icad inc.

Good day and welcome to the ICAD Inc. Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Jeremy Suffer with LifeSci Advisors. Please go ahead, sir.

Thank you, Anna, and good afternoon, everyone. Thank you for participating on today's call. Joining me from ICAD are Michael Klein, Chairman and Chief Executive Officer, Stacey Stevens, President, and Charles Carter, Chief Financial Officer. Earlier this afternoon, ICAT announced financial results for the three and six months ended June 30th, 2021. Before we begin, I would like to caution the comments made during this conference call by management contain forward-looking statements, involve risks and uncertainties regarding the operations and future results of ICAT. I would also note that management may refer to certain non-GAAP financial measures. Management believes that these measures provide meaningful information for investors and reflects the view, the way that they view the operating performance of the company. You can find a reconciliation of our gap to non-gap measures at the end of this earnings release. I encourage you to review the company's filings with the Securities and Exchange Commission, including, without limitation, Forms 10Q and 10K, 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 5, 2021. ICAT 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 Michael Klein. Mike?

Thank you, Jeremy, and good afternoon, everyone. I'd like to begin by highlighting several key aspects of ICAT's second quarter performance, as well as provide a brief snapshot of the current business and operating conditions as we move into Q3. As presented in our earnings release, ICAD's second quarter total revenue was $7.8 million. While this was a 41% increase over the second quarter of 2020, second quarter 2021, total revenue was negatively impacted by longer than expected enterprise sales cycles, which impacted the timing of several large accounts. We began to close some of these longer cycle deals in July. While we anticipate that the longer enterprise sale cycle will continue to be a meaningful component of our pipeline, the addition of these enterprise sales will increase our addressable market and average deal size. To be clear, the longer cycle deals that didn't close in Q2 were not lost to competition, which we continue to see little evidence of, and the slippage of some larger enterprise deals in Q2 are well-qualified customers actively seeking ICAD's detection and risk assessment AI solution and have dollars budgeted and allocated for purchase. And as stated, July was a successful month of capturing several of these important deals. It is worth spending a moment to detail the makeup of these enterprise deals and how we are evolving our commercial infrastructure, personnel, and go-to-market strategy to efficiently secure them. We have been tracking the emergence of this unique customer segment as it has become more prominent in recent months. These are typically large and often geographically diverse accounts. Their decisions on healthcare procurement are driven by a commitment to enhancing workflow productivity among a large number of stakeholders. Overall quality, consistency, and even uniformity of care and measurable ROI's are outcomes that are essential to enterprise customers. In sum, enterprise customers represent a unique linkage or triad of economic, clinical, and now technical decision makers, typically with the title of chief technology or chief information officer. We'll refer to the latter as CIO. While an additive and often helpful upstream call point, the inclusion of the CIO in the enterprise deal decision process can and has moderately extended our sales cycle. The emergence of the CIO in enterprise deals, however, presents us with a highly receptive, AI-centric, and knowledgeable customer that provides a clear advantage to ICAC. The CIO, or titles similar to it, represent a new category of final decision makers that understand the nuances and advantages of AI software, and importantly, the difference between a clinically validated and algorithmically based solution. This allows us to speak a common language, engage in more informed discussions, and allows us to even illustrate our performance superiority, productivity yields, and broad healthcare economic value proposition across all of ICAD's profound AI offering. And as just one example, one of the reasons that we are encouraged by the emergence of IT or the Chief Information Officer and enterprise customer is their high receptivity to our new risk offering and its importance across not only clinical and patient constituents, but to all C-level stakeholders. Our risk offering allows screening sites, clinicians, and patients to look one to two years ahead and determine level of patient risk of breast cancer. The patient could then be assigned unique screening regimens with higher risk patients scheduled with unique personal protocols and with more frequency than lower risk patients. The result is more cancers found, earlier intervention, and an improvement in healthcare economics across the spectrum from providers to payers to patients. Enterprise customers will be a priority call point for our new 3D risk assessment offering that we are very excited to announce today will be released in this quarter. We have carefully curated the release of this 3D risk AI offering based on our experience with 2D risk. We intend to significantly promote this offering in September and October to align with Breast Cancer Awareness Month in the fall. It is worth repeating that ICAD is unique in the market as the only vendor for a look into the future risk assessment AI offering for both 2D and 3D mammography. It provides sites with the ability to identify problematic cases one to two years before breast cancers may be discernible to the naked eye or is even detectable on software that looks only at today's age. Now, moving on to our therapy business, we continue to be pleased with the performance from this segment in both product and service revenue areas. Total therapy revenues of $3 million represents a doubling of revenue over Q2 of last year. Year over year product revenue increased by 600% from Q2 2020, while service revenue increased 31% as compared to Q2 2020. For a business that has 50% of its revenue derived by recurring follow-up sales, the high volume of new installations in the first half of 2021 is an encouraging lead indicator for increased recurring revenues as we look ahead. The growth in our therapy business was driven by several factors, including the sale of nine controllers in Q2. The majority of ZOFT products in Q2 were due to the continued surge in dermatology controller installations, which are being heavily influenced by the emergence of positive shifts in reimbursement payer coverage, and regulatory changes. Stacy will provide additional detail on this in a few minutes, as well as highlight the timing of our full commercial launch into neurosurgery with our treatment for glioblastoma. Let me add that in spite of the dramatic increase in the number of COVID Delta variant cases, we anticipate minimal impact on our order patterns. For MAMO screening sites, clinicians and patients, It comes down to simple math. As we head into month 18 of COVID and the resultant rolling screening delays and backlog, all healthcare professionals, clinical sites, and societies strongly agree that breast cancer risk and incidence vastly exceeds the probability of Delta variant-related disease severity, hospitalization, and or mortality rates. As such, now more than ever, continuing and even accelerating catch-up screening, particularly for high-risk patients, is essential. Not doing so with the knowledge that delays lead to more advanced cancers and greater cancer occurrence could emerge as one of the more detrimental long-term impacts of this pandemic. I'd like to mention, however, that the COVID pandemic has enhanced an already hard-coded core competency within ICAT. This is our ability to appropriately and prudently manage cash. With just under $38 million of Q2 ending cash and all debt paid off, we see ourselves continuing on prudent approach to spending while enhancing our commercial position and technology leadership. Productivity tools and techniques refined during COVID will continue to be a part of our managerial repertoire. I'd like to use this call to announce three key new members of the ICAT team. All three will be integral in maximizing and balancing our productivity and commercial yield with a strong cost-effectiveness orientation. The first of these is Charlie Carter, who after three months as our interim CFO will now serve as our full-time CFO. Charlie is a highly seasoned executive with both public and private company CFO experience, and we are thrilled to now have him on our team. I'd also like to announce Jeff Sirich as ICAD's new Chief Commercialization Officer. Jeff has run commercial operations at ZOFT for the past four quarters and has highlighted in our financials was successfully responsible for taking previously lumpy Zoff sales and has generated consistent and predictable sales momentum while demonstrating the highest level of commercial and operational acumen. Jeff's unique experience both at Zoff and in prior senior positions, particularly ones with very large account exposure with enterprise-like characteristics, makes him a particularly good fit at this time in our growth. We are also pleased to announce the appointment of Brian Testa as Chief People Officer. Brian has extensive experience in supporting organizations in building efficient, scalable, and high impact outcomes into their processes and culture. In his tenure with the company to date, he has played an essential role in expediently executing the high octane transformation of our commercial capabilities while also bolstering our innovative edge and our high productivity game plan. After a quarter of unique, well-defined, and transient dynamics, we see ourselves as better equipped for our next phase of commercial adoption. Our continually improving commercial team led by individuals with clear track records of proven sales success, combined with hard-coded prudent management of operational expenses, all added to the continued release of new innovations, such as 3D risk, this quarter will allow us to continue our success trajectory. I'd now like to turn the call over to Charlie for his review of the financials. Charlie, congratulations on officially joining the team, and please take it from here. Charlie?

Good afternoon, everyone, and thank you, Mike, for the nice introduction. I'm excited to join the ICAD team and look forward to supporting the continued growth of the business. With that, I'll now summarize our financial results for the three months ended June 30th, 2021. Second quarter 2021 total revenues were 7.8 million, an increase of 2.3 million or 41% as compared to 5.6 million in the second quarter of 2020. Detection revenues were 4.8 million in the second quarter of 2021, an increase of 17% over the second quarter of 2020, driven by a 17% increase in detection product revenue and a 15% increase in service revenue. Therapy revenues were $3.0 million in the second quarter of 2021, an increase of 109% over the second quarter of 2020, driven by a 646% increase in therapy product revenue, as controller sales were minimal due to COVID-19 in the second quarter of 2020, and a 31% increase in service and supplies revenue. As Mike mentioned, we're not pleased by our detection product revenues but anticipate being able to capitalize on the enterprise sales opportunity in the future. Moving on to gross profit. On a percentage of sales basis, gross profit was 71% for the second quarter of 2021 compared to 78% for the second quarter of 2020. On a pure dollar basis, gross profit for the second quarter of 2021 was $5.5 million as compared to $4.4 million in the second quarter of 2020. The decrease as a percentage of sales was due to changing sales mix. In the second quarter of 2021, therapy sales were higher as a percentage of total sales and therapy revenues currently yield lower margins than detection revenues. Total operating expenses for the second quarter of 2021 were $8.4 million, a $1.7 million or 26% increase from $6.7 million in the second quarter of 2020. This is in line with the anticipated 2021 expense run rate we discussed on our last call, but is higher as a percentage of revenue given our Q2 revenue performance. As in the past, we are committed to a disciplined approach to spending and anticipate operating expense increases to be managed between $5 and 10% in Q3. This expense rate will support anticipated revenue growth while correspondingly moderating overall expenses and cash burn and result in expenses running at a lower percentage rate of revenue than in Q2. Moving on, our second quarter net loss was 3.3 million or 14 cents per share as compared to the second quarter 2020 loss of 2.4 million or 11 cents per share. Non-GAAP adjusted EBITDA for the second quarter of 2021 was a loss of $2.2 million, which represented a decline of $1.5 million compared to the second quarter 2020 non-GAAP adjusted EBITDA loss of $0.7 million. The decline is driven by Q2 revenues relative to operating expenses. Non-GAAP adjusted net loss for the second quarter of 2021 was $2.8 million or $0.11 per diluted share as compared to a non-GAAP adjusted net loss of $2.5 million or $0.12 per diluted share for the second quarter of 2020. This metric for Q2 2021 reflects adjustments to GAAP net loss for the cost of retiring our debt and the settlement of a decades-old IP claim by InVivo relating to an abandoned product line. While the associated per share non-GAAP adjusted net loss reflects the higher loss, but also the higher outstanding share count. Moving on to the balance sheet. As of June 30th, 2021, the company had cash and cash equivalents of 37.9 million compared to cash and cash equivalents of 27.2 million at December 31st, 2020. We have an extremely strong cash position with no debt and are well positioned to continue executing on our growth strategy. Cautious, disciplined spending will allow us to minimize our cash burn and preserve capital to sustain operations well beyond 2022 and through the transition to cash-positive operations. One other element of the balance sheet I'd like to comment on is accounts receivable. AR increased to $11.2 million from a December 31, 2020 balance of $10 million. Of the current balance, $3.1 million represents balances more than 60 days overdue with nine customers representing $1.8 million of this balance. The company has validated the intent to pay with all nine larger customers. Overall, there is no perception of greater risk of non-collectibility in any of the past due amounts. This concludes the financial highlights of our presentation. I would now like to turn the call over to Stacy. Stacy?

Thank you, Charlie. I'm thrilled to have you on the team, and good afternoon, everyone. Although we saw some impact on revenue in Q2 by longer than expected sales cycles for some of our enterprise opportunities, we remain confident in the unique value our portfolio of technologies offers and are optimistic as we look ahead towards the second half of 2021. I'm pleased to report there is continued balanced performance and successes across both the detection and therapy sides of our business. With exciting next generation products coming down the pipeline, a growing body of evidence that continues to support our technologies, including several ongoing clinical studies, and emerging new market opportunities, we believe we are well positioned for continued success as we look ahead to the remainder of the year. Let's begin by highlighting the progress of our company's latest advancement, Profound AI Risk. On the last earnings call, I reported that we were finalizing the data collection and validation of the risk algorithm for 3D. We also wanted to provide early access for several KOLs and luminary sites. We are pleased to announce that despite the physical restrictions of the pandemic, we successfully collected 3D cases and key input for both training and validation, and we are on track to deliver the US-based version of the product within the September timeframe. The launch of profound AI risk for 3D will mark a significant milestone for ICAD as it will be the world's first commercially available personalized image-based short-term clinical decision support tool for estimating breast cancer risk using 3D mammography. Furthermore, the performance of profound AI risk for 3D is showing even better results than when compared to the algorithm for 2D images. which is already far superior to traditional risk models, which are based predominantly on family history. We believe this technology will lead to more appropriate utilization of supplemental imaging and biopsies, less anxiety for women, and decreased costs to the system overall. In addition to our focus on profound AI risk, we are continuing to advance our flagship solution, Profound AI. I recently had the opportunity to join our sales team for a prospective customer site visit with one of our KOL sites in Florida. Not only did the visit go extremely well, but it was a strong reminder to me about how much what we do every day at ICAD truly makes a difference in women's lives. Our KOL, who is a world-renowned breast imager, demonstrated the value of profound AI by showing our prospective customer many cases where the cancer diagnosis would have been missed or delayed if it were not for profound AI. These were cases where subtle cancers would have been overlooked or dismissed and women otherwise sent home with a normal mammogram. Not only was I personally touched by this, knowing that these women were well-served and their lives possibly saved by our technology, but our prospective enterprise customer was equally moved. It is moments like these that really remind us all of the impact profound AI is having on patients' lives. To elevate awareness of profound AI and the unique value proposition it offers to patients and clinicians, particularly during this post-pandemic recovery period, we recently launched a robust marketing campaign. As more people become vaccinated, our customers are still dealing with a massive backlog of patients who need to be screened. And this highlights the need for advanced solutions like profound AI. In light of this emerging trend, we launched a surround sound marketing campaign directed at both patients and clinicians, which blanketed the United States with a blitz of positive media coverage. The campaign kicked off with an article, which was picked up in nearly 900 digital media outlets, including the Los Angeles Times, the Chicago Tribune, Houston Chronicle, and San Francisco Gates. This content reached a total potential audience of more than 200 million readers across these digital papers. Additionally, we recently launched ICAD's first-ever satellite media tour featuring Dr. Randy Hicks, CEO of Regional Medical Imaging in Michigan. This media event involved a total of 28 live interviews, including ABC, NBC, and CBS affiliates in many major media markets. These segments aired nearly 600 times across the U.S., reaching an audience of potentially 100 million. Our team then leveraged this incredible coverage with a strategic email campaign targeted at clinicians, directing them to key online and broadcast placements and further educating them about our technology and the value it offers. On the last call, we mentioned we had recently received FDA clearance for Profound AI version 3.0, which offers enhanced clinical performance benefits, including up to a 10% improvement in specificity performance while maintaining an industry-leading high sensitivity level and approximately 40% faster processing on the new PowerLift platform. Since then, this next-generation technology received a CE mark approval last month. We also now have clearance for the third generation of our product, with an EU-focused approval for the Hologic HD and Fuji 3D systems, also with the improved specificity of up to 10%. Additionally, we received FDA approval for our latest PowerLook density solution, which is now a deep learning-based algorithm. This new and improved deep learning breast density assessment product will support synthesized 2D images from both GE and Hologic, and will be commercially launched globally with our September release of Profound AI Risk for 3D. Altogether, that is three regulatory clearances in the last several months, which really speaks to the agility and sheer power of our agile AI-focused product and R&D teams. These clearances give us access to broader market opportunities going forward. These new Profound AI releases are accompanied by a major platform release which includes the ability to track specific usage of the product, allowing us to more widely offer an operational subscription license model. I'd now like to review our performance internationally. In May, Europe experienced a reduction in COVID restrictions, paving the road to renewed product demonstrations in clinics and hospitals. We added a second direct rep in France to take advantage of this large mammography market, and Germany has been officially opened as a direct sales region. A customer event is already planned with a profound AI workshop in collaboration with GE and Dr. Axel Gravenholz, a leading expert and influential radiologist at Radiology AM Theater in Paderborn, Germany. This is scheduled in Munich at the end of August. The distribution network has grown to include both Saudi Arabia and South Korea in Q2, and the regulatory process has begun for both countries. The registration process is expected to take approximately six months. In the meantime, distributors will be trained and reference centers and KOLs will be investigated. Additionally, several advancements have been made with the distributors in Australia and Thailand, which expected contract signatures in Q3. Expansion into Japan is also under investigation. Regulatory requirements are being evaluated and calls with potential KOLs. are underway to help us prepare for market entry and possibly fulfill any clinical regulatory requirements. On the ZOP side, we continue to see consistent results on revenue and momentum on the implementation of our two-tier strategy to drive revenues around the current applications while developing the new indications, neuro and rectal, through our clinical trials, registry, KOL sites, and pre-commercial efforts. In Q2, the Zoff business exceeded $3 million in revenue and has now shipped 18 controllers in the first half of the year. The breakdown has been nine U.S. skin systems, six from our China business, and three to locations for general IORT work. We have seen a quarter-to-quarter gradual uptick in our source and service business and expect this trend to continue as we sell more controllers and the COVID hospital recovery continues. The skin business we restarted in Q4 of last year continues to show promise with favorable regulations in key states such as Florida, the addition of new partners including our new West Coast edition Dermacure RT, and a pipeline that is growing 3x quarter to quarter. Additionally, we are restarting the collection of five-year data from our skin study started in 2017 The objective is to complete this exercise in 2022 and begin leveraging this data with negative policy private payer networks and key societies to build consistency of reimbursement across the Medicare and the private payer network in the US. Moving on to new clinical applications, we have started the execution of new neuro sites with our GLIOCS trial and expect to treat our first patients in Q3. The integration of this trial has taken a little bit longer largely due to COVID recovery in hospitals and lengthy budget cycles and process on clinical trials. Expected full commercial launch with this FDA cleared offering is now Q1 of 2022. While we continue to monitor key strategic areas such as the U.S. ROAPM ruling and progress in our fast-growing skin segment, ZOPPS continues to be on a trajectory of significant growth year to year. As we reflect upon our progress and achievements from the first half of 2021, we look ahead to the second half of the year with continued enthusiasm. We look forward to providing you with additional updates as we continue to advance our business and technologies forward, drive sustained leadership, and create additional shareholder value. We will now open up the call for questions. Operator?

Yes, ma'am, thank you. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that you please limit yourself to one question and one follow-up to allow everyone an opportunity to signal. Once again, that is star 1 if you would like to ask a question. And we'll pause for just a moment. And we'll now take our first question from Brooks O'Neill with Lake Street Capital Markets.

Good afternoon all and congratulations to the new members of the team. I was hoping you might be able to give us a little color on the size potential of some of these enterprise customers you're talking to guys and maybe just share a little bit of of color on the difference you're seeing from the ones you're talking to now versus, for example, what you saw with SOLUS mammography towards the end of last year. Thank you very much.

Okay, Bruce, let me take that to the mic. I'd say that the range of fields, actually, we know this pretty well, range from deals that could be from 350,000 to well over a million. And they are geographically diverse, which means well dispersed. They are different from, let's say, a SOLUS deal or a Simon Med deal that are regional in nature, that they have an absolute obsession with trying to drive consistency of care and uniformity of care and procedures almost like a franchise model, while some other sites may allow for a little more independence. They definitely are quite different when we talk with them in that the chief technology officer is at the table. And while we often have to educate folks on what to look for and how to make decisions, these newer enterprise networks are very savvy, very skilled, ask intelligent questions. It's not like our prior customers didn't, but these folks have actually assessed and were hired to look at AI technologies going forward. So they're very productivity-oriented. They are obviously still clinically driven, and economically driven, but this focus on productivity, throughput, consistency of care is unique to these deals. And they're large in size, and again, by the extra decision-making regimen and the number of sites that are involved and the disparity of geography, this added a bit to our sales cycle. It's given us an additional call point.

Okay, that's very helpful. I'll just ask one follow-up. Obviously... Everybody's kind of curious if you think some of these deals, more of these deals will come through in Q3, or do you think it's going to make sort of the process lumpier so that, you know, maybe there's going to be a bunch of variability quarter to quarter going forward? Thank you very much.

Yeah, I would just say on that last point, we see a pretty good balance of these deals. These deals with the more traditional deals you mentioned that we understand the sales cycle of, as well as smaller deals, we saw a surge of them this quarter. We basically re-engineered our sales force and continue to do that into July and August to deal with these new kinds of decision makers, putting more technology-oriented personnel on the front lines. I think we'll smooth out. It's our view that the lumpiness that could occur with dynamics like that is not well prepared. We are well prepared to deal with that based on the work we have done to add additional firepower and ammunition to the front lines to smooth out the seven cycles. And obviously in doing so, driving towards the elimination of potential lump or certainly mitigation of lumpiness. Good questions, folks. Thank you.

And we'll now take our next question from Francois Brisebois from Oppenheimer.

Hi, Mike. Thanks for taking the questions. Just, I guess, first one here, so 3D, profound AI risk for 3D this quarter. Any idea, any color here on the financial impact? Is this kind of a slow process here to get people used to it. You said that some KOLs have already looked at it. And in terms of validation, are you going to share the data on, you know, how much better 3D is risk than 2D? And do you think that can drive kind of 3D in Europe instead of staying on 2D a little longer?

Yeah, these are good questions. It's kind of like a couple pieces to it. I can tell you that we are extremely bullish about 3D. Folks have been waiting for it. We wanted to curate these accounts with clinical sites so we would have clinical data. We actually have some results of that. I'm going to turn it over to Stacey to drill in a little bit more in terms of what the findings are with 3D, risk over 2D, and maybe answer the back end of your question as well. Stacey?

Sure. So as I mentioned in the script, we're seeing significantly improved performance with the 3D risk algorithm, just to kind of put it in perspective. With the 2D risk algorithm, our AEC, which as you know, Frank, is sort of a metric that combines sensitivity and specificity into one sort of measurement of accuracy, if you will. And our AEC on the 2D risk solution was 0.73. and we're seeing a 9-point improvement in the 3D up to 0.82. So it's actually a really significant improvement over the 2D and also a very big difference from the conventional lifetime risk models that are on the market today, which are around 50% to 60% accurate, right? So we're really excited about the improvement in performance that we're getting from the 3D risk algorithm and think that will drive more rapid adoption of this in our customer base.

Great, and if I could just sneak in a last one there. I know there's a couple parts to the first one, but the enterprise customers going forward, what gives you confidence? Is this something that, you know, there should be kind of a, I guess like a pent-up demand somewhat for revenues to hit on the back end, or what gives you confidence that we can move forward and close these?

Yeah, these are all of the customers we're talking about are ones that are budgeted, are ones that... have already vetted other technology and looked towards us. We did, as indicated, have to deal with sort of another level of involvement in getting the IT folks to tie it into the process. We also are seeing an increased preponderance of these as sites because due to economics or efficiencies are actually aggregating This has always been a trend with integrated delivery networks. But I think we're going to see more of these kinds of deals. And the reason that we've reoriented our sales force for them is to kind of keep up with this very rapid pace of change. And literally, we didn't really see this at the beginning of COVID, or it was minor, but we see it now. But we do believe that we'll keep pace with it as to whether or not we'll – move faster, in other words, catch up for let's say Q2 and Soarhead. We'll have to see more as we go into the couple of weeks and months ahead. These are more complex deals. The good thing is that compliance at these deals is high. They actually are even less price sensitive because they appreciate the productivity opportunity. So we're going to learn a little bit more as we go through the quarter in terms of, let's say, how much more we can accelerate ahead. But we're very confident that the anomalies that we saw in Q2 are ones that we have a good handle on as we move forward into Q3 and beyond.

And we'll now take our next question from Marie Theibold with BTIG.

Great. Thank you for taking the questions. Maybe one quick follow-up to the questions on the enterprise sales process. What do you think drove this surge in interest that we're seeing now, and what specifically are the CIOs asking about? Is it as simple as wanting to compare reader times and sensitivity and the sorts of things that drive productivity, or are they wanting to do more involved sorts of trials and little pilots before they commit?

That's a good question, Marie. I would say that the big surprise for COVID was that not only are we seeing it as a clinical solution, but increasingly as our products were used to help people plan for who to bring back and even looking at prior year's images to see what the prior year's score was or running the 2D risk product on the prior year to see who to bring back first, it became more of a workflow or as much of a workflow and productivity tool so suddenly we had a whole new reason for people being interested in the cell and then that brought in the i.t folks that were interested in productivity in uniform productivity and consistency across all sites so i would say that it was a broader appreciation of our value proposition beyond just that of clinical and some economics to this quality assurance, this productivity, this throughput, and it happened to also align with the IT initiatives to create consistency, uniformity, common platforms across multiple vendors. We're actually seeing a lot of folks ask us if they can buy multiple AI products from us because they want to have fewer vendors to work with, which presents us with an opportunity. So this is something we, you know, I don't want to say it's completely unique in that we've heard these things early in COVID, but as we went further into COVID, and particularly since December and the first quarter and into the second quarter of this year, we've just seen this emerge in a big way. These chief information officers, you know, they were always someone in the past that you should just check in with and make sure your agenda was aligned with their agenda, but they're sitting right next to the CEO now. They have a seat at the table. It used to be if you're not at the table, you're on the menu. These folks are, whether they're at the table or away from the table, they're being consulted with as being productivity, consistency, engineers, and they've run the numbers and looked at IT as being integral to the success equation. So this unique triad of economic decision makers, technical and clinical engineers. Was there, there may have been another nuance to your question that I missed. Could you repeat it if you don't mind?

You know, I think I was asking specifically about what these CIOs want to see in terms of evidence, whether it's just, you know, looking at the data and comparing it to others they've vetted or whether they want to do sort of small pilots and trialing before they commit.

Yeah. Well, they're less inclined to, they'll defer on the evidence. to the radiology or clinical personnel, the folks that, the chief technology officer wants to see if our technology and the way we're processing images and our cloud-based or on-prem or hybrid solution, it runs parallel with where they are in their movement to the cloud. So this is more of a technology interaction commingling alignment exercise and that has become you know a really key part of the process and that's how they've entered the good thing is that and maybe a little bit you know surprising as we go into the second half the year is that prior to that we always felt that clinically was going to be adequate combined with economics and we knew the connectivity elements would be key. But we're seeing it now being a very dominant part of the purchase process. And they're probably equally weighted. But they want to make sure that you're aligned with their IT strategy, solution, migration pattern, and that's what they're looking for from us. So it's a whole different set of questions, and it adds some time to the process. The good thing is that when we get in there, we get in there very deep. We get in there with another constituency that understands what we're doing. They actually understand signal noise processing. They actually understand the difference between people who are showing real AI capability versus those that are just doing more general triaging and pattern recognition. So these folks are hard to fool. On the other hand, they ask very intelligent questions. and press you to be your best technically. And that has been why we literally spent a good portion of Q2 orienting ourselves to facing off better with these new kind of decision makers.

Jump back in queue.

As a final reminder, that is star one if you would like to ask a question. And we'll now take a question from Yelgen with Laidlaw and Company.

Good afternoon, and thanks for taking the questions. My first question is that if you look forward, what percentage of the future custom prospects can be categorized as this enterprise account versus your sort of traditional accounts? And I have a follow-up after that.

Yeah, it's a good question. In the U.S., And I think we're going to see this, first of all, mostly in the U.S. right now. So right there, that's pretty much 85% of our business. So we're going to see it mostly in the U.S. Prior to this, we thought of the market, most people thought of the market as being kind of like the entrepreneurial segment and then the more academic segment with IDNs. What we're seeing is that these enterprise networks are crossing the horizontally, almost diagonally across both segments, and we'd say that they're probably around 30% to 35% of the market. The interesting thing is that while they're 30% to 35% of the market, the call points may only be 15%. So they have a disproportionately high volume for the percentage of sites you call on. which translates into really needing to have the best kind of sales rep and a new type of sales rep calling on the accounts because the yield for the sales process is going to be higher. At this point, it's about 35%. Some of this is not all just coming out of nowhere. These are accounts that were leaning in this direction already but have now sort of crystallized. I don't think, though, I think next year that might get towards... closer to a 40 or 50% number, but I also see that these things do balance out over time. I have seen power trends where the radiologist controls the chart, the chief operating officer controls the chart. We're going through a phase here where the chief information officer controls the chart or has a stronger seat at the table. But we'll see this balance out over time. One of the key things you have to do is keep mapping the procurement process to see where the power dynamics are flowing and make sure you're getting ahead of it. And I believe we're ahead of this. I think that Q2 was a bit of an anomaly with a lot of change happening quickly. But again, I'd say a third of the accounts, a little bit more, and it may get up to 40% to 50% next year and stabilize at that level.

Okay, great. That's very insightful. And maybe just a quick follow-up. Given the characteristics of these enterprise accounts, would they be more aligned to your potential future set of patient-based type of payment system? And if that's the case, what's your current thought in terms of migrating to that payment method or accounting method? And thanks.

The good news about these folks is that they really understand what SaaS subscription models are, having done it with other offerings or other companies before coming online, and they will create far more successful subscription models than in the past because they understand how to set up the architecture that enables it. So I do believe that this will, over time... accelerate the movement to SAS. But it's been interesting to see that the SAS model has moved at a rather slow pace. In part, I think it's because folks realize there's a lot more infrastructure to set up. People are waiting for 5G. People are waiting for better tools. So part of the enterprise providers coming in is, in fact, to your point, to drive towards more of these subscription-based solutions. Keeping that in mind, they're going to have to compete with those who are worried about privacy and HIPAA and those dynamics. And there are certain sites that don't like to have their data out there in the cloud. So it'll go to a certain point, and it will probably move quicker towards subscription next year. But this year, it's actually moving to subscription maybe a little bit slower than we thought because it's almost like they're going to a pit stop and retooling themselves to get ready for subscriptions. And interestingly, we are correspondingly been doing the retooling ourselves to be able to face off with them. So I think in the long run, this is going, and the long run doesn't mean like, you know, too long out there for us because we're well underway here. We're going to line up better with these accounts. They will move to subscription, but I think it's going to happen slower this year and a little more rapidly next year.

And that does conclude today's question and answer session. I'd like to turn the conference back over to Mr. Klein for any additional or closing remarks.

Well, I would like to just close by summarizing that we're very confident in the new leadership positions we've put in place. We do look at Q2 as an intriguing anomaly that we believe we've got our hands around and have been very proactive in setting ourselves up to deal with enterprise accounts and solutions. We will continue to move in this direction through Q3 because these accounts continue to take on unique forms and some emerging as winners and some are lagging behind. So it'll be an organic process, but we've got this well in hand. We are particularly encouraged that the pace of innovation has not stopped and we will continue to move forward with 3D. We'll continue to manage our costs because as we learned during COVID, having a strong balance sheet is critically important. And we're very, very excited about the opportunities at Zoff as it continues to move forward in a positive trajectory with dermatology powering the way and providing us the runway and capital to continue down the path for neurosurgery. So we look forward to providing additional updates as we move forward. As Stacey said, we're particularly bullish on the second half of the year. All the dynamics that existed before within the company are still here. We're grappling with a new breed of customer, you might say, but it's one that actually happens to be perfectly aligned with where we're going. especially in terms of subscription. It's just a longer call point pattern that's been established that we believe we've adjusted to and have a significant range of deals that could smooth out the lumpiness that could potentially inveigle us if we didn't have a broad funnel and pipeline of deals. So with that, I'd like to thank everybody for joining today, and we look forward to future updates as we move ahead.