iCAD, Inc.
Q2 2015 Earnings Call Transcript
Published:
- Operator:
- Good morning, ladies and gentlemen, and welcome to the iCAD Second Quarter 2015 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 follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Zack Kubow with The Ruth Group. Mr. Kubow, you may begin.
- Zack Kubow:
- Thank you, operator, and good morning 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. Before the market opened today, iCAD announced financial results for the three and six month periods ended June 30, 2015. Before we begin, I would like to caution that comments made during this conference call by management that contain 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 Form 10-Q, 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, August 5, 2015. 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 now turn the call over to Ken Ferry. Ken?
- Ken Ferry:
- Thanks, Zack. Good morning everyone and thank you for joining us today. During the call, I'll provide a brief review of our second quarter financial results and a business update for our cancer therapy and detection businesses. 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 recap our key initiatives for the remainder of the year, and then we will open the call for questions. Second quarter revenue was $11.1 million, up 15% over the prior year. This includes solid performance in our cancer detection business, which was up 3% in the quarter and 8% year-to-date fueled by strong sales of our PowerLook advanced mammography platform, along with increasing sales of both breast density and MRI software. In our therapy business, revenue grew 28%, which was lower than previously expected due to uncertainty related to a change in reimbursement for the treatment of non-melanoma skin cancer in the United States. Given that this reimbursement uncertainty has been the key subject of interest for investors, I'll begin the business update with a review of the current situation, and our proactive efforts to address the issue. During the second quarter, Noridian, the Medicare Administrative Contractor or MAC, covering 13 states primarily in the West Coast, communicated that beginning June 8 physicians should report CPT code 17999 when using high-dose rate electronic brachytherapy for the testament of non-melanoma skin cancers instead of the American Medical Associations established 0182T code. I have not to-date published a reimbursement rate for this code. This transition without a corresponding payment rate has created a great deal of uncertainty for our customers. Noridian's policy change was not anticipated in light of decision by the American Medical Association in consultation with the Associated Medical Societies in 2014 to create a new code that is dedicated to the use of HDR electronic brachytherapy for the treatment of non-melanoma skin cancer. This new dedicated code goes into effect on January 1, 2016. As a result of the considerable uncertainty surrounding the Noridian action, combined with the pending transition to a new dedicated code as of January 1, our skin eBx business was negatively impacted in the second quarter. As such, we withdrew our financial guidance for the year, and implemented initiatives to reduce expenses to best manage our cost structure during this period of uncertainty. Despite this slowdown in the skin eBx business, there continues to be a high level of interest in HDR electronic brachytherapy for the treatment of non-melanoma skin cancers from clinicians, with some treatment and purchase decisions being postponed or delayed because of the reimbursement uncertainty. In the past few weeks, we've received several reports of practices receiving payments under the new Noridian 17999 code. While this is encouraging, we still do not have enough data at this point to understand the methodology that is being used to calculate payment rate. As such, it remains difficult for us to measure the impact on our business and to provide guidance until there is greater clarity on the reimbursement situation. Obviously, this reimbursement situation of HDR electronic brachytherapy for the treatment of non-melanoma skin cancer has been a major focus of the company over the past several months and continues to be a top priority going forward. We're working with our customers, professional medical societies, and Noridian, to obtain clarity on reimbursement for the near term. This is in addition to executing our strategy for the upcoming transition to the new dedicated CPT skin code by January 1, 2016. Beginning this month, we plan to communicate with all eight of the regional Medicare contractors and to present the growing body of positive clinical data in support of HDR electronic brachytherapy for the treatment of non-melanoma skin cancer and to outline the cost associated with delivering the therapy. We believe this transition to a dedicated skin code will provide greater reimbursement stability and potentially be a catalyst for additional regional Medicare contractors to provide coverage and payment for the procedure in 2016. Moving on to other therapy applications, our breast IORT business had a good quarter of solid execution. We're very encouraged by our progress particularly in the international markets where we now have 21 centers actively treating patients with the Xoft system. In 2015, we expect to do as many as 400 IORT cases outside of the U.S. which is more than four times the total procedure volume of the last several years. This includes good progress in newer markets including Taiwan and Portugal. In addition, we recently received regulatory approval in Russia, initiated the regulatory process in India, and expect to gain approval in China later this year. Other active international IORT markets include the United Kingdom, Italy, Spain, Turkey, Egypt, and Saudi Arabia. Worldwide IORT procedure volume is indicated by disposable applicator unit sales grew 38% in the first half of 2015 compared to the same period in 2014. In July, we launched a new cervical applicator for the Xoft system, our first multi-channel applicator. It is used to deliver a precise dose of radiation to the larger target areas of the cervix while minimizing exposure to help new tissue. While with this launch we now offer a full gynecological product line allowing radiation oncology to treat all gynecological indications with the Xoft system. This new product will be important to our growth initiatives in the international front particularly in countries with high instances of gynecological cancers. Now turning to the cancer detection business, revenue was up 8% for the first half of the year. This includes strong demand in the second quarter for PowerLook upgrades in breast density and MRI products. For the first half of 2015, PowerLook upgrades grew 75%, breast density grew 124%, and MRI products grew 83% compared to the same period in 2014. This was partially offset by the usually large one-time mammography cancer detection order of $630,000 in Q2 of 2014, and weaker service performance comparatively. In July, we launched the iReveal breast density module for the PowerLook platform, following on our acquisition of the technology in late April. The iReveal software is designed to deliver automated, rapid, and reproducible assessments of breast density to help identify patients that may experience reduced sensitivity to digital mammography due to dense breast tissue. We have received positive initial feedback on the iReveal module. We are pleased to offer this module to our customers as part of a comprehensive breast imaging workflow and believe breast density represents a large growing market opportunity for the company. Currently 27 states mandate breast density reporting and there is strong legislative momentum in the remaining states to enact a similar reporting requirement. In the future we also will leverage our success with iReveal and PowerLook in the 2D market to develop a breast density product for the 3D tomosynthesis market. In total, we believe breast density represents a $100 million to $150 million market opportunity in the near-to-mid-term in our installed base alone. Another key area for growth in our cancer detection business is the development of our breast tomosynthesis cancer detection software. During the second quarter, we made significant progress completing a clinical reader study in support of our European regulatory submission for this software. This should put us on track for planned European launch at the end of this year. In the reader study, radiologists read tomosynthesis cases with without the use of our interpretive software. We are very encouraged by the early data coming from the study indicating our software had a positive impact on radiologist productivity and workflow. Given the positive tracks with our development plan, we are planning to introduce our tomosynthesis software at the JFR Radiology Meeting in Paris in mid-October. We will have three major European key opinion leaders with experience using this software at our booth presenting their experience and highlighting the technology. In United States we will begin our clinical reader study with our tomosynthesis software in September, which will form the basis for our FDA submission. Based on current timelines, we anticipate the submission to be in early 2016. We also believe that the market opportunities in our installed base alone for the tomosynthesis interpreted software to be in the $100 million to $150 million range in the near-to-mid-term. I will now pass the call over to Kevin Burns, who will discuss our financial results in greater detail. Kevin?
- Kevin Burns:
- Thank you, Ken, and good morning everyone. As Ken mentioned, in the second quarter of 2015, we found solid performance in our cancer detection business with reimbursement uncertainty in our therapy business. This required us to take certain actions to ensure prudent expense management that I will discuss during my overview of our second quarter financial performance. For the second quarter, total revenue increased 15.3% to $11.1 million. In our therapy business, revenues increased 28% to $6.2 million. Therapy product revenues declined to $141,000, while therapy service and supply revenue increased to $6 million. The $6 million of service revenue is primarily related to our skin brachytherapy business. It can be broken down into approximately $3.8 million coming from our subscription base non-melanoma skin cancer customers, and $2.3 million coming from service and source agreements as a result of customers who have directly purchased our therapy system. As a result of the reimbursement uncertainty, there is a major impact to our skin electronic brachytherapy business both from a subscription and new product placement perspective. Looking forward, into the second half of 2015, we have a base of skin brachytherapy subscription customers that are continuing to treat patients, and we expect that this drive approximately $1 million of subscription revenue per quarter, and our service and source revenue will be slightly north of $2 million per quarter. In addition, we do anticipate additional product traction from the IORT business in the back half of the year, as deals pickup both domestically and internationally. Finally, any certainty related to HDR electronic brachytherapy reimbursement could be additive to the baseline revenue numbers that I just discussed. Moving on to cancer detection. Total revenue in the second quarter was $5 million, a 2.5% increase compared to the second quarter of 2014. Product sales of $3 million in the quarter increased 5.2%, driven by strong results from PowerLook upgrades and sales of our breast density and MRI products. Service revenue decreased 1.1% in the quarter to $2 million. As previously discussed, we expect a low-single-digit growth to continue in this business moving forward with significant acceleration upon the availability of our 3D mammography workflow solutions. Gross margin in the second quarter of 2015 and 2014 was 70.7%, with a slightly improved product gross margin percentage offset by slightly lower service and supply gross margin percentage. Depreciation and amortization categorized as cost of revenue in the second quarter was $503,000, an increase from $343,000 in the second quarter of 2014. Moving down to operating expenses. In the second quarter we recorded $27.4 million non-cash impairment charge in our therapy business, consisting of $14 million impairment related to goodwill, and $13.4 million impairment related to long-lived assets. These debt assets were being impaired as a result of the reimbursement uncertainty and the potential impact this may have on the future results of the therapy segment. As a result of the impairment, D&A classified as cost of revenue will decrease to approximately $150,000 per quarter from $503,000 in the second quarter; and D&A classified as operating expense will be approximately $200,000 per quarter, down from approximately $500,000 in the second quarter. Excluding impairment expenses, operating expenses in the second quarter were $8.3 million, down from $8.9 million in the first quarter. In the second quarter, we had approximately $400,000 of one-time expenses, of which approximately $300,000 was severance due to a reduction in force that we implemented in early June. As a result of this action, and other expense controls, we expect operating expenses to be in the $7 million per quarter range in the second half of 2015. Please note that included in the $7 million of operating expenses per quarter is an investment of $800,000 to our tomo reader study and to develop new technology that will significantly reduce our cost to deploy and utilize our electronic brachytherapy therapy solutions in the non-melanoma skin cancer market that we anticipate bringing to market in early 2016. As a result, we will be entering 2016 with a quarterly operating expense level in the range of $6.5 million to $7 million per quarter, with potentially additional investments to be made based on reimbursement clarity. Looking at our profit metrics, non-GAAP adjusted EBITDA for the second quarter was $1.6 million or 14.4% of revenue, up from $917,000 or 9.5% of revenue in the second quarter of last year. Non-GAAP adjusted net income for the second quarter was $30,000 or $0.00 per share, compared to non-GAAP adjusted net loss of $589,000 or $0.04 per share in the second quarter of 2014. Looking at the balance sheet, we have $18.2 million in cash at the end of the quarter, compared to $32.2 million as of December 31, and $20.3 million at the end of the first quarter. In the second quarter of 2015, we generated $391,000 of cash from operations. As I just discussed, we have taken many steps to reduce our expenses, and we believe that we have sufficient capital to work thorough this period of reimbursement uncertainty. In the second half of 2015, we expect to use between $1 million to $3 million of cash, approximately one half of this amount is related to an inventory build-up through the end of the year. Assuming no positive or negative movement on reimbursement we believe we'll be entering 2016 at a cash neutral run rate. I would now like to turn the call back to Ken. Ken?
- Ken Ferry:
- Thanks, Kevin. Before we open the call for questions, I want to reiterate our top priorities in the second half of the year. Number one, continue work with our customers, professional medical societies, and Medicare, to gain clarity on Noridian's new coverage and payment policy, while launching our coverage and payment initiative with all the Medicare regions for the new skin code which goes into effect on January 1, 2016. Two, drive growth at our cancer detection business and execute on the development of our 3D breast density and cancer detection software which represents significant growth opportunities for the business. Three, continue to selectively invest in clinical studies to build long-term data required to support the use of Xoft eBx system for treatment both breast and skin cancer and, four, to carefully manage our expenses and complete the cost efficiency programs by the end of the year. We will certainly be updating you on these goals as we execute them. And at time point in time, operator, we'd like to open up the call for your questions.
- Operator:
- Thank you. [Operator Instructions]. Our first question is from Bill Bonello with Craig Hallum. Your line is open.
- Bill Bonello:
- Good morning, guys. A few questions. First of all, just on the -- thanks for all the color you provided, very helpful. First of all, just on the skin reimbursement, I know that you're reluctant to extrapolate from what the practices are seeing thus far, but can you at least give us some sense of what the payments that have been received are even though we know that may not be what ends up being the average, or at least some sense of if the level that docs are getting paid thus far would be a viable amount?
- Ken Ferry:
- It's, Ken, Bill. Obviously we want to get this right and provide as much accurate information as we can. And what I would say at this point is we track in the Radion Hub software claims data. And so, I guess the good news would be is we have well over 300 claims that are in to the Radion from providers. So that's kind of the good news. The bad news is that there's only been about four or five that have actually been paid. And so we're very cautious in trying to draw any sort of conclusions to what the reimbursement would be. So, given that we have over 300 claims in and we would hope in the next 30 to 45 days to see a significant number of those processed, we would then be in a strong position I think to articulate what the reimbursement range is for the types of lesions that are being treated. In the very handful that I've taken a look at I would say I'm encouraged, but I would also add caution and say that until we have a significant, more additional data points that could be just optimism for the sake of being optimistic which is my general nature.
- Bill Bonello:
- Okay, that's helpful. And then you talked about preparing for the new CPT code and I absolutely understand the necessity of going out and meeting with all of the other MACs et cetera. But from a Noridian standpoint is it your thought that we're going to go through this all again at the beginning of next year or do you think that they will whatever rate they sort of end up paying for this temporary code would be the rate that they transition to with the new CPT code?
- Ken Ferry:
- Yes, that's good question, Bill. And we don't fully understand all of the work that they did in coming to what co-decisions they've made. And I think as we see more and more claims data it will help us to understand that logic. So exactly what path they are going to take going forward with the new code is not clear. What we do expect is that they're going to gain experience with what changes they've made with the current code, and then they process that all the MACs follow in the fall, where they all get together on various conference calls and so forth, and they all listen into all these different code changes that are being proposed for January 1. And I believe that Noridian will participate in those calls just like all the other seven MACs and my guess would be that if you combine their experience with the code change they've just initiated with what they hear on the calls they may or may not make changes to their current course of action. It's not really clear. We will provide them with information no different than what we've provided to -- we will be providing to the other seven Medicare regions, some of that will be redundant with what we've already communicated to them over the last several months, and our hope is that we will have a chance again as we did recently to engage them in a dialogue as it relates to what we have from a clinical data and from a coding crosswalk standpoint recommendation relative to the clause associated with delivering the treatment. So, it's going to be a fluid process between now and January 1, and we certainly intend to engage Noridian no different than the seven other MACs. It may have some different twist and turns given some of the more recent developments.
- Bill Bonello:
- Okay, great. And then just a little bit more color on the recurring skin revenue, you talked about may be $1 million going forward from the subscription revenue and a couple of million in addition to that from service et cetera. How sustainable is that? Is that revenue coming from practices that are getting enough reimbursement from other payer sources or have other incentives who want to do this procedure or is that something that down the road could become sort of thorny as docs don't want to pay for something they're not getting paid for?
- Kevin Burns:
- We feel fair -- Hi, Bill, this is Kevin. From the subscription standpoint we communicated $1 million per quarter in Q3, Q4 and those are from existing customers, a majority of those customers are outside of Noridian, so they're in a different region. And we have line of sight to that $1 million per quarter. So we feel fairly comfortable with that number. And then historically, our source and service revenue numbers have been in the $2.50 million range. Those are -- that's from customers who embark capital equipment and you can break that into two components. One is breast customers; customers who are using IORT, that's about half of that number; and then the other half are skin customers. And those are annual agreement that we in place. So depending on again where reimbursement lands in the next couple of months, we'll see what that -- if that number stays flat or starts to grow or if we do see some attrition on that number. So for now, we feel very comfortable that revenue is locked in contractually for the next two quarters. And pending reimbursement clarity, we'll see where any of that source and service revenue goes in early Q1.
- Bill Bonello:
- Okay, that's helpful. And then you gave a lot of color on the sort of IORT, but just given the uncertainty around skin, I know you don't usually breakout revenue by the segments, but I think it might be useful if you gave us some sense of kind of what the run rate IORT revenue is at this point?
- Kevin Burns:
- Right. So of the $2 million to $2.50 million of service and source revenue per quarter about half of that revenue is being derived from the IORT segment.
- Bill Bonello:
- Okay.
- Kevin Burns:
- Then on top of that --
- Bill Bonello:
- That includes the applicators or --?
- Kevin Burns:
- Yes, it does. And then on top of that as we've discussed, we think we're going to get some additional traction here in the back half both domestically and internationally with IORT capital product placements, so that will certainly be additive to the numbers that I've discussed.
- Bill Bonello:
- Okay. And would you mind just saying what you said that was again? I got a little bit lost on that.
- Kevin Burns:
- The IORT portion of our recurring, is that what you're saying?
- Bill Bonello:
- Yes. What you're expecting going forward on the traction? What the -- I thought you put a target out there?
- Kevin Burns:
- In terms of new sales or just the run rate of those in our --
- Bill Bonello:
- Yes, systems, maybe I made that up.
- Kevin Burns:
- The answer I would say is that we have a number of different programs running in the United States where customers can buy a system outright for IORT or they can kind of do it on a per procedure basis or on kind of a monthly rental basis. And so we've -- we do made a number of these programs and we're seeing some traction from it. So in the United States we expect to see some traditional capital purchases. We have a pretty good funnel going forward for the back half. We're also getting customers moving from a treatment standpoint. And there's obviously a nice recurring revenue stream coming there since each balloon on average sells for about $1,500 per case. Internationally, we actually have some pretty exciting activity going on. And we've received word unofficially, if you will, we won a large four-system deal this quarter in Bulgaria, kind of a surprise location. And we have some other transactions that we're pretty positive about, and those are all IORT deals. So our hope in the back half is that, this reaction in product revenue in Q2, which was pretty significant, I mean we booked a system early in the quarter that was a transaction we thought we're going to get from a prior quarter and then the announcement came out in April and the whole opportunity to sell capital, if you will, into the skin market stopped as well as really adding a lot of new customers in the subscription model. But I think as we go into the back half, we see more opportunity to sell IORT systems domestically and internationally and bring customers on -- may be on a transactional basis as we better understand where we are with reimbursement and how much we can rejuvenate both new purchases and subscription activity in the skin market. So hopefully international will finish much stronger. And in our earlier comments as well as we've had some good regulatory traction. And Russia represents an opportunity for us. If we have approval in China by the end of the year, that could be substantial for 2016. So it's nice to see that we're getting international traction. I also made the comment, which I think is worth noting that we may end up doing close to 400 IORT procedures this year internationally. Now, keep in mind, that last year we did about 950 on a worldwide basis and under a 100 internationally. So we're having really good traction this year. As I mentioned, I think our balloon sales are up almost 40% worldwide in the first half of the year. So we have other avenues in the therapy business to get some growth, which could offset some of this temporary circumstance around the skin market.
- Bill Bonello:
- Okay. That's very helpful. Thanks for bearing with me through all of those questions.
- Ken Ferry:
- Thanks.
- Kevin Burns:
- Thanks, Bill.
- Operator:
- Thank you. And our next question is from Brian Marckx with Zacks Investment Research. Your line is open.
- Brian Marckx:
- Good morning guys. Based on the skin reimbursement issue, I know the consumables are sold in bulk. Are you subject to potential returns of the consumables?
- Ken Ferry:
- No, those consumables have been used out in the field. And frankly, the sources are not very extensive to manufacture, so that's not -- they're not getting returns. We do have controls out in the field in our subscription model, but those are our fixed assets that we control. So we don't have any exposure there.
- Brian Marckx:
- Okay. Kind of relative to gross margins, how does the reimbursement issue affect gross margins?
- Kevin Burns:
- So in the cancer detection business our gross margins in the first half were about 83% and it's really going to be dependent on our new product placements in terms of where our margins are going to be in the back half. So it's hard to predict at this point, Brian, where the therapy gross margins are going to be in the back half. So we're going to have about $3 million, $3.50 million of recurring revenue and depending on product placements that will really drive where that gross margin is going to be.
- Brian Marckx:
- Kevin, you talked about that outside of Noridian, the reimbursement issue or at least indicated the reimbursement issue may be a little bit more positive I guess. Is there opportunity to target those areas of the country where reimbursement is more favorable right now?
- Kevin Burns:
- Yes, absolutely. And we have a handful of customers that are going to be coming online in Q3 and Q4 outside of the Noridian territory. And we are actively working in those regions to identifying new markets. With that said, there's a lot of talking about the reimbursement throughout the United States. So it's not going to be easy, but we are certainly focused in those markets to find new opportunities. However, I think a majority of the customers will probably dispute waiting to see where the reimbursement lands.
- Brian Marckx:
- Okay. Relative to breast IROT, there has been a recent debate about the reliability of the statistical analysis of the Target A Study and whether it actually does show non-inferiority to whole breast radiation. Can you talk about whether that debate has caused any headwinds to adoption of Xoft for IORT?
- Ken Ferry:
- Brian, we really haven't seen any changes in let's say the overall business opportunity. And I think that when we see these sort of articles we need to look carefully at the authors and what their experiences are with the technology and even in some cases whether they're potentially have conflict of interest, because they're promoting competitive technologies, while writing articles quite frankly about technologies they don't use. So I think there has been in the "Red Journal" as an example, an excellent article rebutting the commentary that you're talking about. And at the end of the day, I think it's pretty clear. There is a certain segment of the patients not all breast cancer patients, but certainly early stage single tumors three centimeters or smaller, lymph nodes are clean, there is very specific criteria, where the patients benefit from this technology. And if you look at the one long-term study, which was conducted by Pfizer competitor, they showed with five year follow-up 1700 patients to get IORTs and 1700 patients roughly that got whole breast radiation. And when you look at the patients that got IORT at the time of lumpectomy, which was the majority but not all, there was a 1% recurrence rate difference with whole breast radiation, 1.3% versus 2.3%. That's very, very encouraging and very promising. And the non-inferiority range was 2.50 points of differential, so the results were well within that statistical category. So I think that there should be a lot of optimism around IORT for a segment of the patients. And whether it's older patients that will tolerate whole breast radiation, those that have to work for living and can't take four to six weeks of their life and go for radiation therapy every day and then number of other categories where we think IORT really, really benefits the patient. So you have to look at the whole picture. And I'm not discounting the importance of getting more clinical data. We've invested substantially at our own study, and we will be publishing some of the early recurrence data over the course of this year with our own study, which now has well over 500 patients in the study. So we are investing as I'm sure our colleagues at Pfizer in getting more and more data on the use of IORT. You also have to be realistic though and look at the authors and what their economic motivations would be. So to be blunt, one of our obstacles is radiation oncologist get less than $500 to slip up to the operating room, gown up, coordinate with the surgeon place a balloon and deliver radiation therapy. When they're down in their centers, they're basically treating a patient 20 to 30 times receiving well over $2,000 in reimbursement and often other than really being hands on for the first treatment, the radiation techs are doing most of the work. So we have obstacles that are valid from a clinical standpoint but we have economic obstacles that I'm not convinced at all times patients are getting what it's in their true best interest in terms of the most objective conversations with their physicians over which therapy is in their best interest. So we're going to continue to lobby for a record reimbursement. We're going to continue invest in the studies and we think for the longer-term this is an extremely viable technology both as a monotherapy and as a boost to be used in conjunction with whole breast radiation. So it's going to take some time, but we think this is an excellent market opportunity. We think the addressable market from a clinical demographic standpoint really; really make this an attractive business for us to be in. It just will take more time before it really scales to the potential we believe it has.
- Operator:
- Thank you. [Operator Instructions]. Our next question is from Shannon Kerman [ph] with DRW. Your line is open.
- Unidentified Analyst:
- Good morning. Thank you very much for all the detailed information that you have provided. Just a few follow-up if I may, the roughly $3 million or so expected return on revenue on the therapy side that you hope to get per quarter over the next couple of quarters, are those subscriptions primarily one-year subscription started in 2016 they will be revisited or are they longer-term contracts?
- Kevin Burns:
- So, we will break that out; break that Shannon into two buckets. One is the $1 million subscription that is based on procedure volume those are three-year contracts but again it's all based on the number of patients and the number of fractions that are treated at a customer location. The other $2 million to $2.5 million are annual source and service contracts that expire periodically. So those are not calendar year but just annual agreements that are auto renewed.
- Unidentified Analyst:
- Perfect. And you had mentioned you expect roughly low single-digit growth in the detection side of the business until the 3D rollout. Is there -- have you guys announced any data as to when you expect a nationwide rollout or when you should start seeing the impact of the 3D rollout?
- Ken Ferry:
- Sure. What we had generally in my comments was that we just completed a reader study in Europe in preparation for our regulatory submission. We believe that the process will play out and we will have a international product ready to go at year-end with GE. And GE really has, had significant traction in the international markets. They have had a tomo system approved for over two years internationally. So in essence they've grown an very sizeable installed base and we're working on a commercial plan with them so that as the software is ready, as their workstation release that supports the software is ready at year-end we would have a fairly substantial installed base to go out and market the software too. So we hope to see some significant revenue traction in 2016 beginning in the first quarter internationally, and then our hope is somewhere in the middle part to early the third quarter of 2016 to have the U.S. regulatory approval. I mentioned earlier that we are beginning our U.S. reader study in preparation for the FDA filing in September and then we should probably by January be filing with the FDA. So things go smoothly by the middle of the year we're hopeful that we will have FDA approval. And obviously GE now has been in the U.S. market for almost a year with their tomo systems, so our traction in the second half could be a combination of international and domestic sizable installed base upgrade opportunity in addition to new systems going out the door. And if you look at a lot of the data we've been seeing in the market regarding tomosynthesis, and then if you listen to Hologic in their transcripts and so forth of their earnings calls it appears that this market is accelerating at an even faster pace than a lot of us had anticipated. And for us contracting as to 2D mammography it gives us the opportunity both domestically and internationally. In 2D mammography computer-aided detection software was probably purchased on probably one out of every five machines. We believe based on the extensive work we did in Europe with GE sites, and then the reader study which we did with GE, customers in Europe that the software is really a global opportunity, so that just about every system that goes out with tomosynthesis will need the interpreter software. So this really allows us a much bigger addressable market as the international component will be much larger than it was in the 2D world, and then we combine with that this notion of adding breast density software. We are now at 27 states of an active legislation in the U.S. all other seem to be in some active form. The combination is in the $200 million to $300 million opportunity range just in our installed base. Just in the 4,000 to 5,000 systems out there that have our 2D product attached to it, if we would add a 3D computer-aided detection product combined with breast density, the opportunity for us now in this 3D world, if you will, with the two avenues being detection software and breast density, assessment is substantially bigger than when we went from the analog to digital products back in this 2005, 2007, 2008 timeframe. And when you think about it as a comparison, back in the peak of the transition from just analog film to digital mammography in 2008, we were about a $38 million business just selling 2D mammography CAD into what was largely just a U.S. market. So we were very excited about the size of the opportunity of 3D because it's global and it includes two different products versus one that we had back in the mid-2000 timeframe.
- Unidentified Analyst:
- Just a couple of cost and cash flow items as well. Now this $6.5 million, sorry the $7 million per quarter OpEx that you've guided to for second half '15 that does not include the D&A number, that is a cash OpEx number?
- Kevin Burns:
- No, that does include D&A and D&A in that $7 million number is about $200,000.
- Unidentified Analyst:
- Perfect. And when I think about uses of cash, do you guys have any outside of -- some of the one-time acquisitions that you had any run rate CapEx number and you expect to pay any cash tax and what I'm like trying to bridge from EBITDA to operating cash flow number and there is not much interest that you would be paying. So what type of once you get to free cash flow, CapEx, and may be tax should I think about going forward?
- Kevin Burns:
- Yes, we have no taxes, as you know we have no debt, so we have no interest expense and from a key P&E standpoint, CapEx standpoint, it's going to be $200,000 per quarter and as I mentioned in my comment we will have a slight inventory build in the back half we've made commitments to purchase some inventory assuming no change on reimbursement earlier in the year. So that's going to build, and we will burn that down throughout the course of 2016, so it is more of a short-term blip, Shannon.
- Unidentified Analyst:
- And on the liquidity side, do you guys have a minimum liquidity that you want to keep the business out like a minimum cash balance you want to keep on balance sheet as we're going through this uncertainty regarding reimbursement?
- Kevin Burns:
- Our goal is to preserve as much cash as possible which is why we took a lot of steps to reduce our expenses. And again using $1 million to $3 million and be in at a cash neutral run rate going into hopefully more positive reimbursement environment I think we're going to be add into our cash balance throughout the course of 2016.
- Unidentified Analyst:
- And final question on the reimbursement front, you guys had mentioned that out of the 300 or so cases only four or five came back. My question is do you see that the volume of these therapies have declined due to the uncertainty or is the volume is what it is just we don't know what we're going to get paid yet.
- Ken Ferry:
- We've seen a substantial decline in treatments and I think it's a unique clinical paradigm where essentially in most cases a dermatologist is contracting with a radiation oncologist on a paradigm basis to come into their practice and treat patients. So they've got fixed process go beyond just their normal staff and treatment rooms and overhead. And so when you get hit with this uncertainty as to what the reimbursement is going to be it's almost an all nothing scenario until you understand the economics. So the customers that own their own equipment many are still treating. The radiation oncologists that are on their own equipment and treat directly most are still treating. It is really that larger segment of those systems in the dermatologist office where they're bringing in radiation oncologist that have essentially stopped treating and are waiting to hear or to see claims that they have put into the system what the economics look like and then obviously we've heard some very encouraging feedback from the majority of which is, if the economics work we'll be right back up and treating patients very, very quickly, but with the uncertainty they have said they need to put a pause on this until they have more color.
- Unidentified Analyst:
- But within the 30 to 45 day time period that you mentioned that when more of the cases come back with some rates to the extent that your initial optimism plays through, you could see some of the volume come back as well. Is that a fair assumption?
- Ken Ferry:
- Yes, I mean again it is early and the data points are few but if they do represent any kind of a trend what we think at a minimum is our higher volume sited would probably start to treat right away. If you look at the subscription model we probably have about 35 sites active and about 15 of them would be in the category of being high volume sites. So those would be the more likely ones to come out right away unclear with the lower volume sites. So we need to monitor it. And the reason, we're being cautious, we are not out marketing yet to our installed base what a new customers in the Noridian MAC because we ultimately still feel to do it responsibly we need many more data points than we have. But as soon as we have them if they do turn out to be favorable we will have a very, very aggressive and immediate marketing plan to our installed subscription customers as well as what has been a very healthy funnel with new customers as well.
- Kevin Burns:
- And I would to add to that, we have seen a few customers actually start to come back online and treat due to patient demand and some of their own analysis. So we have lost some customers in June and three or four of them have come back to us over the last two weeks and we think may be a few more will come back online as well in the near term despite the reimbursement of earning.
- Operator:
- Thank you. And I'm not showing any further questions at this time. I'll now turn the call back over to management for closing remarks.
- Ken Ferry:
- I would like to thank everyone for joining the call today. It is a challenging period, but I believe we've taken all of the necessary steps to right size our cost structure in the near term, to give ourselves as much of running room as we need particularly from a cash preservation standpoint to run our business, and be able to hopefully enter 2016 with the strong balance sheet that we have today. And at the same time we have worked very diligently to respond to the reimbursement issue both for skin in the short-term with Noridian, and as well in the longer-term plan we have had in place for well over a year to market our new code that goes into effect January 1, 2016. We think that the growing positive clinical data is one of the strongest arguments we have for coverage and payment, and we believe that we can do a crosswalk to existing codes from a treatment similarity in cost that provides viable reimbursement and ultimately we hope to come out the other end on Jan 1 with more MAC's covering and paying for skin. We've had good progress with IORT, very encouraged by the international traction, and at the same time all-in-all we think that business will do well over the next several years. It just takes some time to rebuild, if you will, as the skin business source out. In cancer detection, we've had some really, really good progress. I talked about the importance of breast density and cancer detection software for the 3D marketplace. We are close; we are hopefully within six months of having something internationally for detection software for tomosynthesis. Hopefully in the same timeframe we will have 3D breast density. We have 2D today. We believe that that opportunity is very considerable and something that in 2016 will give the company some considerable traction. So a lot of good things going on. We look forward to reporting our third quarter results and the progress that we hope to make and we thank you again for you time today. Have a good day.
- Operator:
- Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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