iCAD, Inc.
Q4 2014 Earnings Call Transcript

Published: 25 Feb 2015

[Operator:]

Good day ladies and gentlemen and welcome to the iCAD, Inc. Fourth Quarter 2014 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 Zack Kubow from The Ruth Group. You may begin.

[Zack Kubow:]

Thank you, operator. Good afternoon, everyone. This is Zack Kubow with The Ruth Group. Thank you all for participating in today’s call. Joining me from iCAD are Ken Ferry, Chief Executive Officer; and Kevin Burns, President and Chief Financial Officer. Following the market close today, iCAD announced financial results for the three and 12 months ended December 31, 2014. Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding operations and future results of iCAD. I encourage you to review the company’s filings with the Securities and Exchange Commission, including without limitation to the company’s Forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in 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, February 24, 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 turn the call over to Ken Ferry. Ken.

[Ken Ferry:]

Thanks, Zack. Good afternoon, everyone and thanks for joining us today. We were quite pleased with our fourth quarter and full year results for 2014. We delivered strong revenue growth while making considerable progress with our strategic initiatives for the radiation therapy and Cancer Detection businesses. During the year, we positioned the company for continued growth by raising $29 million in a secondary offering, restructuring our debt and acquiring businesses that expanded our solution offerings to the dermatology market. We closed the year with our tenth consecutive quarter of revenue growth and delivered on our financial guidance, which we increased after the third quarter. On today's call, I'll provide a brief review of the financial highlights from the fourth quarter, a summary of our 2015 guidance and long term opportunity followed by our business update. I'll then turn the call over to Kevin Burns, our President and Chief Financial Officer, for a detailed review of the financial results. I want to acknowledge that he recently was promoted from Chief Operating Officer to President, reflecting his significant contributions to the business and the key role he will continue to play as we execute on our growth strategy. Following Kevin's remarks, I'll come back to recap our key initiatives for the year, then we will open up the call for questions. Turning to the fourth quarter for 2014, revenue for the quarter increased 44% over the same period a year ago and recurring service revenue more than doubled to $8.6 million or 65% of total revenue. We delivered improved gross margin of 70.6% and adjusted EBITDA of $2.5 million or 18.7% of revenue. The strategic acquisitions that we made in the third quarter of 2014 contributed nicely to our fourth quarter and full year 2014 results, helping to increase adoption and utilization of Axxent system for the treatment of non-melanoma skin cancer by dermatologists and radiation oncologists. Combined with the ongoing progress we're making in our breast IORT and cancer detection businesses, we're well positioned to deliver another year of strong growth and improved financial performance, while increasing investments in sales, marketing, clinical studies and reimbursement initiatives. For fiscal year 2015, we expect revenue to be in the range of $55 million to $59 million, representing growth of 25% to 34% and we expect to deliver adjusted EBITDA margin in the 16% to 20% range. This guidance reflects another year of substantial progress. With this said, we will still only be scratching the surface in terms of potential for our business. Over the next several years, we believe iCAD has the potential to meaningfully penetrate the Electronic Brachytherapy market for breast and skin cancer. We also believe that 2016 will be the beginning of a new growth cycle for our Cancer Detection business, associated with the launch of our 3D tomosynthesis software. To describe the size of the opportunity and the addressable market numbers, we believe the treatment of non-melanoma skin cancer is a multibillion dollar annual opportunity in the U.S. alone. The treatment of eligible breast cancer patients with IORT exceeds $350 million per year and the tomosynthesis interpretive software opportunity exceeds $500 million over the next four to five years. This aggregate represents an annual multibillion market opportunity in the early phase of adoption. Turning now to an operational update beginning with therapy solutions. We saw continued strong momentum in this segment during the quarter, driven by the growing use of the Axxent system for the treatment of non-melanoma skin cancer. To date our system has treated over 10,000 lesions and continues to grow. The recent acquisitions are also having a positive impact on the business. Our team can now provide a comprehensive solution for Dermatologists and Radiation Oncologists to develop, launch and manage eBx programs for the treatment of non-melanoma skin cancer. This includes SaaS based Oncology workflow software, professional services, non-melanoma skin cancer program development, operational logistics, physics support, source calibration, training and access to radiation oncologists and radiation therapists. They will continue to be a significant opportunity to add new eBx practices and we're only at 1% to 2% market penetration today. To continue to accelerate adoption, we're investing in additional clinical studies, educational initiatives such as live symposia, webinars and training and marketing support programs. We've been particularly pleased with our activity at the medical meetings, where we have begun to gain momentum. The next major meeting will be the American Academy of Dermatology in San Francisco in March and we expect to have strong presence at the meeting through our exhibitor booth, poster presentations in the second meeting of our Advisory Board. Turning to Breast Intraoperative Radiation Therapy or IORT, we continue to see positive year-over-year growth in procedure volume and corresponding sales of our balloon applicator. For the year we sold more than 900 disposable balloon applicators, which represented a 36% unit growth in the United States versus 2013. Later this week, we'll be attending the Miami Breast Cancer Conference in Multidisciplinary Breast Cancer Meeting where we will be sponsoring an educational symposium with key presenting physicians. Similar to our efforts with dermatologists, we're investing in live symposia, webinars and training and marketing support programs to drive adoption and utilization of breast IORT. A key initiative for our skin and breast therapy solutions business is the development of clinical studies and data supporting the use of our systems. In 2015, we will be investing in three key clinical studies. First, the ongoing Expert Study, during the fourth quarter reached a key milestone of more than 500 patients treated and enrolled in the trial. As a reminder, the study will enroll up to 1,000 patients in the United States and Europe. Study subjects will be followed for 10 years after treatment till we evaluate the long term safety and efficacy of breast IORT with this system. The study will also assess cosmetic outcomes and quality of life for those treated. Early results from the Expert Study will be presented for the first time in posters by [Dr. Nasir Saeed] Long Beach Memorial and Helena Chang, of UCLA at The National Consortium of Breast Cancer 2015 meeting in Las Vegas in mid March and The American Brachytherapy Society in April. We expect additional presentations of the data at other meetings throughout the year as well. Second, also in the area of breast IORT in 2015 we plan to initiate and IORT as a boost clinical trial while the protocol for the study is still being developed, the goal is to asses IORT as a boost to standard whole breast external beam radiation in higher risk patients. The study will enroll 500 patients across multiple sites with the primary endpoint of cancer recurrence at five years. Third for skin brachytherapy we plan to launch a study comparing Xoft electronic brachytherapy as a non-surgical alternative to most surgical procedure, which is the current standard of care. The primary end point will be local cancer recurrence rates at five years with secondary endpoints around skin toxicity, safety, cosmesis and quality of life. The study will enroll 600 patients randomized to either Zoloft or Mose. Now moving on to Cancer Detection, we had a good quarter with revenue growth of 12% year-over-year, this was driven by an increase in PowerLook sales and MRI software product sales to our partner Invivo. In December, we featured our proprietary solutions for the early detection of breast and colon cancer after 100th annual meeting of the Radiological Society of North America in Chicago. Some of our key products including PowerLook and VeraLook CTC were featured in symposia, poster presentation and workshops discussing our technology for the early identification of Cancers. In addition we demonstrated works in progress, tomosynthesis interpreter software, which consistently receive positive feedback from Practicing Radiologists with [indiscernible] demonstration. Looking forward, we will continue to invest in the development of our 3D tomosynthesis interpretive software products. This will put us in a strong position for growth in 2016 and beyond and give us significant opportunities associated with the growing adoption of 3D mammography. Overall, I am very pleased with our execution and the progress we've made in 2014, particularly our strong commercial and financial achievements and continuing to adjusted EBITDA profitability. We look forward to continuing this momentum into 2015 and executing on our key growth initiatives. I'll now pass the call over to Kevin, who will discuss our financial results in greater detail.

[Kevin Burns:]

Thank you, Ken, and good afternoon, everyone. This continues to be an exciting time for iCAD. Our 2014 results and in particular our second half performance demonstrates that we remain on track with our long term strategy to drive topline growth and realize operating leverage as we continue to execute on our plan. 2014 was a pivotal year for us as we gained traction in driving adoption of our disruptive Xoft technology and growing our Cancer Detection business, while improving our gross margin and operating margin profiles. We had our 10th consecutive quarter of year-over-year revenue growth and more importantly we're very pleased with the growth of the recurring services revenue component, which grew 104% for the fourth quarter and 74% for the full year. We had previously stated that we expect the higher margin services revenue to have a greater contribution to total revenue going forward as radiation oncologists and dermatologists continue to adopt Electronic Brachytherapy as part of their treatment offerings. In the fourth quarter, services revenue was 65% of total revenue, up from 46% during the same period last year, resulting in further gross margin expansion of approximately 180 basis points compared to the fourth quarter of 2013. We've seen solid performance in our Cancer Detection business with significant opportunities that remain ahead of our new product launches around 3D tomosynthesis. In addition, we have multiple initiatives in place to drive further adoption and penetration of our Xoft system within the breast and skin cancer market segments. Given these significant opportunities, we're pleased to provide fiscal year 2015 guidance of $55 million to $59 million, representing year-over-year revenue growth of 25% to 34%. With respect to the fourth quarter of 2014 total revenue increased 44% to $13.2 million. This included a 71% increase in therapy revenue and a 12% increase in cancer detection revenue. Total revenue for fiscal year 2014 increased 33% to $43.9 million. Revenue growth continues to be driven by strong trends in recurring services revenue with recurring services revenue growing to 104% in the quarter and 74% for the year. Strong adoption and utilization trends continue and enhance by the significant value added by our strategic acquisitions in the third quarter, providing Dermatologists and Radiation Oncologists with the tools to launch and optimize their brachytherapy programs. We exited 2014 with total annualized recurring revenue run rate of $34.4 million. For the fourth quarter of 2014, total therapy revenues increased 71% to $8.5 million, therapy product revenue declined [13%] [ph] to $2.1 million while therapy service and supply revenue increased 222% to $6.4 million, which reflects the continued momentum we're seeing with our Xoft system in the skin and breast cancer markets. Recurring therapy service revenue was approximately 75% of total therapy revenue for the quarter, which was flat sequentially; however, total therapy service revenue did grow 11% sequentially. We do expect the general trend to be a larger portion of this business to be recurring services as we drive further penetration and adoption going forward utilizing various business models including monthly subscription services. Moving on to Cancer Detection, total revenue for this business in the fourth quarter was $4.7 million, a 12% increase compared to the fourth quarter of 2013. Product sales of $2.5 million in the quarter increased 28%, which was due to a strong mix of new business from our MRI products and Cancer Detection product upgrades. Service revenue decreased slightly, by 1% in the quarter to $2.2 million, Cancer Detection revenue for fiscal year 2014 increased 10% with product revenue growing 19% and service and supply revenue increasing 1%. As previously discussed, we expect low single-digit growth to continue in this business moving forward with significant acceleration upon the availability of our 3D mammography solutions. Moving down the P&L, total gross margin improved to $9.3 million or 70.6% in the fourth quarter, up from $6.3 million or 68.8% in the fourth quarter of 2013. Product margins were 71.1% in the fourth quarter and 73.7% for the year. Product margins were down slightly from the prior quarter trends due to a higher mix of third-party products in our Cancer Detection business, combined with a higher percentage of product sales in the therapy segment. We continue to see very encouraging improvements in our service margin driven by the growth in our recurring service revenue combined with internal work to optimize deployment and increase efficiencies within this organization. For the year our service margins were 76.2% with fourth quarter service gross margins of 77.2%, an increase of approximately 440 basis points from the same period last year. As a reminder, we reclassified all depreciation and amortization expense last quarter to a separate line in the comp to sales. G&A in the fourth quarter was $584,000, an increase from $324,000 in the fourth quarter of 2013. The increase was primarily due to depreciation and amortization expenses associated with the third quarter acquisitions. The non-cash depreciation and amortization has negatively impacted our gross margins by approximately 180 basis points, compared to first half trends. As we have discussed, we continue to expect margins in the low 70% range for the next few quarters. Total operating expenses increased to $8.8 million in the fourth quarter from $6.9 million in the fourth quarter of 2013. Excluding D&A, fourth quarter operating expenses were approximately $8 million of which there was approximately $200,000 due to a litigation settlement around a third-party contractual dispute. In addition, our depreciation and amortization categorizes operating expense increase to $810,000 in the fourth quarter. This significant non-cash increase is primarily due to the amortization of intangibles related to our acquisitions. Going forward we do expect operating expenses to increase throughout the year from a current normalized run rate of $8.5 million including approximately $750,000 of depreciation and amortization expense per quarter. As Ken mentioned, we will be making incremental investments in clinical studies to further support the effectiveness of our Electronic Brachytherapy cancer treatment and we’ll also be making incremental commercial investment in sales and marketing programs to drive expansion and adoption. Interest expense for the fourth quarter was $562,000 of which $340,000 represents non-cash amortization of financing cost and settlement obligations. Adjusted EBITDA for the fourth quarter was $2.5 million or 18.7% of revenue up from $285,000 or 3.1% of revenue in the fourth quarter of last year. For fiscal year 2014 adjusted EBITDA was $6.4 million or 14.5% of revenue, compared with $1.9 million or 5.6% of revenue for fiscal year 2013. Non-GAAP adjusted net income in the fourth quarter was $107,000 or $0.01 per share, compared to non-GAAP net loss of $1.5 million or $0.14 per share in the fourth quarter of 2013. On a year-over-year basis we improved our non-GAAP net loss by $0.39 per share from a loss of $0.48 per share in 2013 to a loss of $0.09 per share in 2014. From a balance sheet perspective, we had $32.2 million in cash and cash equivalents at the end of 2014, compared to $11.9 million at the end of 2013 and $33.4 million at the end of the third quarter. Working capital improved dramatically on a year-over-year basis by $23 million to $22.6 million at the end of the fourth quarter. From a debt perspective we ended the year with $11.25 million of debt at interest rate of 5.75%. We paid $3.75 million of principal in October of 2014. Of the remaining debt $3.75 million is due at the end of '15 and the balance of $7.5 million is due at the end of 2016. In fiscal 2014, we generated $3.2 million in cash from operations, compared to a cash use of $1.4 million in fiscal year 2013. In the fourth quarter alone, we generated $3.4 million of cash from operations. Looking ahead to our financial guidance as I mentioned earlier, our revenue guidance is $55 million to $59 million, which represents growth of 25% to 34% with adjusted EBITDA in the 16% to 20% range. We expect service revenue to continue to have a larger contribution to total revenue. In addition we continue to believe our CAD business is poised for further growth with the launch of 3D products, sales of breadth density solutions and upgrades to our current suite of products. Our disrupted Electronic Brachytherapy platform is still in the early stages of market adoption relative to the significant opportunity that exists for both breath and skin cancer. With strategic marketing, clinical and reimbursement initiatives in place to increase awareness and value to radiation oncologist, dermatologist and patients of the like, we're confident that we're well positioned for significant growth. With that financial overview, let me now turn the call back to Ken. Ken?

[Ken Ferry:]

Thank you. Kevin. 2015 will be another exciting year for the company and we’re focused on the following key initiatives during the year. Number one to achieve our revenue and EBITDA guidance through strong operational execution particularly with our comprehensive product and service offering for the treatment of non-melanoma skin cancer. Two, to drive patient enrollment in our three key clinical studies for Electronic Brachytherapy, the Expert Study, the IRT as a Boost Study and the skin eBx study. Third, to position the Cancer Detection business for the launch of the tomosynthesis interpretive software products, we expect to do that in Europe in the fourth quarter of 2015 and hopefully early in the United States in 2016. And last, to gain regulatory approval in strategic countries outside of the United States particularly China and Russia. If we achieve these goals, we’ll have made good progress towards our goal of substantially increasing penetration of a multi-billion dollar annual addressable market opportunity for the company. We look forward to update you on our progress. Operator we will now open the call for questions.

[Operator:]

Thank you. [Operator Instructions] The first question is from Per Ostlund of Craig-Hallum Capital. Your line is open.

[Per Ostlund:]

Thanks. Good afternoon everybody, just stepping in for Bill today. Congratulations on the quarter and the year. A lot of good developments here. Couple questions for you, I know you guys have like kind of a lot on your plate when you made the acquisition of DermEbx and Radion over the summer just kind of on-boarding the backlog and doing the early integration there. But now that we’re call it seven, eight months in, have you began to kind of look back at your original client base those folks that weren’t using the DermEbx or Radion hub and going back in and doing some of the up-selling there or is that still something that’s a little bit further down the road?

[Ken Ferry:]

Well Per, the opportunity with that installed base is probably to bring in the Radion hub software and we have discussed this with several customers and I believe we have made several transactions, but nothing really what I call the major trend. And to be honest, the opportunities to place new systems in new sites is so significant particularly with the expansion into the Midwest that we’ve been quite busy really talking to potential new customers, but I think that in a period of time, over the course of this year, we absolutely will try to proactively approach the installed base. We think the software has some very, very unique advantages around improving workflow and optimizing all of the documentation and compliance issues you have to be mindful and diligent about and we think this is considerable opportunity. At this point, we’ve done a little, but we clearly have a very strong funnel. We just finished the fourth quarter where we essentially either sold or signed contracts for more system placements than in any other quarter in the history of the company and the skin business and that is keeping us quite busy right now.

[Per Ostlund:]

Excellent, excellent, looking at the 2015 revenue guidance, a very nice number there. Based on the commentary so I guess I’m just kind of looking for conformation here, based on the commentary I’m assuming that there’s probably not a lot of the 3D tomo really in the number in that detection. We should be thinking of as kind of that low to mid single-digit grower behind the breast density and what not kind of until the tomo products come late in the year and early next, is that fair?

[Ken Ferry:]

Yeah, I think that’s the way to look at it. The opportunity in 2015 would be probably sometime late in the fourth quarter on an international basis not domestically. We will likely be in the FDA process in that fourth quarter timeframe, but do not expect to see something favorable until the first part of 2016. So we’ve taken a somewhat of a conservative or cautious approach relative to try and count on tomosynthesis really for any meaningful revenue. So when we say low single-digits it really doesn’t imply really any tomosynthesis revenue in 2015. There is a possibility with the substantial growing installed base that GE has, if we can get our upgrade to their installed base synced up sometime in the fourth quarter, it could be a nice balance, but for the purpose of being a bit conservative given the time that that’s going to take, we’re not really factoring any tomo revenues into the '15 plan for the computer aided detection business.

[Per Ostlund:]

Okay, that makes sense. One more from me and then I’ll cede the floor, so again on the guidance. Just looking at the EBITDA margin characterization 16% to 20% coming off of I think the second half of '14 where you did about 19.5% I think by my math, is that a little bit of conservatism do you think? Is that mix or is that some of the investments in market development reimbursement? Is it more of that sort of thing that might kind of be a near-term depressor on the margin side? If it is actually is being depressed?

[Kevin Burns:]

Yes, it’s a combination obviously Per of all those factors. One is what is the mix in 2015 going to be between products and recurring? We have the different models and the different options available to our customer. So how will that mix play out next year? In addition, we’re significantly increasing some commercial investments and some clinical study investments primarily around IORT as a business. Ken mentioned the EBX versus [Mose] [ph] clinical study as well. So we’re going to continue to invest in those clinical programs that will obviously drive some further OpEx as we go throughout the course of the year. And finally we do plan to continue to expand and grow our commercial investments in terms of sales force as well as all the marketing programs to raise awareness around our technology.

[Per Ostlund:]

Okay excellent. Thank you.

[Kevin Burns:]

Thanks.

[Operator:]

Thank you. And the next question is from Brian Marckx of Zacks Investment Research. Your line is open.

[Brian Marckx:]

Hi guys, congratulations on the quarter. Kevin, a couple for you, just so I got it right there was 200,00 roughly in litigation expense in Q4 and that relates to the shield litigation is that right?

[Kevin Burns:]

No, actually we did settle the Tungsten litigation matter as we'll. That entire -- that was all covered by our product liability. This was just a small third party contractual dispute that we’ve been working behind the scene. So that was not related to that transaction.

[Brian Marckx:]

Okay, but it was about 200,000, is that right?

[Kevin Burns:]

That’s correct.

[Brian Marckx:]

Okay. And as far as D&A, I think you said about 750,000 a quarter in 2015, that’s what you're kind of expecting?

[Kevin Burns:]

Yes, so two components just to make sure we’re on the same page, from an operating and expense standpoint in the fourth quarter, it was $810,000. We had a little bit of a catch-up there. For 2015 our D&A categorized as OpEx will be in the 750,000 range.

[Brian Marckx:]

Okay, great, and that’s below the line, below the revenue line right?

[Kevin Burns:]

Correct.

[Brian Marckx:]

Okay. So in terms of the related studies, in terms of R&D, can you kind of help us with what we should expect in terms of modeling in 2015? I assume that that will be a reasonable step-up in R&D expense?

[Kevin Burns:]

That’s right. So similar commentary we provided earlier where our normalized run rate when you back out the litigation in the fourth quarter was approximately 8.5 of which 750 was D&A and the growth next year. G&A will grow modestly - minor incremental expenses there just as we get a little bit larger, we will certainly see some additional sales and marketing and then the larger component will be the clinical trials and that would be in the R&D expense. So that 8.5 should be -- will be growing we expect throughout the year.

[Brian Marckx:]

Can you give us an idea sort or range anyway?

[Kevin Burns:]

At this point I think we're just -- we're going to be balancing it with our revenue growth as well. So we’re going to be making appropriate investments as we see the revenue coming in. So we have a few levers that we can pull to accelerate or to slow some things down. We still want to maintain a decent level of EBITDA profitability in the business, which we feel very comfortable we can do. So if we start to get ahead of things from a revenue standpoint, it may accelerate more investments to drive more awareness, which would obviously further accelerate our revenue growth. So at this point, Brian, it's going to be balanced and we need to see how it plays out on a quarterly basis.

[Brian Marckx:]

Okay, all right. And so the new trials that you're initiating and specifically as and in terms of the as boost I think is what you called it, can you talk about what prompted you to initiate the study and is that an area where Xoft is being introduced as a boost to external beam where you're seeing adoption I guess or more adoption that there was initially?

[Ken Ferry:]

Brian, boost has been around for quite a while and it’s been done with isotope based technology or HDR systems and ultimately when you really think about it, little bit like IORT wouldn’t have been most convenient to provide a boost during the lobectomy procedure versus burdening the patient with additional whole breast radiation, which is how it’s done today, in addition to the full regimen of whole breast radiation. So we think the use of IORT is a natural fit as a boost in addition to whole breast radiation for patients that are obviously of a more complex nature that IORT as a monotherapy would not be appropriate. And one of the benefits of course as I mentioned is getting it done during the lobectomy procedure and we think that the data that you need to develop is not -- we think the data is not going to be as stringent as when you try to use IORT for monotherapy, because now you're using in a combination with whole breast radiation. And you're either trying to accomplish one of two things. One is to reduce recurrence risk even further or potentially as you gain experience and have sufficient data to shorten the regimen of whole breast radiation. So we think that by not going with this all or nothing if you will, IORT as a monotherapy, what it really does is it opens up a new segment of the addressable market and so instead of going from let’s say 40% of the newly diagnosed patients in the United States, which might be let’s say around 70,000 or 80,000 patients you can add equally as many in from the boost category. So now your addressable market goes from say 35% or 40% of the newly diagnosed to more like 60% or 70%. So it’s a much bigger patient population by adding boost. What we’re going to do is we’ve got a panel of experts that have a lot of experience that are going to design a protocol for how we would use IORT as a boost and then we’re going to begin a study and enroll patients and obviously treat them and follow them with the specific timeframes and volumes that I mentioned earlier in my opening remarks. And so it’s going to take us a few years, but it adds an additional population to this opportunity and it takes us out of this debate where it's either IORT monotherapy or nothing. We think over time the data will support more and more so IORT as monotherapy so we’re not backing away from it. If anything 2015 is a very important year for study data in IORT, we have no less than three or four scenarios where data is going to be presented at major meetings over the course of the year. And it’s all follow-up data on IORT patients using our system. So if anything we’re starting to build a stronger set of data to support monotherapy, but we think there’s an additional segment of patients that don’t qualify for monotherapy that boost in conjunction with whole breast is appropriate and we also think we have unique advantages as a boost technology being done during the lobectomy versus having to have it done on our patient basis. So in hindsight might we have begun the emphasis on boost back in the beginning when we first got into the business probably should have done that. With that said, the opportunity we think is still considerable to almost double the size of the addressable market for the use of IORT. And so we’re going to pursue that aggressively expecting over the next say two to three years, this could become some meaningful opportunity for us to really increase procedure volumes. And it’s a combination of probably new customers and all of our IORT sites that are doing IORT, but have patients that don’t outfit the guidelines right, that have larger tumors or have lymph nodes involvement and so forth that don’t have clean margins ultimately could benefit from our technology as a boost. So we think the opportunity will be both in our installed base where the systems we use mono and as boost as well as new opportunities where it will be used in some cases solely potentially as boost.

[Brian Marckx:]

And is this solely a marketing study or do you envision this potentially as an additional indication as a boost?

[Kevin Burns:]

Well we absolutely, that’s why we’re basically doing the study is that we want to show the efficacy the safety and we want to follow the patients and get follow-up data to see exactly what happens to recurrence rate. So, we’re treating this quite honestly no different than IORT is just a different indication as you referenced.

[Brian Marckx:]

As an FDA indicated indication.

[Kevin Burns:]

What can be used today, because technically our indication is wherever radiation is delivered inside the body, so basically we’re already cleared if you will it’s really poor function of providing proper clinical data to give the confidence to the physicians, but this is both clinically effective and safe and that’s really what we’re trying to prove with the study.

[Brian Marckx:]

Okay, all right congratulations guys, great work. That’s all I had.

[Kevin Burns:]

Okay, thanks Brian.

[Operator:]

[Operator Instructions] The next question is from Bob Jones from Wells Fargo Advisors. Your line is open.

[Bob Jones:]

Yeah I live in Southwest Louisiana about two hours from Houston when people around here have a cancer issue we typically hear for MD Anderson over there. And I asked my dermatologist few months back if you had ever heard of blackhead and he had not. And I said we’ll look they’ve got this eight minute video on their website if you will listen to it give me your opinion, I’ll give you a good bottle of wine. Well he did and he got the better into that, because he got a good bottle of wine and he gave me rather negative outlook, he didn’t for various reasons, he didn't think it would catch home. My question is have you made any inroads into the Houston market?

[Ken Ferry:]

We’re talking specifically Bob about breast IORT.

[Bob Jones:]

No skin?

[Ken Ferry:]

Skin, the Texas market is silent as it relates to reimbursement and so basically what happens in a silent market what it means is that the Medicare provider only on a case by case basis would be willing to pay for a claim, instead of what that does is it makes it very hard for us to go in and educate and to market the products in an environment where essentially reimbursement has not been established. So what we have today is we have 21 states that have Medicare positive pay policy, believe we have 13 states that have a negative pay policy and then if my math is right, there’s 16 states that have a silent policy. So unfortunately Bob Texas fits into the silent policy. So I’m not surprised that you got that reaction, because we’re not aggressively marketing at this point into the states that have either silent or negative policy. Now we’re investing in getting the technology into those states to generate patient procedure volume and we’re going to be filing or should say the provided are going to be filing claims so that we can test the level of progress and potentially the appeals process at some point to establish reimbursement it’s a tactic that has worked in other regions. So I’m not surprised, that that’s the response you got. Now the other way to think about this is that there’s about three million cases a year of non-melanoma skin cancer to get treated in the United States alone. And of the three million, about one million have the lesion size meaning smaller early stage lesions where radiation would be indicated as an alternative to most surgery. So we’re looking at a million lesions a year clinically. We’re proud as can be that this year we’ve now got past 10,000 lesions treated, but to be realistic 10,000 lesions is 1% market share if you will, compared to the million lesions to get treated in some fashion. So we’re still early and so it doesn’t surprise me that your dermatologist reacted that way. One thing that is positive for us is that we’re starting to build a very strong clinical Advisory Board within the American Academy of Dermatology and one of the participants in our Advisory Board is a former President of the American Academy of Dermatology. And that meeting is going to be in San Francisco their National Meeting next month and so what we’re really trying to do is take this longer term view and build a relationship with the American Academy of Dermatology. We have an Advisory Board of really some who’s who resumes if you will that could really help us to establish the technology. So to be honest, I’m not surprised that you got that reaction. It’s an indication of a large market. We’re getting good traction, but realistically with 1% penetration, we’re going to have that sort of response much more so in the regions that there’s not positive payment from Medicare.

[Bob Jones:]

That's interesting. Thank you.

[Ken Ferry:]

Yeah, thank you.

[Operator:]

Thank you. And the next question is Shawn Boyd of Next Mark Capital. Your line is open.

[Shawn Boyd:]

Good evening. Congrats on another good quarter.

[Ken Ferry:]

Thanks Shawn.

[Shawn Boyd:]

Couple good real brief questions here. Ken, you mentioned a record quarter on control replacements for skin and after the acquisition last summer, the company was looking at a couple of different advantages you would came out with the capital purchase model and then of course the subscription basically having a placement in using a subscription model in terms of service going forward. Can you give us little bit more color on how that’s working now that we're a couple of quarters into it and then I got a follow-on to that if I could?

[Ken Ferry:]

Yeah the mix Shawn is I would say in a real ballpark sense it’s probably 50-50 or 60-40 now in favor of this solution model, which is the services model that wraps the equipment into a monthly fee structure. And, while we’re still doing a reasonably good job selling capital if you will it really a combination of probably three dimensions. One is international is still a normal transaction. IORT is for the most part a capital transaction and I would say and again just on a ballpark sense above 50% of our derm customers are buying the equipment about 50% of buying it through a solution model. So that’s where I kind to this, maybe 60% of it is roughly a solution versus a capital. At the end of the day as much as I would love to get the capital upfront the recurring revenue is significantly higher from the solution model. You go from roughly a $100,000 a year in the capital model or maybe 125 maximum yet in service post warranty to literarily a $300,000 to $500,000 a year recur revenue model with the solution. The challenge though is that solution transactions come in and they can take three to four months to get the account up and running. So you really have a lag in terms of when you see the revenue. That 30,000 or 40,000 come in per month may not start sometimes for 120 days post signing of a contract. So we’re still kind of working through that transition, but in the fourth quarter, we had by far the largest number of system placements either from a signed contract on a solutions basis or from an outright capital purchase and when you look at the potential let’s call it six figure recurring revenue from each of those models that’s a good thing.

[Shawn Boyd:]

Yeah no absolutely. And so as that mix shift we’ll continue to see revenue per system fall up?

[Ken Ferry:]

Yeah I think that clearly as we attack the skin market opportunity, we have consciously said that if we see a barrier, which is write a check $250,000 for the capital then we’re more than willing to shift into the total solutions model, because we really want to establish two basic things. More sites and more procedure volume and the more sites, the more procedure volume either model is very good for our business And when we sense as it does happen commonly, the dermatologist doesn’t want to write a check for $250,000 or finance a system, we quickly move into the solution model and I think what it will do is in the short-term it will not show a significant uptick in revenue as it would if we sold all of those systems outright. I think that 12 months, 18 months from now it will kind of get past that inflection point and you’ll see a significant increase in total revenue, because now you have gone through a cycle. And the total revenue you’re getting per year if the customer is substantially higher than it would have been when you add the capital dollars into an annual source and service agreement.

[Shawn Boyd:]

Got it. Okay and I know I did this before, that just to get an update and again now you’re kind of several months into it any -- and looking at other partners out there and thinking about that derm maybe that acquisition from last year. Any other partners that you might think of or that might be candidates as we continue to move forward in terms of bringing them in house?

[Ken Ferry:]

Right, I think the size of the funnel is growing. The activity is growing. The regions where we we're selling is growing. We’ve got plenty in front of us. If at some point whether it be broadening our product portfolio for dermatology in a more of a vertical play or broadening our channel play made sense, we would certainly consider it. But right now, I think when you kind of look at what we’ve accomplished particularly in 2014 and what we’ve put in play for guidance for '15, we’ve got plenty to do and so I would say that focusing on execution of the plan we have with the resources we have is by far our highest priority. If someone were to offer something out that you quote unquote “couldn’t refuse to take serious look at we would certainly take a look”, but that’s not really where our mindset is. Our mindset is we’ve got tremendous opportunity with what I’ll call our new organic plan to really execute and that’s where our focus will be.

[Shawn Boyd:]

Got it, okay. Great color I appreciate it and if I can just jump to Kevin for second, the share count dropped a little more than would have expected, is that -- can you just kind of fully do it the share count we should expect going forward?

[Kevin Burns:]

Yes, at the end of Q4, we had 15.4 million shares out and we’ve got another million shares using the treasury, so about 16.5 million.

[Shawn Boyd:]

Got it. Okay. Hey, thanks a lot and congrats gentlemen.

[Kevin Burns:]

Okay. Thanks Shawn.

[Ken Ferry:]

Thanks Shawn.

[Operator:]

Thank you. There are no further questions in queue at this time. I’ll turn the call back for closing remarks.

[Ken Ferry:]

I would like to thank everyone for joining us on call today. As I mentioned in my opening remarks, we’re very, very pleased with the progress we’ve made in 2014. We believe we have a very solid plan for 2015 and we believe our guidance supports that. We’re going to put tremendous amount of focus on execution and balancing the importance of performing on a quarterly basis with making the proper investments to really support the business long-term, because we’re still in the early phase of adoption in some very large markets. And we do need to educate and make visible the effectiveness of this technology to all of our potential customers. So we’ll try to have that careful balance and hopefully execute as well or better in '15 as we did in '14. So thank you all very much for joining us today. And we look forward to providing you color on the first quarter, sometime later on probably in the late April timeframe. Have a good day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.