million in the nine months ended September 30, 2023. 

Amortization and Depreciation. Amortization and depreciation, which relates primarily to acquired intangible assets and depreciation of machinery and equipment, were approximately flat for the nine months ended September 30, 2023 and 2022.

Other Income and Expense:

Three months ended September 30, 2023 and 2022:

Interest income. Interest income increased by approximately $124,000, or 174.6%, from $71,000 for the three months ended September 30, 2022 to $195,000 for the three months ended September 30, 2023. The increase results from higher interest rates in 2023 compared to 2022.

Other income (expense). Other income (expense) was a loss of $(2,000) during the three months ended September 30, 2022 compared to a loss of $9,000 during the three months ended September 30, 2023. The change is driven by lower foreign exchange losses recorded in 2023 compared to 2022.

Tax (expense). Income tax expense was approximately $4,000 and $0 for the three months ended September 30, 2023  and September 30, 2022, respectively. The effective tax rates for the three months ended September 30, 2023 and 2022 were less than 1% in each period. The difference between the Company’s effective tax rates in 2023 and 2022 compared to the U.S. statutory tax rate of 21% is primarily due to changes in valuation allowances associated with the Company’s assessment of the likelihood of the recoverability of deferred tax assets. The Company has valuation allowances against substantially all of its net operating loss carryforwards and tax credit carryforwards. 

Discontinued operations, net of tax. This line represents the net loss of the Company's former Xoft business line which was sold in October, 2023.

Nine Months Ended September 30, 2023 and 2022:

Interest expense. Interest expense was approximately flat for the nine months ended September 30, 2022. compared to the nine months ended September 30, 2023.

Interest income. Interest income increased by approximately $439,000, or 439.3%, from $89,000 for the nine months ended September 30, 2022 to $528,000 for the nine months ended September 30, 2023. The increase results from higher interest rates in 2023 compared to 2022.

Other income (expense). Other income (expense) was a loss of $(45,000) during the nine months ended September 30, 2022 compared to a loss of $8,000 during the nine months ended September 30, 2023. The change is driven by lower foreign exchange losses recorded in 2023 compared to 2022.

Tax (expense). Income tax expense was $13,000 and 0 for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rates for the nine months ended September 30, 2023 and 2022 were less than 1% in each period. The difference between the Company’s effective tax rates in 2023 and 2022 compared to the U.S. statutory tax rate of 21% is primarily due to changes in valuation allowances associated with the Company’s assessment of the likelihood of the recoverability of deferred tax assets. The Company has valuation allowances against substantially all of its net operating loss carryforwards and tax credit carryforwards. 

Discontinued operations, net of tax. This line represents the net loss of the Company's former Xoft business line which was sold in October, 2023.

Liquidity and Capital Resources (in thousands, except as noted)

The Company believes that its cash and cash equivalents balance of $19.0 million as of September 30, 2023, 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. We will continue to closely monitor liquidity and the capital and credit markets.

The Company had net working capital of $20.9 million at September 30, 2023. The ratio of current assets to current liabilities at September 30, 2023 and December 31, 2022 was 2.83 and 2.84, respectively.

Net cash used for operating activities for the nine months ended September 30, 2023 was $3.5 million, compared to $9.7 million for the nine months ended September 30, 2022. The improvement in net cash used for operating activities for the nine months ended September 30, 2023 resulted primarily from the Company’s focus on collections of accounts receivable and ongoing cost saving initiatives.  We expect that net cash used for or provided by operating activities to fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the timing of when we recognize revenue, collections of accounts receivable, inventory expansion due to supply chain risk, and the timing of other payments.  Included in these figures are the cash flows from our discontinued Xoft business.  For the nine months ended September 30, 2023, the impact on cash flows from operating activities related to the Xoft business was limited given the previously announced furlough and focus on strategic alternatives.  For the nine months ended September 30, 2022, the impact on cash flows from operating activities related to the Xoft business was a use of cash of approximately $4 million.  

Net cash used for investing activities for the nine months ended September 30, 2023 was $675,000, compared to $365,000 for the nine months ended September 30, 2022. The net cash used for investing activities for the nine months ended September 30, 2023 and 2022 is primarily for purchases of property and equipment.

Net cash provided by financing activities for the nine months ended September 30, 2023 was $1.9 million related to sales of our common stock as well as stock option exercises by employees.  Net cash provided by financing activities for nine months ended September 30, 2022 was $172,000 related to the issuance of common stock pursuant to the Company’s stock option and employee stock purchase plans.

The Company is obligated to pay approximately $1.1 million for firm purchase obligations to suppliers for future product and service deliverables and $0.4 million for minimum royalty obligations.

On November 6, 2023, the Company received cash of approximately $5.0 million related to the sale of its former Xoft business line.  

Recent Accounting Pronouncements

See Note 1 to the Condensed Consolidated Financial Statements.

Item 3.        Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4.        Controls and Procedures

The Company’s management, with the participation of 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 report. Based on this evaluation, as of September 30, 2023, 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 at a reasonable level of assurance.

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

There were no changes to the Company's internal controls over financial reporting during the quarter ended September 30, 2023 that have materially affected or which are reasonably likely to materially affect internal control over financial reporting.

PART II OTHER

INFORMATION

Item 1A.        Risk Factors:

Our business is subject to various risks, including those described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which we strongly encourage you to review. Other than described below, there have been no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 31, 2023.  

We have been informed that the FDA requires additional information to determine appropriate regulatory requirements of our ProFound AI® Risk product based on revised FDA guidance and have paused U.S. sales of the product.

We have been informed that under the FDA’s current position, as reflected in revised FDA guidance, ProFound AI® Risk meets the definition of device by section 520(o)(1)(E) of the Federal Food, Drug, and Cosmetic Act (“FD&C Act”).  The FDA has requested additional information from us to determine the applicable regulatory requirements. Under the previous FDA guidance, we believed that ProFound AI® Risk met the definition of a device and at that time, based on the FDA’s then guidance, FDA did not intend to enforce compliance with the applicable requirements of the FD&C Act, including, but not limited to, premarket clearance and premarket approval requirements.   While there have been no adverse safety issues reported in the U.S. by our customers which have deployed ProFound AI Risk, we have paused sales of ProFound AI® Risk in the U.S. and will inform customers of our need to provide the FDA with additional information under their revised guidance. However, we do not currently intend to recall any licenses previously sold and granted. 

Sales of ProFound AI® Risk have not been significant to our aggregate sales and we have only made sales to a limited number of customers. Note that ProFound AI® Risk is, however, approved for use in countries outside of the U.S. including Canada and the European Union, and we have received no reports of safety issues from any users.  We are presently determining the optimal regulatory strategy designed to satisfy applicable FDA requirements.  The changes in FDA guidance applicable to ProFound AI® Risk do not affect sales of our other products which include our primary product ProFound AI® Detection as well as ProFound AI® Density.

We may not be able to complete all activities necessary to comply with FDA guidance on a timely basis or without expending significant resources. We will submit a 513(g) Request for Information regarding the requirements applicable to the product under the FD&C Act. We are unable to control the timing of FDA action and we may be required to make additional submissions within certain timeframes. We also do not know whether or not the FDA will change its current thinking regarding the regulatory requirements applicable to ProFound AI® Risk.  If the FDA determines that we have not satisfied its requirements, any failure of ours to address such requirements or provide requested documentation could disrupt our business operations related to the ProFound AI® Risk product and the timing of our commercialization efforts  and could have a material adverse effect on our financial condition and operating results.  In addition, the FDA could take action against us for the period of time from the change in FDA guidance applicable to ProFound AI® Risk to the present time, in connection with our decision not to recall the licenses previously sold and granted and could require us to recall the product in the future .  We may also be at risk from claims made by our customers who have commenced sales of ProFound AI® Risk to their customers.

Instability in geographies where the Company has operations and personnel or where the Company derives revenue could have a material adverse effect on the Company’s business, customers, operations and financial results.

Economic, civil, military and political uncertainty may arise or increase in regions where the Company operates or derives revenue. Further, countries from which the Company derives revenue may experience military action and/or civil and political unrest. For the fiscal year ended 2022, approximately 11% of the Company’s revenue was derived from customers located in Europe and the Middle East.  In late February 2022, Russian military forces launched significant military action against Ukraine. In early October 2023, an armed conflict between Hamas-led Palestinian militant groups and Israeli military forces broke out with a Hamas attack on southern Israel, to which Israeli military forces retaliated. Sustained conflict and disruption in these regions is likely. The aggregate impact to Eastern Europe and Europe as a whole, throughout the Middle East, as well as actions taken by other countries, including new and stricter sanctions by the United States, Canada, the United Kingdom, the European Union, and other countries and organizations against officials, individuals, regions, and industries in Russia, Belarus and Ukraine, and each country’s potential response to such sanctions, tensions and military actions, is not knowable at this time, and could have a material adverse effect on the Company, its business and operations. Any such material adverse effect from the conflict and enhanced sanctions activity may disrupt the Company’s sales to customers in the region. Prolonged unfavorable economic conditions or uncertainty may have an adverse effect on the Company’s sales and profitability

Item 6.        Exhibits

*         Filed herewith

**       Furnished herewith

Signatures

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