iCAD, Inc.
Q2 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Good day, and welcome to the iCAD, Inc. Second Quarter 2017 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Bob Yedid. Please go ahead, sir.

[Robert Yedid:]

Great. Thank you, Cody, and good afternoon, everyone. Thanks for participating in today's call. Joining me from iCAD are Ken Ferry, Chief Executive Officer; and Rich Christopher, Chief Financial Officer. After the market closed today, iCAD announced financial results for the second quarter ending June 30, 2017. Before we begin, I would like to caution that comments made during this conference call by management that contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of iCAD. I encourage you to review the company's filings with the Securities and Exchange Commission, including, without limitation, the company's Form 10-Q and Form 10-K, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. Furthermore, the content on this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 8, 2017. iCAD undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. With those prepared remarks, I'll like to now turn the call over to Ken Ferry, Chief Executive Officer. Ken?

[Kenneth Ferry:]

Thanks, Bob. Good afternoon, everyone, and thank you for joining us today. I'll begin today's call with some brief comments on the second quarter and first half of 2017 financial results. I'll then turn the call over to Rich Christopher, our CFO, who will review our financial results in greater detail. At the conclusion of Rich's remarks, I'll provide an update on our key growth drivers before opening up the call for your questions. The second quarter 2017 revenue was impacted by softer-than-expected product sales in our Therapy business, specifically IORT, combined with the result of having exited the MRI software business in the first quarter of the year. However, a number of key trends began to emerge in the second quarter and first half of 2017, including the strength of our mammography product revenue and the growth of subscription-based revenue in our skin electronic brachytherapy business. Importantly, these two segments represent our key future growth drivers. So the progress demonstrated in these businesses during the first half of the year was particularly encouraging. I'll provide more detail on these growth drivers later in the call. I'd now like to turn the call over to Rich Christopher for more detailed review of our second quarter and first half of 2017 financial results. Rich?

[Richard Christopher:]

Thank you, Ken, and good afternoon, everyone. I'd like to review the company's second quarter 2017 financial highlights which were disclosed in this afternoon's earnings release. As I will only be discussing the highlights of our financial results, I'd like to refer you to our quarterly report on Form 10-Q for more specifics and detail. The company expects to file its Form 10-Q for the second quarter of 2017 with the SEC tomorrow. Before I get started with the financial highlights, I would like to note that during my comments today, I will be referring to certain non-GAAP financial measures. Management believes that these measures provide meaningful information to investors as well as better reflect the way that we view the operating performance of the company. You can find a reconciliation of our GAAP to non-GAAP measures at the end of our earnings release. With that covered, I will now summarize the financial results for the quarter. For the second quarter of 2017, total revenue was $6.4 million, reflecting a $1 million or 13% decrease from the prior year quarter. These results were driven by lower revenues from both our detection and therapy segments. Taking a look at our results by segment, total revenue on our detection segment for the second quarter of 2017 was $4.2 million, representing a decrease of $700,000 or 13% year-over-year. As Ken mentioned, our results within detection were negatively impacted by the fact that we recorded $600,000 of MRI revenue in the second quarter of 2016. As we detailed on our last earnings call, we completed the sale of the MRI assets to Invivo in the first quarter of 2017. Excluding MRI revenue from the prior year quarter, detection revenues were relatively flat at approximately $4.2 million year-over-year. Shifting over to our Therapy segment, second quarter therapy revenue totaled $2.2 million, reflecting a $300,000 or 12% decrease from the prior year quarter. This decrease was driven by a $500,000 shortfall in product revenue as we had fewer capital sales in the second quarter of 2017 versus 2016. This decrease was partially offset by a $200,000 year-over-year increase in our service revenue. Favorable service revenue is reflective of the growth in the number of subscription consumers that are using the Xoft system to treat skin cancer as well as an increase in the volume of patient treatment administered. Moving on to gross margin, gross margin in the second quarter of 2017 was 70%, in line with our expectations, but below the 77% achieved in the prior year quarter. The market percentage shortfall is reflective of both decreased revenue as well as a $300,000 credit recorded in the prior year period related to the refund of medical device excise tax. This refund positively contributed 4 percentage points to gross margin in the second quarter of 2016. Operating expenses in the second quarter of 2017 were $7.1 million, down from $7.2 million in the second quarter of 2016, illustrating ongoing cost control by the company. Operating expenses in the second quarter of 2017 reflect lower amortization and depreciation charges as well as lower general and administrative expenses, which were partially offset by increased marketing and sales spending. Over time, we believe the additional investments in marketing and sales will result in increased products and recurring revenues in each of our business segments. Looking at our profit metrics, GAAP net loss for the quarter was $2.6 million or $0.16 per share compared to a loss of $1.6 million or $0.10 per share in the comparable prior year quarter. The year-over-year change in our bottom line primarily reflects the margin shortfall associated with a lower revenue base. On a non-GAAP adjusted EBITDA basis, the net loss for the second quarter of 2017 was $600,000, representing a $300,000 increase over the prior year period. These non-GAAP results also reflect the year-over-year margin shortfall, which was offset in part by the net change in certain noncash-related items such as depreciation, amortization and stock compensation. Turning our attention now to the balance sheet, we ended the second quarter of 2017 with $7.7 million in cash on hand as compared to the $8.6 million we had on hand as of December 31, 2016. During the second quarter of 2017, we used approximately $1.6 million in cash from operations. I would also like to highlight that subsequent to the end of the quarter, the company secured a credit facility of up to $13 million from Silicon Valley Bank. The transaction comes in the form of a $6 million term loan and a $4 million revolving line of credit. In addition, assuming the achievement of a certain revenue milestone, the company has an option to secure an additional $3 million in term debt. These funds help to strengthen our cash position and are expected to be utilized to support top line revenue growth as well as to advance our product development programs. So in summary, the key takeaways from today's earnings release are as follows. We are experiencing a number of important positive trends from the 2 long-term growth drivers of our business. First, our digital product revenue within our detection segment is demonstrating strong growth. Excluding MRI revenues in both periods, first half detection product revenue was up $1.1 million or 26% year-over-year. Second, service revenue within our Therapy segment is also demonstrating solid growth. First half therapy service revenue was up $200,000 or 5% year-over-year. We continued to add new customers as well as increase treatment volume within our subscription-based skin therapy business. And lastly, we are truly excited to begin our partnership with Silicon Valley Bank. We believe the new credit facility will help finance the company to the achievement of profitability, while at the same time allowing us to make critical strategic investments to further support our future success. This concludes the financial highlights section of the presentation. Now I would like to turn the call back over to Ken. Kenneth Ferry Thanks, Rich. Let's begin with our Cancer Detection business. We remain particularly enthusiastic about the recent U.S. launch of PowerLook Tomo Detection, the first AI software product used by radiologists in the detection of breast cancer. This interpreter software, based on machine and deep learning, is a powerful tool used by radiologists to optimize workflow while reading data-intensive breast tomosynthesis exams. We are making important progress developing a growing tomo sales funnel, which increased from just over $4.5 million at the end of Q1 to just over $7.5 million at the end of Q2 in the United States. While we'll take some time to close these opportunities, we are very encouraged by the mounting customer interest and sales activity. To continue this positive momentum, we have established and are executing on a number of key initiatives, including

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Kevin Ellich with Craig-Hallum.

[Kevin Kim:]

Hey guys, good afternoon. Thanks for taking the questions. Ken, I guess, just starting off, could you maybe talk about the competitive positioning of GE's new mammography instrument? Do you think it's more competitive versus Hologic? And what's the engagement been like with GE sales force since it was launched?

[Kenneth Ferry:]

Well, I think, Kevin, for sure, their system, being a second generation is more competitive than their first. And as I understand it, the combination of image quality combined with the ergonomics and novel workflow enhancements have made this a much more competitive system. Having some indication of what their order rates, particularly in the U.S., have looked like, since they launched in late March, I think they're really gaining some momentum. And then contrasting that to the MQSA data, which would say that replacing about 100 systems a month, if you look at the January to June statistics, it would appear to me that they're gaining significant momentum, and that their current share from an order standpoint would seem to be higher than historically what they have achieved in 2D. So I'm pretty excited about the product. I know our team is pretty excited as well to be working with them. So we think that's a terrific combination when you combine the Pristina system with PowerLook Tomo Detection. In terms of engagement, it's been a little bit challenging in the United States. They, GE had a hiccup where they were not able to get our product on their price list until early June. And so, unfortunately, we missed the opportunity for more than two thirds of the quarter to be out there really selling aggressively side-by-side and, obviously, having them quote the system to the customer. And so the majority of our progress, which was substantial in the second quarter, was more done through our direct sales team. And I give them a lot of credit because they've been working at the fine line between collaborating with their partners at GE and satisfying customer demand, particularly in that time frame of April and May, when we were the only ones able to quote the product. We have recognized that there's a need for more training. Out product is not as a simple to use as a 2D product, where you essentially read the mammogram in 4 views and then turned on the CAD system and it'll be read. This is a concurrent read interpretation tool. We all know there could be 80 or 90 images progress that need to be processed and reviewed. So I do think there is a training issue we've identified. We did stop in at their New York roadshow site, and we met with their national sales manager and some of their key marketing people several weeks ago, and we've kind of mapped out, between now and the end of the month, a number of new training efforts to help them to get much more comfortable with the product. But I think the product itself has received, Kevin, excellent response from customers in spite of the fact that we were out there essentially only in the international market in the first quarter, and we were not out there in full force in Q2. We've seen a significant increase in demand in the number of units that we sold contrasted to the beginning of the year. And I'm very hopeful that with GE having the ability now in Q3 to engage 100%, that we'll see another noticeable increase in tomo product revenue in the third quarter as we did in the second quarter versus the first quarter.

[Kevin Kim:]

Oh, that's all very helpful, Ken. And then, in your prepared remarks, you made mention of the roadshow that GE is doing. Just wondering what sort of feedback you've been hearing? And I guess, how are they featuring you as a partner?

[Kenneth Ferry:]

Well, I think the roadshow is a great idea. I'll be honest and say that July and August may not be the optimal months to have it so I think they've had good attendance. But, probably, if this was something done in the spring or fall, I would just speculate you'd probably see a lot more customers at it. Those that come through, have the benefit of going through their mobile van and seeing their systems and then seeing our interpretive software also going inside to the line view area and receiving demonstrations. We have people staffing a workstation at all times in both locations, so that we can very much be there to ensure that the product is positioned properly, and that the customer has a chance to really see it. And I think the best estimate I can provide, Kevin, is I mentioned on my prepared remarks that our funnel in sales force at the end of Q1 was $4.5 million, and at the end of Q2, it was $7.5 million. So all of the effort that we've made, all of the effort that the larger GE organization has made has created a lot of buzz and a lot of interest in the product. There's always timing issue when you're trying to find capital dollars that you hadn't necessarily had the benefit of a fiscal year of planning process. So I do think we're running into some delays relative to the funding being made available. But with that said, I think we feel really good about the progress with GE, and I do think will probably, as a result of the delay in the price book, we should plan all that out in the third quarter, see some really good progress, and then step it up even further in Q4. The other thing that will complement that is that GE has a much stronger shipment plan for Pristinas in the second half, each quarter increasing the number of shipments noticeably, because they have a very healthy backlog in the first half of the year. So goes their shipment plan in the right direction, certainly the volume of detection solutions will as well. So we feel good about the progress. We feel good about the momentum. And we're just getting started, so to speak, but so far so good.

[Kevin Kim:]

Great and just two more from me. Product sales on the therapy side were a little bit lower than we expected. I know it's been variable historically, but just wondering if you could give us some placement data activity? I don't know if you guys and I might have missed it if you said anything about placements, Ken? And then just a quick one for Rich on the new bank facility, what are the terms, what sort of interest rates should we be thinking about and what's the expiration or maturity on that?

[Kenneth Ferry:]

Sure. So just quickly, Kevin, on the therapy product side, if you look at our product revenue line, obviously in the release, obviously, it's equivalent to about one system being sold, and it was actually in the skin market. And so our challenge there has been closing IORT and/or GYN deals in a timely fashion, and that's in both international as well as in the U.S. And so in Q2, we were teed up to close probably two, three transactions between the international and the U.S. market for IORT and, unfortunately, they all slid into the third quarter. And so that, obviously, hurt us from a revenue standpoint. As I look at that business, what I would say is that we expect a much stronger third quarter from a product standpoint. In the United States, there are probably 30 deals in the funnel that are all in a healthy active state. Timing is always difficult to predict in terms of when they'll close, and we have probably 8 or 10 in the international market that we're tracking and working on. So our expectation is we will have a much stronger product quarter in Q3, and when you combine that with momentum that we've spoken about in the skin business as well, I would expect the Therapy business to pick up more substantially in Q3 than we saw historically over the first two quarters. And with that, I would also add that the international piece that I mentioned on GYN seems to really be growing in terms of interest, and we're finding, obviously, in emerging markets that the incidence of endometrial and cervical cancer are much higher than here in the United States. And so there's another angle now to be getting product sales into the market as opposed to leading almost exclusively with IORT, and we encourage that GYN may become more of a growth driver OUS relative to the appeal of the product. So with that said, I will now turn it back over to Rich, and he could, maybe, give you highlights on the terms of the Silicon Valley agreement.

[Richard Christopher:]

Sure. Just by way of background, we went through an extremely competitive process with a number of banks. And in the end, we feel that we've got the most competitive deal from Silicon Valley, and we chose to have them as a partner, certainly a flagship bank backing the company is certainly an endorsement on our product as well as our company. The terms of the loan, it is a $6 million base term loan. It's 4-year period. The interest rate is linked to The Wall Street Journal primary, which is currently 4.25%. The interest, it is interest-only for the first 12 months of that 4-year period. It does have a balloon payment at the end of 7%. And so overall, the internal rate of return on the loan or the term loan portion of the deal is below 6.5%, which, obviously, is extremely competitive and very much attractive to us, particularly in comparison to when we look at dilutive forms of financing. So we're thrilled to have landed the deal and to have closed on the transaction, literally [indiscernible] as we speak, and that will be announced tomorrow publicly with an 8-K.

[Kevin Kim:]

Great, thank you. Thanks guys.

[Kenneth Ferry:]

Sure.

[Operator:]

Thank you. [Operator Instructions] That does conclude today's question-and-answer session. I would now like to turn the conference back over to Mr. Ferry for any additional or closing remarks.

[Kenneth Ferry:]

Thanks, operator. In close, I would like to reiterate our priorities going forward

[Operator:]

Thank you. And that does conclude today's conference. Thank you for your participation. You may now disconnect.