ICAD Inc (ICAD) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the iCAD Second Quarter 2018 Earnings Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Jeremy Feffer.

Please go ahead.

Thank you, Catherine, and good afternoon, everyone.

Thank you 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 period ending June 30, 2018.

Before we begin, I would like to caution that comments made during this conference call by management that contain 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 accurate only as of the date of this live broadcast, August 14, 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 second quarter ended June 30, 2018.

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

After the conclusion of Rich's remarks, I'll provide an update on our key growth programs prior to opening the call for questions.

With that, let me begin by saying that in spite of quarterly revenues not being as strong as anticipated, we were able to make good progress with gross margin expansion and significant reductions in operating expenses and cash burn.

In our Cancer Detection business, mammography product revenue, which grew over 50% in 2017 versus 2016, was relatively flat year-over-year in the second quarter.

Business with our largest OEM partner, GE, has been weaker than anticipated in the first half of 2018.

This weakness has been partially offset by stronger direct sales efforts in Q2 and the first half of 2018.

On the therapy side of our business, our strategic decision to discontinue offering the subscription service model to customers in our skin brachytherapy business and focus on capital sales and recurring revenue has had a highly positive impact on our overall business.

Importantly, product sales in this segment increased 110% in the first 6 months of 2018 as compared to the first half of last year.

More on these topics later as part of the business update.

Now I'll turn the call over to Rich, who will provide additional financial details on the quarter.

Rich?

Thank you, Ken, and good afternoon, everyone.

I'd like to review the company's second quarter 2018 financial highlights, which were disclosed in this afternoon's earnings release.

As I will only be discussing the highlights of our financial results for the second quarter, I'd like to refer you to our quarterly report on Form 10-Q for more specifics and detail.

The company filed its Form 10-Q for the second quarter of 2018 with the SEC moments ago.

Before I begin 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 second quarter.

On a reported basis, total revenue for the second quarter of 2018 was $6.2 million, reflecting a $200,000 or 4% decrease from the comparable prior year quarter.

It should be noted that there is a significant amount of noise in our reported revenue numbers due to the inclusion of revenues from discontinued operations, specifically MRI and skin subscription.

Excluding these revenues from both periods, quarterly revenues on an adjusted basis actually increased $500,000 or 8% year-over-year.

As we examine our results by segment, let's begin with detection.

Total revenue in our detection segment for the second quarter of 2018 was $4 million, representing a $200,000 or 6% decrease from a prior year period.

Detection product revenues were virtually flat at $2.5 million.

The year-over-year decrease in our detection revenue was entirely driven by a $200,000 decrease in service revenue.

The $200,000 decrease in detection service revenue was a result of the sunsetting on service contracts related to a legacy digital mammography product, TotalLook MammoAdvantageTM, or TLMA.

Shifting our focus to the therapy segment.

Second quarter 2018 therapy revenues totaled $2.2 million and were flat compared to the prior year quarter.

As detailed on previous earnings calls, the company decided to exit the skin subscription business and successfully did so in the first quarter of this year.

Once again, this decision has created some noise in our top line numbers and has negatively impacted our year-over-year therapy revenue comparison.

Excluding the impact of skin subscription revenue in both quarterly periods, adjusted therapy revenue actually increased by $700,000 or 46% year-over-year.

The $700,000 increase on adjusted therapy revenue was a result of the sale of incremental controllers in the second quarter of 2018.

We are building momentum in our IORT business, which has resulted in incremental controller sales as well as increased balloon volumes.

In fact, our worldwide balloon volume is up 22% for the first half of 2018, reflecting strong growth in both the U.S. and OUS markets, which are up 20% and 25%, respectively.

Moving on to gross profit.

On a pure dollar basis, gross profit for the second quarter of 2018 was $4.8 million as compared to $4.5 million in the second quarter of 2017, a $300,000 increase.

On a percentage basis, gross profit for the second quarter of 2018 was 78% as compared to the 70% in the prior year quarter, reflecting a robust 8% improvement year-over-year.

Both the gross profit dollar and the gross profit percentage improvement were primarily attributable to the company's exit from the skin subscription business.

As for operating expenses, operating expenses for the second quarter of 2018 totaled $5.7 million.

This represented a $1.4 million or 20% decrease from the second quarter of 2017.

The decrease is reflective of both lower stock compensation and sales and marketing expense.

Summarizing our profit metrics.

GAAP net loss for the second quarter was $1 million or $0.06 per share compared to a net loss of $2.6 million or $0.16 per share in the comparable prior year quarter.

The $1.6 million year-over-year improvement in our net loss was driven by incremental gross profit dollars as well as lower operating expenses.

On a non-GAAP adjusted EBITDA basis, the net loss for the second quarter of 2018 was $300,000.

This represented a $300,000 improvement over the prior year period.

The improvement in our loss was primarily driven by incremental gross profit dollars.

As a result of the bottom line results achieved in the second quarter of 2018, the company triggered a 6-month interest-only extension provision within a debt agreement with Silicon Valley Bank.

The company will now begin principal payments on the loan in March of 2019.

Moving now to the balance sheet.

We ended the second quarter of 2018 with $7.8 million in cash on hand.

This compares to the $9.4 million we had on hand as of December 31, 2017.

The company continues to prudently manage expenses and as a result, cash burn in the second quarter of 2018 totaled just $900,000.

This compares favorably to the $1.9 million that the company burned in the prior year quarter.

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

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

A summary of the key amendment terms are as follows: the remaining quarterly 6-month trailing revenue covenants for 2018 have been lowered and in exchange, the final payment on the debt has increased from 8% to 8.5%.

This amounts to a $30,000 incremental cost for the company's debt facility.

Overall, we are very much pleased with the terms of the amendment.

Silicon Valley Bank once again has acted in true partnership fashion to amend the agreement as we reposition the company and drive towards profitability.

In summary, the key takeaways from our second quarter and first half 2018 performance are as follows: we are experiencing underlying top line growth in our revenues for the business.

Excluding MRI and skin subscription revenues from both the 2017 and 2018 periods, overall revenues are up 8% for the quarter and 3% for the first half.

In addition, our strategic decision to exit the skin subscription business is paying dividends.

Gross profit percentage grew to 78% in the second quarter of 2018 and is up 8% for the quarter and 4% for the first half.

We are effectively managing our operating expenses, which were down 20% for the quarter, and excluding the onetime gain from the MRI sale in 2017, were down 9% for the first half.

And lastly, we are showing a significant reduction in our cash burn.

Excluding $3.3 million in onetime cash inflows from 2017, net cash burn dropped from $4.2 million in the first half of 2017 to $1.6 million in the first half of 2018, a year-over-year improvement of $2.6 million.

So in closing, the company is effectively executing on its strategic plans, which include resource management and cost control.

This, along with top line -- anticipated top line revenue growth, better positions the company as we head towards cash flow break even, which is expected by year end.

This concludes the financial highlights section of our presentation.

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

Thanks, Rich.

Let me begin with our Cancer Detection business.

While the demand for our AI solution PowerLook Tomo Detection continues to grow, our total addressable market today is limited to GE systems only.

This is why Version 2.0 of the product is so important to our longer-term growth, as it will be available on all of the major suppliers and 3D mammography systems, which significantly expands our addressable market.

So now for an update on our Version 2.0 AI solution, let's start with the U.S. status.

We filed a PMA supplement with the FDA at the end of May of this year, which was approximately 2 weeks after our last quarterly results call.

The most significant component of the supplement was the results of our clinical reader study.

The study was comprised of 24 radiologists reading 260 3D mammography cases, of which 65 were cancer cases.

The reader protocol was to read the cases twice, once with the use of Version 2.0 software after reading the cases without it.

And after a 30-day washout, they read using our software.

And they read the same cases for comparative purposes.

The results of the study demonstrated that when Version 2.0 was used to read the cases, the radiologist's cancer detection accuracy or sensitivity improved by an average of 8%.

In addition, radiologist's specificity or the ability to accurately detect false positives also improved in accuracy by an average of 7%.

This outstanding performance also resulted in a 7% reduction in unnecessary patient recalls.

And lastly, this performance, when using Version 2.0, had an average reduction in case reading time of almost 53%.

So overall, exceptional results demonstrating that Version 2.0 helps radiologists to find more cancers, dismiss more false positives, while reducing their average reading time by greater than 50% per case.

The full study results will be presented at the Radiology Society North America's Annual Meeting in November of this year.

Now for an update on our FDA submission.

We had a call with the FDA in early August, a little over 2 months after filing the supplement.

They communicated to us that they have completed an initial review of our application and that we would be receiving a letter outlining a list of questions that they would like us to respond to.

We received a letter approximately 1 week after the call.

We are actively formulating our responses.

We expect to complete and submit our response to the FDA in approximately 2 weeks.

As the letter did not outline issues or questions that caused us serious concerns, we still feel confident that Version 2.0 could be cleared in the fourth quarter of this year, consistent with the time frames we've communicated on prior earnings calls.

As for our progress with Version 2.0 commercially.

In Europe, there are now a number of key opinion leader sites using our software.

In addition, we are seeing growing customer interest.

To this end, we are making good progress recruiting distributors in the major countries so as to focus on the growing 2D and 3D systems installed base opportunity, particularly in the countries of France, Germany and Italy, which make up approximately 75% of the addressable market.

Also, we recently received FDA clearance for PowerLook density assessment for digital breast tomosynthesis.

This AI solution adds to our growing portfolio of detection and workflow solutions for 3D mammography and increases our addressable market further.

Lastly on our detection software.

We intend to continue investing the development of a broader roadmap of AI software solutions based on machine and deep learning.

Our robust and highly innovative platform as well as significant advanced engineering and development experience in this area will support our reference to further expand our portfolio of solutions over the near and longer term.

Shifting to therapy.

I'd like to provide an update on our skin and IORT brachytherapy businesses.

Our strategic decision to discontinue the subscription service model to customers in our skin brachytherapy business has led to improved product revenue trends and had a beneficial impact on margins and cash flow, as Rich has mentioned.

Specifically, adjusting revenues for the subscription business, therapy revenues were up 24% year-over-year in the first half of 2018.

Moreover, product revenue in the therapy segment was up over 100% in the first 6 months of 2018 as compared to the same period last year.

IORT and skin system sales in the U.S. were the biggest contributors to the year-over-year product revenue growth.

Shifting more specifically to breast IORT.

The business is performing well into 2018.

Increased interest in the U.S. is being driven by growing favorable clinical data.

To this end, we placed 3 systems in the United States in sites in the second quarter, and I'd like to highlight 2 of those.

The first, Navicent Health in Macon, Georgia.

This is the first center that now offers the full suite of iCAD products from PowerLook Tomo Detection to the Xoft IORT system.

And the second, the State University of New York Upstate Medical University, a large state network with multisystem potential.

Our installed base overall continues to grow, as we approximately have 40 U.S. centers and 59 OUS centers treating patients with either IORT or GYN applicators.

In regards to continuing to grow our OUS markets, we were recently notified that we won a multisystem public bid with the Catalan Institute of Oncology, a leading multicenter cancer organization in Spain.

We are also installing our first 2 systems in China in the second half of the year and have completed installation of our first system in India.

We expect to be treating patients in the second half of this year as well.

We also experienced, as Rich mentioned, a 22% growth in disposable IORT applicators sales in the first half of 2018 versus the first half of 2017.

And at this pace, total unit sales and procedure volume should exceed 2,000 patients worldwide in 2018.

While sales cycle time remains a challenge in this segment, we anticipate continued strong progress in system placements in the second half of 2018, both in the U.S. and internationally.

We are also focused on expanding additional opportunities this year in key emerging OUS markets, including Saudi Arabia, Egypt, Colombia and Africa.

In support of breast IORT, the results of study of 1,000 tumors treated with IORT using the Xoft system for early stage breast cancer in a single site trial in Hoag Memorial Hospital Presbyterian was recently published in the Annals of Surgical Oncology, the official journal of the Society of Surgical Oncology.

The prospective trial enrolled a total of 984 patients with 1,000 early-stage breast cancers from June of 2010 to August of 2017 and included a median follow-up of 36 months.

Local regional and distant recurrence rates observed in this trial were comparable to those of the prospective randomized TARGIT-A and ELIOT trials.

The low complication rates previous reported by the group as well as the lower occurrence rates reported in the study support the use and continued study of x-ray IORT in women with low-risk breast cancers.

In addition, we recently completed enrollment in our U.S. ExBRT study evaluating the use of the Xoft system for the treatment of early-stage breast cancers.

1,200 patients have been treated in the study with low recurrence rates to date with the median follow-up of just under 2 years.

We continue to target the second half of 2018 for the publication of these results, which will be the key to increasing adoption over the coming years.

With the strategic shift in our therapy business now complete, we are focused on growing our base of capital, customers and increasing recurring revenue from each site as the treatment volumes increase.

Lastly, we also continued to experience strong global market interest in general IORT applications, including prostate, brain and rectal treatment and have active projects underway to commercialize new applicators in the future.

So in summary, we believe we're making good progress with our Version 2.0 AI software in our detection business as well as steadily increasing our worldwide installed base and procedure volume with our therapy business.

This progress should enable us to accelerate our growth through new and recurring revenues in the near future.

And with that summary, operator, please open up the call for questions.

(Operator Instructions) Our first question will come from Per Ostlund with Craig-Hallum.

As I'm thinking about it, I think it's very clear that the story is going to increasingly be about the Tomo CAD 2.0.

But if we can just for a moment talk about GE's engagement here on Version 1.0.

I know that there's been some vacillation on their part selling a little bit more 2D than a little bit more 3D.

Are you seeing any firming of the underlying trends there where they are moving more toward 3D?

Or is it still jumping around a little bit?

And then I guess related to that, are there programs you can put in place, whether it's with GE or as you suggested, Ken, where you're exhibiting strong interest when you utilize it, a direct presence, are there programs you can put in place to drive that adoption yourself?

So yes, there's good news and bad news with GE.

Starting with the good news, the mix of sales of 3D versus 2D have improved.

And I would say as you look at the first half of this year, it was probably in the 50-50 range, which is certainly better than where we ended in 2017, which was probably more in the 65-35 range, meaning 2D was sold twice as often as 3D.

So we have seen a favorable mix shift.

The unfortunate thing is we just have not seen the level of volume from GE in business in the first half of the year that we saw in the second half of last year.

So I can only speculate as to why, but there's a lot of competitive pressure in the market.

Pricing in the market for systems for 3D have come down, and I think they've been challenged by that.

And so goes GE's volumes, so go iCAD volumes to a great extent.

And so I think we are making good progress with 3D software and getting a higher mix of what we're selling with them in that category.

I think the unfortunate thing is their business has been softer in the first half than we would have ever expected.

And they are taking a number of corrective actions to improve the business in the back half, and we are actively participating with them in several promotional programs to stimulate increased demand in what is likely a much more competitive environment out there.

So yes, we are working with them with various programs, to the second part of your question, to try to stimulate more business, recognizing that the average selling prices have come down and it's time to start responding to that to recapture the momentum that they clearly have in the final 3/4 of 2017, post FDA approval of their new system as well as the introduction of Tomo Detection in midyear.

Okay.

That makes sense.

I know I ask about this or mention it pretty much every call.

Just looking at the MQSA data, it does look like the last several months have been some of the better 3D placement months or Tomo placement months of the year thus far.

Do you have a sense or is it too early to tell if GE has had any greater success over the last couple of months than maybe they were having earlier in the year?

It's really hard to say because I don't believe that the actual revenue on a monthly basis really tracks a one-to-one with MQSA.

I think there's a lag, although I think it's a very important barometer of the overall health of the market.

So if you look at it over a 6- to 12-month window, I think you could get a really good feel for how much demand is out there.

I don't think as you navigate from 1 month to the next or even 1 quarter to the next sometimes, it's really something that gives you what I would call really a firm indicator.

So I think the market is showing steady demand.

I think MQSA, if you just looked at it on an average, it is about a 350 systems per quarter placement.

That's been pretty consistent for some time.

There are months where it does spike, but it then tends to smooth out.

And going forward, I think GE has plans to step up their sales efforts.

We're there to support them in more and more deals.

We're there to work with them in proactively in promotional programs where they will be bundling our 3D software in with a attractive price point for their systems.

And hopefully, it will quickly turn around the demand side for them, so that they will increase their volumes consistent with what we saw on our second half of 2017.

With that said, my hope here is that we're approximately a quarter away from Version 2.0 with any luck being available in the market.

And if that is the case, obviously, then it significantly changes the game for us in terms of the size of our addressable market as well as the different systems that we would be compatible with for either new business or installed base opportunity.

That makes perfect sense.

And I guess that's maybe a perfect segue then as well to my next question.

So it sounds like the data on 2.0 is all very compelling.

And obviously, we're looking forward to having a favorable resolution in Q4, as are you.

Is it too early to characterize any discussion you might have had with other manufacturers that you would actually be able to -- would be compatible with upon an FDA approval?

Well, I think the relationships we have and the contractual agreements with people like GE and Siemens and Fuji will continue with 3D.

I don't see the current relationships changing.

Now what will change is that we will have compatibility with Hologic, and we actually used all Hologic data in our reader study.

And so clearly, the performance in that study is outstanding.

I mean, it's unprecedented to have an 8% increase in sensitivity and to have almost an equal increase in specificity, because we all know that the more you increase sensitivity, the more you typically decrease specificity or introduce more false positives.

So to be able to have an unprecedented outcome of increased sensitivity, specificity and to essentially be able to read exams in half the time, which one of the big objections from the radiologists is the amount of time it takes to read Tomo exams, we think we have a tremendous product for all our customer base, including Hologic.

And our plan is to increase our commercial efforts, particularly in the United States with more direct salespeople toward the end of the year once we are very clear on the timing or have more confidence on the timing of our approval.

And we're doing a good job signing distributors in the major countries in Europe because there's a very large installed base of 2D systems and a growing installed base of 3D systems in Europe that we think are untapped, because the OEM partners strictly go after the new sales and they really don't go back to the installed base.

So going forward with Version 2.0, we'll increase our direct commercial efforts in the U.S. by adding more people toward the end of the year.

We're going to add more channel partners in Europe and making good progress against that goal right now.

And we're hopeful that out all of that effort will translate into some meaningful revenue growth and quite honestly, we will not be as dependent as we are on GE, who over the long run, has been a very good partner for us.

But ultimately, we need to be able to participate in a larger addressable market, and we hope that we're just some number of months away from actually doing that.

Perfect.

That makes sense.

I don't want to hog the call, but I do have 2 other ones that I'll ask here quickly.

So the operating expense control was, I think, stellar in the quarter and some of that was in the form of stock compensation.

But it seems like it was just lower in general.

Ken, you just alluded in your last answer to potentially taking on a little bit more sales and marketing effort as you get the approval of 2.0.

Is there anything else from an expense standpoint that logically needs to tick up all that much from Q2?

Can Q2 be something of the level of expense we might expect?

And I guess maybe just get your current thoughts on the breakeven profile of the business.

I'll let Rich answer that one, but I think just to say in a general sense, the incremental investment that I see is all focused on Version 2.0 of Tomo Detection.

And that is going to be -- some number of headcount coming into the U.S. sales team.

But as we blend it in over the course of the late third quarter and probably early fourth quarter, I don't see that having a huge financial impact on the business.

There'll be some additional promotional investments, particularly in Europe.

We're going to be bringing on more distributors.

We're going to need to support them whether it be with sales training and sales tools, more general advertising and trade show presence.

So I think you'll see more of an investment really starting this quarter in a gradual sense, not a dramatic amount of spending in the commercial side of ensuring that when Version 2.0 hits the marketplace in full force, that we're really there to take full advantage of it.

And that's where I really see some incremental investment, and I'll let maybe Rich comment on the breakeven time frame.

Sure.

We've improved our ability to get to breakeven certainly with the exit from the unprofitable skin subscription business.

Therefore, our blended gross margins are higher than they had been historically.

So the current expense base on what we're projecting for the remainder of the year, including some of the ads, our breakeven point is probably about $7.5 million worth of top line revenue at this point.

Okay.

Excellent.

All right.

One last one, then I'll promise I'll stop.

You alluded -- more than alluded, I guess, I should say to the Hoag study in your prepared remarks.

And I think you've said in recent quarters that there's been a building interest in the U.S. on the IORT side.

Just curious as to maybe how catalytic the Hoag study could be in terms of fostering that even further?

And what the intermediate term plans might be to see that data get a little bit more broadly disseminated.

Right.

Well, I think you've got 2 major studies now that you can look at.

Obviously, the Hoag study, where they literally starting treating patients back in 2010 and we're talking 8 years ago.

And with median follow-up of 36 months being comparable to the TARGIT-A and ELIOT trials, that would translate it recurrence rates in the roughly 2.5% range.

And I think that's meaningful at 3 years.

And there are those that would say, 5 years of follow-up data is the gold standard, but I would also argue that 60% of patients that recur happen in the first 2 years.

So I think a 3-year follow-up is a very meaningful statistic and I think that is helping us significantly.

In our own study with 1,200 patients, we are just at about 2 years of patient follow-up.

And I believe at 2 years, we had something like 14 recurrences, which is like 1.2%.

So the recurrence rates are really low.

And if you're using the right patient selection criteria, I mean, this is proving to be an extremely effective alternative to a very heavy commitment of whole breast radiation for as many as 4 to 6 weeks, 5 treatments a week.

So if you pick the right patients, this is a great fit.

And I think more and more facilities are seeing that option.

And then there's also the competitive dynamic that if one buys it in a particular market, others feel they have to as well to offer the treatment as well.

So I think we will continue with our focused sales effort.

We have dedicated specialists out there selling the product.

We are at all the major oncology meetings that we can get the message out.

We focus a lot of our time on breast surgeons.

Certainly, time on radiation oncologists, and we feel optimistic about that business.

And I think at this point in time, we'll continue with our investment as it is as opposed to increasing it.

Because if the studies really are the bigger catalyst right now for growing the business, just continuing to follow the patients and publishing the results is what you really need to do and that should help us to continue this momentum.

We're on track to place probably twice as many capital systems in the market this year as we did last year, and we're really excited about that.

And with that said, we're also trying to balance that with getting the company to cash flow breakeven.

And with this increased investment on the detection side with Version 2, we're going to have to keep our spending somewhat curtailed on the therapy side, even with the positive signals we're seeing around breast IORT.

Our next question comes from François Brisebois with Laidlaw.

Yes, a lot was answered in the previous ones.

But I was just wondering, you brought up, in terms of the GE partnership and some of the issues there for sales and you brought up the -- you guys are helping out on the promotional side with programs and maybe bundling for the 3D.

Can you give more color on the efforts you're making to help them with their promotional programs?

Well, I think that, Frank, we have a differentiated solution.

No one else has Tomo Detection capability.

And I understand Hologic does a good job of taking a 10- or 12-year-old product that does 2D detection and runs it across a synthetic image and tells the customers that it's 3D CAD, but the performance is weak and it's poor.

And so the more we can get that information into the customer base and have them understand that true Tomo Detection has tremendous advantages in terms of performance and workflow, and we can bundle that in with the GE 3D machine, the more we have a more powerful and differentiated solution.

So we're trying to really work more proactively as a solution provider as one entity in these programs other than really going to the customer and having them buy the machine and then saying you can add more 2D CAD capability to existing server base, or you can decide if you want to take on 3D detection now or later.

We're really trying to use it as a differentiated bundle from a performance standpoint, and we've sharpened pencil a little bit on the pricing so we can be more competitive on pricing as well.

And we believe together in the near term that could be a nice stimulus for business.

So I just would say we're working more from a bundling and from a coordination standpoint, trying to really sell a differentiated solution at a more competitive price.

That's really the goal.

That's not really far off from what we've been trying to do since the product was introduced, but we had never officially bundled it in to transactions in the past.

And with this bundling strategy, we think we'll have a more cohesive way to approach the customer as a collective team.

Understood.

And then in terms of the clinical reader study, the sensitivity, the specificity of 7%, 8% for the medical community, does that resonate because you wouldn't necessarily expect sensitivity and specificity to go the same way?

Or is it mostly the reading time that for them, cut in half really resonates with them?

I think, Frank, to be honest, it's all of the above.

Typically in historical sense, if you could show a 5% increase in sensitivity, you could typically get a priority claim versus non-inferiority claim which your software, and that's a historical number.

The fact that we had an 8% average increase is very significant.

And typically, what you'd be looking for is obviously a compromise on specificity.

And ultimately, we actually had almost a comparable improvement in specificity, which is really, really important because ultimately with the new software, we're getting more and more accurate in terms of not putting marks on normal exams, which has always been a nuisance with 2D software where you're looking at marks and you have to spend more time to rule them out.

So you're starting off with an algorithm that's more sensitive in terms of detection capability, and you're not compromising that by putting excess false marks to get that extra sensitivity.

If anything, we're reducing dramatically the number of false marks.

What we're finding with the standalone testing is depending on the vendor, 40% to 60% of the normal exams are getting 0 marks.

And so you're helping the radiologist not just to find these tough cancers, but you're helping them to get through normals, which in a screening population is very important.

Screening population, you're only going to find 3 or 4 cancers per thousand.

So having the ability to get help to validate the normals on 60% to 65% of the exams by not putting marks is a big, big plus.

So this product, having both the benefit of increased sensitivity and increased specificity, where typically to get a decrease in specificity that you, in the old days, hoped wouldn't be as great as the increase in sensitivity, we believe is unprecedented in a reader study.

And then to get those dual benefits with an average reduction of reading time of greater than 50% of what it took them to read these exams without the tool, I mean, we think all 3 of those metrics are extremely important and really will differentiate this product in the market and will really help with adoption.

Understood.

Okay, great.

And then we're hoping to see the Version 2.0 here in the U.S. here in the fourth quarter.

Is there a -- what is the difference in terms of being in the market and then seeing top line impact when it's ex-U.

S. in the EU versus the U.S.?

If we're just trying to see what happens in the EU and just trying to translate it to what could potentially happen in the U.S. here.

Yes.

I mean, first of all, what I would say, Frank, is they're totally different markets.

So when you think about the EU, 2D CAD was only adopted probably in 1 out of 5 sites.

You might say, well, why would that be the case if it was the standard of care and used on all sites of the U.S.?

Well, most of the mammography screening in Europe is done by the government, right, single-payer health care.

And the reading protocol that they used, literally, which we can never afford to do in the United States, was 2 radiologists had to read all of the screening mammograms, and that is still the protocol today in most countries.

Even the NOMOS, which is rather labor-intensive, right.

Two radiologists having to read a normal mammogram before it gets finalized.

So because you had the luxury of the radiologists, quite honestly, being government employees and the time to read these exams, detection software wasn't as important there.

You also didn't have the issue of liability and malpractice and so forth, which again, one of the reason detection software taken off in the United States is because it does help under those types of unfortunate circumstances.

So you have a totally different market from a basis standpoint.

So now you bring in 3D mammography.

And in Europe today, 3D is not used for screening other than a handful of private centers.

In the United States, probably 30% and growing fast of the mammography screening is now being done with tomo machines.

So in Europe, you don't have that phenomenon yet and, hence, you're not using tomo for a very, very high volume of exams.

You're using it on diagnostic cases.

So if you're using it on a small number of cases and then you think about that phenomenon I talked about in 2D historically, the adoption rate is going to be slower.

You have to build these KOL sites.

You have to build reference centers.

You have to be able to prove all the benefits of the technology.

And so just as an example, in the Netherlands, they're putting together a multiyear screening trial, which we actually -- our detection software is going to be part of.

And they're trying to really quantify the benefits of using CAD versus using a 2 radiologist reader protocol, and that could, they believe, save them billions of dollars each year in costs.

And so those types of studies putting together the KOL sites that we're doing, all will gradually build a very, very solid market opportunity.

So now you contrast that to the U.S. where 2D software in the detection world became a standard of care 10 years ago.

And pretty much every site uses it for the benefits of increased detection, for the issue of liability and litigation, and so forth.

And so when you now look at the dynamics of the U.S. market and you bring in a product that they are familiar with, this is a very different version, a very different type of technology, it's AI-based and so forth, but they have a familiarity and they've been incorporating 2D detection in every site basically as part of their workflow, the learning curve and the adoption should be much, much faster.

And when you bring in the kind of benefits we have to an environment where radiologists will tell you, we're looking at 70 or 80 slices per breast.

We're looking at this overwhelming amount of data contrasted to 4 static views in 2D, the amount of time it takes is substantial.

And then in addition to that, the reimbursement is not substantially greater for 3D.

So if you could bring a tool that increases their cancer detection capability substantially, reduces the false positive versus adding them as you benefit from the increase in sensitivity and allows them to read in half the time, I mean, their productivity goes up dramatically.

The one challenge, as it always is, is the product is sold under capital business model, they have to find the funds.

So I don't expect day 1, we go into the market that every customer is going to have the money in their budget to buy the product.

But I think over a 6 to 12-month window, customers will go to all ends possible to find the funds to add this capability, whether it's on a new purchase or in the installed base with the system that they're using without the tool today.

So they're totally different markets the U.S. market is significantly bigger I mean, the number of systems in the U.S. is probably 2 to 3x the number that are in Europe.

And ultimately, again, with tomo growing very quickly in the U.S. as a screening tool, with customers wanting to literally not do 2D mammography and strictly use 3D in the screening environment, there's just a whole host of dynamics and history that say it's a much larger market, the adoption will be faster.

With that said, we know customers have to find the funds.

And in the hospital world, that typically takes longer because you have to get into a new capital budgeting cycle.

Large radiology practices have a lot more discretion.

But certainly, they need to take time as well to plan because they're budgeting for a whole host of things across the imaging modality world as opposed to strictly for mammography.

So in summary, I do think you'll see the U.S. market start and move much, much more quickly.

What I would say we're doing today in the European environment is we're really -- we're seeding a market right now that we believe in 2019, 2020, could really be a substantial opportunity.

But the learning curve and all the dynamics I mentioned that we have to accomplish and we're making progress for sure, are not going to translate it into meaningful revenue there probably until sometime in early 2019.

Our next question comes from with Tim Quinlisk with Colrain Capital.

My questions actually have been answered.

Thanks for the update.

(Operator Instructions) We'll go to Brian Marckx with Zacks Investment Research.

Congrats on the improved profitability in Q2.

Ken, wondering if you can talk about GE from a corporate sense, given the recent changes in terms of them spinning off some businesses and the recent headline that they could -- that they're looking at spinning off the health care business.

And then how that affects your relationship with or could affect your relationship with GE.

I mean, it's a good question, Brian.

I really struggle to have a really clear answer.

I think the mammography business is a part of a much larger imaging business, which is part of a much larger health care business.

And it's just not really clear to me that it's having an impact on the group.

I do think that clearly, when there's attrition in the field, you might sense from your conversation that it might be taking a little bit longer to get hiring approvals and things like that for replacements and so forth.

So I do think the culture maybe has become a little more cautious maybe in terms of spending or how quickly they move on some things.

But I don't think it's really the core of what we're dealing with.

I think the core of what we're dealing with is a market that shifted to a much more price competitive market.

And I think GE now knows they have to move more quickly to adapt to that market, and that probably is why our business hasn't been as strong.

But they are very much working on it, rolling out programs as I speak to address it.

So my hope would be that the order book improves steadily over the course of the rest of this year and that we enter 2019 with them with a very strong backlog.

But I don't think the corporate activity is really having much of an impact from what I hear.

In terms of the breast density FDA approval, what's the time line for launch?

Is that expected to be immediate?

And then in terms of your existing installed base, what percentage of the existing installed base would you anticipate would upgrade to the breast density product?

Well, the way we're seeing this product today is in density, is it's a natural adjunct to our 3D detection software.

And so today, obviously, prior to the announcement, we have the ability to do density detection in 2D exams only.

And what we've essentially done is modified the product, so that whether you're connected to a 2D machine or 3D machine, that software can sense what it's connected to and it can perform density assessment on either the 2D images or the synthetic image, relative to the 3D exam.

And so we think that the leverage, if you will, with density from a 3D standpoint is really going to be when we have Version 2.0 in the market with all of the companies that are providing that 3D machines.

So we can go in and sell a solution around the workflow and the detection that both does cancer detection as well as density assessment on the 3D exams.

So once we're out there with Version 2.0, I think this new version of our density software will get a lot more play and will have a more significant opportunity to really contribute to our revenues.

And so we're not holding back on that product at the moment by any means.

It's available for sale with both GE and Hologic systems today.

But I think the real leverage on that product is going to be when Version 2.0 is out there and we can go out with a bundle or a software solution, that really incents the customer to buy both detection as well as density software from us.

They just announced, I think, today that the State of Illinois was the 36th state in the country to adopt legislation on density reporting.

So clearly, the trend continues and we think that our ability to measure density in 3D is going to get a lot of play, particularly along with Version 2.0 of the product.

And as it relates to Version 2.0, we are very hopeful to have this early to mid-Q4.

It's so hard to be certain, but we would launch this immediately.

We have plans in place.

And obviously with the RSNA being in late November, it would be ideal if we had our FDA clearance prior to that.

And that would really, really enhance our ability to market a product in front of the largest radiology audience in the world.

And then on therapy, can you tell me how many systems were sold in the quarter and were they all for breast?

We sold a mix of systems in the quarter, more so on breast and skin.

We're not in the habit, Brian, of getting into units on a quarterly basis.

But what I would say is we're substantially ahead of last year.

And obviously, our product revenues reflect it.

And I would say that just in general about 2/3 of that favorable momentum has been in breast and probably 1/3 of it coming from skin.

With no additional questions, I'll turn the floor back over to management for any additional or closing remarks.

In closing, I'd like to reiterate our priorities as we go forward.

Maximize the success of PowerLook Tomo Detection software in the market today; we're rolling out Version 2.0 in Europe as we speak and then in the U.S., hopefully, later this year.

We're also going to continue to increase our capital customer base and patient procedure volume and corresponding recurring revenue within our skin and IORT brachytherapy businesses.

And lastly, to manage our expenses and cash as prudently as possible with the goal of reaching cash flow breakeven by year-end.

So with that, we are pleased that you could join us today for our Second Quarter 2018 Conference Call, and we look forward to updating you again after the end of our third quarter when we announce our third quarter results.

Have a good day.

Thank you.

Ladies and gentlemen, again, that does conclude today's conference.

Thank you all again for your participation.

You may now disconnect.