iCAD, Inc.
Q3 2015 Earnings Call Transcript

Published: 1 Nov 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the iCAD Incorporated Third Quarter 2015 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over 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. Today, after the market closed, iCAD announced financial results for the three and nine-month periods ended September 30, 2015. Before we begin, I would like to caution that comments made during this conference call by management 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, 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, October 29, 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 would like to turn the call over to Ken Ferry. Ken?

[Ken Ferry:]

Thanks, Zack. Good afternoon, everyone and thank you for joining us today. During the call, I will provide some comments on our third quarter financial results and review the significant longer term growth opportunities in our cancer detection and therapy businesses. I will 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 will be back to recap our key initiatives for the remainder of the year and into 2016 and then we will open up the call for questions. Third quarter revenue was $9.6 million compared to $12.6 million for the same period last year. The year-over-year decrease was driven by a decline in our therapy business due to ongoing uncertainty related to a change in reimbursement in the treatment of non-melanoma skin cancer with our electronic brachytherapy system in the United States. This softness was partially offset by a strong quarter of IORT system placements internationally and strong performance in our cancer detection business, which increased 5% in the quarter and is up 7% year-to-date. We are pleased with the positive results in our cancer detection business and this segment represents a significant product and recurring revenue growth opportunity over the next three to five years. There are three key growth areas within our cancer detection business

[Kevin Burns:]

Thank you, Ken and good afternoon everyone. As Ken mentioned, we had another solid quarter of performance in our cancer detection business, combined with strength in our IORT system placements. This was offset by lower revenue related to the ongoing reimbursement uncertainty. The third quarter was also the first full quarter in which we realized the benefits of our expense reduction programs, which helped us to continue to deliver positive EBITDA and effectively manage our cash. For the third quarter, total revenue decreased 23.8% to $9.6 million. In our therapy business, revenue decreased 42.6% to $4.4 million. Therapy product revenue decreased to $1.3 million in the quarter, but was up sequentially from $141,000 in the second quarter. This sequential improvement reflects the placement of 30 new Xoft systems in the quarter, including eight international IORT systems, two U.S. breast IORT systems and three U.S. skin placements. Our international IORT business included a four-system deal in Bulgaria and two additional systems in Taiwan, where we now have 21 cancer centers utilizing the Xoft system. From an IORT balloon perspective, year-to-date sales volume was up 35% to 976 balloons. The U.S. market was relatively flat at 662 balloons and the international market was up significantly from 58 balloons in 2014 to 324 balloons through the first nine months of 2015. Therapy services and supply revenues decreased to $3.1 million in the third quarter. The $3.1 million of service revenue is predominantly related to our skin brachytherapy business. It can be broken down into approximately $1 million coming from our subscription based non-melanoma skin cancer customers and $2.1 million coming from service and source agreements as a result of customers who have directly purchased our therapy system. Both the total service revenue and the split between subscription, service and source revenue were in line with the expectations that we communicated during our second quarter conference call. Looking forward into fourth quarter, we anticipate a slight decline in our therapy service revenue. However, any certainty related to electronic brachytherapy reimbursement could be additive to the baseline revenue numbers that I just discussed. Moving on to cancer detection, total revenue in the third quarter was $5.2 million, a 5.4% increase compared to the third quarter of 2014. Product sales of $3.2 million in the quarter increased 17.6%, driven by strong results from PowerLook upgrades and breast density sales. From a unit perspective, we sold 168 PowerLook upgrades into our installed base during the first nine months of 2015, compared to 78 upgrades in the same period last year, an increase of 115%. We believe the strong growth is the result of our customers preparing for the adoption of 3D tomosynthesis and the software tools that support their workflow. We sold 58 breast density licenses during the first nine months of 2015, up from 23 licenses in the same period last year, more than doubling the volume on a year-over-year basis. In addition, as Ken mentioned, in July we launched iReveal, our breast density module integrated with PowerLook platform. In August, Invivo, our exclusive distribution partner for our MRI-CAD products, exercised their contractual right to a fully paid-up license to distribute the current version of the MRI software. As a result, we received a payment of $2 million and will recognize this revenue ratably through the term of the contract, which expires in July of 2017. In parallel, we are discussing further services and product development work as well as strategic options for our MRI assets. From a revenue standpoint, we expect our MRI revenue to decline in the fourth quarter as a result of Invivo exercising their rights to paid-up license. However, the revenue impact is yet to be determined as we expect to finalize the framework for our future strategic relationship in the fourth quarter. Cancer detection service revenue decreased 10% in the quarter to $2 million reflecting ongoing 2D market share loss by one of our OEM partners, which has negatively impacted service contract renewals for this OEM’s customer base. On a sequential basis, service revenue was flat demonstrating that the service revenue has stabilized as we believe the market share loss as its partner has tapered off. Looking forward, we believe the service revenue line will begin to grow in the near to mid-term as a number of PowerLook systems will be coming off of warranty and moving to a service agreement combined with new service revenue related to breast density and 3D tomosynthesis. Moving on to the rest of the P&L, gross margin in the third quarter was 71.2% compared to 72.9% in the third quarter of 2014. The decrease in gross margin dollars and percent was driven primarily by the lower contribution of service revenue in the quarter. D&A, categorized as cost of revenue in the third quarter, was $289,000, a decrease from $527,000 in the third quarter of 2014, reflecting the impairment charge we took in the second quarter. Operating expenses in the third quarter of 2015 were $7.2 million, down from $8.2 million in the third quarter of 2014 and excluding the asset impairment charge down sequentially from $8.3 million in the second quarter of 2015. The $7.2 million of operating expense was slightly higher than anticipated due to higher commissions and bad debt reserves. Looking forward, we anticipate fourth quarter operating expenses to be closer to $8 million. The increase is related to our planned investments in our tomo reader study that commenced in October, additional marketing events such as ASTRO and RFNA, as well as the development of new technology that will significantly reduce our cost to deploy and utilize our electronic brachytherapy solution in the non-melanoma skin cancer market that we anticipate bringing to market in early 2016. As a result and in line with previous communications, we will be entering 2016 with a quarterly operating expense level of approximately $7 million per quarter with potential additional investments to be made based on reimbursement clarity. Looking at our profit metrics, non-GAAP adjusted EBITDA for the third quarter was $739,000, or 7.7% of revenue, down from $2.6 million, or 20.3% of revenue in the third quarter of last year. Non-GAAP adjusted net loss for the third quarter was a loss of $402,000, a loss of $0.03 per share compared to non-GAAP adjusted net income of $590,000, or $0.04 per share in the third quarter of 2014. Looking at the balance sheet, we have $17.5 million in cash at the end of the quarter compared to $18.2 million at the end of the second quarter. In the third quarter of 2015, we used $248,000 in cash from operations and $25,000 year-to-date. We will continue to balance our strategic investments in clinical studies and marketing initiatives with our $17.5 million cash balance. In the fourth quarter of 2015, we expect to use between $1.5 million to $2 million of cash, split between Q4 clinical investments and additional inventory buildup. Assuming no positive or negative movement on reimbursement, we believe we will be entering 2016 at a cash neutral run-rate. Given the lack of clarity on the Noridian reimbursement and transition to a new dedicated skin code on January 1 across all the MACs, it remains difficult for us to measure the impact on our business and to provide guidance. Looking forward, we remain optimistic that the transition to dedicated skin code will provide greater reimbursement stability and potentially be a catalyst for additional regional MAC coverage and payment for the procedure in 2016. I would now like to turn the call back to Ken. Ken?

[Ken Ferry:]

Thanks, Kevin. I would like to reiterate our top priorities for the remainder of the year and well into 2016. Number one, we will continue our education program for payers and medical professionals to gain reimbursement clarity associated with the new skin therapy code, which goes into effect on January 1, 2016 and rebuild momentum for this business. Number two, drive growth in our cancer detection business and execute on the development of our 3D breast density and cancer detection software, which represents significant growth opportunities for this segment of our business. Three, continuing to selectively invest in clinical studies to build the long-term data required in support of the use of the Xoft eBx system for the treatment of both breast and skin cancer and obviously carefully manage our investments and expenses as we go. We look forward to updating you on the progress of these goals at our upcoming fourth quarter conference call. But for now, what we would like to do is open up the call to questions. Operator?

[Operator:]

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

[Bill Bonello:]

Hey, guys. Good afternoon. A couple of follow-up questions. Thanks for all the color you provided there. The detection product revenue was the highest it’s been in, I think more than three years. Just curious given the sort of various puts and takes that you discussed, obviously, there are lots of product opportunities, a little bit of offset with Invivo. Does this product revenue – I mean, is this a reasonable run-rate going forward? I assume it will be lumpy sort of quarter-to-quarter, but from a trajectory standpoint, is this sort of a good run-rate?

[Ken Ferry:]

I will say, Bill, it is a solid run-rate. And what we have going on as you know is that the sale of 2D cancer detection software systems is going down, brand new sales for new placements of systems, right? So, the significant growth is being driven by, as we mentioned the upgrade market in breast density in the near term and it will be driven by the 3D tomosynthesis tools in a bit longer term into the early part of next year. So, we kind of have some offsets, but I definitely think that this is a solid baseline number that we think we can grow further from. Because the rate of the upgrades is increasing each quarter and the rate of purchases on the breast density software increasing and then as we get out into, say, late Q1 of ‘16, the 3D tools kick in. So if anything, we should start to see more of a rapid acceleration on the new product revenue. And our hope is that the service revenue, as Kevin pointed out and I think I have pointed out, hopefully, has flattened. And as we now start to see a lot of these upgrades that we have been selling for several years coming off of warranty, we will start to rebuild more quickly the service contract base, because a lot of the upgrades were sold with a multiyear service agreement. And then I think obviously we are working through the transition with Invivo relative to MRI and that’s a totally separate category from where we saw this pretty significant balance in new product revenue.

[Bill Bonello:]

Okay. And just on the service piece of it, I mean, you talked about that stabilizing and then starting to grow. I mean, is that – do we have to go through a couple of more quarters though of it being down year-over-year or are you suggesting that as early as fourth quarter, we could see that flat?

[Ken Ferry:]

Kevin?

[Kevin Burns:]

I think sequentially, Bill, we are going to – we believe we have bottomed out from a service revenue number of around $2 million. So, we expect to be growing that. If you look sequentially, it will be down perhaps slightly from Q4 of last year, but it’s – we believe it bottomed out in Q2 and we are going to be growing from there.

[Bill Bonello:]

Okay, great. And then the international IORT, could you just maybe give us a sense of the market opportunity there, what you perceive that to be? And then any color on how the economics internationally may differ from those in the U.S.?

[Ken Ferry:]

Well, I guess what I would say is the European opportunity for IORT is clearly well established, Bill, and I think our competitor, Zeiss, having a big footprint in Germany, has invested quite a bit, much more so than we had in that opportunity. And so they have their strengths in certain countries, but we have been able to grow a broader footprint in Europe. But also as we have tried to expand into Asia, we were really pleasantly surprised by this really rapid uptick in Taiwan. And to have essentially a global service now in Taiwan that is servicing 21 hospitals, you can imagine the procedure volume growth that, that’s creating, and that was reflected in Kevin’s comments. The economics are a little different when you are selling to a distributor who then sells it to the end users. So obviously probably see your average selling price is lower. The balloon applicators sell for a lower price point. You don’t have the benefit of reimbursement that you have in the United States, so that you do see lower selling prices when you get involved as we did in a tender in Bulgaria. And you are looking at a four-system order, obviously in the pricing versus the competition could be fairly aggressive. So it is a lower price point for the products and the consumables, but it’s still very good solid margin business and we are just kind of scratching the surface internationally. We only sold several systems in the first few quarters internationally, so this was kind of a breakout quarter. While we are not predicting that this eight-system scenario is a new run rate, we feel really good about the traction we are making internationally and we are also in the cusp of some large market opportunities. We have received approval in Russia this past summer. We have product approval in China. We are waiting on the applicators, which could be in the first quarter or second quarter of next year and we think the Chinese market could be really, really big for us. So there is a lot going on internationally. And I think that as we get more regulatory approval and we get more reference sites up and running, our footprint is really going to grow internationally. There is a lot of interest and clearly breast cancer is in essence pretty significant around the world and value proposition is pretty considerable. We really feel good about it going forward and there is just a lot going on. Just an example is we are working in Korea for regulatory, we are working in Egypt, Saudi Arabia and we are working in India. So we have got a number of countries, very large markets that we are very active in the regulatory process, which should add to this pretty considerable momentum we have had in 2015 versus 2014.

[Bill Bonello:]

Okay, great. And then if I can just a couple of other questions, maybe you can talk about the two systems placed for the skin business in the quarter, very interesting to hear that. Were those in geographies where Noridian is not the carrier or how do we think about the decision of people to take those systems?

[Ken Ferry:]

Right, yes. Those were placed in the Midwest, where obviously there are two other MACs that have positive coverage and pay policy for our technology.

[Bill Bonello:]

Okay. That mix – and that reimbursement has held?

[Ken Ferry:]

That is correct.

[Bill Bonello:]

Okay. And why would the service component be down a little bit on the skin side in Q4, especially given that you placed a couple of systems this quarter?

[Ken Ferry:]

Kevin?

[Kevin Burns:]

It will take a little bit of time for those systems just to get up and running. Typically, it’s 60 days to 90 days Bill, for that revenue to start to kick in. Plus, we continue to have attrition out in Noridian, so some of those services for those contracts are coming to the end of their term. So it’s not going to be a dramatic decline, but there is a little bit of decline until we can get these three new sites up and running. And again, any additional clarity on reimbursement and we can get our existing sites up – back up and running would obviously be added steps to that revenue number.

[Bill Bonello:]

Great, okay. And then the final thing is just, has Noridian said anything about whether its intention to establish, to start to use the new CPT III code to establish a reimbursement rate for that, etcetera, are you just totally in the dark in terms of what their thinking is?

[Ken Ferry:]

Well, we obviously Bill, have a number of data points of what they are actually doing today with the code that they communicated back in April. So we have some data points in reimbursement. It’s unfortunately pretty wide range and so as you look at that range, it’s very hard to connect the dots as to what the logic is other than there is some pattern that the destruction codes that are being billed seem to connect to some sort of a reimbursement formula and those destruction codes are a function of location on the body and size. So as we go forward, the communication we have had with them has been in writing with our package as we sent out to all eight MACs. We have not received any formal feedback. Anecdotally, in September they said, we will revisit this as part of the new code and the implementation process in the fall. And if we have questions or concerns, we will reach out to you and have a discussion. So that’s about as far as it’s going. And we have, at this point in time communicated this information on the new code to all eight MACs. And to be honest, we have not heard anything formally or anything in writing that nothing back other than some more informal acknowledgments, they have received our materials. So we are really with all of the MACs, in a holding pattern so to speak, until we start to see the decisions that they may have been made in the timing.

[Bill Bonello:]

Great, thank you. Thanks for taking all those questions.

[Operator:]

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

[Brian Marckx:]

Hi guys. Nice quarter, so just if I could for clarity on the reimbursement issue, is it your understanding that the CMS contractors – not all of the CMS contractors will adopt the new AMA code that they are switching to?

[Ken Ferry:]

The way it works Brian is that when you have a CPT III code, each of the eight MACs independently can make a decision on coverage and payment. And hence, if you look at us historically right, we have had three MACs with positive coverage and pay. We have had three with silent policy and two with negative. So you can see it’s been a mix bag, so to speak for some time. And we have made progress against that number over the last several years. But at this point in time, each MAC has the prerogative of determining whether they cover and pay for experimental codes based on the merit of the application or the information that’s been provided to them.

[Brian Marckx:]

Okay, alright. Relative to the Axxent system placements overseas for the quarter, I guess I would assume based on your comments that you think that there may be some lumpiness and we shouldn’t expect necessarily that rate of system placement kind of going forward on a regular basis, is that fair?

[Ken Ferry:]

I think that’s fair, Brian. I think I would have to look it up. We probably placed three or four systems in the first half internationally. So the notion that we would have the ability at this point to put another eight in play in the fourth quarter, I think would be very aggressive.

[Brian Marckx:]

Okay. Kevin, relative to service margin, it was – I think it came in a little bit relative to recent history anyway, anything there that’s worth talking about or is that kind of timing and maybe mix related?

[Kevin Burns:]

Well, it’s the certain – the margin percent Brian is really related to – the decline is really related to the lower revenue number. With that said, I think we are pleased with the 73% service margin. I have made some comments and reference to some investments we are making in the third and fourth quarter to actually reduce our cost of service and deploy our electronic brachytherapy systems to treat non-melanoma skin cancer. So going forward in 2016, obviously depending on reimbursement, we think those margins can grow because we are taking a lot of expenses out of the process to deploy and maintain our equipment on the field.

[Brian Marckx:]

Okay, great. And just one more if I could, on the 3D European reader study, Ken you just talked about it briefly, it sounds like everything went okay. But is there anything else that’s kind of significant or otherwise worthy of talking about relative to whether that would affect CE Marking or approval overseas, I guess?

[Ken Ferry:]

Yes. I think that we feel very good Brian, about the results of the study. And what we are finding in 3D, which is a little different than 2D is that this is a really important workflow tool and important for the radiologist’s productivity. Then when you think about it, if you are looking at a 2D exam on a soft copy workstation, you are typically looking at two views of the breast. And in a tomo exam, you are looking at 70 slices in each breast. So the ability to navigate through that large dataset in contrast to 2D is extremely labor intensive. And so what we are finding is that our tool is extremely helpful to navigate through those slices very quickly and without a degradation in cancer detection. And the other thing we have done which we think is a breakthrough is in the 2D world, what you essentially did is the radiologist read the exam on their own, so to speak. Then they turned down the CAD system as a second look or a backup to their eyes. What we are doing differently in 3D is we are doing a concurrent reading tool. So, as the radiologist is reviewing these slices for the first time, they are actively using our software tool simultaneously. So, you are not reading the exam twice, you are reading it once with a comprehensive support tool. We think that paradigm is going to allow them to read much more quickly. It’s going to allow them to eventually find more cancers and that this tool will be just invaluable in the overall workflow. So that is some of the findings we got from the European study. We think getting CE Mark is very likely. We have taken some learnings from that study and we have initiated in October, a much larger U.S. reader study, which has been designed with clear feedback from the FDA in terms of what they are looking for. And we are optimistic that, that study will go well as well. And again, it’s a different approach than what we did in 2D and we think the value proposition is both productivity and cancer detection, not just cancer detection, which was largely what we provided in the 2D space. The other thing that’s encouraging is that since we have done a lot of work with European sites, particularly GE sites, in development of the cases we need and in the development of the software, we have been able to show this product to a lot of radiologists in Europe that historically have not used 2D CAD. And the response we have seen has been outstanding. They want this in their practice. They want this in their workflow immediately. And historically, only one in five radiologists in Europe would typically see the value of our 2D product. So the good news is the market opportunity should be bigger because the international opportunity should be bigger. And we are working at a good pace. I mean, our hope is that by say March, this will be released in the EU. There will be a very large installed base to upgrade for GE. There will be a lot of new system opportunities to bundle this product in with the 3D total system sale. And then we hope by June to have the U.S. approval with GE and be in a position again to go into that market both from an upgrade and a new systems standpoint as we all believe that the transition from 3D to 2D is really accelerating. So hopefully, we are in the right place at the right time. A really, really good product and that should be really by mid 2016 a significant growth engine for the CAD business. I have said this at times before, particularly in investor conferences. When the world went from analog film to digital, our business went from a $15 million run-rate with one product in mammography in 2006 to a $37.5 million in 2008. So, when I take a look at the total CAD opportunity and add to it the breast density opportunity and the platform change to PowerLook, we are at a considerably larger addressable market than we were back in the 2006 to 2008 timeframe. So, I think that’s why we are optimistic. And we are basing these market opportunity sizes solely off of our installed base. We are not necessarily making assumptions of share gain and so forth. We are just talking about if we transition our current customer base from the 2D workflow to the 3D workflow. And now this additional tool around breast density and the new platform, which is a natural evolution of the business it’s a considerable opportunity over the next 3 to 5 years.

[Brian Marckx:]

Is there any meaningful difference between I guess the way that the EU reader study is structured versus the way that the U.S. reader study is going to be structured? And is there any other sort of concerns with the U.S. study that may not have been the same, I guess, with the EU study?

[Ken Ferry:]

A bit – somewhat comparable, I think the biggest difference is there is a much larger number of readers in a much larger number of cases that we are using to power the U.S. study, but the protocol is somewhat similar. So, I think we have modified it slightly based on the experience of the European study. And at this point, the benefit of the European study was twofold. One, it was for CE Mark, but equally as important, it was a way to do a pilot and then adjust the U.S. study to some extent as we learn from the original study as we take on a much greater study for the purposes of submitting a PMA supplement to the FDA.

[Brian Marckx:]

Okay. Alright, great. Thanks a lot.

[Operator:]

Our next question comes from Jeb Terry of Aberdeen Investment Management. Your line is now open.

[Jeb Terry:]

Hi, Ken. Hi, Kevin. How are you doing?

[Ken Ferry:]

Hi, Jeb. How are you?

[Jeb Terry:]

Great, great. Well, so couple of things. It’s really great to hear that you believe that FDA approval for tomo in the U.S. will go faster than 2D. That was a painful experience. So, it’s remarkable that it sounds like you feel like it could happen in almost – in a 6-month period. Am I hearing that correctly?

[Ken Ferry:]

Yes. I think what we have done is we have worked very closely with the FDA on defining the study and the study protocol. Obviously, we have to provide the performance that backs that up, but I think we had very good collaboration and very good cooperation on this reader study to really define what we need to do. And at least going through the smaller study in Europe with a lot of similarities in the protocol, we are very pleased with the results and so now we need to get through a much larger study, which actually started earlier in the month. And because we are now able to file a modular PMA, we will be putting this in, in pieces, so to speak, starting in November with the final module in, in January. And our hope is that again provided we get the performance we anticipate that in 90, 120 days plus or minus, this couldn’t get approved. All of this is contingent on our performance. So, I don’t want to make the automatic assumption here that we have achieved that, but at least with the pilot study we did in Europe, we are a lot more confident and so it’s different than 2D. A, we had really good alignment with the FDA on the actual study design and protocol. Exactly, we have done the trial with a pilot study that supported the type of performance we believe we need to get U.S. approval.

[Jeb Terry:]

And as I understand, the GE is fully launched in Europe with their tomo product, is that correct?

[Ken Ferry:]

They have been out there for almost 2.5 years. Their approval in the international markets was 2 years ago in June. So, they built up a sizable installed base, where they have a strong market share across really the entire international market, including Asia. So, we are now trying to work through a commercial strategy, which would upgrade those sites that have already put a tomo system in with certain offering. And also they are working through the commercial activity of proposing our software with all of the new system sales as well. So, there is really a two-pronged opportunity between the legacy installed base and then the new systems that they are shipping on a monthly and quarterly basis. And then we would have the same exercise in the United States hopefully by the end of Q2 or maybe the June timeframe.

[Jeb Terry:]

As I recall the 2D timeframe, there were substantial installed base opportunities amongst the big OEMs that were awaiting your approval from FDA. And that was hundreds of units, as I recall, back in those years. Is that the similar situation and it’s kind of upscale, it could be hundreds of units installed, but GE and others there are kind of awaiting approval for your reader – I mean, approval for your...

[Ken Ferry:]

Here is the way I would look at it. It is just real ballpark numbers. When we get approval in the EU, I would hope there is at least 300 to 400 systems out there that are candidates for an upgrade. When we get the approval in the United States, let’s say, in the middle of next year, I would like to think there would be at least that, if not more. So, it’s a ballpark number, but it could be using a broad range, 500 to 1,000 systems that could be installed, all of which would be candidates to buy the software as an upgrade.

[Jeb Terry:]

Okay. And I may have misheard it, I read I think that there were two skin units placed, but I thought you said there were three skins, so eight international breast, two U.S. breast and did I hear three skin placements or did I have that wrong?

[Ken Ferry:]

I believe that’s correct, yes.

[Jeb Terry:]

Okay. And the three skin, are they subscription or are they – I know – I mean, you have indicated you are going to have a focus on the subscription model. Would these be placements under a subscription model or are they placements under – I mean, is there someone that bought the units and then – how would that...

[Kevin Burns:]

It was actually – it was a mix, Jeb, of the three systems – skin systems we have placed, one of them actually purchased the equipment from a capital standpoint and the other two are the solutions customers that pay on a per procedure basis.

[Jeb Terry:]

Okay. Is that also the case relative to the IORT placements, the breast placements? Are they a mix of purchases and solution?

[Kevin Burns:]

We only had actually one solution type customer in the IORT area. The rest of them were capital sales.

[Jeb Terry:]

Okay. And on the solution business, I know you said you reduced your cost dramatically. I am assuming you have reduced – that means both for hardware and for service delivery, and therefore, margins would go up. I am assuming margins would go up both for the hardware – but I don’t know how – I guess, I mean I will let you answer. I don’t know what it would be?

[Kevin Burns:]

Right. So, I was really referring to our Xoft solution customers, where we provide a radiation therapist prescribed by the medical physicist and we provide the equipment and service and source around that. So, for those customers, we wanted to analyze every expense component and try to assess where we could optimize workflow and efficiency and also take cost out from a hardware source standpoint. And apples to apples, we took about 30 – we are going to be able to take out between 30% to 40% of our historical operating expenses to provide that service when our new product is available in Q1 of 2016. So, it’s a dramatic improvement. The team has done a great job of reconfiguring the workflow, automating the lot of things, but also developing some new technology that reduces – that has the lower cost and reduces our cost to deploy.

[Jeb Terry:]

Okay. And if there is clearly budget they want on the reimbursement and presumably, it’s an economic number, do you think there would be a lot of disparity between the MACs or would they – as there has been in the past or would they all – do you think – do you have any idea that if – would they be more alike? I know the Midwest was quite different than California before California suspended. What’s – I mean, is there a ballpark that we might think in modeling out what might be the 2016?

[Ken Ferry:]

Yes, I guess, Jeb, what I would say is they are all independent. And I do think there is some communication that goes on amongst the MACs, conference calls at different times of the year, so that they can hear about the changes coming down on coding all at one time since the administrative side of this is common to all of the MACs, but they each have their own medical directors. They all have different points of view. They have different specialists in the field that they rely on for advice, as an example, let’s say, radiation oncology. And so I think it’s very hard to predict what I will describe as a uniform response. And I think, again, it’s reflected historically in the fact we had three positive, three silent and two negatives, so we have been all over the map, so to speak, with our current coverage. But the way I would look at it is the clinical data is growing and it’s extremely positive and that should have a very positive impact on the MACs decision. Secondly, we have really worked to provide appropriate use criteria, which patients are great candidates for this technology and which are not. And we are investing a lot in education. And so I don’t see this as a war, if you will, that will be won or lost on January 1. I see it as an ongoing process that between now and let’s say the middle to the end of 2016, I am optimistic we will make some really good progress. Because historically when you have strong clinical data and it’s growing, when you are selecting and providing the therapy to the right patients and you are providing proper training and there is proper education and so forth reimbursement typically settles out and you end up with an economically viable business. Now, the flipside of that is we have a noninvasive painless alternative surgery. If you look at historically the age of the patients we are treating – in our Radion Hub database, we have got probably 4,000, 5,000 patients. The average age is almost 75 years old. So, there is a very important place for this technology in the treatment of skin cancer. We have got to get through some of these near-term speed bumps and a lot of, quite frankly, misunderstanding and misinformation that has been communicated. And in our campaign that we have talked about that we have launched, it’s really about educating public and the professional societies and clinicians at large. Because we believe this technology has tremendous benefits, we just have to get the proper information and education at large out to the public and to the professionals.

[Jeb Terry:]

Kevin, if I look at the Xoft service and supply revenue, it’s somewhat comparable to what you were doing in June last year. And in June last year – I mean, it’s greater than what it was in June, but that said, I was assuming then that there could have been 2,000 patients in the second quarter of 2014 to have generated that kind of revenue. It’s got to be less, because the reimbursement is less. But help me understand the order of magnitude. There are cases being done. There are cases being done in Midwest. There are being cases done somewhere other than the Radion territory. Is – what can you say about the case volumes? And are they going up or – in those areas where you are getting reimbursement?

[Kevin Burns:]

Yes. We have less than 10 sites treating in the Midwest now. And I think what we have seen historically in our – with our customers in Noridian, those sites continue to increase volume on a month-to-month, quarter-to-quarter basis. So, those procedure volumes are in line with what we have seen historically as customers get up and running and they range in the 10 to 14 lesions per month and they slowly increase over time.

[Jeb Terry:]

Okay. So in terms of the consumer acceptance or doctors, setting aside the reimbursement, this product seems to still be attractive in getting more patients?

[Kevin Burns:]

Yes, absolutely. And our existing customers, the customers from Noridian, we received calls from them daily, weekly, monthly for an update on reimbursement and they have a lot of patients who are clamoring to have this technology back so they can be treated. So, we have a very active pipeline of the customers waiting to come onboard with any reimbursement certainty.

[Jeb Terry:]

Okay. Well, thank you gentlemen for answering my questions and fingers crossed. Good luck.

[Ken Ferry:]

Thanks, Jeb.

[Operator:]

Our next question comes from Shawn Boyd of Next Mark Capital. Your line is now open.

[Shawn Boyd:]

Good afternoon, gentlemen.

[Ken Ferry:]

Good afternoon.

[Kevin Burns:]

Hi, Shawn.

[Shawn Boyd:]

Just wanted to clarify on one thing, we have had a long call here and I think we said almost everything. But the cost reductions that you are working on that we have a little bit of an investment for in the fourth quarter, what can you tell us on those just in terms of – is it too early to start talking about what that looks like from the customer’s perspective, what we could think on that subscription model, where are we getting this price point down to?

[Kevin Burns:]

Well, we have – as I mentioned, a few minutes ago, we have brought it down by 30% to 40%. The question, obviously, Shawn will be how much of those savings will we be passing on to our customers going forward. And all of that will be contingent upon that reimbursement value, right and what business models and what economics makes sense for Xoft, for iCAD and for the dermatologists, radiation oncologists. So, it’s hard to assess how much of that will be moved over into the customer’s bucket.

[Shawn Boyd:]

Right, okay. And then just back on breast for a second on the international side, Ken, how would you characterize the pipeline at this point? Is it – and the reason I ask is because of the four systems to Bulgaria, is it the kind of thing where you are going to have several unit orders or is it more granular than that?

[Ken Ferry:]

Well, Shawn, in the first two quarters internationally, I think we sold two or three systems in total. And so I would be looking at several systems probably in the fourth quarter, not six or eight realistically. I mean, we could be fortunate and do a little better than that, but I think we will do better than our first half kind of performance, but by no means are we going to be on a 6 or 8-system quarterly run-rate internationally. I do think in the U.S., we are seeing a lot of positive press, a lot of good study data. So, I think the interest level in IORT is kind of getting rejuvenated there. So, we may see a little uptick in the fourth quarter from the fact we essentially sold two systems in the United States in the quarter for IORT, which is not necessarily particularly strong quarter. So we might see a little stronger quarter I think in Q4 as it relates to U.S. IORT sales. But also in that market, we have gone to a subscription model as well. So it’s a little difficult to predict at this stage, how many might come in as capital lease, see the revenue upfront versus we getting revenue on a ratably recognized basis based on monthly activities within the account. So it’s a little bit of a mix. But I think the important thing I would convey is that we are really pleased that we put 13 new systems out there regardless of where, because we have said no matter where they are in the world, there is a material recurring revenue stream over time that is associated with them so that it may take us a quarter to start see that benefit, but it will play out in our numbers. And if we can continue to place something in the double digit range in terms of systems of some business arrangement, the recurring revenue over the next few years will really start to get good traction.

[Shawn Boyd:]

Right. And just for order of magnitude, how do you think about the recurring revenue from an internationally placed breast IORT system as opposed to in the U.S.?

[Ken Ferry:]

Well, I mean they are pretty similar and I just think it’s a question of the price points. They have a warranty for a year. Then they would typically buy a service agreement and that presents a certain amount of recurring revenue. And then in breast, they buy the disposable balloon applicators. So just in a real ballpark sense, let’s say we sell these for about $1,500 to $1,700 per applicator in the United States we might sell them for $1,000 to $1,200 internationally. So you are going to see slightly less on the per-procedure basis, so to speak in terms of recurring revenue. But still the number is pretty solid. And of course, they buy source contracts. Source contracts and actually source contract is probably the biggest component. And that also I think reflects slightly lower pricing internationally, but it still translates into a very solid recurring revenue stream as a percent of the upfront purchase on an annual basis.

[Shawn Boyd:]

Got it. Okay. Thanks and keep it, good luck.

[Ken Ferry:]

Thanks Shawn.

[Operator:]

You have a follow-up question from Jeb Terry of Aberdeen Investment Management. Your line is now open.

[Jeb Terry:]

Kevin, what – can you refresh my memory on what the ASP is for the tomo CAD install?

[Kevin Burns:]

So we had not – we are still in the process of finalizing that and – those ASPs. But historically Jeb, when we sell a 2D system, the initial price was $32,000. That was for – in connection to one modality and then there was an incremental $15,000 to $20,000 per modality. So if a site had three modalities, that site would be paying about $50,000 as a capital purchase and then the recurring revenue of $8,000 to $10,000 if they bought a service contract.

[Jeb Terry:]

Okay. Thank you.

[Ken Ferry:]

Thanks Jeb.

[Kevin Burns:]

Thanks Jeb.

[Operator:]

I would now like to turn the call back to Ken Ferry for any further remarks.

[Ken Ferry:]

Thanks, operator and thanks everyone for joining our call today. We covered a lot of ground in our therapy and cancer detection businesses. In the therapy business, we remain confident that our treatment of non-melanoma skin cancer over the longer term is a very, very viable procedure. We will continue to invest in clinical data in support of that, appropriate use criteria and education for all of our customers. We are encouraged by the increase in momentum in IORT. We have been investing a fair amount over the last several years internationally and it’s nice to see that that is gaining additional momentum and starting to pay off. And in our cancer detection business, we have a large installed base. And between PowerLook, breast density and tomo workflow tools, we think we have an exciting opportunity over the next 3 years to 5 years to really get that high margin, high EBITDA business growing orders of magnitude greater than it has historically over the last 4 years or 5 years. So we are optimistic about our future. We will stay focused on execution and we look forward to updating everybody after our fourth quarter at our Q4 results call. So thanks again for all of your interest and time. And we look forward to speaking with you in the near future. Bye-bye.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You my all disconnect. Everyone have a great day.