ICAD Inc (ICAD) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2013 iCAD, Inc.

Earnings Conference Call.

My name is Steve, and I'm your event manager.

During the presentation, your lines will be on listen-only mode.

We will conduct a question and answer session towards the end of the conference.

(Operator instructions)

As a reminder, this call is being recorded for replay purposes.

And now I would like to turn the call over to Anne Marie Fields, Senior Vice President of LHA.

Please proceed, ma'am.

Thank you.

Good morning.

This is Anne Marie Fields with LHA.

Thank you all for participating in today's call.

Joining me from iCAD are Ken Ferry, Chief Executive Officer, and Kevin Burns, Executive Vice President, Finance, and Chief Financial Officer.

Following the market close yesterday, iCAD announced financial results for the third quarter ended September 30th, 2013.

If you've not received this news release or if you would like to be added to the Company's distribution list, please call LHA in New York, at 212-838-3777, and speak with Carolyn Curran.

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 the operations and future results of iCAD.

I encourage you to review the Company's filings with the Securities and Exchange Commission, including, without limitation, the Company's forms 10-K and 10-Q which identify 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 29th, 2013.

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.

Thanks, Anne Marie, and good morning, everyone.

We are pleased with the third quarter's results as we achieved our strongest revenue quarter of 2013.

Therapy revenues in Q3 were also the strongest of the year, with year-to-date revenues exceeding all of 2012, a solid comparative as we nearly doubled 2012 revenues versus 2011.

Also we have sold 30 Xoft systems year-to-date, equaling all of 2012 as well.

In addition, recurring revenue, which is driven primarily by patient treatment volume, has grown substantially.

Cancer detection revenues were also strong in the quarter, and we were particularly pleased with the growing traction with our next generation mammo platform, PowerLook.

We achieved strong sales to new customers and through upgrades to our growing installed base.

Also, service revenues year-to-date are up 18% over the same period in 2012.

So, to conclude my opening remarks, we remain very confident of the potential for the continued strong growth from therapy products, and also anticipate the continued growth with cancer detection products, driven by our progress in generating more recurring revenue from our installed base.

Following Kevin's commentary on the quarter and year-to-date performance, I'll provide you with a more detailed business update before opening the call to questions.

So now, let me turn things over to Kevin.

Thank you, Ken, and good morning, everyone.

As Ken said, we are pleased to report that our third quarter was another good quarter of progress with solid business and financial results.

This marks our fifth consecutive quarter of revenue growth and adjusted EBITDA profitability.

Our investments are producing results and we expect to have continued strength in both our therapy and detection businesses in the fourth quarter.

Turning now to a review of our revenue, for the first nine months of 2013, total revenue increased 17% to $23.9 million, highlighted by a 41% increase in therapy revenues and a 2% increase in cancer detection revenue.

For the third quarter, total revenue was $8.3 million, an increased 1.3% from the third quarter of 2012, driven by a 14% increase in our cancer detection revenue, offset by a 10% decline in therapy revenue.

With respect to our cancer detection business, total revenue for the third quarter grew 14% to $4.3 million, up from $3.8 million a year ago.

In the third quarter, product sales increased 11%, and our subscription-based product and service revenue grew by 18%.

From a year-to-date standpoint, total revenues increased 2% with an 18% increase in our service business.

Since the end of 2012, we have increased the number of customers under a service agreement by 14%, to over 1,100 customers, and expect the service business to continue to grow on a quarter-over-quarter basis, as our focus on recurring revenue continues to gain traction.

In addition, we continue to see growing demand from our install base for our latest generation CAD platforms driving additional product and service revenue.

For the third quarter, our therapy business generated $4 million in revenue, which was a decline of 10% over the third quarter of 2012.

In the third quarter, we sold 10 controllers, 194 balloon applicators, and we treated more than 1,000 skin lesions.

From a comparative standpoint, in the third quarter of 2012 we sold 12 controllers, 150 balloon applicators, and we treated approximately 250 skin lesions.

As we have discussed in the past, we believe that with such a dynamic growth business, it is more appropriate to focus on the year-to-date results to remove any quarterly fluctuations.

As a result, year-to-date therapy revenue increased 41% to $11.2 million with sales of controllers increasing 36%, from 22 units last year to 30 units for the first nine months of 2013.

We sold 574 balloon applicators in the first nine months of 2013, verse 431 a year ago, an increase of 33%.

We treated more than 2,400 skin lesions compared with approximately 400 for the same period last year, a six-fold increase.

And finally, our recurrent service and source revenue increased 72% over the first nine months of 2012.

Overall, we are very pleased with the top line revenue progress in both the therapy and cancer detection businesses.

Now, turning to the rest of the P&Ls, gross profit for the third quarter of 2013 was $5.9 million or 71.5% of revenue, which were both relative flat on a year-over-year basis.

For the first nine months of 2013, gross margin was $16.8 million or 70.2% of revenue, compared with $14.5 million or 70.8% of revenue for the first nine months of 2012.

This is a gross margin improvement of $2.3 million.

Again, please note that in 2013, we are recording the medical device tax as a cost of goods, and this has impacted our gross margin by approximately $400,000, or 163 basis points for the first nine months of 2013.

Total operating expenses for the third quarter of 2013 declined to $6.3 million from our -- from $6.6 million for the same period in 2012.

However, sequentially, our operating expenses increased by approximately $600,000 as we begin to invest in regional IORT and skin seminars, clinical trials, and incremental product development.

In addition, based on the growing demand, we've rolled out many new marketing and engineering initiatives focused in the skin market during the third quarter, and expect to see this continue into the fourth quarter.

As always, we will continue to make targeted investments to accelerate market adoption, increase revenues, and advance our growth strategies.

Moving forward, we expect quarterly operating expenses to be in the low to mid-$60 million range.

Turning now to our profit metrics, adjusted EBITDA was $545,000 for the third quarter of 2013 compared to with $240,000 in last year's third quarter.

Adjusted EBITDA for the first nine months of 2013 was $1.6 million or 7% of revenue, compared with a loss of $1.6 million or negative 8% of revenue for the first nine months of 2012.

As I mentioned, this is our fifth consecutive quarter of adjusted EBITDA profitability, and an improvement of more than $3.2 million compared with the first nine months of last year, driven primarily by revenue growth.

Looking at other income and expense items during the third quarter, we reported a $624,000 gain due to the change in the fair value of warrants that we issued as part of our financing arrangement.

In addition, that interest expense in the third quarter was $807,000, of which $569,000 is cash payable related to financing the capital lease obligations, and the balance of $238,000 represents non-cash amortization of financing costs and settlement obligations.

On a per-share basis, our non-GAAP adjusted net loss for the third quarter of 2013 was 11 cents per share, which was an improvement of four cents per share compared to last year.

Year-to-date, our non-GAAP adjusted net loss was $0.34 per share, compared with a non-GAAP adjusted net loss of $0.66 per share for the same period in 2012, an improvement of $0.32 per share.

Moving on to the balance sheet, we ended the quarter with $10.2 million in cash and cash equivalents compared with $13.9 million as of December 31st, 2012.

For the first nine months of 2013, our net cash use from operations was $3.2 million, and total cash use was $3.7 million.

For the third quarter, we used $2.5 million from operations and $241,000 for capital investments.

We saw an increase in our DSO to approximately 95 days due to extended financing terms.

We believe our balance sheet is strong with accounts receivable and deferred revenues up and accrued expenses down.

We do expect to be cash flow positive in the fourth quarter.

With that financial overview, let me now turn the call back to Ken.

Ken.

Thanks, Kevin.

I'll begin the business update with therapy products.

2013 growth has been principally fueled by the increasing demand for the use of the Xoft system for the treatment of non-melanoma skin cancers.

This is a considerable market opportunity as non-melanoma skin cancer is now considered an epidemic with over 3.6 million cases treated annually in the US, and approximately 1 million of these cases are eligible for treatment with the Xoft system.

Today the standard of care for these patients is Mohs surgery performed by the dermatologist.

The Xoft system offers these patients a targeted, minimally-invasive treatment with significant patient benefits, particularly when used to treat lesions on the face, ears, and head, which typically results in excellent cosmetic outcomes.

To further adoption, we are increasing our investments in clinical studies, education, reimbursement, and increasing consumer awareness.

On the topic of clinical studies, Dr. Ajay Bhatnagar recently presented the results of his skin study at ASTRO, where he has now treated 187 patients with 275 non-melanoma skin cancer lesions.

At three years post-treatment, Dr. Bhatnagar continues to see highly encouraging results with the Xoft system related to cosmesis and toxicity with no recurrences of non-melanoma skin cancer.

Dr. Bhatnagar's scientific presentation was well attended, reflecting the considerable growing interest from radiation oncologists related to the treatment of non-melanoma skin cancer with electronic brachytherapy.

On the topic of education, we are sponsoring four regional events on the west coast where we have invited local radiation oncologists and dermatologists to attend.

The first two of these events were well attended from both physician specialties.

We also have a number of other initiatives using digital media, direct mail, and frequently updating information on our website to further support the adoption of the Xoft system for the dermatology market.

Moving to the adoption of breast IORT, we are also sponsoring a number of regional symposiums to educate and promote this potentially lifesaving technology.

We recently held a symposium in Atlanta which was well attended by breast surgeons and radiation oncologists.

We are also hosting an additional symposium in New York City in early November.

RSVPs to date have been very positive.

We're also increasing our efforts to improve reimbursement, and have developed initiatives on a national and regional level, with targeted payers to increase reimbursement for hospitals and physicians.

An example of our progress in reimbursement is, as of November 1st, 19 states will have a positive policy for non-melanoma skin cancer versus only 10 states on July 1st of this year.

So in summary, we're making considerable progress with the adoption of the Xoft system, the treatment of non-melanoma skin cancer, and breast IORT.

Procedure volume is up dramatically in the treatment of non-melanoma skin cancer, and in IORT our balloon applicators sales are up 30% versus 2012, indicating the increased procedure volumes from the existing and new customers.

All in all, we feel very well-positioned in these key therapy markets to continue our progress and the growth trajectory should continue as well.

So switching gears, I'll talk a little bit about our cancer detection products.

Mammography CAD revenues were strong in the quarter, fueled by growing demand for our next generation platform PowerLook.

The increased demand came from the sales to our strategic OEM partners such as GE, Siemens, Fuji, and Philips, and through direct upgrade sales to our growing installed base.

We also experienced considerable growth in service contract sales in the quarter.

This growing demand was generated as a result of increased service contract sales to GE, our largest installed base OEM partner, and through direct service contract sales to our broader customer base.

So all in all, we're very pleased with our progress to increase recurring revenue in the mammo product line.

And while on this topic, our mammo CAD product develop team recently returned from a trip to Europe where they were able to meet with several key GE tomosynthesis sites.

The experience and exchange with the sites, along with the GE tomo development team, was very timely, as we continue to develop our tomo workflow tools roadmap.

The interest in digital breast tomosynthesis is growing on a worldwide basis, and should be a major growth opportunity for us in our mammo product line over the next three to five years.

Moving to MRI, we are making solid progress to delivering on the product roadmap with our strategic partner, Invivo.

We delivered a new software upgrade to our breast module in late September, and are planning another upgrade to the prostate module in Q1 of 2014.

We believe the timely execution of the product roadmap combined with Invivo's increasing commercial momentum will drive stronger licensed revenue in Q4 and into 2014.

So, in summary, in addition to my last comments on our progress with Invivo and the MRI segment, we've made really solid progress with the mammo CAD business and a considerable increase in recurring revenue.

We were also very excited about the potential of our new software workflow tools and the development for use with reading of tomosynthesis breast images.

So, lots of good momentum in the business, both in the therapy and well as in the CAD space.

And at this point, operator, I think we're ready to open up the lines and take some question.

(Operator instructions).

Please stand by for your first question.

And your first question comes from the line of Bill Bonello from Craig-Hallum.

Please go ahead.

Good morning, guys.

Thanks for taking my questions, [reporter].

Wondering, Ken, if you can walk us through the GE opportunity a bit, sort of, you know, some color on how long it will take for you to generate sales once GE has FDA approval?

What are the technology and regulatory hurdles that you have to clear to have a product out on the market and selling?

And then just also thoughts around placing CAD with the systems that GE is now placing in, you know, OUS.

Sure.

I'm sure you're speaking to tomosynthesis.

Yes.

And in essence, the timing that GE has communicated for their FDA clearance is somewhere in the Q4 to Q1 timeframe.

So either this quarter or next quarter.

So we're working on the assumption that it should happen sometime in this window.

So with that said, we have had a number of discussions with them as it relates to a roadmap.

And the roadmap will have a number of different tools.

It's not one specific CAD product, quote unquote.

What we anticipate is bringing into the market workflow tools that will help with the reading, will speed up the read and interpretation.

And those tools may not have the exact CAD capabilities that our product does in the 2D world.

But we intent to evolve the roadmap to additional capabilities over time and ultimately have a product that does pretty much what we do in the 2D world.

From a timing standpoint, Bill, that's really hard to say.

You know, first and foremost, GE has to get their clearance, and that could be anywhere from now to the end of the first quarter.

As we work through this tool set, we need to fully understand the regulatory implications, and we are not at a point yet where I could say, even with the first implementation -- which we have a pretty good definition to -- that we are able to give a time frame.

What I would say is that we hope to have something available sometime in the second half of 2014, you know, from a first product implementation.

But that is all fairly fluid as we continue to define these releases along a roadmap, and then fully understand the regulatory implications which will follow over the next probably three to six months.

So that's probably the best I can provide.

What I will say is, it's a tremendous opportunity.

GE has done very, very well shipping and implementing systems in the international markets.

The sites that our developers visited -- they were very impressed with the overall product and, you know, the performance of the systems, and so forth.

And we are, you know, in the process of developing products in support of that entire new work flow.

And we're very excited about it, because we think it's a very big opportunity.

And when it does get to the United States in '14, you know, I would say we should see some revenues in '14.

I would not bank on them being very, very significant, but I would say in '15, '16, '17, this could be a very, very significant growth catalyst for our business.

Okay.

Great.

And then, on the -- on the therapy side, on the skin side, just curious if you can give us sort of any sense of trends there.

You know, you placed a number of instruments in the quarter.

Just trying to kind of figure out, you know, what the timing is looking like from your shipping an instrument to a customer actually starting up cases, and then do they kind of start up full force, or are you finding that they're increasing utilization, you know, over time, after a period of getting kind of comfortable with the instrument.

Just trying to get a -- you know, some sense of what the consumable pull-through from the existing installed base could do, you know, if it grows from this quarter forward, even, you know, kind of independent of placing, you know, winning new customers.

Yes, I would say just using kind of a general framework, there is obviously two types of implementation, skin and breast IORT.

And the one that you're able to get up and running most quickly is with skin.

And what I would say, just using an average, is within 30 days of shipment a program is typically up and running.

In that scenario it does take time to ramp up patients.

Clearly, you know, if you're working in a large dermatology practice, they have patients that they believe are good candidates.

They have patients that probably have elected for Mohs surgery in the past that they believe are a good fit to transition to radiation therapy and the whole coordination of getting these patients transitioned to a different technology, combined with the radiation oncology logistics, if you will, of getting into the practice and providing the therapy, they take time.

So I would say, you know, 30 days is a decent average.

Once you start to do patients, there is certainly a ramp.

And there's also some lag in reimbursement, to be honest.

So, you know, it's not an instant success, nor is it instant cash flow from a reimbursement standpoint.

But if you looked at a three to six month window, practices tend to be up and running and really cranking away, so to speak, in that three to six month window after they can technically be going in about 30 days.

You know, in breast IORT, it's a very different scenario.

It's a much longer ramp up.

Often systems are implemented, and a clinical protocol has to be established and agreed to by the institution.

So that can take time.

You know, we've seen three months', even as much as six months' time before patients are being treated post-sale in the IORT space.

So it's a very different dynamic.

Very, very different training implications in that space.

But certainly once the sites get up and running, and they establish their clinical criteria for which patients would qualify, we definitely start to see a ramp.

But it's not nearly as quick as the skin market.

But as you look at our, you know, IORT business today, we have really strong growth -- I mean, year-to-date in balloon applicator sales.

Some of that is coming from new customers, but a big percentage of it is also coming from sites that are now up and running from systems that were sold last year or early this year, that are really hitting their stride in terms of increasing procedure volume.

So it's a bit of a timing dynamic in both businesses.

And to summarize, I guess I would say that the skin market particularly is one where you can ramp up much, much more quickly than the IORT market.

And -- and, again, on the skin side, for the customers that have ramped up, are -- you know, how -- how is their utilization, you know, ordering of, you know, sources, or what do you hear back from them on, you know, patients treated?

How is that comparing to what your expectations were, going in?

I think it's pretty much along what our expectations would be.

So, sites that are large, that have been treating for the longest time, are using an inordinate amount of source minutes.

I mean, they're treating hundreds and hundreds of patients.

Those that are fairly early in the ramp up, you know, might be treating five to ten patients a week, you know.

And so it's anywhere from that, you know, high end to the low end extremes, and some are in the middle.

And it really does have, I think, both a timing effect as well as the profile of the patients, the collaboration between the specialties, meaning dermatology and radiation oncology, as to the ramp.

And I do think we've heard there is some lag in the reimbursement.

So good news, reimbursement is very strong, bad news, like with any, you know, payer, there can be timing issues in actually getting paid.

So we're really seeing, I guess, a lot of different dynamics in the regions of the country.

But at the end of the day, if you were to, you know, categorize a skin site that was installed six months ago to where they are today, their volumes would be pretty substantial.

And our source usage minutes really reflect this really significant number of procedures that are being done on a daily, weekly, you know, quarterly basis.

Excellent.

And one last question, and then I'll hop -- just -- I know you don't, you know, you don't do specific pipeline guidance or anything, but any kind of color that you can give us as you look out forward, just in terms of what you might be expecting, you know, over the next 12 months or something on the -- you know, on the controller side.

I mean, are we -- can we keep up at the pace that you've been at, or has that been, you know, abnormally high?

Well, I guess the way I would look at it, Bill, is the encouraging thing, if you just look again at the segments, and I don't want to minimize the fact that the system is a platform and there are customers doing both skin and IORT.

But if we want to really take a segment approach, which is probably the most useful way to discuss this, in skin, July 1, ten states had favorable reimbursement.

And now, November 1 comes, and we'll have 19 states.

So when you get this favorable reimbursement shift, almost, you know, doubling the number of states in July 1 to November 1, I think it bodes for a very strong continued growth in the skin market.

There's other regions in the country, other payers that we're working on nationally and regionally, and I think we will just, you know, just slug away at that, if you will, over the next 12 months, you know, to your question.

And that will continue to improve.

There's also a number of payers that are silent which, in many cases, they're also paying.

So I think we have a very nice growing reimbursement environment in skin.

Secondly, we have the best data, based on Dr. Bhatnagar's study.

And to have now up to three year data on as many patients as I referenced and as many lesions without a single recurrence of non-melanoma skin cancer, combined, you know, with the cosmetic benefits, really bodes well.

And so in that particular market, you know, while we're proud to be treating, you know, 1,000 or 2,000 patients a quarter, the reality is there's a million patients in the US alone that are eligible for this treatment, you know.

And it's pretty specific in terms of the dynamics.

It's a patient who has a lesion that is no greater than four centimeters wide and five millimeters deep.

So you've got kind of a profile.

And that is about 30% of the annual cases, but it's a million patients.

So our penetration of this market is very, very low in skin.

So I would be, you know, very enthusiastic about the ability to continue this pace in the skin market when you've got growing favorable reimbursements, strong clinical outcomes, and you've basically, you know, attacking about 1% of the market that's eligible today.

Those are type of tailwinds that typically say you can sustain this kind of growth.

So that's how we feel about the skin market.

You know, IORT and breast is a little bit different.

The eligible population there is about 100,000 patients per year, so the good news is that skin is about tenfold bigger.

But breast IORT is growing.

And it is a little bit more difficult to grow at the pace of skin.

There are certain barriers.

So inversely, reimbursements improving, but it does not necessarily equal full breast radiation reimbursement for the radiation oncologist.

The data, the five year data from the target study, was very encouraging, but it's not ten year data or there are not, you know, multiple other studies out there.

So adoption, I think, is very, very solid for IORT, but we do face some headwinds.

And I think we are very enthused about this opportunity.

We think it's a tremendous technology for the patients that qualify, you know.

But the pace of the ramp will probably not equal that of skin, either due to the size of the skin market or due to some of the traditional, you know, barriers you have to overcome in a new marketplace.

But we do anticipate strong growth in IORT as well.

As I look out at our fourth quarter, I was pleased to see that our funnel had an actually stronger mix of IORT opportunities versus skin.

So it seems like some of the skin momentum is clearly there, but at the same time IORT momentum seems to be gaining traction.

We also had a very, very strong balloon sales quarter in Q3 in the breast space.

So I think we're very enthused over the next 12 months, to kind of wrap up on your question, on both businesses.

I do think that the skin business, or skin segment, probably has, based on share size and all the other factors I mentioned, more potential to grow more quickly.

With all of that said, we really think breast IORT, domestically as well as internationally, particularly in some of the emerging markets, really, really has, in the longer term, tremendous potential to really have meaningful revenue impact on our business.

Excellent.

Hey, thank you very much.

Thanks, Bill.

And your next question is from the line of Brian Marckx from Zacks Investment Research.

Please proceed.

Hey, guys.

Kevin, can you give us what the film-based revenue was in both Q2 and Q3?

In Q2 our film-based revenue was about $1.6 million, and in Q3 it was about $2.3 million.

Good.

That was film-based revenue?

Oh, I'm sorry.

You wanted the film-based.

In Q3 it was $63,000 and in Q2 it was $154,000.

Those numbers I gave you were total product revenue.

Okay.

And then how much, if any, engineering revenue was included in the current quarter, in Q3?

We had about -- we only had about $30,000 in non-re -- of revenue that we recorded as engineering revenue.

Okay.

Of course, that work has subsided at this point.

We do expect some additional work to be completed in the fourth quarter.

So most of that revenue was [sheer] services revenue.

Okay.

Then the service margins were relatively strong this quarter.

Is there anything out of the ordinary that was in the quarter?

Nothing out of the ordinary.

I think that just reflects the growth in both businesses, right, with the CAD service revenue growing nicely and the therapy business growing nicely, with the addition of a -- additional customers and controllers out in the marketplace.

That's adding services revenue and, as Ken was mentioning earlier, we have a lot of customers who are increasing their volumes from a source [minutes] standpoint.

So that's really adding to our top line service revenue growth.

Okay.

Is it fair to assume that as utilization grows, you know, we can see that expand?

It is.

And as Ken was mentioning earlier, we're -- we see customers ramp.

A typical customer, I think, is up and running and at capacity in about six months.

As you probably -- as you know, this business -- the skin business really turned a corner in the third quarter.

So we have a lot of customers in the last month -- quarter, two quarters, that are really turning the corner in terms of increasing their volumes.

So they typically start treating between four and ten patients a month, and then when they're up at capacity, that's upwards of 25 to 30 patients a month.

So our high capacity sites are really starting to treat a lot.

And that results in a lot of source revenue for the Company as well.

And that's going to directly positively affect margins?

Absolutely.

There's very healthy margins in our service and in our source business as well.

Okay.

Relative to the skin studies that you have ongoing, is there, sort of, timelines on when you expect there may be some interim data that you can talk about?

It's a good question, Brian.

You know, we met with Dr. Bhatnagar at ASTRO, which was literally about a month ago, and had some great discussions with him.

We did not discuss a specific timeline where there would be another update to the data.

But he's been pretty fluid in terms of providing updates, not necessarily doing them on kind of an annual cycle.

So we'll have to look into that and get back to you.

Okay.

Last one is on the CTC CAD product.

Is there any status that you can talk about with the product and the integration with the LEMs?

Yes, the major progress we've made is with Vital Images.

And it's been mostly international.

It has not been a real significant amount of revenue.

You know, you're talking about maybe somewhere in the order of about $100,000 in revenue in the third quarter.

So, you know, the good news, we're getting some international traction with it.

You know, Vital is promoting it in the international realm.

We've sold a handful domestically.

But I still think we're dealing with the combination of the preventive task force and all the different forces with the American College of Radiology, and CMS in terms of getting a reimbursement in place for Medicare.

And we really do think that business in the domestic front can grow considerably with CMS proving for reimbursement with Medicare.

But that has not happened yet and, at this point, I think we're probably anticipating it's going to be early to mid-2014 before we'll know.

In the meantime, it's nice to see Vital doing, you know, a steady amount of business internationally.

But we still are, you know, waiting for the domestic opportunity to evolve.

Okay.

Thank you, guys.

Sure.

Thank you.

(Operator instructions).

And your next question comes from the line of Shawn Boyd of Next Mark Capital.

Please proceed.

And your next question comes from the line of Jeb Terry, Aberdeen Investment Management.

Please go ahead.

Good morning, Ken and Kevin.

Hi, Jeb.

Good morning.

Kevin, you mentioned on your -- the growth in your accounts receivables that you may have some financing programs.

Can you talk about the growth in your consult sales?

And then the financing associated with that.

And then, is that DSO something to anticipate?

And then I have some follow-ups.

Sure.

So, in the quarter, as I mentioned, we sold ten units.

And seven of those were dedicated to the skin market and three of those were dedicated to the breast market.

On a year-to-date basis, we have sold 21 controllers into the skin, and nine into the breast.

What we're seeing from a cash and financing standpoint is that the dermatologists -- the dermi groups are a little bit longer in terms of paying than some of the hospitals.

So usually from a hospital standpoint, where we're selling the IORT systems, those payment terms are between 30 and 60 days.

And in the skin market, we're just giving some of these folks extended terms.

And typically those terms are anywhere from 60 to 90 days.

So there's -- the groups are certainly financially viable.

They're able to get financing, but they're just a little bit -- they take a little bit longer to pay than our standard customer profile has been in the past.

So, our DSO did increase, you know, from on average 65, 70 days to 95 in the quarter.

We do expect that to decline going forward, but, you know, it did -- it has bumped it based on the profile of our customers at this point.

And I presume then those counts -- those customers, though, are also benefiting from this high growth in skin cases?

Oh, these -- no, these customers are actually our high volume business partners who have multiple systems installed.

Yes, as Ken mentioned earlier, there is usually a lag between the time that they start to treat and the time that they get reimbursed.

So the volumes on their machines -- they know how to get these machines up and running, usually in about 30 days.

I've talked about our standard customer profile, treating five patients a month.

These people can usually -- those partners can usually treat 15 to 20 patients per month because they know how to utilize the system at a much higher capacity.

And in addition they're also transporting these systems between dermatology groups.

So they're not just treating at one location.

They're using this machine on Monday and Tuesday at one facility.

They're moving it to another facility for another two days, and even treating on weekends.

So these machines are producing a lot of treatments in patients, and resulting in a lot of source minutes for the Company.

So given the six month lag for the ramp in cases, then it -- as I looked at the dispersion of units sold over the last year, then they would seem then there -- those that were sold in March to June have yet to fully flow through the case flow, if you will, the case revenue for the third quarter.

And we could expect to see more cases in the fourth quarter, stemming from those prior period sales.

Yes.

I think the organic group -- growth for the customers who were installed Q3, Q4, and Q1 of 2013, they're still in a growth mode.

They have not reached capacity.

So we're going to see additional patient growth from those systems.

In addition, as you said, the system that we sold towards the end of March in Q2, those are still coming on line.

So this is going to have a significant compounding effect and, you know, I don't want to get into forecasting the number of patients treated, but you've seen the growth.

I mean, we have six-fold growth on a year-over-year basis, and our big penetration into the skin market only happened about 12 months ago.

So we feel as though we're right on the beginning of the -- of additional growth in the skin patient area.

And, Jeb, I think—just to add to that, you know, you look at the service line for the quarter and compare it to a year ago.

You're looking at almost $1.5 million in service revenue versus $765,000.

That 90% increase was driven largely by the increase in source uses -- usage.

So essentially, when you think about this ramp and coming on board, the biggest component of that growth was the fact that our customers are using a significantly bigger number of sources today than they were a year ago.

So you can see where the lag, you know, turns into actual performance when your overall revenues are, you know, not nearly as high as the recurring revenue piece which is really driven by sources, which is driven by procedure volume.

So we're definitely seeing the benefits of that, and the more systems we place, obviously, the less of a timing lag you would see.

But that disproportionate growth of the service line is based on it -- just, this huge ramp in procedure volume compared to where we were a year ago.

So, the implication is that those units that you have in the market are not nearly at capacity, number one.

And then I guess, number two, though, [prepares the] question, do the customers that you now have, do they have capacity or need for more [consults] and therefore more sources?

And this gets back to kind of an over-arcing question.

You mentioned there's a million patients, potential, per year for skin, ten times bigger than IORT.

How's this all going to kind of fit into your evolving go-to-market plan?

Well, I think, quite frankly --

-- (inaudible).

You know, could it?

All right.

Go ahead.

Yes, I was going to say, well, clearly I think what we've identified is the biggest investment in our marketing plan since skin.

And we're putting significant resources -- I, as I said in my opening remarks, into this space.

And it's about regional symposiums bring radiation oncologists and dermatologists together.

It's about investing in, you know, pursuing more clinical studies beyond what's available today in the public domain.

It's being very, very aggressive in terms of pursuing improved reimbursement, as evidenced by the 19 states on November 1. And it's about education, you know, and awareness, whether it be in the skin segment or with consumers.

You know.

So we're doing all of those things, and a pretty significant amount of our op ex increase was in the marketing realm, and specifically around our skin program.

So we're really trying, you know, to put more resource on that particular market.

We are investing in breast IORT, as I mentioned earlier.

We do have separate symposiums we're sponsoring.

We had a very successful one in Atlanta a few weeks back, and middle of next week we're going to be having one here in New York City where we already have a very strong RSVP response.

And so, you know, we're investing for growth, but I would say the biggest dimension of that is the skin market.

No question.

And what -- what's kind of the sales cycle for skin?

I -- it -- I mean, in terms of timeline.

If you had to take these dermatology -- you know, obviously it's a bit of a difference in end user marketplace than the hospitals that you can deal with, as you pointed out.

You know, it's also all over the map, Jeb.

We have seen where we first introduced the product to a skin opportunity, that we've seen an order, and probably the soonest is probably 30 days.

But we've also taken six to nine months to close a skin deal.

It really varies.

A whole host of different issues with each of the particular opportunities.

They clearly close quicker than IORT transactions.

They tend not to be hospital based and obviously when you think about selling capital in a hospital environment with all the layers that have to approve and so forth, relative to capital budgets, you know, when you're obviously selling to, let's call it entrepreneurs and corporate operators or small business people, you know, you can get transactions done more quickly.

But, you know, we've had some deals pop up at the beginning of a month and 30 days later they close.

And we've had some other deals, particularly in skin that two, three quarters down the road we're still talking about.

So it really is all over the map, to be honest with you.

Yes.

Well, thanks very much.

I'll let someone else ask a question here.

Great.

Thanks, Jeb.

Thank you.

I would now like to turn the call back over to Mr. Ferry for closing remarks.

So, in closing, we're very confident that we can carry on and have very strong positive momentum for both the therapy and detection products businesses, into the fourth quarter and beyond.

Thanks for joining the call today, and we look forward to updating you on our progress in the very near future.

Thanks again.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.