ICAD Inc (ICAD) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q4 2013 iCAD, Inc.

Earnings Conference Call.

My name is Mark and I will be your operator for today's call.

At this time all participants are in a listen-only mode.

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

(Operator's Instructions)

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

And now I would like to hand the call over to Anne Marie Fields, Vice President at LHA.

Thank you Mark, 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 of Finance and Chief Financial Officer.

Following the market close yesterday iCAD announced financial results for the 2013 fourth quarter and full year ended December 31, 2013.

If you have 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, February 20, 2014.

ICAD undertakes no obligation to revise or update any statement to reflect events or circumstances after the date of this conference call.

So with that said I would like to turn the conference call over to Ken Ferry, Ken?

Thanks Ann Marie.

Good morning everyone and thank you for joining us.

We are very pleased to update you today on the significant progress that we have made throughout 2013 while executing on our oncology plan.

The fourth quarter marked our sixth consecutive quarter of revenue growth and adjusted EBITDA profitability.

We continue to balance targeted investments in the business with financial discipline and achieved adjusted EBITDA profitability of nearly $2 million for the year 2013.

The most significant contributor to this favorable momentum is our therapy business.

Following a breakthrough year in 2012 the business grew 47% in 2013.

This growth was driven by increases in system sales and an increased recurring revenue from increased utilization.

In 2013 we sold 34 systems, nearly 50% more than we sold in 2012.

The dramatic growth in our therapy business was lead by the growing demand for the use of the Axxent Electronic Braking System in the treatment of non-melanoma skin cancer.

Our cancer detection business made positive strides during 2013 as we made progress increasing business in our large installed base from a balance of new product and service revenue.

In particular we were pleased with the growing demand for the PowerLook Advanced Mammography CAD Platform in service.

Where we added nearly 200 customer contracts and increased revenue by over 13% year-over-year.

But before I go into the specifics of the business I am going to turn the call over to Kevin Burns for a detailed analysis of our fourth quarter and full year financial performance.

After Kevin's review I will provide you with a more detailed business update before opening up the call to your questions.

Kevin?

Thank you Ken, and good morning everyone.

We delivered a strong financial performance throughout 2013 with strong fourth quarter revenue growth and, as Ken mentioned, six consecutive quarters of adjusted EBITDA profitability.

We continue to balance investments in key areas of the business with a view to long-term growth and market penetration while maintaining adjusted EBITDA profitability.

We expect ongoing strength in results of both our therapy and detection businesses throughout 2014.

Let me begin by reiterating how we report revenue which is by the two main oncology areas in which we operate.

Specifically Cancer Detection and Therapy.

Our Cancer Detection revenue includes all of our image analysis and work flow products, including mammography, MRI and CT/CAT platforms, as well as all service revenue from these product lines.

Our Therapy revenue includes the Xoft Axxent Braking Therapy System, applicators, accessories, and servicing source agreements.

Turing now to a review of our revenue.

Total revenue for the fourth quarter increased 17% to $9.1 million from $7.8 million in the fourth quarter of 2012.

Driven by a 60% increase in our therapy revenue.

Offset by a 12% decline in cancer detection revenue.

For the total year revenue increased 17% to $33.1 million.

This includes a 47% increase in therapy revenue and a 2% decline in cancer detection revenue.

In the fourth quarter our therapy business increased 60% to $5 million in revenue with product revenue up 50% to $3.3 million and service and supply revenue increasing 87% to $1.7 million.

In the fourth quarter we sold 14 controllers, 187 balloon applicators, and we treated well over 1,000 skin lesions.

In comparison we sold 8 controllers, 233 balloon applicators and treated approximately 400 skin lesions in the fourth quarter of 2012.

In addition, we ended the year with a recurring revenue run rate in the therapy business north of $8 million per year.

We define recurring revenue to include the service line as well as balloon applicators which are recorded as product revenue.

For fiscal year 2013, the therapy business increased 47% to $16.2 million with product revenue increasing 36% to $11.1 million ans service and supply revenue growing 77% to $5.1 million.

Service and source growth reflects the increase in size of our customer base.

For the year we sold 44 controllers, 761 balloon applicators, and had a significant increase in skin patients treated.

This compares to 30 controllers, 664 balloon applicators, and we treated approximately 800 skin lesions for the full year in 2012.

In the early stages of the Xoft business we felt that providing detailed metrics of the components of our therapy revenue, as I just noted, provided investors with a greater understanding of our growth and business dynamics.

As we mature and the business has begun to scale as well as for competitive reasons we will limit the comments of a detailed revenue and the components of our therapy business while balancing the needs of investors.

Turning now to the cancer detection business, total revenue for the fourth quarter was $4.2 million down 12% compared to last years fourth quarter.

Product sales in the fourth quarter of $1.9 million were down 24% while our subscription based product and service revenue grew 2% to $2.2 million.

Excluding the impact of non-recurring service revenue related to product development.

The year-over-year growth of the service business for Q4 was 15% and 14% for the full year.

During 2013 we continued to make great strides in executing our strategy shift for the detection business.

Our plan to leverage our installed base with new products and upgrades is delivering results.

In 2013 we increased the number of customers under a service agreement by 23% to approximately 1,200 systems and expect the service business to continue to grow throughout 2014 as we continue our focus on recurring revenue.

In addition, PowerLock CAD, our upgraded CAD platform continues to see growing demands from our install base.

Now turning to the rest of the P&L, gross profits in the fourth quarter of 2013 increased to $6.3 million or 68.8% of revenue from $5.6 million or 71% of revenue for the fourth quarter of 2012.

The lower growth margin was primarily due to product mix and the impact of the medical device excise tax which went into effect in 2013.

Gross profit for 2013 was $23.1 million or 69.8% of revenue compared with gross profit for 2012 of $20 million or 70.8% of revenue.

Please note that in 2013 we reported the Medical Device Tax as cost of goods and this impacted our gross margin by approximately 140 basis points for the year.

For 2014 we expect our margins to remain steady at approximately 70% with quarterly fluctuations due primarily to revenue mix.

Total operating expenses for the fourth quarter of 2013 increased to $6.9 million from $6.3 million for the same period in 2012.

Sequentially our operating expenses increased by approximately $600,000 as we continued to invest in Focus IORT Skin Seminars, clinical trials, medical trades shows, and incremental product development.

Also due to higher Q4 revenues and related performance plans we had approximately $300,000 of variable expense that we do not anticipate rolling over into the first quarter of 2014.

Turning now to our profit metrics, adjusted EBITDA was $285,000 for the fourth quarter of 2013, compared to $102,000 in the fourth quarter of last year.

Adjusted EBITDA for 2013, was $1.9 million or 5.6% of revenue compared to a non-GAAP adjusted EBITDA loss of $1.5 million or a loss of 5.5% of revenue for 2012.

As mentioned earlier this is our six consecutive quarter of adjusted EBITDA profitability and an improvement of approximately $3.4 million over 2012.

Mainly the result of revenue growth as we had fairly level operating expenses on a year-over-year basis.

Looking at other income and expense items in the fourth quarter we reported a $2.9 million loss due to the change in the fair value of warrants that we issued as part of our financing arrangement.

This was driven primarily by the increase in our share price during the fourth quarter.

In addition, interest expense in the fourth quarter was $810,000 of which $490,000 is cash payable related to financing and capital lease obligations.

The balance of $320,000 represents non-cash amortization, financing costs, and settlement obligations.

On a per share basis, our non-GAAP adjusted loss for the fourth quarter was $0.14 per share, compared to a loss of $0.15 per share last year.

For the full year our non-GAAP adjusted net loss was $0.47 per share compared with a non-GAAP adjusted loss of $0.81 per share for 2012.

An improvement of $0.34 per share.

Moving on to balance sheet, we end the year with $11.9 million in cash and equivalents compared with $13.9 million as of December 31, 2012.

During the year we used $1.4 million in cash to fund operations and approximately $700,000 for capital investments.

Sequentially, we saw a decrease in our DSO to approximately 76 days from 95 days in the third quarter.

In summary, 2013 was a great year as reflected by our solid financial and operating performance.

We are pleased with our progress and expect to build on this foundation in order to continue to drive top line growth and to generate increasing cash flow and earnings in 2014.

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

Ken?

Thanks Kevin, 2013 was indeed a very strong year for iCAD.

We believe the considerable progress made on our plan positions us very well for continued growth in 2014.

Let me start with a discussion of our Therapy products and then I will move over to Cancer Detection products.

Our Therapy business had an outstanding year in 2013, driven by the substantial increase in demand for the Axxent Electronic Braking Therapy System for the treatment of non-melanoma skin cancer.

Revenue for the non-melanoma skin cancer indication was especially strong, supported by a positive clinical data, growing reimbursement, and most importantly excellent patient outcomes.

There are approximately three million cases of non-melanoma skin cancer that are treated each year in the United States.

We estimate the addressable market for our therapy to be approximately one million of those cases.

The current standard of care is [mode-surgery] a procedure where the surgically removed tissue is examined while the patient waits for the pathologist to examine the tissue specimen for cancer cells in order to determine where to remove tissue next.

This procedure is time consuming and often leads to scaring.

By contrast the Xoft system protocol typically provides a five minute, non-invasive, non-radioactive treatment to the skin cancer lesion, twice a week for four weeks.

The interest in our skin cancer application is expanding rapidly as awareness is increasing for the positive clinical and cosmetic outcomes associated with the procedure.

Dr. [Osia Botnicar] will be presenting his study data using the Xoft system at the upcoming American Academy of Dermatology annual meeting in March.

He will be presenting clinical outcomes data on 172 patients, with 247 non-melanoma skin cancer lesions treated with the Xoft system showing excellent cosmesis and acceptable toxicity with no recurrences with up to three years post treatment.

Studies that [Dr.

Botnicar's] continue to be an important component for driving adoption by supporting favorable and more wide spread reimbursement.

Currently three are 16 states with positive payment policies.

We are working on expanding this with the multifaceted plan on both a regional and national payer level.

In addition, we are working to enhance education and awareness of the positive clinical outcomes of our electronic breaking therapy approach to treating non-melanoma skin cancer as we build preference for the Xoft system with dermatologists and radiation oncologists.

We will continue to pursue strategic dermatology alliances such as the ones we have with [Dermi BX] and Advance Rad Solutions that expand access to the Xoft system at dermatology centers.

These alliances are proving to be very beneficial as these partners offer a range of turn-key services to enable the dermatology practice to be treating patients shortly after the system is installed in their facility.

Our regional marketing efforts are focused on medial education, educational seminars on the Skin application, and are lead by radiation oncologists in collaboration with dermatologists who educate other physicians on how to incorporate Xoft into their practices.

The participation and interest level of these seminars is very high and we anticipate that a high percentage of the attendees will turn into sales leads.

In addition, to the live educational symposium, we are planning to offer education webinars, expand our trade show presence at dermatology meetings, initiate our user group meetings, and continue to invest in additional clinical studies to demonstrate the effectiveness of our technology.

To summarize our view of the Skin market, we believe the opportunity to treat non-melanoma skin cancer patients will be a considerable growth opportunity for the company for years to come.

We also believe we have established a leadership position in this early stage market based on the effectiveness of our technology in published clinical data.

This has created a differentiated value proposition for the patients and physicians.

Shifting to our Breast IORT application it continues to show steady progress.

Balloon applicator sales, which is an indicator of procedure volume, increased 15% in 2013.

The target audience for this procedure is primarily breast surgeons and radiation oncologists.

We are investing in regional education seminars in Breast IORT as well.

We recently hosted a highly successful symposium in New York City with approximately 60 physicians attending.

Last evening we hosted another successful Breast IORT symposium in Philadelphia and in the coming weeks we will host an educational symposium at the Miami Breast Cancer Conference which is one of the premier clinical meetings for breast cancer surgeons.

Our multicentered clinical trial evaluating the safety, efficacy, and cosmetic outcome using IORT to treat early state breast cancer with the Xoft system continues to gain momentum.

To date, 19 medical centers across the US have enrolled nearly 250 patients.

We plan to add several high volume sites in the coming months and should have approximately 500 patients enrolled in the study by year end.

We expect to report interim data from this prospective study some time in 2015.

Positive data from studies such as this should enhance the clinical awareness of Breast IORT and support continued reimbursement improvements.

As with skin cancer application, we are also focused on reimbursement and have invested in issues with national and regional payers to further improve reimbursement for hospitals and physicians.

As we continue to drive the adoption of these clinical products in the US, we also have significant untapped opportunities abroad.

We believe that the international opportunity for Breast IORT, in particular, in emerging markets has tremendous potential to have a meaningful impact on our business longer term.

Our international plan is to accelerate adoption in Europe, Canada, Mexico, Taiwan, and Hong Kong while entering the Russian, South Korean, and Australian/New Zealand markets during 2014.

We also expect to launch in China in 2015.

We have only just begun to penetrate this very large market opportunity in Skin and breast cancer.

Therapy growth should continue to be positively impacted by our regional medical education programs, ongoing positive clinical data, and improved reimbursement as we expand the number of systems placed and achieve meaningful recurring revenue from increasing utilization.

So now let me turn to the cancer detection business.

Our 2013 results demonstrate that the business is stabilized and we are positioned to return to a growth trajectory by 2015.

2014 we expect to see demanding for PowerLook CAD from new customer and add as an upgrade to our considerable install base.

In addition, we saw growing interest in demand for automated tools for the measurement of breast density in 2013.

Our second half sales of the Volpara Breast Density product were very strong and anticipate this continuing in 2014.

We also significantly increased our service agreement in 2013, growing it by nearly 200 customers.

This was accomplished by our OEM partners and through direct sales to our customer base.

We expect this momentum to also continue in 2014.

We are also seeing good traction with MRI CADs through our strategic partner Envivo at Phillips Healthcare Business.

We have a strong product road map primarily focused on prostate care today with plans to expand to new applications areas over time.

We anticipate continued growth in NRE funding and software license royalties over 2014.

And finally, we are very enthusiastic about the opportunity to prove software work flow tools for the interpretation of mammography, 3D images or tomosynthesis.

As the 2D digital systems market transitions to 3D systems over the coming years we believe the opportunity to be considerable, similar to when the analog film market moved to first generation digital technology.

Today, we are simultaneously developing our first set of software tools, while continuing to collect tomo studies from a number of leading international sites to provide sufficient studies for our robots product road map.

We hope to release our first of these products internationally late in 2014 and in the US in early 2015.

So in closing my opening comments.

We are enthusiastic about our prospects for the next 12 months in both businesses.

The work we have done and the investments we have made in 2013 but us in a strong position to deliver continued strong growth throughout 2014.

Our goal remains to drive top line growth while balancing investments for the future growth in order to build a profitable company and to enhance shareholder value over time.

Now operator please open up the call for questions.

(Operator's Instructions).

First question comes from the line of Bill Bonello of Craig-Hallum.

Please proceed.

Good morning guys, nice quarter a couple of follow up questions.

Just curious if you can give us any more color about the Xoft placements in the quarter.

And/or the pipeline.

Are you seeing more multi-unit placements?

Do you expect to see that going forward or is it one practice, one system at a time?

Well Bill, I think obviously we had a bang up year selling 44 systems and 14 in the fourth quarter, so obviously a record year, but also a record quarter.

The sales of the system were dominated by Skin.

We had a solid year with IORT system placements but really we're dominated by Skin.

The other thing I would point out which I think is important is that if you go back to 2012 when we sold 30 systems, 6 of them went to the veterinary market.

So when you really make an apples to apples comparison, we have not sold any systems in 2013 to the vet market.

We sold 44 systems compared to 24, the year prior, in the human market, which is about an 23% increase.

So we are very, very pleased with the overall progress year-over-year.

We have placed 74 systems in the last two years compared to 2011 when we placed only 13.

So the momentum over two years has been very considerable in both Skin as well as IORT.

Now as it relates to Skin placements, it is kind of a mixture.

We do get some multisystem sales.

What you are finding is large dermatology practices which have a number of offices are placing these into multiple offices.

From the beginning it was one machine that might be shared amongst several offices in close proximity.

What we are finding today once the procedure volumes get to a certain level they are buying additional machines.

It is really about our roll out in responsible implementation.

So we are seeing multiple system orders.

We are also seeing single orders based on the pace of which they want to implement these in their various sites.

So the Skin market is still where we are laser focused.

It is a very, very big opportunity.

We seem to see a perfect storm from studies reimbursement.

And interest, it is a new opportunity for both the dermatologist and the radiation oncologist from a treatment protocol.

And that tends to bode well for removing any obstacle for adoption.

So I think we are feeling pretty good about things and we are optimistic as we go forward as well.

Okay and when we think about, sort of, Skin placements going forward.

Should we think-Q4 as you mentioned was really strong.

Should we think of that as a bit of an anomaly and maybe think more of the eight to ten systems per quarter with obviously, variation on a quarter to quarter basis going forward?

As opposed to thinking of this as the new rate at which you are placing systems?

I would answer that two ways Bill.

One, is that historically your fourth quarter, particularly on a calendar basis tends to be your biggest quarter of the year.

And for whatever reasons, whether we have trained our customers to wait until year end to get their best deal or whether your sales people have another opportunity to get into their highest commission plan and all the different dynamics that go on.

Typically, the fourth quarter is your strongest and conversely your first quarter tends to be weaker.

So I don't think that phenomenon is going to change significantly from a seasonality of the business.

I would also say that in a general sense, we are very bullish on the year and our ability to grow with that said, anytime you are in the early stage market.

To think that you can have real predictable performance on a-we wish we could train customers in this early stage in the market, right, to buy on a timely, quarterly basis.

So I do expect we are going to see some spikes and drops and things, over the course of the year, just because of the nature of being on this market and being in an early stage.

So we can't necessarily take Q4 and say that is a baseline or a floor.

What I would say is we are very, very confident that 2014 will be a strong growth year for the company as well as a strong growth year in the Skin market.

And just as a final question on that.

I know you don't have visibility necessarily in the timing, aside from the macro things that you have site, what gives you that confidence?

Is that feed on the street feedback from sales people and where you have identified real customers where you know you are going to be placing systems at some point?

What kind of viability do you have into the pipeline?

Well obviously we have a direct sales force in the United States and a number of them are focused on the Skin market.

We obviously have a salesforce.com data base where they log in all of their prospects and funnel and so forth.

We also have dedicated partners in the Skin market, as I mentioned.

(Inaudible) as I mentioned, so they are a great benchmark in our monthly and quarterly presentations as to what they see as activity.

So we get a pretty good vision, if you would, as to what is out there.

And the overall level of activity is higher.

We are doing the Skin symposiums where we are bringing the dermatologists and radiation oncologists together on a regional basis.

The attendants at those meetings has been brisk.

Very, very positive.

So there is a number of ways that we can assess activity in the marketplace.

But I would say in a general sense, all those different elements, if you will, of feedback are positive.

So we are very enthused, we have actually made some shifts in our field.

2014 where we now essentially are going to have a team of dedicated Skin specialists versus having a team of dedicated team of IORT people.

So that we are going to put 100% focus into different markets with specialists which we think that additional focus will help us since the sale of an IORT system versus Skin are very different.

So we are doing a lot to just get more laser focused and from all the different indicates that drove us to achieving 34 systems sold in 2013 all seemed to be stronger relative to going into 2014.

Excellent, thank you guys very much.

The next question comes from the line of Dr. Harry Kopelman of HAK Consultants.

Yes, impressive quarter.

It seems like you guys are running on all cylinders.

Especially, in the soft derm area.

I just had a couple of questions relative to new development and growth in other areas.

Any idea of the impact of robotic surgery might have on your treatment arm?

For example, you mentioned prostate.

I am wondering about that and perhaps even breasts.

And then I was really interested if you had analyzed your users from the perspective of profitability per say dermatology site versus breast site and when you consider them to be fully loaded?

I believe I will answer the first question and Kevin might take the second one on the ROI.

We re looking at IORT from a minimally invasive standpoint, relative to moving into other organs or body areas.

What we really think though in most cases is that we need to be looking at a very focal tumor in a very concentrated size.

So in breast it is very, very specific in terms of tumor size that we would treat.

So I am not sure as it relates to prostate, given the size of prostate and the number of lesions that you could ultimately need to treat.

So we are not necessarily focused there.

But there are a number of examples where minimally invasive IORT could be very, very high potential going forward.

But again, I think we are trying to provide a highly concentrated, highly focus treatment where when cancer is more spread, more pervasive, more invasive, there are more traditional types of radiation that could be used.

So we are definitely looking outside of our current applications.

But today it is breast, it is Skin, we do have a number of GYN applications we are approved for, endemetrial, cervical, and we are certainly looking to expand on that.

But again, in the type of cancers that are extremely focal given the nature of how we deliver the therapy.

Maybe Kevin on the customer?

Sure, sure from a profitability standpoint, in the Skin market, as you may know, the reimbursement is between $1,000 and $2,000 per fraction in those areas that are paying, which translates into a reimbursement of anywhere from $8,000 to $15,000 per patient, per lesion.

And the costs of our system if you amortize that out over five years is $2,000 and there is obviously associated costs for radiation and oncology, physic support and radiation therapy support.

You add all of that together and the Skin market, the margin in that business, from a dermatology standpoint are very high percentages.

The IORT market, you know most of our business is done in the hospital and those margins are not as healthy.

Primarily because reimbursement is a little bit low and we have been working on some of those programs.

With all that said, in the IORT area, when we see hospitals launch we do see them increase their overall patient volume.

So, we did a case study I think at a major hospital center and their patient volume increased 20% over their existing run rate because they offered IORT.

And it doesn't mean that all those patients came in and ultimately received IORT, they may have gone on to different treatment but just because they offered the program it drove additional patients through the hospital system, which obviously adds to the financial benefit of the system.

That is really interesting data.

And then on the financial side.

I was wondering when you guys think you are going to hit profitability based upon your earnings per share?

So the way we think about the business from a profitability standpoint, is $8.5 million to $9 million gives us adjusted EBITDA margin of 3% to 5%.

And then from a cash standpoint, we are spending (technical difficulty).

Nice.

And one last thing.

On the original question, I guess robotics these days in several ares is becoming an important application for surgeons and so, I guess really what my question was, is there a compatibility between the Xoft system and robotic surgery or not from your perspective.

Ladies and gentlemen, apologies we seemed to have lost our speaker's line.

Hopefully, they will be back with us in a moment.

Once again, ladies and gentlemen, I do apologize for the delay.

Our speakers line has disconnected but they will be joining us in just a moment.

Once again, ladies and gentlemen our speakers will be joining us again in just a moment.

Hello, hello, we are back.

All right.

Can you hear me.

Yes, sorry.

That is good.

I was wondering relative to the first question, my real question had to do with the compatibility between the Xoft technology and robotic surgery.

There are a lot of places that surgeons can get these days and a lot of easier manner with robotics.

And I just wasn't aware familiar enough with the actual applicators and the way the surgeons do their procedure to know whether or not the two would be compatible?

Or could be made to be compatible at some point?

The robotic surgeries are very focal as well as you point out.

I think it is an excellent question.

I don' know that we have done extensive research, but I do think it is a very interesting topic.

To your point of focal surgery and focal therapy.

It is something that I think our PhD types have looked at, peripherally.

So I honestly, can't give you any depth today.

I think it is a very good suggestion and something we should take another look at maybe in a little bit more depth.

Certainly focal surgery and focal therapy make a lot of sense.

It isn't something today we have a very accurate program on but it is certainly something that we should take another look at.

And should that be compatible then, of course, there are other potential channel partners that you would have.

I mean of a significant nature.

Because they are already in.

Just a suggestion.

I think it is a good idea.

What we have found, though, with this opportunity is perfecting the technology and quite frankly in getting a 510k is the easy part.

The efficacy and the risk of recurring cancer is the part that is so important to the use of the technology.

And it takes time to build studies and to follow patients and so forth.

I think we are very interested in the concept.

The amount of time it takes to get to market is a different discussion and it is a big investment.

And so at this point what we have tried to do as a company is to really look at the indications that we have, looking at the markets being so early on in terms of adoption and we have put a lot of our resources into the education and studies that support the use across the indications that we have.

But we do have a longer term road map and we think looking at robotics, and looking at targeted surgery, and targeted focal therapy absolutely makes sense.

Thank you very much.

I am very impressed with the progress you guys have made over the last couple of years.

It is quite remarkable.

Thank you very much for the call.

Appreciate it.

Our next question comes from the line of Jeb Terry of Aberdeen Investment Management.

Please proceed.

Good morning Ken, Kevin.

Question on the number of cases?

I wasn't quite sure, the number of Skin cases was, I think you said, 1,000 for the quarter is that correct?

It was well over 1,000, Jeb and unfortunately, we are not getting all of our sites reporting so this is one of those metrics that we have data available, since we don't have all the sites it is not something we are going to be talking about going forward.

Needless to say, obviously, the volume has been ramping nicely with all of our systems out there being utilized and each of the systems increasing their utilization is a fair statement as well.

OK, well that was the nature of my question.

Since you had a heavy back half of the year in consults, placements and it does take some time to get those up to some normalized rate of utilization.

I think the implication would be that this is your expectation, perhaps, to move into this year and the second quarter this year, the units placed in Q3 and Q4 will be coming on stream I suppose?

That is right, it takes usually about, we are seeing, we are doing a lot of business with our partners and they are on average putting these systems to work in the production in the clinical setting, between 30 to 60 days out.

So we are going to start seeing the impact of our Q4 controller sales in February, March, April 2014 time frame from a revenue standpoint, when they are going to start increasing our source revenue even more.

Given all the bad weather.

Was there any weather impact that could have slowed down the rate of utilization in the last could of months, three months or so?

Most of your work is still in the south, so?

Well I think it is possible, but it is not anything we can track.

I would think it would be diminimous given that the majority of the system are west of the Mississippi.

But one of the obvious indications for us, relative to Skin procedure is the amount of sources that we are selling relative to the contract.

So even through we can't get all the sites to give us as accurate amount of data to Kevin's point, as we said, the source revenue is the largest component of our recurring revenue in the business.

It is more than 50%.

That actual component of recurring revenue doubled in 2013 versus 2012 and given that you use more source time in the Skin market, and we are slanted, obviously, towards a lot of sales in that market, we do expect that component of that recurring revenue to continue to grow at a very healthy clip and really drive that portion of the business, if you will, at a pretty significant growth rate.

Given the number of Skin sites we have as well as again, how much utilization they do from a patient standpoint.

From the IORT world one procedure, 10 minutes to 12 minutes, in this case you are basically providing a patient with roughly 40 minutes treatment over the course of, say, four weeks.

So, more patients, more source time and hence more source revenue.

And it would seem that each of these consults-the point being that you are probably, I guess, your thoughts on the utilization as a percentage of what the ultimate utilization seems to be quite low at this point?

In other words, you can treat a lot per consult?

Yes, absolutely.

The systems are-capacity wise when you think about a five minute treatment per patient you could crank through a substantial number of patients.

But what we love about the Skin market, the absolute size and number of patients is very significant.

As we have talked about the clinical outcomes, the cosmetic outcomes accorded by [D]r.

Botnigar's] study in particular is very, very positive, the reimbursement is strong and again the source component is something where our customers use a lot of source minutes and it is the biggest contributor to the recurring revenue portion of the business.

One of the things that we are really were attracted to when we looked at the Xoft technology was that as you get critical map, so to speak, on placements Jeb, the recurring revenue really, really grows.

Just to give you an example, our recurring revenue in the first quarter of 2013 was just over $1 million.

In the fourth quarter it was just under $2 million.

So we almost doubled recurring revenue from the first quarter of the year to the fourth quarter.

So that gives you some indication that when you really get a number of systems placed and procedure volumes really ramp, what a dramatic impact that can have on the recurring revenue portion of your business.

And the conference that is coming up next month.

I know it is not as big as RSNA but in the world of dermatology, I am just kind of curious, how large that might be and what that might put some context-what kind of exposure you would add to the dermatology consumer base through that conference?

I don't have exact numbers on attendees.

This is in March in Denver but it is the biggest dermatology meeting in the United States.

So we are very, very enthused about being there and Dr. Botnigar is going to present his data there too.

Which I think is very, very powerful and timely.

So we think that is just another example of a focused touch point with this market and we are still investing and ramping because, calling on dermatologists is really something we've only put tremendous focus on the last year or so.

So we are excited about being at this academy meeting.

It is a big one, it is the meeting and I think the buzz around treating non-melanoma Skin cancer with radiation of a radioisotope free technology is really gaining some interest in traction.

15,000 is the number we are hearing of attendees.

So, that is a big, big conference.

Lots of exhibit space and for us it is going to be an extremely timely opportunity.

Very good and thanks.

Congrats on a very eventful year and lets hope that 2014 continues that trend.

Absolutely.

Thanks Jeb.

The next question comes from the line of Brian Marks of Zacks Investment Research.

Hello guys, great quarter, great year.

Kevin you had guided to $6 million to $6.5 million for quarterly operating expenses in the past, do you think that that is going to continue to be the case in 2014?

So in Q4 we spent about $6.9 million as I mentioned in the remarks.

$200,000 of that was one time performance related.

So I think going forward our operating expenses are going to be closer to the $6.5 million range.

And as our business starts to scale we may start to invest additional monies going forward to accelerate growth as well.

So I think we are more in the $6.5 range and perhaps growing throughout the year a little bit.

Okay.

Relative to the Therapy business in Q4 was there any kind of unusual lumpiness relative to source revenue based on bulk orders or whatever it might be?

No, our source revenue (inaudible) is recognized radically over the term of the agreement and that is typically one year.

So we don't usually get spikes in the source revenue.

That is just recognized radically over the term of the agreement with our customers.

Okay.

And in detection the business has shown nice improvement but yet to be consistently growing.

And you guys have a lot of irons in the fire, I guess.

Is the current irons in the fire enough to grow the business in 2014, do you believe?

If you look back on 2013 and you do the little deeper analysis, Brian, we actually had some elements of growth.

I will give you an example, is that yes, the business was down 2% roughly or so versus the year prior.

However, international was down considerably and if you look at the US business it actually grew 2%, so we had a 2% growth.

The other thing that is dragging on our growth is the analog products that are declining rapidly as you would expect.

So just as an example, in 2013 the analog sales were down almost $1 million compared to the year prior.

So if you carve out, what I call, the negative growth drivers which would be the decline of the film based business and weaker international sales, mainly because our biggest part of their GE launched their tomo product in June of 2013, and the focused almost exclusively on Tomo.

We actually had growth in the US business, we had real strong growth in service, we had actually growth in MRI, and we were just ahead slightly a couple of points as well in digital CAD even through the market is declining.

And that is a reflection of how well we are getting traction in our upgrade business.

So there is lots of moving parts, I think that is a good point but there were some core portions of that business that grew and again the US business did have modest growth.

So as you kind of look into 2014 we think we are going to get continued strong traction on our upgrade with Power Look.

We have an aging install base.

We have hardware in that install base that is obsolete.

Customers know that if they are not in some sort of a support agreement and the systems go down they essentially have to buy a new system.

So we have been able to get a number of customers to upgrade to the new platform, new features, particularly breast density, so we think the Volpara Breast Density could contribute to growth in 2014.

Our relationship with Envivo is gaining traction.

We had a strong fourth quarter on license revenue for MRI for prostate.

We are off to a very strong start in 2014 with them as well.

So we think that that is an initiative that can grow.

We are actually seeing pretty strong interest internationally on colon CAD and Vital Images, who is our partner internationally is showing some pretty good traction.

So there is a lot of, I guess using a baseball term, a lot of singles and doubles being hit in the business.

We think that the business is stable and it could show modest growth in 2014 versus 2013 for those particular factors.

The other thing I would say is we are making good progress on Tomo in creating a set of work flow tools to help with the interpretation of Tomo images for mammography.

We are hopeful that maybe in late Q4 we could have a product internationally and then the first quarter or two of 2015, depending on the regulatory cycle, have something in the United States.

So we think we could have a very solid year in 2014.

There are some growth drivers, they are not going to turn us into the growth mode we have in Therapy but they could certainly give us modest growth over 2013 and put us in a very good position to grow at a much more substantial way in 2015.

Yes, okay, great.

Kevin one last one, can you give me the film based revenue for the year for 2013 and for the year of 2012?

Film based in 2013 was about $550,000 and it was about $1 million in 2012.

$1.4 million?

I am sorry, $1.4 million, excuse me $1.4 million, thanks.

$1.4 million in 2012?

$1.4 million and about $600,000 right, so down almost $1 million year-over-year.

All right thanks a lot guys.

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

Please proceed.

Good morning, congratulations on the quarter gentlemen.

Thank you.

Just a couple of quick ones here.

You mentioned the pipeline earlier in response to the question about visibility.

Can you help us and give us an update, I think you have talked in the past about the size of that pipeline, maybe a number of deals or dollar size.

Anything you can give us there would be really helpful?

Yes, I don't recall putting a firm number, if you will, on the size of the pipeline.

I assume we are talking specifically about Skin.

What I would say though is that from the data we have and salesforce.com and the correspondence and dialog that we have with our dedicated Skin partners, the overall activity is clearly continuing to increase.

And so I can't really spell out a specific number in terms of the funnel size but what I would say is that we feel confident that the growth will continue throughout 12014 in this market based on several things.

One is the increasing interest in the geographies where we have existing strong reimbursement.

With both customers looking to expand that have already purchased into other sites.

As well as new customers.

We see emerging reimbursement moving toward the midwest.

St.

Louis is just one example.

So we definitely think that the opportunity to move east if you will and into more addressable markets that reimbursement has been established clearly is going to increase demand.

And I think also as we get more awareness out there, whether it is the national meetings like the Academy of Dermatology coming up in March or the regional symposiums.

All this bodes very, very well for dermatologists and radiation oncologists to want to get into this therapy.

So I can't give you a hard number, what I can say is that the overall activity level is substantially higher than it was a year ago and we think that bodes well for a strong 2014 in the Skin market.

I would just add to that as well, 95% of our customers Shawn are in three states.

Primarily in the southwest.

And two of those states are silent pay.

So if you do the math, as you know we have 16 states that are positive pay, we have one with a high percentage of customers in there sold at this point, so we have 15 other states with positive pay that we are working on entering.

We have added two new sales people since the end of the year that are focused on Skin and that should help grow our pipeline in sales as well going forward.

Yes, that color is real helpful.

That lead right to my next question which is going to be concentration of the controller placements over the last couple of years on Skin.

So 95% of the customers have been in three states?

Is that what I just heard?

That is correct, it is California, Nevada and Arizona.

And two of those states are silent from a reimbursement standpoint but they have been paying consistently and Arizona is a positive pay policy state.

And so they have been paying as well.

That is where most of our business is concentrated.

We have initiatives underway for the other positive payment states.

Which is helping build our pipeline and funnel.

Got it and just last question on Skin.

In terms of the third party providers that you work with here.

I would assume the interest is total continuing to accelerate and you are getting more potential parties, more third party programs that you can work with on the Skin side?

Is that a fair statement or no?

It is.

In the fourth quarter I think we had one or two just start their operations and business and then we have other ones we are looking to partner with us in other territories as well.

So our [Dermi BX] and ARS are certainly our partners and they are doing a great job in the market.

But we are seeing some other folks starting to enter as well.

Got it thank you.

And then just on Breast IORT.

Did controller placements in Breast IORT grow in 2013 or were they fairly flat?

They were actually down so in 2012 we sold about 15 units in 2013 we sold 10 units.

Our balloon procedure volume was up about 15% on a year-over-year basis.

So the existing sites are increasing their volume but the number of new system placements was down a little bit on a year-over-year basis.

OK and as we go into 2014, would you expect that to continue to be a steady sort of educational process and continuing to fight the battle on reimbursement or would you expect to see some sort of inflection on the Breast IORT placements this year?

I think we expect to see it grow from last year.

We had a particularly strong year in 2012.

We doubled the number of systems in 2012 versus 2011.

I think we sold seven IORT systems in 2011 and then we sold 15 in 2012.

So we doubled the number in 2010 and 2013, so we did go down.

What we are seeing though Shawn is the sites that are up are steadily increasing their balloon volumes and that relates to the total number of balloons sold.

So what we are very encouraged by is the sites we sold to have done all the right things in terms of establishing a patient protocol a marketing-ness to their patients and they are seeing an increased amount of procedure volumes which as we know brings in a lot more business beyond just the actual procedure.

So we have got a number of sites that have been very very successful and we think those references will bode well for us in terms of gaining more sites.

Our funnel was pretty strong in the second half of the year a number of deals just did not get across the goal line by year end.

And we are hopeful that as we get into 2014 we are going to see more of those transactions close.

Also we think that IORT in international markets is a real attractive value proposition.

Often you go to some of the developing countries where getting the patients to the therapies is not trivial, being able to bring this therapy to the patients in a mobile fashion could really be positive.

So we re investing more internationally which we think will also increase IORT since the market for Skin is more US centric.

So we have a much more ambition plan as I talked about in my opening comments internationally this year.

We have several dedicated senior resources within the company focused on it and I think we will see a lot more IORT sales in international markets in 2014 versus what we did in 2013.

So when you add that to a stronger US Market we feel confident we will grow in terms of number new system placements in 2014 versus 2013 in that space.

The clinical data continues to be strong and the reimbursement continues to be strong directionally in terms of making progress for increasing reimbursement each year in the hospital setting.

So we still think this is a really solid business opportunity.

The other thing related to IORT we are doing is we are very much investigating the notion of adding electronic braking therapy IORT as a boost, such that post-lumpectomy they would get a boost and then in additional to the boost they would get a shorter regime of whole breast radiation.

We very recently brought a panel of experts together to discuss how we could establish a clinical protocol for using IORT as a boost and obviously modifying the whole breast radiation.

If you do that you almost double the number of patients that would be eligible for IORT as a boost.

So we are looking at a way of possibly opening up a study where those that want to follow this protocol use this as a boost would do so.

There are several sites that are doing that today and we are relying on a lot of their experience and expertise along with expert panel.

So that is something we are also i9nvesting in with IORT and if we can combine boost with monotherapy our sense is the addressable market may come close to doubling in the near term.

So we are very, very, very committed to IORT.

We think the value proposition for the patient is enormous and the addressable market is still very considerable.

And at this point I would say it is low penetration.

As we look out to 2014 we would like to think there is the possibility of substantially increasing balloon sales again because we have a number of sites that are increasing their volume as we bring on new sites.

Got it all that color is very helpful.

That is it for me and congratulations on the growth so far guys.

Thank you.

Thanks Shawn.

There are no further questions.

So I now would like to hand the call over to Mr. Ferry for closing remarks.

I would like to thank everyone for calling into our quarterly and full year results.

We are very, very pleased with our progress in 2013.

Both from a product road map stand point as well as from a financial performance standpoint.

We are very, very confident and enthused about our future.

We believe we have good solid plans in place, focused resources, and ultimately as we are now in the middle of Q1 2014 are very, very enthused and optimistic about a strong year.

So with that I thank you all for your interest in the company and we look forward to speaking with you again at the end of our first quarter as we report our first quarter results.

So thanks again and have a good day.

Thank you for your participation in today's conference, ladies and gentlemen this concludes the presentation and you may now disconnect.

Have an enjoyable day.