iCAD, Inc.
Q1 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

Good day, ladies and gentlemen. Welcome to the iCAD Incorporated First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call maybe being recorded. I would now like to turn the conference to Zack Kubow of The Ruth Group. You may begin.

[Zack Kubow:]

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 Kevin Burns, President and Chief Financial Officer. After the market closed today, iCAD announced financial results for the three-month period ended March 31, 2016. Before we begin, I would like to caution that comments made during this conference call that contains 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 10-K which identifies specific 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 the live broadcast, May 3, 2016. 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, I'd like to turn the call over to Ken Ferry. Ken?

[Ken Ferry:]

Thanks, Zack. Good afternoon, everyone and thank you for joining us today. I'll begin with a few brief comments on our first quarter financial results and the key developments in our business that will drive growth in the second half of 2016 and beyond. I'll then turn the call over to Kevin Burns, our President and Chief Financial Officer, for a detailed review of our financial results. Following Kevin's remarks, I'll be back to review our key initiatives for 2016 and then we will open the call for questions. First quarter of 2016 financial results were weaker than planned, however, we expect to begin to see improving topline results throughout the rest of the year as a result of the considerable progress that we've made with two strategic business initiatives in the company. First, at our cancer detection business. We completed a highly successful U.S. clinical reader study that achieved a primary and secondary endpoint using our 3D tomosynthesis software increasing our confidence and the value of our solution and the market potential for this product, and enabling us to submit a final PMA module to the FDA. In our cancer therapy business we now have sufficient positive data on reimbursement for the new CPT skin eBx code. We're making good progress restarting activity with existing customers and building a strong funnel of new customers for the longer term in order to drive broader adoption and this $1 billion plus in annual market opportunity. I'll provide more detail on both of these topics, and our other growth initiatives in a moment but now I'm going to turn the call over to Kevin Burns for more detailed review of the first quarter financial results. Kevin?

[Kevin Burns:]

Thank you, Ken and good afternoon everyone. The revenue shortfall compared to our expectations for relatively flat sequential quarter was driven by delayed orders in both cancer detection and therapy. However, we are off to a good start in Q2 as several leading fields have already closed in April and the outlook for the second half of the year remains very strong. On the expense side, we continue to invest in our strategic initiatives to support our business, given the positive outlook we have had for the second half of 2016 and beyond. In the quarter, our cash burn was higher than anticipated given our revenue result. We remain comfortable with our cash position which could also be strengthened if we complete the sale of our MRI CAD business later this year. In the second half, we expect to benefit from the planned launch of our breast tomo-solution combined with the reactivation and new customers in our skin eBx business. We continue to invest to support these near-term opportunities and our long-term initiatives and have increased confidence in our ability to deliver improved results. I will now provide an overview of our first quarter 2016 financial results. For the first quarter, total revenue decreased 54.3% year-over-year and 20.6% sequentially to $6 million. The year-over-year decline was driven by reimbursement uncertainty in our skin eBx business and the anticipated decline of our MRI CAD revenue as a result of MBO exercising their rights to a paid-up license during the third quarter, and recognizing the paid-up license ratably over the rest of the contract. As discussed, the year-over-year and to a greater extent, sequential decline was also driven by timing issues for orders in our cancer detection and therapy businesses. In our therapy business, first quarter revenue was $2.1 million. Therapy product revenue decreased to $227,000 in the quarter reflecting the sale of one multi-indication soft system in the U.S. In the first quarter of 2016, IORT balloon sales volume was up 10% to 396 balloons. With the U.S. market up 16.5% from 243 balloons in the first quarter of 2015 to 283 ballons in the first quarter of 2016. Internationally balloon volume decreased slightly from 117 last year to 113 in the first quarter. Therapy service and supply revenue decreased to $1.9 million in our first quarter, it can be broken down to $306,000 coming from our subscription-based non-melanoma skin cancer customers, and $1.6 million coming from service and source agreements as a result of customers who have directly purchased our therapy system. Moving onto cancer detection, total revenue in the first quarter was $3.9 million, a 17.9% decrease compared to the first quarter of 2015. The decrease is due to lower OEM business combined with the fact that in vivo exercise their right to a paid-up license on our MRI CAD product. We continue to expect only the revenue related to the amortization of the $2 million license fee we received in August which we're recognizing ratably over the life of the contract through July of 2017. As a result, this will continue to impact our year-over-year comparison through the second quarter of 2016. We are in strategic discussions with our partner regarding the MRI business which we anticipate could be finalized during the second or third quarter and could potentially result in a sale of the MRI assets. Cancer detection product sales of $1.8 million in the first quarter decreased 37.3%. The decrease is due to part to timing issues with system sales that carried out longer than expected and a so much softer corner for our mammography products. Cancer detection service revenue was $2.1 million in the quarter, an increase of 11.2% year-over-year. This reflects positive momentum for service revenue driven by the growing number of PowerLook systems under service agreement, both from an OEM and direct standpoint. Going forward and excluding the in vivo NRE revenue we received, we expect service revenue to continue to grow throughout 2016 driven by PowerLook, breast density, and our strategy to better capture service agreements for the new service revenue related to our tomo-solutions. Moving on to the rest of the P&L, gross margin in the first quarter were 69.3% compared to 70.8% in the first quarter of 2015, a 150 basis point decline on a year-over-year. The decrease in gross margin was driven by the lower contribution of service and subscription revenue in the quarter, as well as lower cancer detection and controller sales. Depreciation and amortization it the first quarter was $303,000, a decrease from $639,000 in the first quarter of 2015. As a reminder, although we have made significant cost reductions in our business due to the historical reimbursement uncertainty, we maintain direct fixed resources to support a quarterly revenue run rate north of $10 million per quarter and as a result, we expect margin expansion, particularly in the second half of the year, as we realize revenue from our tomo-solutions combined with incremental skin eBx revenue. Operating expenses in the first quarter of 2016 were $6.7 million, down from $8.9 million in the first quarter of 2015. In the first quarter, we completed the purchase of the remaining assets of VuCOMP. As part of this transaction and G&A operating expenses, we recorded a credit of approximately $200,000 in the quarter reflecting a gain on litigation settlement offset by transaction cost. As a result, we normalized operating expenses for slightly less than $6.9 million which was on the low end of our expectations for operating expenses of $6.8 million to $7.2 million in the quarter. Looking to the second quarter of 2016, we expect quarterly operating expenses in the range of $7 million to $7.3 million per quarter with the increase being driven by additional clinical studies combined with commercial investments focused on entering new skin eBx market and adding additional commercial resource resources in established skin eBx areas. Looking at our profit metrics, non-GAAP adjusted EBITDA for the first quarter was a loss of $1.5 million as compared to non-GAAP adjusted EBITDA income of $2.7 million. Non-GAAP adjusted net loss for the first quarter was $2.7 million or $0.17 per share to compare to non-GAAP adjusted net income of $373,000 or $0.02 per share for the first quarter of 2015. Looking at the balance sheet, we had $12.9 million in cash at the end of the first quarter of 2016 compared to $15.3 million at the end of the fourth quarter. During the first quarter of 2016, we used $1.9 million in cash from operations. Given the higher than expected cash used in the first quarter combined with the uncertainty around the timing of revenue in the skin business, we expect to end the year with cash in a range of $10 million to $13 million. In terms of guidance while we are pleased to have clarity on current reimbursement for skin eBx, it is still too early in the process of reactivating customer sites and understanding the ramp up time to provide any official financial guidance. However, we would advise investors to consider the following five points when analyzing the business. First of all, in cancer detection, we expect a slow ramp up of breast tomo-software sales in Europe during the second quarter with potential for more meaningful contributions in the second half of the year. In addition, we anticipate FDA approval for tomo-solution in the third quarter with a similar study ramp initially followed by larger growth as the launch progresses. Secondly, in cancer therapy once we assigned a new agreement with an existing subscription customer, we believe it will take on average between one and two months before they begin treating patients. We have either signed agreements or in contract discussions with 10 solution customers, and are in discussions with approximately 30 additional solution customers that we anticipate could sign agreements to reactivate within the next three to six months. When fully up and running, we believe these subscription solutions -- customers could generate in the range of $100,000 to $150,000 in annual recurring revenue per year. In terms of new customers, we anticipate that we could begin to see a momentum in new subscription placements in the mid to late Q3 and Q4 timeframe. Next, from a skin eBx capital customer standpoint, we or our partners have reached out to approximately 80 sites that are in the process of reviewing if they want to provide skin eBx to their patients. From a revenue standpoint, we expect annual recurring revenue to be in the range of $60,000 to $80,000 per site for skin eBx capital customers. First of all, on the gross margin side, given the new reimbursement level and an anticipated growing customer base, we believe that our skin eBx gross margin can approach the 70% range overtime which includes a positive benefit of the smart solution and are extended by X-ray source. As previously communicated, our cancer detection margins are expected to continue to be in the mid 80% range. Finally, from an EBITDA standpoint, we expect to be EBITDA positive no later than the fourth quarter of 2016 as we continue to make investments to accelerate revenue growth in late 2016 and going into 2017. Looking forward, we are optimistic that we can resume financial guidance later in 2016. With that overview, I will now turn the call back over to Ken. Ken?

[Ken Ferry:]

Thanks, Kevin. Let me now turn back to some of the detail on the first quarter significant developments starting with cancer detection. Major growth driver in our cancer detection business this year is the launch of our 3D tomosynthesis software in Europe and in United States. I'm pleased to report that we have several very positive updates on this front. One in Europe, it was a very positive response to the introduction of our 3D software at the European Congress of Radiology meeting in March. We demonstrated the product to a large number of radiologist and the consistent feedback was that they would not want to read to tomosynthesis exam in the future without it. Or the biggest concerns that we consistently hear from radiologists is about the increased amount of time that takes to read tomosynthesis cases when compared to 2D combined with reader fatigue. Our software dramatically reduces this increased time to read. This market feedback demonstrates the significant opportunity for cancer detection in workflow software among the growing installed base of tomosynthesis users. Two, following the ECR meeting in April, we receive CE mark our 3D software and we recently received our first international order. We expect a sales ramp of our 3D software in Europe towards the end of the second quarter with more momentum occurring in the second half of the year as commercial activities gain momentum. Three, in the United States, the results from our U.S. clinical reader study achieved the primary endpoint. We submitted a final PMA module to the FDA in early April, keeping us on-track for potential approval and launch in the U.S. during the third quarter of this year. The U.S. reader study included 20 radiologist and completed reading sessions for 240 CAD-assisted tomosynthesis cases demonstrating a 29% reduction in reading time with comparable clinical performance. This compares favorably to our European reader study of 80 cases read by six radiologist that demonstrated a 24% reduction in reading time with comparable clinical performance. These studies validate the effectiveness of the product when used by expert and less experienced radiologists. We're also encouraged that U.S. study showed a modest increase in the detection rate of soft tissue densities and mixed lesions. Four, similar to our experience of ACR, we received very positive physician feedback from the demonstration of our 3D tomosynthesis software and three recent medical meetings in the United States. New York Breast Imaging Society, the SPAI ACR Breast Imaging Symposium in Austin, and the 26th Annual Interdisciplinary Breast Cancer Conference in Las Vegas. Many of the attendees at these meetings are eagerly awaiting the availability of our software. Additionally, we've had the opportunity to further enhance our breasts tomosynthesis detection capabilities with our next generation software version. Our goal for the next gen-software is to continue reducing the reading time from radiologists in increasing the accuracy of the software such the radiologists can be confident they only need to read exams identified as abnormal by the software. This will dramatically change the current reading paradigm for radiologists saving them considerable time and improving their productivity or loss of saving costs for the healthcare system. Importantly, we are building the software based on a large multi-vendor data set which anticipate will allow our next generation software to be available for use in all tomosynthesis exams irrespective of manufacture. We're working aggressively to complete the development and testing for this next generation software and could introduce it in Europe the end of 2016 or early 2017, and in the U.S. as early as mid-2017 depending on the features and clinical requirements for approval. Turning now to cancer therapy; we're very pleased that we now have enough reimbursement data under the new CPT 3 code to provide clarity in reimbursement coverage for skin eBx. The good news is that we believe the reimbursement rates to-date will support a viable skin eBx business for iCAD and our customers. This reimbursement clarity removes a significant uncertainty from the skin eBx market and gives us confidence that will be able to reactivate existing customers and build momentum with new customers overtime. We're now working closely with our customer base, many of which have been eagerly awaiting clarity on reimbursement. Our initial focus will be on signing agreements to reactivate our existing subscription model customers along with reactivating our customers at those [ph] system. Kevin has already provided details on our expectations for the ramp up in this business ended at high level. I can summarize by saying we expected to be a very positive growth driver that begins in the second half of the year. We're also accelerating sales activity in our pipeline of potential new customers in the market such as in Michigan where reimbursement under the new code has been publicly published, providing a near-term opportunity to drive new customer adoption. And in addition, we're looking at commercial investments in other regions to accelerate skin eBx growth. Another tailwind for our skin eBx business is the recent introduction of our smart solution and extended life X-ray source for the XOFT Skin System. We expect this upgrade will improve the efficiency of the system by upto 40% and provide an improved business model. We showcase the speeches at the recent American Academy of Dermatology annual meeting and received very positive feedback, particularly on the smart solution. Visitors to our AAD booth were able to experience a simulated treatment session that showed a simpler, more efficient workflow enabled by the smart solution. As we look forward, we will continue to enhance XOFT skin eBx system with improved efficiency for our end-user skin customers combined with even longer X-ray source run times. We're also investing to continue to developed the clinical data to support a broader adoption for skin and in the longer term, a CPT 1 code or the use of our electronic braking therapy. This includes the ongoing enrollment and patient follow-up in our clinical study that we believe will support a level 1 CPT skin code in the future. Based on our current pleasant timelines we anticipate that we may have sufficient three-year follow-up from historical patients in the trial by the end of this year, assuming that results track with commercial experience to-date just may put us in position to submit this to CMS in 2017 and apply for CPT 1 code for skin. Turning now to IORT; we expect another strong year of international performance in this business both, in terms of system placements and sales of single-use balloon applicators. These system places will be driven by growing momentum in existing markets and the expansion into additional markets in 2016. We also expect procedure volumes to grow significantly in our international installed base driven by expanding clinical data and greater patient awareness. In 2015 we experienced significant applicator sales growth, we believe we have the potential to continue this dramatic growth of applicator sales in international markets in 2016 as well. In the United States, one of our key initiatives to drive adoption of breast IORT is focused on expanding the clinical data and support of the procedure. In the coming months we expect to complete enrollment in the expert study comparing the XOFT system to traditional external beam radiation therapy which is a landmark study for the XOFT system in breast IORT and one of the largest studies to-date. Studies enrolling upto 1,000 patients across the United States and Europe. Study subjects will be focused to 10 years after treatment to evaluate the long-term safety and efficacy of breast IORT with the XOFT system. The study will also assess cosmetic outcomes in quality of life for those treated with IORT. In the fall we anticipate that the first data presentation from the extra study will be presented at ASTRO providing another important clinical data point for team as we work to drive adoption in the United States. In addition to the expert presentation, we have a robust schedule of additional IORT data presentations and publications planned for 2016 along with our planned activity at medical society meetings throughout the year. So before we open the call to questions, I want to reiterate our top priorities for 2016. First, the cancer detection successfully launched our breast tomosynthesis software, I'll also continuing to drive adoption of PowerLook upgrades and adoption of our breast density software. Second, in therapy to reactivate our existing installed base of skin eBx sites and build momentum in the business with addition of new customers. Third, also in therapy to continue to drive international momentum for breast IORT. Fourth, continue to invest in clinical studies to build the long-term data required in support, the use of the XOFT eBx system for the treatment of breast and skin cancer. And finally, to continue to carefully manage our costs and our investments. Given these priorities and the positive updates for our 3D tomosynthesis software and the skin eBx business, we believe we are well positioned to accelerate growth in the second half of the year. We look forward to updating you on our progress of these goals at upcoming congresses meetings, and in our second quarter conference call. We'll now open the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Bill Bonello of Craig-Hallum. Your line is now open.

[Bill Bonello:]

Hey guys, thanks a lot. Excellent stuff to beat the balance [ph]. First of all, can you just tell us in terms of although the endpoint on the internal CAD, is that essentially you were looking for. A non-inferior outcome? And how do you measure that, is it a sensitivity and septicity [ph] comparison or what's the actual sort of data you look at there or the E.U. you have showed to the FDA.

[Ken Ferry:]

So when we originally put together the protocol which we did in a collaborative fashion with the FDA, all along what we were looking at this is a very powerful workflow tool. And given the feedback we've received from a number of radiologists about the amount of time that it takes to read tomo exams and the fatigue that can come with it, we came to the conclusion that the ability to essentially read these exams in a much more productive time was probably the most important initial contribution. And that actual performance in terms of cancer detection only needed to be inferior and we would be making a meaningful contribution. So in essence what we were able to accomplish was as we mentioned a 29% reduction in reading time with the study in the United States and 24% on the international study. And essentially comparable detection accuracy with the exception of some soft tissue and mix lesions that we referenced that we did better. So there was a modest increase in detection accuracy in the U.S. study overall but it was not deemed to be statistically significant. However, it has hit the primary and secondary endpoints. We essentially had to show a meaningful reduction in reading time and essentially not inferior or comparable performance in terms of detection. So we feel very confident in collaboration with our PhD statistician that we achieved both, the primary and secondary endpoints. With that said, going forward, we're already working as we mentioned on the next-generation product using machine learning and a very extensive database of all of the vendors that provide 3D machines. And our goal within the next year or so is to have a version that will be substantially more accurate than radiologist reading alone, and further reduce the reading time. And we're really -- our goal there is a breakthrough in that essentially, if we're successful radiologists will only need to read the abnormal cases and we think about it. We typically are going to find only three or four cancers per thousand but certainly more cases will come back abnormal where you would rule out false positives. So we're not going to reduce the total number they read down to 3% or 4% but it could be a dramatically less number than they read today, provided we can achieve the performance. So we think the product is initially positioned as a very powerful workflow tool and we think the follow-on product will have significant increase in detection capabilities. And further impact productivity. Keep in mind that we've brought radiologist together in these two settings and we train them one day and they went right to work in reading the case. And to get a 24% and 29% reduction in reading time when they were essentially just using this for the first time tells us that overtime, even with the current product those reductions in reading time should improve. We also -- this is an average because we brought experienced readers and inexperienced readers and that was kind of the blended average number. So we're optimistic that this is a baseline in terms of productivity that could improve further. And when you think about the U.S. marketplace, being able to read was it the 30% or 40% more exams at the course of a day without compromising detection accuracy is a very, very significant contribution that we believe we're making.

[Bill Bonello:]

Excellent, that's helpful. And in terms of the next-gen product, can you tell us and maybe you can't -- but can you tell us if you had any vendor conversations thus far and sort of -- you think the response from the other vendors besides GE might be?

[Ken Ferry:]

Well, I can tell you what's happened is, we've demonstrated the software that we've initially just provided for GE. And we're at the meetings with -- the medical meetings, obviously all of the other companies that make digital mammography machines, and particularly, our current partners that would be people like Siemens, and Fuji, and Philips, have all committed a booth and they have been anxious to have this product. And we've explained that this was a unique product that we developed with GE but that we believe the next-gen which they may have to wait an extra year to see beyond when GE has the current product will have some really significant incremental benefit. So they're very excited about this, they are little bit frustrated, quite frankly, they're not going to have this product right out-of-the-box as in the 2D world they did. But we think we're going to give them something even much more powerful next year and we're basically collecting an extensive amount of data across all of the companies in the space, barring no one. So by doing so our addressable market for this product should be very, very considerable. And I think I mentioned this, we're the one and only company that essentially has introduced CAD software for 3D. It has CE mark, we have completed a PMA supplement application, doesn't mean that others may not enter this space but we think we have a very powerful tool and we have a captive market for some period of time. And if we execute on the second product in the timeframe we've discussed, we could have quite a lead on anyone else who decides to enter this space and an extremely large installed base, as well as a new system pipeline to sell the software to. So we're pretty excited. We've accomplished a lot with all of the years of development we've put into this, we've invested substantially as two reader studies, and it's given us a lot of confidence that the product will be successful.

[Bill Bonello:]

That's super helpful. And you're not aware of anybody developing a competitive product at this point? There is no chatter from your customers about what they might be hearing from other vendors?

[Ken Ferry:]

Not at this point, you know. They continue to say very consistently that the amount of time that it takes to read the exams, the amount of concentration and resulting fatigue given the volume of exams as a number of the sites, particularly those using this for screening are experiencing -- I would really welcome this. And just as an addition to the testimonials, keep in mind that CAD in the 2D world was not a standard-of-care outside of the United States. And in the U.S. market it became a standard-of-care but let's say in the European and Asian markets maybe 20% of our customers bought that product. We have shown the product in Europe at the European Congress and Radiology. We had obviously six readers -- read in the reader's study and these physicians consistently have said they do not want to read exams without it going forward. And that's a very different reaction the we got in 2D. So we're excited and we're looking forward to more reaction as we're ramping up the commercial sales activity.

[Bill Bonello:]

Thanks. And then if I can just a couple of questions on the cancer side, on the detection -- excuse me, therapy side. You talked about ten solutions customers, and then already 30 or more who could activate that you're in discussions with -- is that between the 10 that are reactivating in the 30 that could. Is that the entire solutions customer base that you had or is that some subset of that customer base.

[Kevin Burns:]

Hi Bill, it's Kevin. Let me just sort of walk you through our current skin customer base and the opportunity ahead of us in the next 6 to 12 months. And from a revenue standpoint, our skin business today -- our recurring skin business is about $3.2 million and that's about 25 active customers. In the solutions world, there are about 40 customers who are opportunity for us. We believe 10 of them are basically under agreement on in contract. So we feel pretty good about majority of those. But if we can get all those on-board, that represents about $5 million recurring revenue in your recurring revenue opportunity. Finally, there is the capital customer. So these are the customers that have purchased system from us previously are no longer using the system and are evaluating whether or not they restart the skin program. And the customers as I mentioned in the remarks would generate about $50,000 to $65,000 of revenue, a recurring revenue per year. So three different buckets, we have 25 active today, we have 40 potential solution customers, and we have between 50 and 70 capital customers. If you do that math with all the ASP, that is an annual recurring revenue opportunity, just within our legacy installed base of $14 million to $18 million, we believe that we're going to get a majority of that onboard over the next 12 months.

[Bill Bonello:]

Excellent. Thank you so much.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Brian Marckx of Zacks Investment Research. Your line is now open.

[Brian Marckx:]

Hi, Kevin you mentioned that there were some timing issues which impacted revenue in both, detection and therapy in Q1. Can you quantify us, quantify for us in terms of what the impact was? And then do you expect that all of that revenue to benefit Q2?

[Kevin Burns:]

I think it's three factors in the first quarter we talked about. We definitely think there was a decline in mammography product sales, our revenues there were lower than anticipated. But I think there was a couple of hundred thousand dollars in each bucket that pushed over from Q1 to Q2. So we do expect that to help out obviously our Q2 number. And we've seen some of that, not all that come in in the first month of the second quarter.

[Brian Marckx:]

Okay. In terms of the therapy service revenue, it sounds like on boarding the existing customers and potentially scoring new customers on the skin side could be at least a several month process. Does that suggest that Q1 therapy service revenue may not necessarily be the low that you have this year?

[Kevin Burns:]

I believe that -- we just mentioned to Bill, today we have about 25 skin customers and I believe those skin customers that's indicated in our revenue number in the quarter will continue to treat going forward. So now I believe it's all going to be incremental from here, we may lose one or two but we feel very good about our current installed base and it's going to be additive, it's a question of how quickly we can onboard, they can schedule patients and begin treatments.

[Brian Marckx:]

Okay, great. So product revenue was -- I believe it was about 90%, if I got that right in Q1, which is historically very high. Can you just give us little insight on what's there?

[Ken Ferry:]

[Indiscernible].

[Brian Marckx:]

I'm sorry, the product margins. I'm sorry, product margin was about -- almost 91%.

[Ken Ferry:]

To product margin, obviously we had disappointing therapy product revenue number and that margin on that business is much lower. So what really drove the higher margin in the cancer was the cancer detection business. And we also had a slight, a small credit and cost of goods sold for device tax credit that we were just working. So that impacted margin by a couple of points. So primarily the improvement in margin, unfortunate was the decline in product, therapy product sales.

[Brian Marckx:]

Okay. Do you have sort of an estimate in terms of the new software, the new expanded X-ray source and then the smart workflow package. How much that potentially could reduce the cost of the system for an average customer?

[Ken Ferry:]

What we've talked about before is that the improvements we've made in terms of our smart technology, the workflow, the number of steps involved in the product -- process, combined with a significant increase in the time that our X-ray source runs reduces the operating and total cost to deliver and operate by about 40% from historical levels. Now how much of that will be retained by iCAD and how much of that will be retained by some other customers, those are things that we're working through as we deploy our new models.

[Brian Marckx:]

Okay. All right, thank you.

[Operator:]

Thank you. I'm showing no further questions at this time. I'd like to hand the call back to the management for closing remarks.

[Ken Ferry:]

Well, I thank everyone for joining us on a call today. While the first quarter was a little lighter than we had hoped in terms of revenue, we feel we more than made up with the momentum that we were able to accomplish with our key programs around skin eBx and tomosynthesis interpretive software. And really those two programs are the most important takeaway for us from this call because those two programs can be very, very strong catalyst for growth, not just in second half of 2016 but for a number of years beyond. When you look at the size of the skin eBx market, it's probably greater than $1 billion a year and we ultimately have penetration that is in a single-digit range today. When you look at tomosynthesis, interpret of CAD software, the entire market is only about 20% penetrated with new 3D machines in the United States and probably less internationally. So we believe these solutions can have a real meaningful impact on our revenue growth for a number of years to come in large addressable markets where we feel we're extremely well positioned and will overtime really see the benefits of this effort and see really strong growth in support of that. So we look forward to updating you as we move forward with our progress at investor meetings and conferences, and medical conferences, and as well of course as we report our second quarter results toward the summer timeframe. So thanks very much for joining us today. And we look forward to speaking with you again sometime in the near future.

[Operator:]

Ladies and gentlemen, thank you for your participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day everyone.