iCAD, Inc.
Q1 2018 Earnings Call Transcript

Published: 15 May 2018

[Operator:]

Good day, everyone, and welcome to the iCAD Incorporated First Quarter 2018 Earnings Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Brian Ritchie with LifeSci Advisors. Please go ahead, sir.

[Brian Ritchie:]

Thank you, operator and good afternoon everyone. Thank you for participating in today's call. Joining me from iCAD are Ken Ferry, Chief Executive Officer; and Rich Christopher, Chief Financial Officer. Earlier this afternoon, iCAD announced financial results for the 3-month period ending March 31, 2017. Before we begin, I would like to caution that comments made during this conference call by management that contains forward-looking statements 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 Forms 10-Q and 10-K, which identify specific risk factors that may cause actual results or events to differ materially from those described in the forward-looking statements. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, May 14, 2018. ICAD undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. With that said, it's my pleasure to turn the call over to Ken Ferry, CEO. Ken?

[Kenneth Ferry:]

Thanks, Brian. Good afternoon, everyone and thank you for joining us today. I'll begin today's call with some brief comments on the financial results for the first quarter ended March 31, 2018. 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 programs prior to opening the call for questions. While our first quarter top line results were weaker than anticipated, it is important to note that after adjusting for comparative MRI revenues in the effect of shutting down our skin subscription offering during the quarter, revenues were essentially flat when compared to Q1 of 2017. Mammography product revenue which was strong throughout 2017 got off to a slower start in 2018 due in part to the particularly strong fourth quarter of 2017. More on this topic later as part of the business update. Now, I’ll turn the call over to Rich who will provide additional financial detail on the quarter, Rich.

[Richard Christopher:]

Thank you, Ken and good afternoon everyone. I’d like to review the Company’s first quarter 2018 financial highlights which were disclosed in this afternoon’s earnings release. As I will only be discussing the highlights of our financial results for the first quarter, 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 first quarter of 2018 with the SEC tomorrow. Before I begin 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 first quarter. For the first quarter of 2018, total revenue was $6.3 million, reflecting a $500,000 or 7% decrease from a comparable prior year quarter. The change was entirely driven by the revenue performance of our detection segment. As we examine our results by segment, let’s begin with detection. Total revenue in our detection segment for the first quarter of 2018 was $4 million, representing a $500,000 or 11% decrease from the prior year period. It should be noted that our year-over-year revenue comparison was negatively impacted by the inclusion of $300,000 in MRI revenues in the prior year quarter. As detailed on previous earnings calls, we completed the sale of the MRI assets in the first quarter of last year. Excluding the impact of the MRI revenues, cancer detection revenue decreased $200,000 or 6% versus the prior year quarter. The year-over-year decrease in our adjusted cancer detection revenues was driven by both a $100,000 decrease in product revenue and a $100,000 decrease in service revenue. The $1000 decrease in detection product revenue was a result of the year-over-year shortfall in sales of our follow-on product, whereas the $100,000 decrease in detection service revenue was a result of the front setting on service related to our TLMA product. Shifting our focus to the therapy segment, first quarter 2018 therapy revenues totaled $2.3 million and were flat as compared to the prior year quarter. As detailed on our last earnings call, the company made the decision to exit the skin subscription business in success – we did so effective February 28 of this year. This decision has created some noise in our numbers and negatively impacted our year-over-year therapy revenue comparison by $100,000. If one were to exclude the impact of the skin subscription revenue in both quarterly periods, adjusted therapy revenue actually increased by $100,000 or 7% year-over-year. The $100,000 increase in adjusted therapy revenue was a result of the sale of incremental controllers in the first quarter of 2018. Moving onto gross profit; gross profit for the first quarter of 2018 was $4.5 million as compared to $4.7 million in the first quarter of 2017, a $200,000 decrease. The year-over-year change in gross profit dollars was due to lower topline detection revenues recorded in the first quarter of 2018. On a percentage basis, gross profit for the first quarter of 2018 was 71% as compared to 69% in the prior year quarter. The incremental gross margin percentage was attributable to our exit from the unprofitable skin subscription business effective February 28, 2018. We expect to see further positive trends in gross margin percentage throughout the year as we begin to experience full quarter impact of this exit. As for operating expenses, operating expenses for the first quarter of 2018 totaled $7.6 million, this represented a $2.5 million increase over the first quarter of 2017. In the first quarter of 2017, the company recorded a $2.5 million gain on the sale of the MRI assets. Excluding this gain from the prior year quarter, total operating expenses for the first quarter of 2018 were flat year-over-year as incremental research and development costs were fully offset by lower sales and marketing costs. The incremental research and development costs were reflective of the advancement of the product development program for Version 2.0 of our PowerLook Tomo detection software. Summarizing our profit metrics, GAAP net loss for the quarter was $3.3 million or $0.20 per share compared to a net loss of $500,000 or $0.03 per share in the comparable prior year quarter. The $2.8 million year-over-year increase in our net loss was driven primarily by the absence of the $2.5 million prior year gain on the sale of the MRI assets and the $200,000 decrease in our gross margins. On a non-GAAP adjusted EBITDA basis, the net loss for the first quarter of 2018 was $2.4 million. This represented a $900,000 increase over the prior year period. The increase in our losses was primarily driven by incremental cost of the Tomo detection V2 study and the decrease in our gross margin dollars. Moving now to the balance sheet; we ended the first quarter of 2018 with $8.7 million in cash on hand. This compares to the $9.4 million we had on hand as of December 31, 2017. We are pleased to report that cash burn in the first quarter of 18 totaled just $700,000. In summary, the key takeaways from our first quarter 2018 performance are as follows; first, we experienced improvement in both gross margin dollars and percentages as a result of our decision to exit the skin subscription business. Looking ahead, we would anticipate further margin expansion within therapy as we reap the benefits of the associated expense savings and execute on our skin capital sales model. Second, excluding the one-time gain on the sale of the MRI assets recorded in the first quarter of 2017, we effectively managed our first quarter 2018 operating expenses which were flat as compared to the first quarter of 2017. It should be noted that this was accomplished while at the same time absorbing the incremental cost associated with advancing the product development program of Version 2.0 of our PowerLook Tomo Detection software. Third, we are prudently managing our resources and successfully reduced our cash burn. In the first quarter of 2018, our cash burn was just $700,000. So in closing, during the first quarter of 2018, the company executed on its plan to exit the skin subscription business, which it did successfully as of February 28. Disposition has already and will continue to result in gross margin improvement in low overall cash burn. This, along with anticipated topline revenue growth from our detection business better positions the company as we head towards cash flow break which is expected by year-end. This concludes the financial highlight section of our presentation. Now I would like to turn the call back over again Ken.

[Kenneth Ferry:]

Thanks, Rich. Let’s begin with our cancer detection business. We continue to be pleased with the demand for PowerLook Tomo Detection in the marketplace. As a reminder, this is the first AI Software product based on machine and deep learning that is commercially available today for GE customers for the detection of breast cancer on 3D mammograms. As I have said in the past, this product platform will be a significant growth driver for iCAD for years to come. As such, we remained focus on maximizing commercial potential for this innovative solution. To this end, there are over 150 sites worldwide today using our software to assist the workflow and interpretation of 3D mammograms. We recently returned from society of breast imaging meeting where we had many positive interactions with prospective customers, received very positive feedback on the clinical workflow value of our software. Within the past two weeks, we also hosted an educational webinar with 120 registrants that each of your customers is sharing personal experiences with the use of PowerLook Tomo detection in their practice. While we are increasing our commercial traction with the current version of PowerLook Tomo detection, we’ve also completed development of the next version of this important product Version 2.0. This version is very significant in that, it expands our addressable market considerably to all of the major suppliers of 3D mammography systems. You will recall that PowerLook Tomo detection version 2.0 received CE Mark in late February. As we discussed on our last call, we are pleased to introduce this product to European Congress of Radiology which took place February 28 to March 4 in Vienna. We expect to make first shipments of this product in Europe shortly and anticipate that it will have a meaningful impact on our financial results beginning sometime in the third quarter of this year. Moreover, I’m pleased to inform you that we will be submitting this product for FDA approval in the U.S. in the coming days. This submission will be based on the outstanding results of our Pivotal Clinical Reader Study. While I cannot share too many details prior to the publication of these results, I can say that we saw a significant increase in sensitivity, specificity and a meaningful reduction in reading time with radiologists read exams with the use of our software versus reading the same exams without it. These results could lead to significant claims specific to increased cancer detection, a substantial reduction in false positive and unnecessary patient recalls, while increasing radiologist productivity through a significant reduction in exam reading time. We look forward to providing further, more specific details on the excellent results from the pivotal reader study soon in addition to plans to publish the data in a major medical journal. We also intend to present the study results at the 2018 Radiology Society North America Annual Meeting in November. Following receipt of FDA approval, we anticipate the commercial launch of PowerLook detection version 2.0 will occur sometime in the second half of this year. ICAD remains committed to investing in the development of a broader roadmap of AI software solutions, based on machine and deep learning. We have a robust and highly innovative platform as well as significant advanced engineering and development experience in this area, and we intend to continue expanding our portfolio of solutions over the near and long term. And lastly to this end, we recently received FDA approval for our 3D breast density software. We are in the process of launching this product in the U.S. which further adds to our capabilities to enhance radiology workflow with 3D breast exams. Shifting to therapy, I’d like to begin with an update on our skin breaking therapy business. We’ve discontinued offering to subscription service model to customers in skin breaking therapy. While this strategic shift had a slightly negative impact on our overall revenue in the quarter, over the long term we discussed on our 2017 year end call, we believe our focus on capital sales model would provide substantial opportunity for sustained success in this area. Our commercial strategy is now centered on expanding in targeting cancer centers and radiation oncologists in addition to the ongoing strategy of focusing on dermatology practices. As a reminder, there are over 1700 cancer centers across the U.S. in states where we’ve had successful skin reimbursement experience making us a particularly attractive market opportunity. As we completed this strategic shift in the first quarter, we can now focus solely on execution and we remain bullish on the significant long-term market opportunity. Importantly, the clinical data in support of this technology continues to grow with favorable results, the critical factor in driving market adoption and long-term commercial success. Also Skin eBx continued to be discussed as an emerging non-invasive pain free treatment option in several podium presentations and e-dermatology meetings in Q1 including the Annual Academy of Dermatology meeting which was held in February. Additionally, we are working to drive Skin eBx awareness and referrals through customized marketing, local events and strategic media in collaboration with sites, demonstrating strong utilization potential. With that, let me now provide you with an update on our other therapy treatment areas. We are currently experiencing stronger interest in the U.S. for breast IORT. Interest in U.S. rural communities is growing and being driven by competition with large urban facilities. Additionally, the growing recruitment of dedicated breast surgeons and oncologists by national oncology companies and health care systems is increasing awareness and interest in IORT in the U.S. Internationally, we continue to see strong procedure growth in parts of Europe and Asia. To underscore this point, we achieved record IORT disposable applicator sales in the quarter. We sold 559 units, a 31% increase in units versus Q1 of 2017. In addition, with our recent regulatory approval, and first system sales in China, we’ve begun to see growing interest there in breast, GYN and general IORT applications. Over time, we believe that the Chinese market will be a major growth opportunity for our therapy business. From a treatment access standpoint, we currently have 40 U.S. centers and 48 OUS Centers treating patients with IORT and our GYN applicators. We continue experienced strong, global market interest in general IORT applications, including prostate, brain and rectal treatment and have active projects underway to commercialize these new applicators. We are particularly pleased with the strong momentum we are seeing in clinical data with numerous presentations occurring in Q1 at major meetings including the National Consortium of Breast Centers, Miami Breast and the European Society of Radiology, Oncology. We expect this positive data to be an important catalyst to further adoption of IORT moving forward. To this end, you will recall that we recently completed enrollment in our U.S. expert study evaluating the use of the Xoft system for the treatment of early-stage breast cancer patients. 1200 patients have been treated in the study of low occurrence race to date for the median follow up of just under two years. We continue to treat, to target the second half of 2018 for the publication of these results which will be key to increasing adoption over the coming years. While a lengthy sales cycle remains a reality in this segment, we anticipate continued progress in system placements in 2018 both in the U.S. and International. We are also focused on additional opportunities this year in multiple key emerging OUS markets in India, Saudi Arabia, Columbia and Mexico. With the strategic shift in our therapy business now complete, we are focused on growing our base of capital customers and increasing the recurring revenue that follows the system placement, and then maximizing the long-term market opportunity in breast, GYN and new application areas as well. So now with that concluded, I think it’s time for us to open up the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] We’ll take our first question from Per Ostlund with Craig-Hallum Capital Group.

[Per Ostlund:]

Thanks, good afternoon guys. Wanted to start out with the detection product sales or I guess detection sales just in general. I think coming out of the fourth quarter, you had commented previously that it was indeed a very strong shipment quarter for GE and I think you’d expected a softer first quarter before re-acceleration potentially beginning in 2Q. Would you say that it was consistent with your expectations, or did it -- did it retrench maybe a little bit more than you thought, and I guess related to that have you seen any change in the attachment rate or the interest level in 3D Tomo coming into the beginning of this year?

[Kenneth Ferry:]

Thanks Per for the question. We did expect to see a stronger first quarter in product specific revenue for detection. Did not anticipate it would be down as significantly as it was. When you look back on 2017 we essentially in Q1 achieved memo product specific revenue approximately the average of what we did in the first three quarters. And then when you look at what we did in Q4, spiked by well over $1 million and we certainly didn’t expect that to continue because in Q4 everything hit perfectly on all cylinders. We had a strong quarter with GE. We had a strong quarter with Siemens, we had a strong quarter with Fuji, we had a strong year-end with our direct sales team. And pretty consistently across the board in Q1, all of those different channel angles were down somewhat proportionately. We didn’t expect it to be as much, but it was something we expected to be in the down some. And so, in the context of our progress and anticipation going forward, one of our challenges is that our Tomo product is only available with GE. And we’ve had our challenges with GE and GE in terms of really getting them to embrace this product as differentiated that this and really aggressively marketing it. So one of the things that hurt us in the first quarter is in the fourth quarter they seem to have turned the corner where they actually sold more 3D than they did 2D for the first quarter ever. Unfortunately in Q1 they seem to revert it back to selling more 2D versus 3D, and given that the transfer prices are quite favorable with 3D, that certainly did not help our cause. So we are trying to work through that with GE and obviously we are working with our other partners to try to strengthen the business. All I can say at this point is that we typically see only two or three orders trickling in the first couple of weeks of a new quarter and in April in the first couple of weeks, we saw about 15 to 20 orders. So while I was encouraged by that, I can’t be real specific in terms of my expectations in the second quarter, other than to say we are working very hard in a very focused fashion to really try to improve the performance further beyond that first three quarter run rate of last year contrasted to first quarter of 2018 and we’ve put a lot of energies behind version 2 of the product, because it just opens up the market exponentially for us as opposed to quite frankly relying on one company who has a approximately 25% market share in both the U.S. and the International markets.

[Per Ostlund:]

That makes a lot of sense. I'll come back to 2.0 here in a second, but just I guess in terms of thinking about the acceleration and it sounds like perhaps at least cautiously you might have seen that in early April. Taking a look at the MQSA data it certainly seems to suggest that both the number of sites adopting tomosynthesis as well as the number of placements might have seen a reasonably material inflection in May. I guess first question to that would be is that true from your perspective as well. And then related to that do you have a window into where that demand is coming from or who you know which manufacture or manufacturers might be benefiting?

[Kenneth Ferry:]

I think it’s a good question. If you look back to 2017 I believe there were about 1300 system placements per MQSA, which obviously do the quick math, that's about 325 system per quarter. And Q3 was a particularly strong quarter. I think it was 378 systems, but as go in to 2018, in Q1 it was 329. So we're pretty much seems to be on this run rate of about 325 systems a quarter. To your point April, I think the number was 199 placements which is extremely high and probably the strongest month since I think actually January of 2017 and its actually was still higher, but that was going back when we had a strong single month and I think August and October. So, to be honest with you it's hard for us to tell whether 200 unit a month at the beginning of a quarter makes for really really strong second quarter in terms of placements. It's just hard to tell. I have not seen really any significant shifting in the market in terms of capacity or volume changes or share shifts at this point in time. So it's really hard one month worth of data period to really draw our analogy. But certainly it's encouraging and I'm hopeful when we look at the MQSA data, we'll see something similar because if the volume starts to well exceed that 325 units a quarter we are all going to benefit. But I think it's too soon to really draw a conclusion.

[Per Ostlund:]

That's entirely fair. Coming back to 2.0 since you did mention the FDA submission is imminent and that's certainly great to hear. You mention that you talked about the reader study utilizing the tool versus not utilizing the tool. Does utilizing 2.0 versus the first version have any relevance whatsoever? And I guess where do you feel -- I guess do you still maintain the same confidence that I think you've been maintaining in terms of the process since you've been through it before once with the original Tomo product?

[Kenneth Ferry:]

Well, I guess, first of all, just to kind of reiterate what I've said before, Version 1 was more of a workflow tool than a detection tool. And we did a great job I think in terms of achieving meaningful reduction in reading time with non-inferior performance result. We had a slight increase in sensitivity I believe from 90% to 92%, but that was not sophistically relevant enough to get superiority claims. However, the product is very effective from the workflow tool standpoint. Version 2 is really a combination of a detection tool and a workflow tool. So there are some distinct differences. And in the reader study which was substantially, we had 260 cases, 65 cancers, we get 24 readers so its was actually a larger study than we did with Version 1. We were very very surprised to see something that's almost very very difficult to achieved, which is an increase in sensitivity or cancer detection is the corresponding increase in specificity, and obviously as these studies typically go the more you torque up the sensitivity, the more you subject performance of the algorithm to move false-positive. What was extraordinary in study was we believe we had an statistically meaningful increase in sensitivity which we are hopeful we will get superiority claims which is non-inferiority. We had almost an equal increase in specificity which essentially means that when the radiologist read with our tool they ruled out more false-positives than they mark – than they read without a tool. So, Version 2 has the president potentially of showing superiority in radiologist reading with our tool, finding a meaningful increased in enhancement and at the same time with the benefit of our tool ruling out false-positives as they mark – when they read without our tool. And with that we have the benefit of reducing unnecessary recalls. What was really surprising to us is when you look at some of the studies out there comparing the performance of 2D mammography, so 3D mammography and the improvement in performance. We actually demonstrated a comparable improvement in performance meaning reading 3D exams without our tool versus reading with our tool. So when you think about how disruptive its being going from 2D mammography to 3D you look at the important improvements and performance both in sensitivity and reduction in false-positives and unnecessary recalls, we actually achieve something in a comparable sense when the radiologist read with our tool versus when they did that. So we're really excited about the product, the reader study results were outstanding. With that said, the FDA process is what it is. And we expect to be at any day hopefully by the end of this week. And we'll just have to see how it goes. We are more confident than we were with Version 1 for a variety of reasons for experience as well as the reader results but with that said the first version of products are quite a bit longer than we had anticipated. So really not predicting a time, but what we are saying is we're going into the FDA cause us extremely excited and extremely confident relative to the performance of the product.

[Per Ostlund:]

Thank you for that. Can I appreciate it. Just one last question on the – if I may, with the shuttering of the subscription businesses is there a tail left to that revenue from those customers now or is that all gone? And then I guess the same thing goes on the cost side, are we looking at full quarter benefit from that decision to close down that side of the business. And then I think I ask this last quarter but now that we're couple months further removed. Are some of those former subscription customers expressing or coming back and expressing greater interest in becoming capital or customers now that model relates is truly gone to them?

[Kenneth Ferry:]

Sure. Why I not just pass it over to Rich.

[Richard Christopher:]

Okay. To hit upon the cost piece, the full cost of the shutdown is now behind us. We were successfully shutting down the business as of the end of February with some residual costs in March. So starting in the second quarter of 2018 you'll see the first full quarter impact of the savings related to that. As far as the tail on revenue there are eight to 10 customers that actually only equipment and will be transformed on to a source and service agreement. So pulling away from the subscription model and moving towards to the source and service agreement, so we'll maintain a piece of that business as well. And above and beyond that we're still actively trying to sell a handful of the control left were remaining five accounts at this point in time. So for all intents and purposes its been shutdown and you'll see the full impact in the second quarter.

[Per Ostlund:]

Excellent. Thank you guys. Appreciate it.

[Operator:]

We'll move next to François Brisebois with Laidlaw.

[François Brisebois:]

Hi. Thanks for taking my questions. I was just wondering you mentioned how in the fourth quarter, this is on the detection side and coming in a little low. You mentioned on the fourth quarter how they'd been kind of a move to the 3D more from 2D and then it kind of came back to 2D in the first quarter 2018 here. Any thoughts as to what could drive that? What would happen that you either could potentially make this happen?

[Kenneth Ferry:]

That's a good question, Frank. All I can say is that GE is extremely margin conscious on every transaction. And as they're still selling to customers that are using 2D for screening primarily in 3D for working up patients on callbacks there is still some logic to adding to the current 2D product and just adding a license. And I think that if these customer sites were going to 3D exclusively to both screening and diagnostic they would obviously not be interested in them to the license. And so because there is a transition going on from 2D to 3D for screening and is still going along nicely. Over time its a no-brainer that its going to be a 3D software option only, but because they have a number of customers that have our current 2D products in their site and the customers now adding 3D capability it’s a lot less expensive to add 2D CAD than it is to add 3D and I think that they get caught in competitive circumstances particularly against Hologic and Siemens and Fuji where they have to be as price competitive as possible. And unfortunately the option of adding a license still becomes a cost-effective option to have competitive pricing with new competition. And also they make a very good margin by just adding a license to a site where we already have an existing Powerlook server. Those customers as we've said over the longer term and not being served well because those customers will eventually over the next two years go to work on 3D protocol for screening and diagnostic and those customers essentially will have to buy a brand-new system because the 3D software is not compatible with the old PowerLook 2D systems. And so we continue to work with GE. We do make progress with them. We disappointed that we've not made more progress because in the long run customers will ultimately have to pay more now to get 3D software. And with that said we'll just continue to work with them and continue to work directly with customers as we have with our own direct team. And ultimately over time we will get this migration, but we expected it would move much more rapidly to 3D more like 80/20 or 90/10 mix and unfortunately the mix has not come anywhere near that relative to 3D outpacing 2D. With that said, I believe as we get close to the Version 2 given some of the unique capabilities, I would really hope that that would be extra motivation for GE to really aggressively market our 3D product exclusively in 3D transactions because it's a tremendous game changer and I do believe customers if its positioned properly would welcome that product

[François Brisebois:]

Okay great. Thanks Ken. And this is probably more for Richard on the subscription discontinuation there on that service. Can you quantify, you might have done this is what thrown at us there, but can you quantify that they decrease in cash burn since that discontinuation? And when you guys mention the cash flow breakeven by year end 2018, is that for the year end 2018 as a whole or is that may be hitting the third quarter, fourth quarter but not for the entire year yet?

[Richard Christopher:]

Well, so we answered the lot part of question there. It would be on a quarterly basis in Q3 and Q4 but not for the full year. And the earlier part of your question has to do with the savings related to the shutdown of the skin subscription business. I think we quantify that at $3 million annually. We had about two and a half months worth the cost in the first quarter, so we didn't have a ton of saving as a related to the 3 million in the first quarter but certainly in the second quarter and beyond we have the full impact of that annualized 3 million coming out of our cost of goods sold line item.

[François Brisebois:]

Okay, great. All right. Thank you. And then, so you mentioned that in terms of revealing to the reader study I'm just looking at. You got CE marking Europe for Version 2.0 and then – but you haven't shown any data yet for the reader study. Can you just remind me just again in terms of time line how that happens, you submitted to the FDA, and then when should we expect this is a publication which you never really know when that happens, but I guess in the EU, its little different because you haven't shown the data yet but has there been any pickup? And then in the U.S. after the FDA hopefully as positive about the Version 2.0, when can we expect this to affect the top line and get contracts and then kind of that mentality with the reader study on top of it?

[Kenneth Ferry:]

Sure. So, maybe to start with the Europe and CE Mark, we obviously has the benefit of CE mark on Version 1, so when you contrast the regulatory process in the CE mark from Version 1 to Version 2 its not nearly as onerous as a PMA going to a PMA supplement in United States. So we benefited from Version 1 which helped us to have the ability to get CE Mark quickly for Version 2. And part of the reason we did that was that for us to be able to really aggressively market Version 2 in the EU we really needed to have CE mark in time for the European Congress radiology which was very late February or early March. With that said, we knew that we still have some additional work to do and actually it was more about hardware because the servers now used GPU cards with the newest product and the ability to source and get a significant quantity of GPU cards test and so forth, we knew it was going to take us four to six weeks. We also wanted to work with our partner companies that we're working on compatibility with their workstations whether it would packs or dedicated mammo workstations, so that when we go to the addressable market in Europe is compatibility with a number of our partners given this product is for all of the companies not just GE. So we work through that whole process Frank. And we think we're probably within a week or so of being able to ship our first products in to Europe and there's quite a bit of interest that's building. As it relates to the U.S. it's a completely different scenario where we will required to do another full-blown reader study which we will not required to do to get CE Mark for Version 2. And the amount of time and effort and cost was pretty substantial. So, as we enter into the regulatory cycle with the PMA supplement, I mean from a process standpoint the FDA has up to 180 days to respond. We're in the 510-K will be up to 90 days. Now we've been talking with them. We've been having good communication and discussions around the submission. We've had lots of questions to make sure that we have their feedback to put the submission in properly, so we surely don't expect to go 180 days to hear from them. We hope to hear from them in a matter of months when we put in the submission. And depending on their response that will give us a better indication of what the timing would be as it relates to getting the product into the U.S. market, so it's a bit of a challenging dynamic to try to predict how that will go. But that's little bit of the history and that's really where we see ourselves as we're about to make the submission any day.

[François Brisebois:]

Okay, great. All right. That's it from me. Thank you.

[Operator:]

[Operator Instructions] We'll move to our next question, is from Brian Marckx with Zacks Investment Research.

[Brian Marckx:]

Hi, guys. Ken, your referenced superiority claims that you may pursue, if you can just may be provide a little bit more around that in terms of when you would I guess kind of know whether that something that you would pursue? And then in terms of competitive differentiation how I guess important is it to be able to have a superiority claim relative to what is in the U.S. today in terms of competition?

[Kenneth Ferry:]

Sure. I think that just in a broad sense Brian, when you measure the performance of the radiologist from sensitivity or detection accuracy standpoint. And then you have the read the same exams again and do it with washout period. On average and I'm just using a general term, you're looking to see a roughly a 5% increase in detection when they use our tool versus when they do not use our tool, so that would be just want I call it a general goal. With that said what we achieved was substantially greater than that. So that gives us a lot of confidence relative to superiority claims. Same exact feeling as it relates to specificity which really as I mentioned earlier it's unusual or unheard-of that you can increase your sensitivity to a significant degree and then actually decrease [Indiscernible] since increase sensitivity and with increase false-positives. But we had almost a similar reduction as it relates to false-positives and that something we're actually investigating relative to what additional studies we may have to do to apply for reimbursement for this product. Because when you think about it with the payers if you can go in and basically show that not only do you find more cancers in that radiologist finds on their own with this product, but if you can reduce in a meaningful way unnecessary recalls you save to help your system a lot of money, right, whether its ultrasound or MRI, or biopsy only to find out its negative. So we're pretty excited about the performance of the product. And these performances that we have will be part of our application is ultimately it will be the FDA's decision as to whether they would deem them to be so significant enough improvements over the reading that was done without our tool to give us superiority claims. But if we use prior reader studies and prior approvals in the 2D world as a comparative we feel really good about our ability to get superiority claims but will have to wait and see how the FDA interprets the results. They ultimately make that call. We're just very optimistic and hopeful going into the process.

[Brian Marckx:]

So it sounds like your upcoming filing, your upcoming FDA approval filing has the potential that you could get a superiority claim with that filing. Is that right?

[Kenneth Ferry:]

Yes. To other earlier point, it could be a huge competitive differentiator because ultimately to be able to detect a statistically relevantly more cancers using the tool then without is a big, big deal and is a big advantage for us. The other thing which I didn't spend a lot of time on is with this significant improvement in performance we also had an even larger reduction in reading time. We had a 29% reduction in average reading time in the first reader study. In this study was close to the 50%. So when you think about radiologist workflow, we think about the productivity gain literally being able to reduce your reading time almost 50% and substantially increase your detection capability and reduce and reject unnecessary false positives. I think this could be a huge competitive differentiator for us in the marketplace and it's a real testament to our outstanding development team and the fact that they have really assimilated really really competent skills around machine and deep learning. We have developed a data capture capability where we have thousands and thousands and thousands of images that we continue to build upon that base and that is reflected in the spot. A lot of companies are out there getting into the space, we hear about it all the time, but often if you compare they're working on their first product. Don't have anything available commercially. And we are on the customer bringing a second version of an AI product to the market. And you should expect significant improvement with every version over the one prior and at least as we make a comparison of the work we did on Version 1 and Version 2 we're very very pleased with the progress that the team made.

[Brian Marckx:]

Thanks Ken.

[Operator:]

That includes our question and answer session at this time. I'd like to turn the call back to Mr. Ken Ferry for closing remarks.

[Kenneth Ferry:]

Thanks, operator. In closing I'd like to reiterate our priorities going forward. One, is to maximize the success of PowerLook Tomo detection software in the market for the Version 1, while we roll out Version 2 Europe first and then in the United States later this year. To reiterate the next version of the software will meaningfully expand our addressable market as it will be available for all the major 3D mammography systems on the market today. Two, to continue to increase our capital customer base within the skin breaking therapy business, and also to expand our IORT and GYN customer base on a global basis. And lastly to manage our expenses in cash use prudently, so as we reach a cash flow breakeven run rate by year-end. With these closing remarks, we thank you for joining on call today for the first quarter of 2018 and we look forward to updating you again following the close of our second quarter. Good day.

[Operator:]

That does conclude our conference call. Everyone, we do thank you for your participation. You may now disconnect.