icad inc.

Good afternoon, ladies and gentlemen, and welcome to ICAD Inc. Second Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Tony Takazawa, Director of Investor Relations. Sir, the floor is yours.

Thank you, Operator. Good afternoon, everyone. Thank you for joining us today for ICAD's second quarter 2022 earnings conference call. On the call today, we have Stacy Stevens, our President and Chief Executive Officer, and Steve Sarnow, our Interim Chief Financial Officer. Before turning the call over to Stacy, I would like to remind everyone that we will be making forward-looking statements on the call today. These forward-looking statements are based on ICAD's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. For a list of factors that could cause actual results to differ, please see today's press release and our filings with the U.S. Securities and Exchange Commission. ICANN undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. I would also note that management will refer to certain non-GAAP financial measures. Management believes that these measures provide meaningful information for investors and reflect the way they view the operating performance of the company. You can find a reconciliation of our GAAP to non-GAAP measures at the end of the earnings release. With that, I'll turn the call over to Stacey. Stacey?

Thank you, Tony, and good afternoon, everyone. I will begin with some high level comments on the market environment and how this affects our current and potential customers. I will then discuss our second quarter results and provide further granularity around the key areas of focus for the company for the remainder of 2022. The market environment we have seen over the last quarter is consistent with what many companies across the healthcare industry have been experiencing and reporting. While access to customers has improved, customer challenges with respect to capital budgets, critical staffing shortages, and supply chains remain. There are also a range of other economic concerns, such as rising inflation, the threat of recession, and overall uncertainty that are continuing to affect current and future customers. While demand for our technology continues to be strong and customers are still spending, they are doing so more carefully, increasingly accounting for a range of factors with purchasing decisions, such as ease of procurement, measurable productivity improvements, and lower upfront costs. This is ultimately driving the beginning of a pronounced and exciting shift in our business, as in recent months, we are seeing a marked increase in demand for monthly subscriptions and other operational models in lieu of traditional perpetual licenses. The subscription model and other operational models have many compelling business and financial positives associated with it. Lower upfront cost reduces the barrier to entry for customers and can and has accelerated customer acquisition. Subscription payments are also generally expensed by customers, which means that they can avoid what typically can be a lengthy and uncertain capital budget approval process. This option not only makes it easier for customers to adopt our technology sooner, it also offers opportunities for recurring monthly billing, which is clearly a more predictable ongoing revenue stream. The long-term value of these subscription customers is far greater than a one-time license sale. And this value extends to the customer too, as it offers them access to annual algorithm upgrades, which typically include clinical or performance improvements, as well as the ability to easily add new functionalities such as profound AI risk, our personal risk assessment solution, without costly capital outlays. It is also much easier to offer proof of concept trials with this method, which enables us to gain new customers rather quickly after they have experienced the capabilities of our technologies firsthand. As previously discussed, we anticipated this shift in the market and began testing the subscription model earlier this year. I am pleased to report that interest in this option has grown at a faster than expected rate. And in order to meet this rapidly growing customer demand, we accepted more monthly subscription deals than we were expecting in Q2. In fact, one-third of our European business in the quarter came in under this new model, as well as a number of U.S. deals which began in Q1. While our short-term revenue was lower than originally anticipated, we acquired more new customers in Q2 than in Q1, and these customers can generate significantly more long-term revenue than if they had been a perpetual licensed customer. Overall, the benefits of moving to the subscription model are compelling, and there is a long history of software companies making the shift to the benefit of their businesses and shareholders across a spectrum of industries. Although it has taken longer for this shift to occur in the healthcare realm compared to others, it appears to be accelerating rapidly as the adoption of SAS-type models in healthcare is reportedly growing at a rate of 20% per year. At ICAD, we have been anticipating this shift and planning for it accordingly, preparing our customer offerings and configuring our business as necessary. We believe these dynamics will continue to propel us towards this better business model create over time a large installed base of customers generating recurring revenue for the long term and position the company for even greater sustained success in the months and years ahead. While the long-term business benefits of this model are clear, software companies that move from a perpetual license model to a subscription model do typically have a hurdle to overcome as they make the transition. This is a short-term impact to reported revenue as they move previous larger one-time revenue to relatively smaller but predictable recurring monthly subscription payments. While all of the benefits of the model begin immediately, there is a challenge of the reported optics of reported revenue as subscription becomes a larger proportion of the business, and we experienced this phenomenon in the first half of 2022. At the halfway point of the year, our reported revenue was impacted by the introduction of the subscription model and the sale of 31 subscriptions. Just over half of these were profound AI, and the remaining mix were our density and risk solutions. While the optics of this in the short term contribute to lower reported revenue, we acquired more customers in the first half of 2022 than in 2021, And now these customers will generate long-term recurring revenue and their value is therefore much higher. There's also a difference in the timing of how we recognize the revenue on subscriptions. Unlike with the sale of a perpetual license where we typically recognize revenue upon shipment, subscriptions are recognized at installation, which typically lags shipment by six to eight weeks. So the majority of our subscriptions in Q2 have not yet been fully recognized as they installed late in the quarter. However, we are confident that we are on the right path. Not only will we continue to reap long-term benefits from these relationships, we are helping customers improve patient care, expanding the total addressable market, expanding access to our technologies, and laying the groundwork for continued success and predictable revenue streams in the months and years ahead. As mentioned on our last call, we are currently experiencing an important inflection point in our business. we plan to continue to leverage the strength of our robust portfolio of powerful solutions throughout the rest of 2022 and beyond by expanding access to these technologies, aggressively targeting broader market opportunities, and offering more flexible ways for our solutions to meet customer needs. Now turning to Q2 overall, ICAD's total revenue was $7.6 million, not including the subscription impact I described earlier. This result was impacted by a number of factors I mentioned, including the faster than expected ramp of the subscription model on the detection side of the business, a somewhat slower ramp from both the US and OUS IORT side of the business, and the generally challenging market environment. Detection revenues were $5.3 million, up 10% when compared to Q2 of 2021, not including the impact from the subscription deals. Therapy revenue with $2.3 million impacted primarily by a decrease in IORT deals, again, both in the U.S. and OUS markets. We managed our expenses well in the quarter and burned significantly less cash relative to Q1. Steve will provide more granularity on these elements. Regarding our detection business, ICAD's Breast AI portfolio offers world-class solutions to overcome some of the most pressing challenges hospitals are facing today. including performance variability across imaging teams, an increasing volume of workload, critical staffing shortages, and physician burnout. These technologies continue to offer unparalleled clinical performance, along with market-leading multi-vendor flexibility. As demand for operational models grew, we were pleased to see positive performance from some of our partners in the quarter, including Arteris, who is one of our partners serving our customers who today desire a full cloud-based model. In recent months, we have introduced a new sales strategy, positioning our triad of high-performing suite of AI solutions as a singular and complete solution for superior breast cancer detection, breast density assessment, and personalized short-term risk evaluation. While each is a compelling product on its own, we believe using the complete suite of these products offers an unmatched value proposition to clinicians and patients. This strategy also helps us to improve penetration of our risk and density products into the marketplace with a differentiated offering, and we are seeing increased interest among new customers in the trio of products, with more new customers opting for the full suite at the outset. As more clinicians employ the use of these technologies in clinical practice, we are learning more about the real-world benefits they offer to facilities, physicians, and patients. Our latest webinar in our Profound Insight, Profound Impact series, which had record attendance, truly brought this concept to life as it featured several compelling case studies presented by leading experts and radiologists who have been using profound AI, power look density assessment, and profound AI risk daily. These case studies not only demonstrate how clinicians are using all three technologies to find cancer earlier, but also the life-changing impact it is having on patients. Additionally, the body of evidence supporting our breast AI suite continues to grow, with compelling new research supporting profound AI risk published in a peer-reviewed journal, Science Translational Medicine, last quarter. In a multi-ethnic study involving more than 154,000 women at four screening sites, Researchers from the Karolinska Institute found profound AI risk is 2.4 times more accurate than traditional lifetime risk models. Using U.S. guidelines, profound AI risk found 14% of women studied who had a negative screen had almost 20 times higher risk of developing breast cancer in the next year than the general risk population. This individualized short-term risk model offers critical and actionable information that can help clinicians personalize breast cancer screening regimens for patients based on their individual risk of developing cancer before or at their next screening. The findings from this study were so compelling that media took note. Health Day, the world's largest syndicator of health news and content, covered the study with an original article that was subsequently picked up in dozens of consumer and trade media outlets. reaching a total potential audience of more than 33 million. Influential trade media such as Medscape, Imaging Technology News, and Fierce Biotech also covered this news. We also made progress across our other major initiatives last quarter, including Salesforce optimization, penetration of the broader available market, and improving our ability to address enterprise-level customers. In fact, today's pipeline of enterprise customers is larger than at any other time in history. Although the revamp of our new sales team is not yet complete, some of these new Salesforce hires are beginning to make a positive impact with one of these new team members ranking as one of our highest performing reps in Q2. We are continuing to rebuild our Salesforce with additional team members and we have not yet fully realized the impact of our new hires as some territories remained open in Q2 and some of our new hires just began in their territories in Q2. We have also recently made strides in our efforts to more fully penetrate the broader market. While some gantry makers' current struggles with supply chain may limit our opportunity to sell into new installations, we are seeing continued success selling into the large installed base of 3D mammography systems. For example, in Q2, we won a large enterprise order at St. Luke's Health System in Kansas City. This is a competitive account who really saw the differentiated value of ICAD's technology. We see great opportunity in this broader market, and we expect continued success moving forward as we leverage our targeted sales efforts, superior technology, and flexible procurement options. Another key aspect of our plan is to better address the needs of enterprise-level customers. These customers represent a very important opportunity as they generally represent larger installations with longer-term strategic partnership opportunities. As a percentage of our total opportunities, these types of opportunities continue to grow and demand for operational models is particularly strong in this segment. We were also pleased to secure another large order in Q2 from the same world-renowned academic institution I spoke about on the Q1 call. Now turning to our therapy business. Revenue in this segment was led by our dermatology sales, which improved as expected from a depressed Q1. As you will recall, Q1 revenues were impacted by the restructuring of one of our dermatology partners during the quarter. This partner has completed their initial financing, and while we experienced improved business in Q2 versus Q1, they are really just starting to gain momentum. End-user demand for our Zoff technology is high, and the dermatology segment and the reimbursement environment remains positive. We are now nearing completion on an expanded body of skin clinical data with the pending publication of updated five-year follow-up data, which has outstanding results in terms of recurrence rates. Our partners are ramping up, and we expect more robust results in the second half of 2022. We also continue to progress our multinational clinical trial, studying the use of our technology in treating brain cancer, and expect to add new European sites into the trial in Q3. We remain optimistic about the impact this technology will have on patients with this deadly cancer. Next, I would like to introduce Steve Sarno, who was appointed as our interim CFO in May. Steve brings a tremendous amount of experience to the company, as he previously served in CFO roles at both private and public technology organizations, including software companies offering SAS-based models. We selected Steve specifically for his experience and expertise in transforming companies from a perpetual model to a SAS-based model. We welcome Steve to the team and look forward to continuing to work together as we continue to scale our business, enhance our team, and drive increased shareholder value. Steve?