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spk02: Good day, everyone, and welcome to the ICAD, Inc. Third Quarter 2023 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, Lenore Faber. Ma'am, the floor is yours.
spk01: Thank you, Operator. Good afternoon, everyone. Thank you for joining us today for ICAD's Third Quarter 2023 Earnings Call. On the call today, we have Dana Brown, our President and Chief Executive Officer, and Eric Lundquist, our Chief Financial Officer. Before turning the call over to Dana, 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 offer 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 a 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 Dana.
spk00: Thank you, Lenore, and good afternoon, everyone. Let's begin with our business update. On October 23rd, we announced that Electa, a world leader in brachytherapy solutions, acquired Zoft, our therapy subsidiary, for approximately $5.5 million in assumed liabilities. As previously disclosed, we have been in the process of exploring strategic options for the Zoft business that would accelerate the accessibility of this technology and provide more focus and synergies to its growth. We're pleased that Elekta has acquired the Zaaf subsidiary along with both the technology and the team. We're confident that the Zaaf technology under the leadership of John LaPre will continue to positively impact the lives of cancer patients and the providers who care for them on a global scale. Elekta took over the business effective immediately upon signing and have completed their final payments. Later in this call, Eric will provide further updates on the transaction and its impact on cash, our balance sheet, and operations. Our thanks to the outstanding work of the Craig Hallam Capital Group, who served as advisors to us for this transaction. Let's now turn to the detection side of the business. As we close out six months since our leadership transition and finalize our growth plans for 2024 and beyond, it's important to recap the trajectory of changes we've made and how those changes are setting us up for future success. In just six months, we've made substantial progress executing a three-phase transformation. Phase one was realigning our base. Phase two, strengthening our foundation. And phase three, investing in growth initiatives. Let's start with phase one, realigning our base. In the past six months, we have stabilized the business through reducing our cash burn. EBITDA, which we now view as a relevant metric to indicate operating cash flow, was a loss of $1.1 million in Q3 23 versus a loss of $3 million in Q1 of 23. This represents an improvement of nearly $2 million a quarter. We've reduced our cash burn. Year-to-date, FY23 total cash burn of $4.4 million, which excludes the one-time cash infusions like our projected soft proceeds, compared to full-year FY22 cash burn of $13 million. We believe cash burn has stabilized. We've continued to manage the shift to a subscription-based annual reoccurring revenue cycle. We'll talk more about ARR growth later in this call, but in summary, we had a 30% increase in ARR since the start of the subscription transition. We've achieved 16% compounded annual growth rate and total ARR over the two-year period or through the end of Q3 23. And we've completed the realignment of our cost base for our core business, and I'm pleased to affirm the company does not need to raise additional funding to pursue growth initiatives. In phase two, strengthening the foundation, in the past six months, we have expanded our leadership team with the appointment of our permanent CFO, Eric, and the addition of a COO, Chief Product Officer, Vice President of Marketing, and Vice President of Customer Success. We're also making good progress in recruiting new board members. We've upgraded our brand by transitioning from a product-focused to a patient-centric value proposition, resulting in our new tagline of Creating a World Where Cancer Can't Hide. You'll see more of the rebrand launch in Q4. And we've developed and launched targeted lead gen programs. Previously, a reliable and consistent inflow of new leads and a documented and measured pipeline management process did not exist. We've revamped our commercial model, reorganized our team structure, how we target and segment our markets, revised messaging, pricing, and account management strategies. We've announced game-changing collaborations with esteemed partners, exemplifying our company's commitment to creating the world's most pervasive and personalized suite as AI cancer detection solutions for our shareholders and stakeholders. To recap these partnerships, we signed a 20-year worldwide development and commercialization agreement with Google Health to integrate Google's AI technology with our profound detection for 2D mammography for use upon regulatory approval as an independent reader for breast cancer screening. We signed a strategic multi-year commercial agreement with radiology partners the nation's largest radiology practice, providing 15% of all U.S. mammography screenings through its owned and affiliated practice, enabling ICAD to expand access to the company's breast AI suite to thousands of physicians and millions of patients in the U.S. We've just wrapped up our testing phase, and we'll begin the next phase of identifying and coordinating a rollout with radiology partners across its network of facilities. And we've secured the largest subscription deal to date, with a prestigious multi-specialty academic medical center, renowned for exceptional healthcare services, and ranked as one of the top hospitals in the U.S. And last but not least, the divestiture of Zoff, coupled with realigning our cost basis and strengthening key foundational building blocks, we've completed the necessary steps to streamline operations and put all our focus into scaling the profound AI breast health business. immediately prioritizing expanding our sales and partnership models to grow revenue, which leads us to phase three, investing in and launching growth initiatives. On the prior two earnings calls, I've noted we're actively assessing and modeling revenue growth and market expansion scenarios. We've aligned on a three-phase approach. Phase one, expanding our existing accounts. Phase two, growing our channels, both direct and indirect. And phase three, entering new markets. These phases will overlap. However, we've clearly defined dates and gates, which are measurable criteria that act as triggers within a phase to open the gate to enter the next phase. We've orchestrated these phases to maximize growing annual recurring revenue while keeping burn in check, which is why we believe we do not need to raise additional funding to pursue the growth initiatives in phase three. Let's take a few moments and break these phases down. Phase one is expand existing accounts. This phase is focused on maximizing revenue from our sizable install base, including re-engaging customers who've lapsed on annual maintenance service agreements, are behind in upgrading to new versions, including the transition to cloud, winning back lost or deeply lost customers, and accelerating deployment across large national accounts. For example, I just mentioned our strategic multi-year commercial agreement with Radiology Partners. Radiology Partners is a leading provider of mammography services to millions of women across more than 3,200 facilities, including 17 of the 20 largest health systems in the country. We're honored that Radiology Partners has selected ICAD as its provider of breast AI technologies, and we're working closely with Radiology Partners to actively deploy ICAD's advanced technology through their cloud to their network of facilities. The initial order from Radiology Partners, recognized in one first quarter of this year, represents less than 5% of the total potential from this partnership. It's a long-term relationship and will take time to adopt and roll out across their large enterprise. And while you've heard us announce in past quarters winning deals with large enterprise customers like Solus, Radiology Partners, SimonMed, Ascension, and Cleveland Clinic, who collectively serve about 15% of the U.S. mammography screening market, Great potential lies ahead for ICAD, as many of these customers are in the early stages of rolling out our technology and are continuing to expand it to more sites and markets each month. The focus of this phase is to accelerate deployment of our technology across these national and regional accounts, as well as re-engage approximately 1,000 of our 4,000 customers who've lapsed on their maintenance agreements or who are operating on older software versions. Moving to phase two, which is growing channels, both direct and indirect. This phase is focused on accelerating winning new business in both the US and OUS through growing our direct sales force and establishing new distribution partnerships. Backed by science, clinical evidence, and proven patient outcomes, our profound breast health suite solutions of cancer detection, density assessment, and risk evaluation provide an unmatched approach to accurately detecting more cancers earlier, providing certainty and peace of mind to providers and patients. Our mission is to see that these solutions are deployed universally as part of a standard of care for breast health in order to achieve our vision of a world where cancer can't hide. We're pursuing a large addressable market where significant patient need exists. Globally, more than 31,000 mammography systems serve approximately 250 million women in the age range recommended for annual mammograms. Yet recent research indicates only 37% of mammography sites are currently using artificial intelligence. In the United States, for example, there are 8,800 certified mammography sites. Of the 37% of sites using AI, we have one-third of that market. Expanding into the 63% of the market that is not using AI, plus additional wins in the segment using AI but not profound, results in significant opportunity for new business. We believe U.S. sales have declined due in part to a significant reduction in the sales force that occurred in FY22. In the U.S., we currently have six sales reps versus 12 in Q3 of FY22. After a thorough analysis of rep performance over the past three years, we believe adding additional sales reps focused on new business, given our large addressable market opportunity I just discussed, and reps focused on large national accounts like radiology partners will lead to revenue growth. Which leads us to phase three, entering new markets. After measurable progress in phases one and two, we'll begin phase three, most likely in FY25. As mentioned on prior earnings calls and as just one example of growth is our work with Solus Mammography to commercialize our heart health solution, which was previously referred to as breast arterial pacification. In fourth quarter 2022, we announced the development and commercial collaboration agreement with Solus. This collaboration is focused on using mammography to define cardiovascular risk. a new application that could identify millions of women at risk for heart disease using data obtained from their mammogram. With heart disease being the number one killer among women in the U.S., this collaboration not only offers the potential to address a significant unmet need in patient care, but also to penetrate a sizable new market. This product is currently available for investigational use only as we go through the FDA approval process, so more to come. Just to reiterate, Once we've reached critical mass in phases one and two that warrant and enable us to expand our focus, we'll update you on our growth initiatives. Let's now turn to a few brief Q3 highlights. Our Salesforce continues to secure opportunities with some of the most esteemed and prestigious healthcare facilities worldwide. Among the new licenses sold last quarter, we also secured our first two customers through our AI platform partner, Ferrum Health. Sutter Health, and Radiology Associates of Albuquerque. Ferrum Health is a leading AI platform provider, delivering access to the most innovative and impactful clinical AI technologies on a single platform. We expect additional expansion with Ferrum in Q4 and beyond, with significant near-term expansion opportunities within the Sutter Health System, which encompasses more than 20 sites. We also expanded deployment with our key partner, Solus Mammography, adding two new SOLUS sites in Texas. We expect continued expansion with SOLUS across new U.S. markets in Q4 and beyond, as the SOLUS model of personalized care continues to expand nationally. SOLUS mammography has approximately 115 sites nationwide, and to date, we've implemented our solution at 85% of those sites. We also continued expansion within the government sector, adding the prestigious Walter Reed National Naval Medical Center and the VA Medical Center in Birmingham, Alabama. Reinforcing the strategy in near-term revenue opportunities in phase one, expanding into existing accounts, you've heard us announce in past quarters winning deals with large enterprise customers like Solus, Radiology Partners, SimonMed, Extension, and Cleveland Clinic, who collectively serve about 15% of the U.S. mammography screening market. Great potential lies ahead for ICAD, as many of these customers are in the early stages of rolling out their technology and are continuing to expand into more sites and markets each month. During the past quarter, we also achieved several key milestones with our OUS sales channel, further expanding the growing global reach of ICAD's technology. Our direct sales force in France achieved a groundbreaking milestone by finalizing its most significant deal to date. Thirteen profound AI licenses were sold to a leading radiology group in Dijon, France. Our OUS team also signed and onboarded two new distributors to oversee operations in the United Arab Emirates and Slovenia, Croatia. Our Benelux distributors not only secured a pivotal deal with Brussels University in Belgium, but also expanded their support to the Luxembourg screening program by adding eight density assessment licenses alongside the existing detection licenses sold in Q2. and several firsts marked Q3 with the Saudi Arabian distributors completing their first customer sale for Profound AI 2D, 3D, and the first customer site installs occurring in Turkey. And lastly, a preview of our showcase at RSNA 2023 occurring November 25th to 30th. At RSNA, ICAD will be demonstrating new AI-powered innovations in mammography, highlighting new product enhancements, partnerships, and workflow solutions, featuring our profound breast health suite. We're featured in four clinical abstracts, including presentations from both Dr. Axel Gravingold of Radiology AM Theater, Paderborn, Germany, and Dr. Michael Erickson of the Karolinska Institute on new data highlighting profound risks, short-term risk assessment capabilities for evaluating development of breast cancer in the next one to two years, including a multinational validation of a clinical image-based AI risk model for individualizing breast cancer screening. Presentations from both Dr. Chirag Patel of Solus Mammography and Dr. Tu Ha Dao of Henry Mondor Hospital on the novel application of deep learning AI to detect and quantify breast arterial calcifications on digital mammography. As I mentioned earlier, this solution has not yet been cleared by the FDA for commercial use, It's being used in investigational mode only at this time and expect clearance in late 2024. And Emily Conant, Professor of Radiology and the Vice Chair of Faculty Development in the Department of Radiology at the University of Pennsylvania, Perelman School of Medicine and past president of SDI, will be highlighting new data from ICAD's fourth generation enhancements during the AI showcase theater presentation titled From Pixels to Practice, harnessing innovations in breast AI to improve patient outcomes. We will also be demonstrating new product enhancements, including our new profound detection version 4.0 and density version 4.1 solution that streamline workflows, provide support for analysis of prior mammograms, identify cancers even earlier with more accuracy, and lead to improved patient outcomes. I continue to be optimistic about the company and its prospects. With a portfolio of market-leading, first-in-kind technologies, we are addressing significant unmet needs in global health. And I'm confident that we are taking the right steps and that we're building the right team to ensure continued growth for the company and create additional shareholder value. In summary, we're taking decisive actions to drive rapid transformation within the company, prioritizing stability, cash preservation, and the development of a strong, competitive long-term strategy. Our goal is to diversify our revenue stream and reduce customer concentration, ensuring a more sustainable and resilient future. I'll now turn the call over to Eric for a detailed review of our Q3 2023 financials.
spk04: Good afternoon, everyone, and thank you, Dana. I'll now summarize our financial results for the third quarter ended September 30, 2023. Please note that these results exclude the divested ZOPS segments. Results relating to the ZOFT segment are presented in Note 2 of our 10Q. Revenue for the quarter was $4.1 million, a decline of $0.3 million or 7% in the third quarter of 2022. Third quarter of 2023, product revenue was $2.2 million, down 15% over the prior year. The decline is attributable to a variety of factors, including our transition to subscription, longer purchasing cycles, increased competition, and budget constraints. Detection service revenue was $1.9 million, up 3% over the prior year. Moving on to gross profit. On a percentage of revenue basis, gross profit was 86% for the third quarter of 2023, which was up from 85% the third quarter of 2022. On a pure dollar basis, gross profit for the quarter was $3.5 million, as compared to $3.7 million last year, largely reflective of the reduction in revenues. Total operating expenses for the second quarter of 2023 were $4.7 million, $2 million, or a 29% decrease year-over-year. This improved run rate reflects the implemented cost-cutting measures previously announced. Operating loss was $1.2 million in the second quarter of September 30, 2023, versus 3 million in the quarter ended September 30, 2022. GAAP net loss for the third quarter of 2023 was 1.4 million, or 5 cents per diluted share, compared with a GAAP net loss of 3.9 million, or 15 cents per diluted share for the third quarter of 2022. Non-GAAP adjusted EBITDA for the third quarter of 2023 was a loss of 1.1 million, versus 3.4 million in Q3 2022. Non-GAAP adjusted net loss for the quarter was 1.4 million or 5 cents per diluted share compared to 3.9 million or 15 cents per diluted share in Q3 2022, reflecting a few adjustments to GAAP net loss in each period. Moving on to the balance sheet. As of September 30th, 2023, the company had cash and cash equivalents of 19 million compared to cash and cash equivalents of $21.3 million on December 31, 2022. During the third quarter, the company generated net proceeds of approximately $1.8 million from the issuance of 958,248 shares of common stock in the at-the-market ATM offerings at a weighted average price of $2.26 per share. In addition, the Zoff sale in October 2023 resulted in net cash proceeds of $4.8 million. Had the sale of Zoff occurred on September 30th, 2023, our cash balance would have been $23.8 million. Accordingly, we believe we have sufficient cash resources to fund our planned operations with no need to raise additional funding. The steady shift to a recurring revenue model from the perpetual model has numerous benefits, including better visibility, more efficient expense management, and an improved ability to predict future cash flow. It also has risks, including short-term lower gap revenue and negative cash flow impact for the next three years. As noted in previous earnings announcement, our plan was to bring back the annual recurring revenue ARR metric once it had become a reliable and growing portion of our revenue mix. In addition to the previously disclosed subscription ARR metric, we are introducing three new ARR metrics. Total ARR, or T-ARR, represents the annualized value of subscription license, maintenance contracts, and active cloud services at the end of a reporting period. Maintenance Services ARR, or MARR, represents the annualized value of active perpetual license maintenance service contracts at the end of the reporting period. Subscription ARR, or SARR, represents the annualized value of active subscription or term licenses at the end of a reporting period. Cloud ARR, or C-ARR, represents the annualized value of active cloud services contracts at the end of a reporting period. As of the end of Q3 23, total ARR, or T-ARR, was $8.3 million. Maintenance Services ARR, or MARR, was $6.9 million. Subscription ARR, or SARR, was $1.4 million. Once we have released our commercial cloud platform, we'll begin tracking cloud ARR. In addition to the recurring revenue metrics noted above, we will begin to disclose the total number of orders relating to perpetual product, subscription, and cloud deals. The intent of this metric is to illustrate the pure volume of sales without the complexity of multiple gap revenue streams. We are pleased to report that in Q3-23, we closed 60 perpetual and 7 subscription orders. This brings our year-to-date total to 193 perpetual and 62 subscription orders. This concludes the financial highlights of our presentation. I would now like to turn the call back over to the operator to lead the Q&A.
spk02: Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask, though, while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Your first question is coming from Per Oslin from Craig Hallam Capital. Your line is live.
spk03: Thanks. Good afternoon, Dana and Eric. Congratulations, first and foremost, on the ZOF divestiture. It's nice to see the resolution there after the process. It really didn't start that long ago, so congrats on that. A lot of places we could go here, I think. Obviously, looking at the release and seeing that the ZOF business is now in the discontinued operations, I think it does really highlight the margin profile of the standalone detection business. So maybe just a couple of questions around that to start out with, if I could. The expense structure looks like it came down by about a third year over year, the operating expense structure. You've done an admirable job there and spoken at some length about that over the last couple of quarters. Is there more to go there on that front and sort of part and parcel with that, do you have a break-even revenue level in mind for the standalone AI business, whether it's on an EBITDA basis or a cash flow basis.
spk00: Thanks, Per. So I'm going to turn the questions over to Eric, but just wanted to say thanks, and thanks for the comments on ZOFT. Just maybe one data point there. We were thrilled that Electa took both the technology and the team. You know, there was great market potential, I think, for the soft technology. It was just really difficult to do with two very different lines of business kind of under the same umbrella. So pleased that you're already kind of zeroing in on what the detection business looks like standalone. So because that's, you know, what we've been focused on and trying to get to on these calls. So with that, I'm going to turn it over to Eric so he can talk about kind of expense structures and where our thoughts are.
spk04: Thanks, Dana. Yeah, I think on the ZOFT, with the furloughs and all the other things we did in the last three quarters, I don't think there's going to be as much savings next quarter as you might expect if you're just looking at what we lost in the past historically for ZOFT. and thinking it's going to come down significantly. We'd pulled back on clinical spend and employee spend significantly. So there could be some, and we did release in our 10K the direct ZOFT impact. So there was about a $377,000 loss in Q3. So that's called out. So that's what we lost from direct ZOFT business. So in theory, we might pick some of that up going forward. But I don't think it'll be much more than that.
spk03: Okay. So I guess maybe on that point, since one of the discussion points in the prepared remarks is growth initiatives. So if we look at the third quarter expense structure for, again, for detection standalone, how much might actually need to come back now that you've got the ZOFT proceeds and that transaction's completed and you've raised the funds throughout the market facility and you feel good about your cash position? Is there a spend that might need to come back now that you have that singular focus on AI, whether it is sort of redeveloping the sales force? You commented, Dana, how the direct force is maybe down 50% year over year in terms of people. What else might get bolstered now that you feel like you're level set around one initiative?
spk00: So you're tracking right along with us. So we are going through an exercise right now to refine actually our budget for FY24 so that we can get that approved by our board at the upcoming December meeting. But there are really two areas that we're looking at for investment. So we've got, you know, I'll say spent the money, right, or have any commitments out there. But it is what we're looking at so that we can determine what the ROI would be. The first one is on the sales team side. So how can we do some restructuring of the current sales team to get them better focused on new business versus ongoing account management? So I talked a little bit about that. We believe that we have a significant amount of kind of lapsed revenue. Just have I had team members on top of ensuring that accounts stayed current on their maintenance support agreements if they had purchased a perpetual license. So kind of getting more of an account management focus to some members of the team and then bringing on some additional team members focused on new business. And then the second area that we're looking at is regulatory. So we're in a fortunate position now of having, you know, multiple products that have been developed over the last two years. kind of multiple versions of those products and then the work with Google as well. So we need to figure out how we can enable our regulatory team to work in parallel through multiple approval processes instead of being very sequential. So that way we can begin to commercialize solutions in markets faster. So those are the two areas that we're looking at. So I think to your point, you probably will see a bit of an uptake in spend, but we're going to continue to be really conservative and cautious, you know, to use the phrase, not get out in front of our skis in that regard, but there will be a little bit there.
spk03: Okay. That's more than reasonable. Actually, I'm going to come back to my first question just because the question was lengthy. Now that you have the detection business, you know, as really it's the singular focus and the cost structure is mostly, I think, set at this point. Is there a break-even revenue level in mind, whether it's on an EBITDA basis or a cash flow basis? Or is it too early to say? I think it's too early to say.
spk00: Yeah, that's what I was going to say.
spk04: All the initiatives and inspections. I mean, you could look at the EBITDA that we released for this quarter and just... minus 1.1, and say if we had that much more in sales, it would break even. But I don't know that the cost structure is completely solidified yet. There's a lot we're looking at.
spk03: Okay, that's fair. All right, I'll let some other people ask some questions. Thanks.
spk00: Yep, thanks.
spk02: Thank you. Once again, everyone, if you have any questions or comments, please press star, then 1 on your phone. Please hold while we poll for questions. Thank you. That concludes our Q&A session. I'll now hand the conference back to Dana Brown, President and Chief Executive Officer, for closing remarks. Please go ahead.
spk00: Thank you, Operator. In conclusion, we're making bold moves to rapidly transform this company with the focus on maintaining stability, preserving cash, and building a defensible and competitive long-term strategy that diversifies our revenue stream and smooths out that customer concentration. Demand for our technology continues to be strong, and the evidence supporting it continues to grow. And our team continues to secure opportunities with some of the most prestigious and esteemed healthcare facilities worldwide. I remain optimistic about the company and its future, and I firmly believe in the bright future of the company and our ability to generate significant shareholder value. Thank you, and have a great evening.
spk02: Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
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