ICAD Inc (ICAD) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the iCAD Inc.

Fourth Quarter and Full Year 2017 Earnings Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Jeremy Feffer with LifeSci Advisors.

Please go ahead, sir.

Thank you, Rebecca, and good afternoon.

Thanks for participating in today's call.

Joining me from iCAD are Ken Ferry, Chief Executive Officer; and Rich Christopher, Chief Financial Officer.

Earlier this afternoon, iCAD announced financial results for the 3-month and 12-month periods ending December 31, 2017.

Before we begin, I would like to caution that comments made during this conference call by management that contains forward-looking statements involve risks and uncertainties regarding the operations and future results of iCAD.

I encourage you to review the company's filings with the Securities and Exchange Commission, including, without limitation, the company's Forms 10-Q and 10-K, which identify specific risk 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 accurately -- accurate only as of the date of this live broadcast, March 22, 2018.

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, it's my pleasure to turn the call over to Ken Ferry, CEO.

Ken?

Thanks, Jeremy.

Good afternoon, everyone, and thank you for joining us today.

I'll begin today's call with some brief comments on the financial results for the fourth quarter and full year ended December 31, 2017.

I'll then turn the call over to Rich Christopher, our CFO, who will review our financial results in greater detail.

At the conclusion of Rich's remarks, I'll provide an update on our key growth programs before opening up the call for questions.

I'm pleased to report our strongest revenue of the year in the fourth quarter of 2017.

This was fueled by particularly strong demand for 2D and 3D mammography software in our detection business.

This product segment had a very strong 2017, with greater than 50% growth versus 2016.

Therapy revenues were in line with our expectations for the quarter, and we showed respectable growth in both product and service for the full year.

As we look to 2018 and beyond, we will continue to invest significantly in our artificial intelligence software platform as we look to expand our product offerings and also to increase focus and resources on accelerating growth of our product sales in our Therapy business as well.

More on these topics later in the call.

Now I'd like to turn the call over to Rich for a detailed review of our fourth quarter and full year 2017 results.

Thank you, Ken, and good afternoon, everyone.

I'd like to review the company's fourth quarter and full year 2017 financial highlights, which were disclosed in this afternoon's earnings release.

As I will only be discussing the highlights from our financial results, I'd like to refer you to our annual report on Form 10-K for more specifics and details.

The company expects to file its Form 10-K for 2017 with the SEC in the coming week.

Before I get started with the financial highlights, I would like to note that during my comments today, I will be referring to certain non-GAAP financial measures.

Management believes that these measures provide meaningful information to investors as well as better reflect the way that we view the operating performance of the company.

You can find a reconciliation of our GAAP to non-GAAP measures at the end of our earnings release.

With that covered, I will now summarize the financial results for the fourth quarter.

For the fourth quarter of 2017, total revenue was $7.9 million, reflecting a $1 million or 14% improvement over the comparable prior year quarter.

The year-over-year change was driven by a 26% increase in detection revenue, which was slightly offset by a 4% decrease in therapy revenue.

It should be noted that our year-over-year revenue growth was negatively impacted by the inclusion of $500,000 in MRI revenues in the prior year quarter.

As detailed on previous earnings calls, we completed the sale of the MRI assets in the first quarter of 2017.

Excluding the impact of MRI revenues, total revenue increased by $1.4 million or 22% over the comparable prior year period.

This year-over-year change is reflective of an extremely strong 40% increase in detection revenue.

Taking a look at our results by segment.

Total revenue in our detection segment for the fourth quarter of 2017 was $5.2 million, representing a $1.1 million or 26% increase over the prior year period.

Again, excluding the impact of MRI revenues, cancer detection revenue increased $1.5 million or 40% versus the prior year quarter.

The year-over-year increase in our adjusted cancer detection revenues was entirely driven by a $1.8 million or 100% increase in our product revenues.

This increase is attributable to domestic sales of our PowerLook Tomo Detection software.

Shifting to our therapy segment.

Fourth quarter therapy revenues totaled $2.7 million, a slight decrease of $100,000 or 4% from the prior year quarter.

These results included a $300,000 decrease in product revenue, which was partially offset by a $200,000 increase in service revenue.

The decrease in product revenue is due to geographical sales mix.

All of the controllers sold in the fourth quarter of 2017 were sold outside of the U.S., where we realized lower average selling prices on international distribution sales.

Moving on to gross profit.

Gross profit for the fourth quarter of 2017 was $4.3 million as compared to the $4.5 million in the fourth quarter of 2016, a $200,000 decrease.

The decrease in gross profit was as a result of a $1 million inventory reserve recorded in the fourth quarter of 2017.

The reserve is related to our exit from the skin subscription business.

Absent this charge, gross profit in the fourth quarter of 2017 was $5.3 million, representing a year-over-year increase of $800,000.

On a percentage basis, gross profit for the fourth quarter of 2017 was 55% as compared to the 65% achieved in the prior year quarter.

The year-over-year change in gross profit percentage was also negatively impacted by the $1 million inventory reserve.

Absent this charge, gross profit percentage in the fourth quarter of 2017 was 68%, representing a year-over-year increase of 3%.

As far as operating expenses go, operating expenses for the fourth quarter of 2017 totaled $8.5 million.

This represented a $700,000 or 9% increase over the fourth quarter of 2016.

In the fourth quarter of 2017, the company recorded a noncash impairment charge of $2 million related to the goodwill and long-lived assets of the therapy segment.

This charge was also as a result of the company's decision to exit the skin subscription business.

Excluding the goodwill and long-lived asset impairment charge, total operating expenses for the fourth quarter of 2017 totaled $6.5 million, representing a $1.3 million or 17% decrease year-over-year.

Looking at our profit metrics.

GAAP net loss for the quarter was $4.2 million or $0.26 per share compared to a net loss of $3.3 million or $0.20 per share in the comparable prior year quarter.

The $900,000 year-over-year increase in our net loss was driven primarily by the $2 million goodwill impairment charge and the $1 million inventory reserve, which were partially offset by incremental gross profit of $800,000 and a decrease in operating expenses of $1.3 million.

On a non-GAAP adjusted EBITDA basis, the net loss for the fourth quarter of 2017 was $1.3 million.

This represented a $700,000 or 36% improvement over the prior year period.

Moving now to the balance sheet.

We ended 2017 with $9.4 million in cash on hand.

This compares to the $8.6 million we had on hand as of December 31, 2016.

In 2017, we used approximately $7.3 million in cash from operations, generated $2.5 million in cash from investing and generated an additional $5.7 million in cash from financing.

The cash generated through financing was as a result of the credit facility that we entered into with Silicon Valley Bank in August of 2017.

We would like to announce that subsequent to the end of the quarter, the company amended the terms of its credit facility with Silicon Valley Bank.

The amendment was made necessary by the company's decision to cease offering its skin subscription service model to customers.

It's important to highlight that the total credit facility in the amount of up to $13 million remains the same and the interest rate on the debt remains the same.

A summary of the amendment terms are as follows.

The covenant structure has changed from a revenue-only covenant structure to a combination of both revenue and EBITDA covenant structure.

The tranche 2 revenue milestone and maturity date have changed.

Some of the terms of the line of credit have changed, and lastly, the final payment has changed.

So in all, we are pleased with the terms of the amendment.

Silicon Valley Bank acted in true partnership fashion to amend the agreement, working with us as we execute on our plans to exit the skin subscription business and drive the company towards profitability.

In summary, the key takeaways from our 2017 performance are as follows.

First, our top line revenue continues to demonstrate solid growth.

Fueled by a strong fourth quarter performance, annual revenue, excluding MRI revenues, increased by $3.6 million or 15% year-over-year.

Second, and more specifically, we are experiencing significant revenue growth within the key revenue metric for our business, cancer detection product revenue.

Excluding MRI revenues for the full year, annual detection product revenues were up $3.9 million or a robust 52% year-over-year.

Third, within therapy, we are seeing meaningful growth in our Breast IORT balloon volume.

In 2017, we sold 1,809 balloons as compared to the 1,596 we sold in 2016.

The increase was driven in particular by sales outside of the U.S., where balloon volume was up 36% year-over-year.

Further, in January of 2018, we announced the company's intent to exit the skin subscription business.

This strategic decision will result in higher gross margins, lower cash burn as well as better position the company as we head towards profitability.

Lastly, we continue to believe that our current cash position will support the company to the achievement of profitability.

This will, at the same time, allow us to make critical strategic investments to further support top line revenue growth, especially in the area of AI.

This concludes the financial highlights section of our presentation.

Now I would like to turn the call back over to Ken.

Thanks, Rich.

Let's begin with our cancer detection business.

We're pleased with the increased demand for PowerLook Tomo Detection in the fourth quarter.

It being the first AI software product based on machine and deep learning that is commercially available today for the detection of breast cancer on 3D mammograms, we continue to believe that this product platform will be a significant growth driver for years to come.

We continue to be focused on maximizing the commercial potential for this innovative solution through various initiatives.

To this end, we had an extensive presence at the Radiology Society Meeting of North America in November, where our leadership position in AI was highlighted.

During the conference, we hosted a well-attended presentation on AI with breast tomosynthesis in the dedicated artificial intelligence pavilion of the conference.

This was in addition to our usual presence in our OEM partners' tradeshow booths as well as our own, where we generated over 150 sales leads.

We're also executing a comprehensive PR and advertising campaign in the U.S. and Europe focused on tomo detection.

As part of this, we recently announced that iCAD was named one of the Top 10 Artificial Intelligence Providers for 2018 by Healthcare Tech Outlook magazine.

Moreover, our exclusive women's portal sponsorship with multiple promotional banners and ads on Imaging Technology News, a website focused on imaging and women's health, continues to generate significant momentum as do our PowerLook Tomo Detection customer education webinars.

Finally, we continue to leverage our iNFORMED Blog to communicate with patients.

Our most recent post was focused on AI in women's health.

As our financial results for the fourth quarter indicate, we are beginning to gain meaningful market acceptance with our PowerLook Tomo Detection software.

In fact, there are currently over 100 sites worldwide using our software to assist with the workflow and interpretation of 3D mammograms.

Moreover, as you've just heard, we are executing on a number of initiatives to enhance this success.

While we are focused on increasing our commercial traction with PowerLook Tomo Detection, we've also developed the next version of this key product, which adds of our product offering, particularly in the second half of this year.

iCAD's strategic objective is to create a road map for unlocking and maximizing value in the evolving field of AI.

The development of a follow-on product to PowerLook Tomo Detection is an important example.

Most importantly, the next version of the software will be available for all of the major 3D mammography systems in the market today.

Now for an update on our development and commercial progress.

PowerLook Tomo Detection version 2.0 received CE Mark in late February.

As a result, we were pleased to introduce it in Europe at the European Congress of Radiology, or ECR, which took place February 28 through March 4 in Vienna, Austria.

This next version of the software was shown in the booths of several leading companies at ECR as well as in the iCAD booth.

Initial feedback was extremely positive, and we look forward to conducting a broader launch in Europe over the coming months.

Additionally, we recently completed our U.S. clinical reader study for the product and are on track for an April FDA submission.

We continue to be hopeful for the commercial launch of PowerLook Tomo Detection version 2 as a complement to version 1 in the U.S. sometime in the second half of this year.

We're also expecting a response from the FDA soon on our PowerLook breast density 3D application.

This technology allows radiologists to accurately and consistently quantify breast density when using tomosynthesis.

Of significance, legislation has been passed in 31 states requiring physicians to notify patients of their breast density.

So while we're still evaluating the size of this market opportunity, it could be an important product offering for the company.

iCAD will continue investing in the development of a broader road map of AI software solutions based on machine and deep learning.

As I've said in the past, we have a robust and highly innovative platform as well as significant advanced engineering and development experience in this area.

And we look forward to augmenting our portfolio of solutions in the coming years for the benefit of our customers.

We are firmly committed to providing the latest in detection and workflow software for the radiology market segment.

Shifting to therapy.

I'd like to first provide an update on our skin brachytherapy business.

In early 2018, we announced our intention to discontinue offering the subscription service model to customers in our skin brachytherapy business.

Despite our best efforts, we were unable to achieve the minimum treatment volumes at a majority of the treating sites to continue to offer this option.

Conversely, sites that own their own machines have grown nicely over the 18-month time frame and delivered over 80% of patient treatments in 2017.

So following a comprehensive review of market dynamics, we determined that we will only offer a capital sales model commercially going forward.

In doing so, we will continue to offer X-ray source and service support to all the sites using our system to treat skin cancer.

Beyond the upfront capital sale, X-ray source and service contracts will continue to provide for a healthy recurring revenue stream to the company.

Further, our current capital customer base is utilizing local expertise and resources or regional third-party providers with good success to assist them with treatment delivery.

Since disclosing this strategic decision, we've continued to communicate with our current and potential new capital customers.

Following these discussions, we believe that our capital customer interest remains quite robust.

In addition, we recently learned that CGS, one of the Medicare regions covering Ohio and Kentucky, has changed from a negative policy to a positive coverage policy for skin treatment.

Accordingly, iCAD remains firmly committed to this business.

Our commercial strategy that now exclusively focuses on capital sales will result in an aggregate savings of approximately $3 million in salaries and benefits on an annualized basis.

We expect to reinvest some of these savings in our capital sales and marketing initiatives through the expanded targeting of cancer centers, radiation oncologists and to an existing strategy of focusing on dermatology practices.

The cancer center market is particularly attractive with over 1,700 such centers across the U.S. in the regions where we have reimbursement experience.

While we do not view the strategic shift in our therapy business as an immediate panacea, the clinical data in support of this technology continues to be compelling, and we're excited about the long-term opportunity for iCAD with capital customers.

With that said, let me now provide you with an update on our other therapy application, intraoperative radiation therapy, or IORT, for the treatment of breast cancer and certain GYN cancers.

In the fourth quarter, we announced the results of a landmark cost effectiveness study that showed the benefits of IORT compared to external beam radiation therapy in the treatment of early-stage breast cancer.

The analysis demonstrated that IORT could result in direct cost savings for the U.S. health care system of more than $630 million over the lifetime of patients diagnosed annually with early-stage breast cancer as well as significant (sic) [significantly] benefit patient health by minimizing radiation exposure and offering a better quality of life.

The results of the study, which were published in the peer-reviewed Cost Effectiveness and Resource Allocation, determined IORT to be a preferred method of treatment.

From a utilization standpoint, we currently have 36 U.S. centers and 48 OUS centers treating patients with IORT and our GYN applicators.

We placed 4 new IORT systems in the fourth quarter in international markets.

We are experiencing strong global market interest in general IORT applications as well, including prostate, brain and rectal.

Looking ahead, while a lengthy sale cycle remains a reality in this segment, we anticipate continued progress in system placements in 2018, both in the U.S. and internationally.

Additionally, we see further opportunities in 2018 in certain emerging OUS markets, including India, Saudi Arabia, Colombia and Africa.

Finally, let me provide you with an update on our study evaluating the use of IORT with the Xoft system in early-stage breast cancer patients.

We completed enrollment in this study in February.

To date, 1,200 patients have been treated with a median follow-up of 19.4 months.

You'll recall at ASTRO late last year that we presented data demonstrating that Xoft IORT delivered high survival rates, excellent to good cosmetic results and a low rate of high-grade adverse events and recurrences in appropriate patients.

We are targeting second half of 2018 for the publication of these results.

So to summarize the status of the therapy business, we believe our focus on capital customers will allow us to maximize a long-term profitable market opportunity in the skin brachytherapy area.

Additionally, we continue to achieve progress in the U.S. with IORT and GYN, while market demand remains very strong in Europe and Asia, and further opportunities are developing in key emerging markets as we look to the future.

Based on all of this, we believe we are well positioned to achieve long-term success with this business area.

So now we'd like to open up the call for questions.

Operator?

(Operator Instructions) And your first question will come from Kevin Ellich with Craig-Hallum Capital.

This is Per Ostlund on for Kevin today.

A lot of positive developments here.

So let's start with the -- let's start with the tomo business.

I think in Q3, it sounded like maybe there had been a little bit of a mix or -- I don't want to call it adverse mix but maybe a little bit more 2D than 3D than maybe you had expected at that time.

Did that shift a little bit in Q4 more in favor of 3D?

And if so, how would you characterize the drivers there?

Yes, Per, I would say that if you look at total product revenues in Q4 in detection, the number jumped pretty significantly from Q3.

And it was largely, if not exclusively, as a result of the PowerLook Tomo Detection product.

What I would say is we're making progress.

I'm not satisfied with the progress, to be blunt.

We did see increased effort by GE from shifting the mix from 2D to 3D.

We also had a very, very strong quarter with our own sales team in terms of closing business.

And so the combination of increased focus with GE, a somewhat higher increase of purchases from them of the 3D product versus the 2D product as well as more sales of 3D directly really contributed to that.

With that said, we still have ways to go.

Unfortunately, I do feel that there's too much 2D products still being quoted in 3D environments.

And again, that's because the systems provide capabilities to do both 2D and 3D exams.

And a number of the sites, the majority of the sites are still using 2D for screening.

So has the volume of 3D exams, while growing, has not necessarily become the standard for screening yet.

We see that developing over the coming years.

There's very strong clinical data in support of 3D for screening, and a lot of the very large leading-edge sites are using 3D for screening.

So directionally, things look very, very good.

What I would say though is we still have work to do to really get this shift moving dramatically.

I do believe as we get to version 2 of the product and that all of the companies that we work with have this product available to them, I think that will be a major catalyst for the 3D interpretive software to become more standard on all transactions involving 3D imaging capability.

So over the course of 2018, I see that improving in part just based on the efforts we're making collaboratively with GE and with our direct team.

But also, I believe as you put the innovation of 3D interpretive software in the hands of all the companies, similar to what happened when the 2D products came out sometime ago in the mid-2000 time frame, you start to see the competition offering these products against one another, and that would be a very good dynamic for us.

That makes perfect sense.

I want to come back to Tomo 2.0 here in a second.

But curious just if the turn in the calendar or any attendant budget resets have had an incrementally positive impact on 3D sales at this point out of it's still kind of that quoting environment that you're talking about, Ken.

Yes, I mean, what I would say is Q4 is always our strongest quarter of the year.

And also for GE, who is our largest partner, it's by far their largest quarter.

So I don't see us having the ability to replicate what we did in Q4 certainly in Q1.

But I think what I would say is I don't see impact of customer budgets going up or down.

I just see them being more as steady as we entered into the new year.

I've not heard a lot about budgets getting squeezed.

On the other hand, I've not heard about a lot of incremental funds being provided.

So I think we're looking at a marketplace that's probably comparable to 2017.

That's at least how we see it right now.

And again, seasonally, fourth quarter is always the biggest shipment quarter where we see the most action from our partners.

And then things start to ramp up slowly through Q1, through the rest of the year.

And hopefully, by the end of, let's say, 2018, we will have another strong year relative to top line growth as we did in 2017, as we've commented before, adjusted for the sale of the MRI business.

Sure.

That makes sense.

So on 2.0, with the introduction at ECR following the CE Mark, you mentioned that it was showcased in not only your booth but in partner booths as well.

So does that mean that Hologic, that Siemens, that GE were all showcasing it as well?

And I guess if so, sort of what was their effort behind it at that point given whatever exposure level they've had to the new product at this point?

Right.

Well, an important milestone, Per, was CE Mark because a lot of those larger companies are very strict about showing things, even in the works in progress, unless it has some sort of regulatory clearance.

And so the good news is we had CE Mark.

And it was shown very much so in GE's booth.

It was shown in Siemens' booth.

I know that Hologic had intended to show it, but they had some logistical challenges.

And as I understand it, the product and the works in progress software for their workstation showed up at the very end of the show.

So I'm not sure they had the opportunity to show it.

But where it was shown in the booths and where we able to interact directly with customers, we got incredibly positive feedback.

The reaction by a lot of luminaries and KOLs in Europe were that they'd love to work with us.

They would love to conduct studies to help validate the benefits of the product.

So beyond the basic detection and workflow contributions, which are very important, to have a lot of these KOLs and opinion leaders commit and really show a lot of excitement to try to collaborate with us was another validation on the product.

And obviously, as you go to a second version, you're able to build upon the success of the first product.

So we were very, very pleased with the outcome of ECR.

I felt that it was a very, very good meeting.

But with that said, our partners are working on the workstation interface to their mammography workstations.

In many cases, it's going to take through the second quarter for that development work to be done.

So the real impact of this product in Europe is probably not going to really start to happen until the third quarter of the year.

It's just a system environment, where you can't just release a product and have an immediate compatibility.

So there's commitments from all the major companies to make our product compatible with their mammo applications and their workstation.

And sometime over the next, let's say, 3 to 4 months, we're hopeful that, that will all be completed.

And that will really have a much more positive impact in terms of a major launch and obviously for revenue stream to follow.

So we're really excited about it.

With that said, we have an excellent product in version 1. And we believe it's a terrific product for the market.

And we've really created 2 products.

Even though we call it version 2, version 1 is more of a traditional workflow product and version 2 is more of a traditional detection product.

So we plan for both those products to continue to be in the market with new capability over time.

So we really don't see version 2 replacing version 1. We essentially see 2 different implementations of our algorithm basically, one with more of an emphasis on workflow, one with a more of an emphasis on detection.

So we've got, I think, a good strategy there.

And going forward, the European theater, in the second half of the year, hopefully in the -- early into Q3, should be a real opportunity for us to start to gain some additional traction and revenue.

And then obviously, in the United States, we've completed our reader study.

We have the preliminary results and we're initially very optimistic about the product.

With that said, we've got quite a bit of work to do to get all the data crunching and so forth and get our application together.

But we're on track to make that happen sometime in April.

So hopefully, having learned as much as we did with version 1 with the FDA, this product will hopefully work its way through the FDA process much more quickly and seamlessly.

And we could have some opportunity in the second half of the year for this product to also be in the United States market.

Excellent.

I want to ask you quickly on the skin subscription, that exit.

Is there still a carryover effect in '18 from the customers that would have been under contractual relationships for some amount of time yet?

And then related to that, as some of those customers are approaching the end of contracts, is there an interest level being expressed in taking on the capital purchase to maintain the service to their patients?

And then I'll cede the floor.

Sure.

There definitely is a contractual commitment that varies by customer that has us providing services in the first quarter of the year.

The feeling is that those services and interactions should be completely done by the end of the quarter.

And so there is still some activity going.

To your other question, there certainly is an interest on a number of our customers of acquiring their systems.

We had a number of accounts that really were building momentum and doing fairly good volumes.

The majority unfortunately were not, and that led us to that decision.

But there definitely is an interest, from a capital standpoint, in the sites that were really already doing good strong volumes or saw their volumes ramping.

So we're working on those transactions with those customers, and we're hopeful to close a number of those over the next quarter or 2.

And from Laidlaw, we'll hear from François Brisebois.

Just in terms of the launch in Europe, just a reminder, in terms of [scene], can you give more color on the commitments that people have that you just mentioned?

And then is that launch, you said, more of an effect in Q3?

Is that supposed to start in Q2?

Or just more on that.

Well, our goal is to offer this product essentially to all the major -- all the major platforms.

So to be specific, that would be GE, Siemens, Hologic and Fuji.

We obviously are hoping to and planning to work with all of the companies in that process and in some commercial fashion.

Some of those agreements have been completed and some are in process.

With that said, we're also looking to ramp up our own commercial efforts further both in Europe and the United States because in an environment where we can sell directly, we can obviously get a much higher selling price than we get from a transfer pricing scenario.

So we really plan to go to market, Frank, with kind of a co-exclusive agreement, where our partners can sell it and we can sell it.

And obviously, we'll have some rules of engagement so that we minimize any channel conflict.

And that is a tremendously larger addressable market than we've had with version 1, where that product, as you know, has been exclusive to GE.

So we're very excited about the addressable market expansion, that's going to come with this product, whether it's through a traditional OEM partnership or through direct sales of our own.

And as I mentioned, we're going to expand our selling with distribution partners in Europe, and we're going to expand our selling in the United States just by the nature of the size of the addressable market across all the companies that we can now provide a product for.

Got you.

That's helpful.

And then in terms of market share, is it fair to say that 70%, 80% of the market share in the U.S. is Hologic's right now?

And then ex U.S., how does that market share go?

Is it more of an even distribution?

I think your comment on the U.S. is probably accurate just based on the way we see the market and hear all the different numbers around the MQSA data each month and how the differing companies are doing as they communicate their results.

In the European market, I would say that Siemens and GE probably are the market leaders, with, my guess would be, Hologic being a close third.

So I don't know that the shares are equal.

I do think GE and Siemens, given the breadth of their imaging product lines that they can leverage and the resources they can put to bear in the marketplace across so many countries, probably gives them somewhat of a slight advantage.

But certainly, the 3 major players are GE, Siemens and Hologic.

And I would say they're probably all fairly close in market share.

But my guess would be that GE and Siemens might be more slightly in the lead versus Hologic.

But this is my gut from our own assessment of the market.

Got you.

And then just lastly, on the -- in terms of -- are there any issues with customers deciding -- now that the budgets are realigned, deciding not to buy Tomo version 1.0 because Tomo 2.0 might be coming out later?

You touched on it.

Can you just mention how you don't see them as cannibalizing one another?

Well as I said, version 1 is much more of a workflow tool and it's a dedicated product to GE.

Version 2 obviously is more of a traditional detection product that emulates more the way our 2D products, even though it does have an awful more capability than what we did in the 2D world.

But in essence, what we're offering to the GE customer base is a transition program through a premium service offering.

And so in essence, if the customer is aware of version 2, and obviously with the CE Mark and the announcement at ECR, it's become more visible, the customer does have an avenue, a pathway to buy version 1 and then through a premium support contract, have the ability to get version 2. And so we are using that in circumstances where customers, for whatever reason, are interested in version 2. For the most part, our customers really like version 1 with GE.

So we really haven't seen an issue with that.

But we have created a service offering that really would ensure a seamless transition to version 2 for those customers when it's available.

Obviously, outside of the GE's customer base, we don't have a product today.

So version 2 will be the first product for the other companies that we're working with.

(Operator Instructions) From Zacks Investment Research, we'll hear from Brian Marckx.

Ken, you talked about the integration work for 2.0 for the systems manufacturers.

Can you talk about whether GE -- given the existing GE customers with the first generation version, is the integration work for 2.0 as extensive or as involved as it would be for, say, a Hologic that doesn't have the first generation version?

What I would say, Brian, it's a good question, is it's not a heck of a lot of work, to be honest, for any of them.

It's pretty straightforward, using industry standard interfacing capabilities.

And then really what they have to be able to do is to accept the navigation capability that comes with our product and be able to utilize it.

It's not a lot of work.

And so whether it's -- you have it in version 1 versus version 2, it might be a little less work, if you've already got it in the GE Seno Iris workstation to add version 2. But to do it in general is not much work.

And it's not a lot of work for the PACS companies.

The challenge we've run into is obviously they all have scheduled releases.

And they're not going to drop what they're doing and just do this.

So we've got a very strong commitment from the companies that have dedicated mammo workstations.

We've had some strong commitments from the larger PACS companies.

But it's really going to be bundled into their next annual release in many cases.

So one of our challenges logistically is really when is that next release.

So that is more of a timing issue based on a portfolio of features they're adding as opposed to -- so as an example, if one of the PACS companies says, "We'll have it but it won't be until the end of 2018," it's not because it takes 6 to 9 months to develop this interface.

It can be done probably in less than 30 days.

The issue is really coordinating their major releases and all the features at one time.

So that's one of the logistical challenges we're dealing with.

But it's truthfully not a lot of work.

It can be done, in a development sense, in a matter of weeks.

Okay.

And then in terms of the GE current installed base, the ones that have the first generation version, just so I have -- I understand it better, is this -- is 2.0 potentially a complement or a supplement to the first generation version?

Or would this be a complete replacement?

What we're looking at is an upgrade where they essentially keep the product they have.

And what we do is we drop in a higher-performing algorithm so that the features, if you will, and the workflow don't change.

But this has an enhanced detection engine in it.

So that would be the implementation for GE.

Beyond GE, again, it's more of a traditional detection product, putting marks on images, where we believe we see calcifications and soft tissue densities.

So it's a different implementation.

Now GE customers will have access to that product, too.

So they'll really have a choice.

We think a lot of their installed base customers really like our current version, really like the workflow aspect of it and would like us to just drop in a higher-performing algorithm and be done.

Others may choose to go towards a more traditional computer-aided detection product with the circles and squares, so to speak, in looking at suspicious lesions.

So our goal is to make both implementations available to GE customers, let them choose which route they want to go.

But we see a positioning in the market for both products.

Okay.

And then in terms of the training for your sales force, is there any significant incremental, additional training that's involved with the 2.0 versus the first generation version?

No, not really.

Our team, since we've showed this at ECR, we showed it at works in progress at RSNA, very much understands the product and knows it very well.

The only challenge, I think, from training and education will be we're going to add people to our sales force probably in the second half of the year.

And we're kind of working through a channel strategy process at the moment, assessing what kind of commitments we have from our OEM partners and where we want to fill the gap with additional direct people, whether it be in support of those partners or to garner up direct sales.

And so we'll be adding some people in the back half given the size of the installed base and the new systems opportunity out there across the entire market and all the differing companies that supply 3D machines.

So if there's any trending issue, it's going to probably be just adding some new people in the back half and getting them up to speed relative to the 6 people that we have out there in the United States in the field today.

Okay.

And then on the Therapy side, Ken, you mentioned minimal volume -- minimum treatment volume relative to your decision to exit the subscription business.

Can you provide, I guess, any more kind of background on what you mean by minimal treatment volume relative to exiting it?

And was the decision in concert with the indenture of your bank facility?

Or was the bank facility indenture change post decision to exit the business?

Right.

So the last part, which is easy to answer, is that the Silicon Valley relationship had nothing to do with the decision.

If anything [Bay], as Rich mentioned earlier, we're very good partners in responding to what we decided to do strategically.

On the front end of your question, Brian, we had said along that we needed subscription customers to get to a volume of 10 patients per month.

If they did 10 patients a month, that roughly equated to about $150,000 a year to us per site in recurring revenue at a very good gross margin.

When we hit the peak in the end of the third quarter of 27 sites on subscription, we literally had about 3 sites that were on the cusp or already hitting the 10 patient a month plateau.

So we spent a lot of time with those other customers.

And the biggest challenge, to be blunt, is that you cannot create contractual terms that require those sites to treat 10 patients a month.

In a lot of businesses, you create terms with the customer and you ultimately say for this kind of level of services and this price, here's your minimums, right?

You can't do that in health care.

You can't, at the end of the year, as an example, rebate customers for the volume of treatment.

So we really had contracts in place that, quite honestly, did not have enough teeth in them to require the treatment.

And so when we looked at this business over the course of '17, just to put it in plain terms, we saw a little over $2 million in total revenue coming in.

And that was growing.

But we literally spent $3 million in cost of sales, which was all of the people in the field that had to show up on the sites should deliver the treatments.

And so what we ultimately did was we went and looked at our capital customer base of about 25 sites.

And what we realized was that they were able to find those resources required, whether it's a radiation oncologist or rad tech, a physicist, locally in their medical community easily as we could.

And the people were local, and they weren't dedicated to their site.

So in many cases, they either did this on their own or they found a third-party company that was in this business similar to what we were doing that also have those resources available because they were servicing other sites like, as an example, possibly an oncology center.

And in essence, they were able to cobble together, as I say, all the proper resources to deliver effective and safe treatments using local resources as needed.

So we looked at that model and said, ultimately, we've got people very underutilized that are either in a geography or we're flying into a geography to provide treatments.

And without the ability to really ramp up those sites in a meaningful fashion, we're spending more money in cost of sales, meaning the headcounts to deliver the treatment, than we're bringing in revenue.

And then we are looking across the way at these 25 capital sites that have figured out how to get it done and are treating -- 80% of the treatments that were delivered in '17 were with sites that own their own machines.

And we said that looks like a much more viable business model for us as the company providing the technology.

So that was what weighed into our decision.

And clearly, our salespeople still try to help the customer if they're new and they're trying to find the resources locally to deliver treatments.

So we try to help them with that.

But by stepping out of the business and becoming a more traditional supplier of the technology, providing the X-ray source, providing the service, we felt that the market is big enough for us to be successful, increase our gross margins considerably and reduce our expenses from a cost of goods to deliver all those services that many customers are more capable of finding for themselves or again, partnering with a third-party company who's in that business to provide the services.

So all of that weighed into our decision, and we're out there now, obviously, marketing aggressively our technology because it's a great, great clinical solution, but from a different angle than we had over the past 18 months.

Ken, I appreciate the detail on the answer.

In terms of the capital customers, from what you hear or I guess maybe even ordering patterns on the consumables side, it is -- I assume that that's a -- they find it's a profitable business, I guess, on the capital side anyway, the customers you just described?

Yes.

I mean, at the end of the day, they have to treat a certain number of patients, too.

And I think that if they are actively treating approximately 10 patients a month, which in a large derm practice is not a tremendous number, the reimbursement on average, if I use an average number, is $4,000, $4,500.

So if you do the math and say they're bringing in $500,000 a year, plus or minus, with that 9 to 10 patients a month scenario, that's a pretty good revenue stream.

And then when you look at the resources required to deliver the treatment, there's still a very solid profit in there for the dermatologist.

I think that there has to be a champion and an advocate to really ensure that they continue to market the service and really focus on the patients that are either new or those existing in their practice where radiation is a better fit than most surgery.

And we found those that really focus on that were successful in growing.

A lot of them kind of petered out so to speak after some initial success.

And so it's still a very viable technology and clinical solution.

But it's not a natural fit into a derm practice, and they have to invest in local marketing to ensure they get the patient flow.

And that, I think, was one of the big challenges that we ran into.

And we essentially decided that we would still market this to large derm practices but let them assemble the resources they needed to deliver the treatment.

And then we looked at this big cancer center opportunity.

And just in the states that we have either positive or silent coverage, there's 1,700 freestanding cancer centers that have all the resources already physical there to deliver the treatments.

What they need obviously is the patient referral.

And what we found in a lot of those centers is they advertise directly to the patients and their community.

So that is a big, big opportunity, and it's going to take some time to establish it.

But clearly, they already have all the resources in house to deliver the treatment.

We have to help them to determine how is best to attract patients to their facilities.

And at this time, I would like to turn the conference back over to Ken for any additional or concluding remarks.

In closing, I'd like to reiterate our priorities going forward: number one, to maximize the success of PowerLook Tomo Detection software in the market while rolling out the next version first in Europe and then in the U.S. later in this year.

The next version of the software will be meaningful, and it substantially expands our addressable market; number two, to continue to increase our capital customer base within the skin brachytherapy business; number 3, to continue to expand our IORT and GYN customer base, particularly in the global and OUS markets; and fourth, to manage our expenses and cash prudently to reach cash flow breakeven in the near term.

With his closing remarks, we thank you all very much for joining us today for our fourth quarter and full year 2017 results, and we look forward to updating you again after we close out the first quarter of 2018.

Thanks again for joining us, and have a good day.

Ladies and gentlemen, that does conclude today's presentation.

We do thank everyone for your participation, and you may now disconnect.