icad inc.

and welcome to the ICAD incorporated fourth quarter and full year 2023 earnings conference call. At this time, all participants are on a listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Jeremy Bennett. Sir, the floor is yours.

Thank you, Operator. Good afternoon, everyone. Thank you for joining us today for ICAD's fourth quarter and full year 2023 earnings call. On the call today, we have Dana Brown, our President and Chief Executive Officer, and Eric Longquist, our Chief Financial Officer. Before turning the call over to Dana, I would like to remind everyone that we'll 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. Security and Exchange Commission. ICAD undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. Also, please 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 Dana.

Thank you, Jeremy, and good afternoon, everyone. This week marks one year since I was named president and CEO of ICAD. I had my first earnings call on March 28th of last year, and during that call, I shared my background, why the board and I believe I was uniquely qualified to lead the company, and our confidence in the company's future. As I stated then, and reiterate now, I'm honored to be leading this incredible company. Working alongside our talented team, our board, our clients and partners, I'm committed to uphold our vision to be the world's most pervasive and personalized suite of AI cancer detection solutions, changing lives for patients around the world and creating value for our shareholders and stakeholders. The management team we've assembled is uniquely prepared to leverage their experience and expertise to position this company for future growth. And I hope as you followed our progress over the course of the past year, you see we deliver on what we say we're going to do. Before we get into financials, I want to take a few minutes particularly in light of 2024 being our first year as a company solely focused on AI cancer detection and risk solutions, to recap our solution set and market opportunity. ICAD is a global leader in AI-powered cancer detection solutions. Our mission is to create a world where cancer can't hide, because cancer wins when it hides. Remaining undetected, cancer poses one of the greatest threats to life. With our industry-leading profound breast health suite, cancer has finally met its match. The profound breast health suite enables medical providers and professionals to accurately and reliably identify where cancer may be hiding and when it might make its move. The profound suite offers solutions comprised of four areas. Number one, breast cancer detection. Number two, density assessment. Number three, one or two-year breast cancer risk evaluation, and number four, cardiovascular risk evaluation related to elevated levels of breast arterial calcifications. Powered by the latest innovations in artificial intelligence and built on one of the largest, most demographically and geographically diverse data sets, The PROFOUND suite offers unique 360-degree solutions for cancer detection, density assessment, and personalized risk evaluation, all based on a 2D or 3D mammogram's collection of images. The PROFOUND detection solution scores cases and suspicious lesions, helping radiologists identify and focus on areas of most concern and highest suspicion of cancer. The PROFOUND density assessment standardizes and simplifies breast density reporting, algorithmically examining a woman's breast anatomy from the mammogram image. The profound risk solution provides a near-term probability for developing breast cancer in the next one or two years, making it more actionable and relevant than generalized lifetime risk scores. The profound heart health solution identifies the presence and quantity of breast arterial calcification, which is proven to correlate with calcifications elsewhere in the body, raising concern for cardiovascular or heart health concerns. Used by thousands of providers serving millions of patients, Profound is available in over 50 countries. We estimate that Profound has been used for more than 40 million mammograms worldwide in the last five years alone. With over 25 years of experience in AI cancer detection, ICAD has secured 45 patents, completed over 50 clinical studies, and as I just described, we train our algorithms on one of the largest and most diverse data sets, pulling data regularly from over 100 global locations. ICAD's deep experience and unmatched set of capabilities differentiates ICAD from its competition and positions it as the industry leader with an AI solution that continuously gets better as the company continually refines its algorithm models using its extensive data set and research partners. As outlined during our 2023 third quarter earnings call, ICAD is increasing its leading position as the premier breast AI solution by transitioning into a platform-based, software-as-a-service, data-as-a-service organization by implementing a three-phase transformation. Phase one, realigning our base. Phase two, strengthening our foundation. and phase three, investing in growth initiatives. In 2023, we made good progress executing phases one and two, including stabilize the business through reducing our cash burn. EBITDA, which we view as a relevant metric to indicate operating cash flow, was a loss of 0.4 million in Q4 23 versus a loss of 3.6 million in Q1 of 23. This represents an improvement of nearly $3.2 million per quarter. Reduced cash burn. 2023 cash burn from operating activities of $5 million compared to 2022 cash burn from operating activities of $12.8 million. We believe cash burn is stabilized and I'm pleased to affirm the company does not need to raise additional funding to pursue current growth initiatives. 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 36% increase in ARR since the start of the subscription transition. We've achieved 16% compounded annual growth rate in total ARR over the two-year period through the end of Q4 23. We 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. In December, we announced expanding our sales leadership team to accommodate growth. Bill Kyes shifted and expanded his role to Senior Vice President, Global Sales Operations, and Peter Graham joined us as Senior Vice President, North American Sales. We also made good progress in recruiting new board members, and you may have seen the recent announcements on those additions. We upgraded our brand by transitioning from a product focus to patient-centric value proposition, resulting in our new tagline of creating a world where cancer can't hide. You can see more of this brand upgrade in our new investor deck, available for download via the investor section of our website, icadmed.com. announced game-changing collaborations with esteemed partners, exemplifying our company's commitment to creating the world's most pervasive and personalized suite of AI cancer detection solutions. And last but not least, the divestiture of Zot also resulted in a reduction to cash burn and an influx of cash. Completing this divestiture has enabled us to put our focus into scaling the profound suite business, immediately prioritizing expanding our sales and partnership models to grow revenue. The company's next phase of transformation, phase three, has begun in 2024 and includes launching initiatives that strengthen and deepen business with existing accounts and growing through expanding our direct and indirect sales channels, including expanding ICAD's geographic footprint. We believe U.S. sales had declined due in part to a significant reduction in the sales force in fiscal year 2022. As of Q3 2023 in the U.S., we had six sales reps versus 12 in Q3 of 2022. 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, which I'm going to discuss next, and reps focused on large national accounts will lead to revenue growth. Since our Q3 call, we added four new team members to the sales organization. I'll take a few minutes now to outline our large addressable market opportunity. When diagnosing breast cancer, early detection matters. Identified in stage one, cancer is more likely to respond to treatment and can result in greater survival rates. In fact, according to the American Cancer Society, The relative five-year survival rate from breast cancer is 99% when detected early. However, the incidence of breast cancer is growing. According to the World Health Organization, breast cancer is the most common cancer worldwide, recently surpassing lung cancer, with 2.26 million new cases diagnosed worldwide in 2020. One in eight women will get breast cancer in their lifetime, and every 14 seconds, a woman is diagnosed with breast cancer worldwide. Compounding the situation, 59% of women in the U.S. missed their recommended screening mammograms. And for those who regularly screen for breast cancer, 20 to 40% of cancers are missed in mammogram screenings, with up to 50% missed in women with dense breast tissue. Traditional risk assessment models have relied on family history of the disease as a leading risk factor, when in fact, and most surprising, 89% of women diagnosed with breast cancer have no direct family history of the disease, and 90 to 95% are not related to inherited gene mutation. As breast cancer detection is becoming increasingly complex, AI can help radiologists spot cancer faster, with greater accuracy, and save more lives. With the continuing migration from 2D reading systems to 3D, known as DBT or TOMO systems, radiologists are spending two times the amount of time reading hundreds more images per 3D case compared to the four images captured with 2D. This geometric increase in the number of images to read leads to stress. 50% of radiologists are overworked, and burnout is reported to be 49%. her Medscape Radiologist Lifestyle Happiness and Burnout Report 2022. Simultaneously, false positives and unnecessary recalls for suspected cancers have continued at similar rates, while hard-to-detect interval cancers are being missed or diagnoses are delayed. The rise in workload for radiologists is felt by patients too, anxiously waiting weeks for results, or receiving unnecessary recalls and biopsies lead to undue stress and anxiety, not to mention distrust of the healthcare system. On average, only 10% of women recalled back from a routine screening mammogram for a diagnostic workup are ultimately found to have cancer, resulting in the patient being confused and frustrated with the process. Additionally, a significant economic burden is placed upon patients and payors that extends throughout multiple years when a breast cancer diagnosis is missed in its early stages and instead diagnosed at a later, more advanced stage. Beyond associated clinical benefits, finding and treating breast cancer earlier may limit the need for more intensive and expensive treatments, increase patients' health-related quality of life, have a significant impact in managing healthcare costs among cancer patients, and reduce caregiver and societal burden. ICAD calculates if diagnoses were shifted one stage earlier for just 20% of the 280,000 women in the U.S. diagnosed with breast cancer each year would result in a savings of approximately $3.7 billion across two years of patient treatment and healthcare costs. Our AI-powered mammograms are setting a new standard of care in cancer detection, density assessment, and short-term risk evaluation. With ICAD's profound breast health suite, radiologists' reading times may be cut in half with improved accuracy and specificity in finding suspicious cancerous lesions. Radiologists benefit from standard, objective, inclusive results measured by an algorithm built upon many millions of images. and patients benefit from receiving timely, personalized results, fact-based assessment of the breast density, and short-term risk assessments that inform their screening plans. As noted above, ICAD's mission is to create a world where cancer can't hide, because when cancer wins, we all lose. For the health of women everywhere and the benefit of their communities, ICAD's AI-powered, image-based solutions help detect cancer faster, earlier and with greater accuracy, as well as evaluate breast cancer and cardiovascular risk from a single mammogram. The Profound Breast Health Suite is cleared by the FDA and has received European CE mark and Health Canada licensing. As I noted earlier, Profound is used by thousands of providers serving millions of patients. Profound is available in over 50 countries. According to a December 2023 report, approximately 40.5 million annual mammograms are conducted in the U.S. across 8,834 certified facilities, as measured by the FDA Mammography Quality Standards Act. Yet, only 37% of facilities are using an AI mammography solution, according to research and markets United States Mammography and Breast Imaging Market Outlook Report 2022-2025, Leaving Room for Growth. Of the 3,268 facilities using AI, ICAD has an active customer base of 1,488, or 46% of the AI market, and 17% of the total U.S. market. In the last five years alone, ICAD estimates reading more than 40 million mammograms worldwide. Based on the number of DBT units relative to the total units left to be converted to DBT and the associated large number of installation opportunities, we believe our profound solutions for 3D may represent a significant growth opportunity in the United States. We also believe that there is a growth opportunity for 2D mammography and DBT AI solutions in international markets, both from the analog to digital conversion, as well as more countries adopt the practice of each exam being read by a single radiologist using AI, rather than the current practice of having two radiologists read each exam. Furthermore, additional Western European countries have already implemented or are planning to implement mammography screening programs, which may increase the number of screening mammograms performed in those countries. Since having released our first FDA-cleared product in 2002, ICAD has remained committed to innovation in artificial intelligence by continuously improving and releasing the highest performing and most widely available solutions in breast care, with FDA clearances, CE marks, and Health Canada licenses. The latest versions of ICAD profound breast health suite solutions are currently under review with the FDA, including version 4.0 of our profound detection solution built on the newest deep learning neural network AI. Per regulatory test data, ICAD has observed detection version 4.0 will deliver significant improvements in specificity, sensitivity, and the highest AUC, or area under the curve, for specificity and sensitivity for breast cancer detection at 92.5%. Along with the new heart health solution, measuring the level of calcification in breast arteries, identifying cardiovascular concerns, and new cloud deployment options, ICAD's overall value and ease of implementation continue to improve. In 2023, we strengthened our market leading partnerships. Recognized as the leader in breast AI powered solutions, ICAD partners with industry leaders across technology, academic research, integration, and advocacy organizations to iterate and improve upon ICAD software and make solutions more accessible to customers. Our solutions are interoperable with more than 50 PACS vendors worldwide. With 22 global distributors and growing, ICAD's market share is on the rise. In 2023, ICAD continued its work with Duke University, Indiana University, University of Pennsylvania, and Karolinska Institute on artificial intelligence advancements and clinical testing. Additionally, ICAD expanded its partnership with Google Health to enhance the company's technology and expand access to millions of women and providers worldwide. ICAD's new 20-year research and development agreement includes co-development, testing, and integration of Google's AI technology with the profound breast health suite for 2D mammography for worldwide commercialization to potentially ease radiologists' workload and reduce healthcare disparities for women. The conventional double-read workflow used by most countries, where mammograms are assessed by two separate radiologists, has become increasingly challenging as there's a global radiologist workforce shortage. Leveraging AI as a viable alternative to current double-reading by introducing ICAD as secondary independent reader can help radiology departments run more efficiently. ICAD solutions more available to customers, we expanded into new platform and channel partners, technology partners, and health system partners. In November of 2023, we announced ICAD is the only breast cancer AI detection solution integrated into GE's new My Breast AI suite, an all-in-one platform made up of three workflow algorithms from ICAD's profound breast health suite. GE has released My Breast AI Suite first in the U.S. and plans to release globally in 2024, simplifying the sales and implementation process for GE and enabling AI use by customers across the globe. Additionally, ICAD developed several new partnerships and integrations with several AI distributors and marketplace aggregators to implement profound AI via cloud options, such as Ferrum, Change Healthcare, Blackford, and have several others currently under negotiation to further expand ICAD's footprint. Looking forward, ICAD is dedicated to serving those in need by establishing free, equitable access to AI-RED mammograms. To start, ICAD will bring profound detection to the countries of Ghana and Guyana in partnership with RAD-AID, a nonprofit entity that works in over 30 countries to improve and optimize access to medical imaging and radiology in low-resource regions of the world. Together, ICAD and RAD-AID plan to improve diagnosis of breast cancer where breast cancer mortality rates are the highest. I'll now turn the call over to Eric for a detailed review of our Q4 and year-end 2023 financials.

Good afternoon, everyone, and thank you, Dana. I'll now summarize our financial results for the fourth quarter and year ended December 31st, 2023. Please note that these results exclude the divested Zoff business unless otherwise noted. Results relating to the Zoff business line are presented in Note 2 of our annual report on Form 10-K. Revenue for the year ended December 31st, 2023 was $17.3 million, a decrease of 2.5 million, or 13%, from 19.8 million in fiscal 2022. Product revenue declined 2.7 million, offset by a 0.2 million increase in service revenue. The revenue decline was driven primarily by a reduction in sales force, along with our continued shift from a perpetual to a subscription-based revenue model. Revenue for Q4 2023 was $4.7 million, an increase of $0.1 million, or 2%, from the fourth quarter of 2022. Fourth quarter 2023 product revenue was $3 million, up 8% from the prior year. Service revenue was $1.8 million, down 6% over the prior year. Moving on to gross profits. On a percentage of revenue basis, gross profit was 91% for the fourth quarter of 2023, which was up from 84% in the fourth quarter of 2022. On a pure dollar basis, gross profit for the quarter was $4.3 million as compared to $3.9 million last year. Total operating expenses for the fourth quarter of 2023 were $5 million, a $1.4 million or 22% decrease year over year. This improved run rate reflects the implemented cost-cutting measures previously announced. Gap net loss for the fourth quarter of 2023 was $0.5 million, or $0.02 per diluted share, compared with gap net loss of $2.2 million, or $0.09 per diluted share for the fourth quarter of 2022. This year-over-year decrease in the gap loss per share is primarily due to operating expense reductions. Non-GAAP-adjusted EBITDA loss decreased $1.7 million to $0.4 million in the quarter ended December 31, 2023 from the same period in 2022. Note that the non-GAAP-adjusted EBITDA loss for quarter ended December 31, 2022 was $3.1 million with the ZOFT business unit included. Moving to the balance sheet. As of December 31st, 2023, the company had cash and cash equivalents of $21.7 million compared to cash and cash equivalents of $21.3 million as of December 31st, 2022. Net cash used for operating activities for the year end of December 31st, 2023 was $5 million compared to $12.8 million for 2022. This improvement of approximately 61% year over year is due primarily to cost savings initiatives implemented during the first quarter of 2023. Please note that the cash balance and net cash used in operating activities both reflect total ICAD, both ZOPT and detection. As Dana noted earlier, we believe we have sufficient cash resources to fund our planned current operations with no need to raise additional funding. The cash balance as of December 31st, 2023 includes net proceeds of 4.5 million from the ZOFT sale in October 2023, as well as net proceeds of approximately 2 million from the issuance of shares of common stock in at-the-market or ATM offerings. The ATM proceeds were generated primarily in Q3 2023. As noted in our prior earnings call, the steady shift to a recurring revenue model from a perpetual model has numerous benefits including better business 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. To help illustrate our progress in this transition, we began reporting the following annual recurring, or ARR, metrics in Q3 23. 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 CARR, represents the annualized value of active cloud service contracts at the end of a reporting period. Total ARR, or TAR, was $8.7 million as of December 31, 2023, up from $8.3 million at the end of the prior fiscal quarter. Maintenance Services ARR, or MARR, was $7 million, up from $6.9 million at the end of the prior fiscal quarter. Subscription ARR, or SARR, was $1.7 million, up from $1.4 million at the end of the prior fiscal quarter. Once we have released our commercial cloud platform, we'll begin tracking cloud ARR. In addition to the recurring revenue metrics noted above, we also began disclosing the 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 the multiple gap revenue streams. We are pleased to report that in the fourth quarter of 2023, we closed 80 perpetual and nine subscription orders. This brought our 2023 year to date total 273 perpetual and 31 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.

Thank you. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue, and you may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from Per Ostlund with Craig Hallam Capital Group. Your line is live.

Thanks. Good afternoon, Dana and Eric. Now that we've gotten through the divestiture, obviously, it seems like the margin profile of the detection business is very much shining through, and I think the growth profile ultimately will as well. Now that you really have the singular focus on detection side. I want to start out with some of the new product activity that you've alluded to in your remarks, Dana. So you mentioned Profound 4.0. It's under review at FDA. We've talked about the Google Health combined algorithm. We've talked about breast artillery classifications. Kind of curious as to how the timing of those three things might start to phase in. I assume 4.0 is probably the nearest in and might have some impact here in 2024. But you tell me. And then with respect to Google Health, is there a reader study there? What kind of is the timing there? And then same goes for breast arterial classifications.

Sure. So I think your sequence is correct. So maybe just to reiterate, and first of all, big caveat, right? It's all dependent upon regulatory approval. And if I've learned anything in the last year, that can be unpredictable. So all of this, you know, comes with like best laid plans, right? But 4.0 is a new version of the algorithm that is under review with the FDA because it's an update to an existing product that's already received a device classification. I'm using air quotes here. Allegedly, it should move the fastest. So, yes, we hope that the FDA can get through their review and give us clearance to take that algorithm to market here within this calendar year. We'll keep everyone updated as we move along through that process. Breast arterial calcification, which is a new standalone solution that works with the entire suite, is also in the FDA process. It's a new product, not just for us, but for the market in general. So lots of Q and A going back and forth with the FDA, but it's moving forward. So, likewise, we hope to receive clearance this year, but you just don't know when it's a brand new product. And we have our partner, Solus Mammography, helping us with answering questions for the FDA based upon, you know, real world experience. And in fact, they'll be kicking off a treating exercise to help prepare some of the additional data needed to answer some of the FDA's questions. The third one is the combined kind of Google algorithm, in particular, the use of the algorithm for independent and second reader. That is a European Union-focused effort, not something that has widespread possibility in the United States as of today. And that's going to be a very long-term effort. So that's probably going to take a few years to get through regulatory approvals. There are studies already underway but we're expecting to have to do multiple studies across different countries to get that algorithm through clearances. So it's not anything that we've built into our commercial model from a revenue standpoint in this calendar year.

Okay, excellent. Let me add one more product question.

Sure. Profound risk. FDA has some new guidance related to that product and those type of tools. Where does that stand today? Are you still in the data gathering mode there or is that also now back at FDA? Where are we looking at there?

Risk is already cleared in the European Union, so it has its CE mark. It also has its Health Canada licensing, so we are actively selling it in those regions. But here in the U.S., we did hear back. So the first step with the FDA, once the FDA had released its final guidance, was to resubmit the risk product and ask the FDA to classify it. They did come back and which we have a firm answer from them that it is classified as a de novo or brand new device. There is no predicate device in the market today. So we're definitely breaking ground with something brand new. So we are going through the process right now of preparing all of the data and the documentation information needed for a de novo device submission to the FDA. So that will be a longer process. So I think our estimates are, you know, it's probably going to be sometime early 2025. We hope if everything goes well, when we receive any form of clearance back from the FDA. But again, you never know kind of what questions they come back with. But it is moving forward. It seems to be better understood now that we've submitted some of the answers to prior questions that we received. And so it's just a matter of going through the FDA process.

Sure, that makes sense. This may be a leading question, but indulge me. The fact that it's being treated as a de novo, that obviously adds a little bit of time to the equation, but does it also at the same time actually strengthen your hand in the sense that there are other decision support tools out there that are kind of coin flips where you come out with a de novo clearance from FDA on your risk product and shouldn't that kind of move to everybody's sort of head of the line for what they would want to use in that sort of scenario?

Um, it does, I mean, and part of, you know, I'll say a bit of the benefit and being de novo is we can kind of set the bar right for what additional products. You know, we need to provide in terms of functionality and their accuracy in order to claim, you know, we're a predicate device for them. So. And it is also still available today for investigational use. So we still have customers using the product and, you know, deriving some benefit for their customers. They're just not able to commercialize it. But, you know, that strengthens the analysis and the data that we can provide to the FDA through their use of it in an investigational mode.

Okay. Very good. I'm going to ask two more if I can. Yeah. The revenue performance in Q4 was nicely ahead of my forecast and consensus, and I'd hazard a guess that, you know, we all probably tried to be a little bit conservative because of the moving parts and the transition and what have you. Did the quarter surprise you at all from, you know, versus your and Eric and the team's internal expectations? Because, you know, an 80-year-old and nine subscriptions seems like a pretty good number. These are probably all implicitly had in our models.

I'm trying to think of like the most effective.

So the part that didn't, did not, right, surprise us is we have a pretty rigorous forecasting and pipeline review process that happens every single week, very consistently. So we began to see, you know, deals moving through stages of the pipeline, obviously much earlier than it's at a point where it's something you could announce, right? So I would say, you know, we began seeing that movement happen. The flip side is, you know, it was first time through that pipeline for kind of all of us as a team, right? And so while you might have a sales rep, you know, forecasting a deal at stage three, right? And, you know, stage four is kind of getting to the final stages. You know, we ask as many questions as we can to try to validate that, but you still got a little bit of, you know, fingers crossed that we're all speaking apples to apples in terms of expectations as things are moving through the stages. So, you know, I would say, it's like a roundabout answer, but on the one hand, you know, we stopped building and we're beginning to have some of that predictability. On the other hand, it was first time through the process. And so we hoped, you know, everybody was qualifying deals and categorizing them at stages that, you know, we were all on the same wavelength. I think fourth quarter in general, just having spent literally decades in software, it's, it's, it's always the best quarter, right? It's always very seasonal. Um, so there was some expectation there in terms of just like the quantity, right? And deals that, you know, might come through. Everybody likes to take advantage of any discounts or just kind of end of your budget money that's available. So that part, I would say kind of played true in terms of like a traditional software business, especially software as a service business. But, um, I'll ask Eric if he wants to chime in and he can feel free to have the exact opposite point of view.

I agree, Dana. I wasn't really that surprised by the results, honestly. We had a few deals that slipped out of Q3. I think maybe my take would be that Q3 was a little lower than we expected and Q4 might have got a slight benefit from that. But no, I think it was in line with what we expected coming into Q4 internally. I don't think it's an anomaly for the business at all. I think it's a good quarter. We're happy with it, but it's not ridiculously high that we're surprised by it. I think we executed two expectations in Q4.

That's great. All right. One last one. I apologize. I feel like I'm hogging the queue, but maybe just a super big picture question. RSNA, I think it was your first time at RSNA, I believe, Dana. Just curious if you had sort of a high level takeaway of what you felt like messaging and what the interest was and did you see other really interesting things out there that that you know gave you pause as far as your competitive standing or any you know kind of just anything you you you kind of thought coming away from that show so overall I think our show presence and level of activity exceeded my expectations you know so

We had a bit of an internal competition and kind of a high bar in terms of what would count as a meeting, right? That was booked during RSNA, a meeting with a prospect or a customer, and it had to meet certain criteria. You heard on the call, right? My prepared remarks, you know, we were at Salesforce 50% half the size of the year before. And we had far, far more meetings and qualified meetings at RSNA generated by that, you know, small and mighty team. So, and both, you know, U.S.-based as well as international-based meetings. So, I think our show presence was great. We had people, you know, expressing genuine interest. I would say the flip side is because I was so busy in all those meetings, I probably didn't get to walk the show floor and check out other things that were going on as much as I thought that I might. But I did get to spend time, you know, at some of our competitors' booths. You know, everybody's kind of a bit more friendly in a trade show environment. You know, they know folks are walking around and open to talk. So that was great. Obviously, seeing the presence of companies like GE was just fabulous and getting to get a peek at some of their innovations, things that were important to them in terms of articulating their innovation and the way that they want to see their products positioned. As I mentioned, right, it was very timely because we were able to announce this full-blown integration into their My Breast AI suite at the show. So that was good. I think, you know, if I flip it around and I'm the radiologist walking the show floor... I think it can still be a bit overwhelming figuring out how all of these technology components fit together and kind of how I make my decisions on what to use and in what order. So that gave us more insights when we came back home after the show on ways in which to really improve our messaging, our product demos, even our initial kind of introductory to ICAD pitches. So we've been spending a lot of time on that. We are developing a new kind of adoption campaign and some training materials, trying to make sure that we don't underestimate the amount of change management and cultural adoption that needs to happen with AI, right? You heard me quote the stat, and we actually talked about this even with Hologic team members at the show of only 37% of rate of screening, right? Mammography screening centers are using AI. There's still a long ways to go to really saturate that market. And so what are barriers to adoption? And a lot of it's just cultural and change. And so we've been focusing a lot more on that to complement maybe the technical aptitude and knowledge that we try to share in our presentations in the past.

That's great. That's very thorough. Thank you. I appreciate all the answers.

Yep.

Thank you. Our next question is coming from Marie Thiebaud with BTIG. Your line is live.

Hi, good evening. Thanks for taking the questions, Dana and Eric. I wanted to ask here about your new head of sales and the new folks that you welcomed onto your sales team. Tell me a little bit about when they came on when you expect them to ramp, what they're focused on, is this perpetual, is this a subscription, a bit of both, and how we can expect to see OpEx maybe step up a little bit. I know that's been very nicely controlled, but I guess you have to spend a bit on some of these new folks. Yeah.

So I'll talk a bit about the I'll say kind of like the new structure for the sales team and then hand it over to Eric to talk about the OpEx side. So maybe just a step back, when we had the six sales reps and we had a head of sales, I'll say everybody is kind of doing everything. And when you really get to know a salesperson, I would say most often their DNA skews to either really being excited about cold calls and new business right or they may like more of the ongoing relationship management account management um just kind of care and feeding right of existing accounts and given our large install base we were skewing much more right to that side of the equation much more to an account management versus a new business type of dna in the sales team so When we thought about, you know, the way in which we wanted to restructure the team going forward, we wanted to do a bit of division of roles and responsibilities. So the new head of sales we brought on board, he's the new SVP for commercial for North America, so both the U.S. and Canada. He's definitely wired as a new business guy. So he likes getting the net new logos, breaking ground, right, in new accounts. So to compliment that, I would say of the six that we had, we had one other individual who was really clearly kind of a new business person. And we had one who was a strong hybrid and the rest were really great at account management. So of the four that we've added, one was the new leader that I just mentioned. We added two more account reps that are focused on new business. So we have three people kind of double clicking on new business. we added a new strategic national accounts executive, and so she's on board. So that makes up the four new people that we have, and then moved the existing sales team into more of that account management role. And as account managers, they're really focused on expanding within an existing account, making sure accounts are staying current on upgrades and updates, maintenance and support agreements, whereas the new business team is really kind of net new logos. So everyone, the head, the new SDP started very late December, and the other three new individuals started in mid-January. So their pipelines are beginning to build. A couple of them have some very small deals on the board, as our SEP likes to describe it. And we're expecting, right, that they've got a couple quarters here of ramping up. So far, they're on track with what our expectations are and hope they begin to contribute in the second half of the year. Eric, do you want to talk a bit? A couple of other, you know, I would say kind of holes in our team that we filled, we did add a couple of other, a regulatory resource and a couple of engineering resources as well, right? So to your point, when you think about op-eds, in addition to some of the sales hires, we had a couple of others in those other departments as well.

Anything from Eric there or...

Yeah, yeah, I can add in a little bit of color too. So in Q4, our OpEx was right around $5 million. I think as you're thinking about what that means, it's kind of the first clean quarter without ZOFT. We did have some benefit in the quarter, I think one time, kind of favorable P&L impact. So I'd say in the $200,000 to $300,000 range. So I think about Q4 is kind of where we're at. in OpEx post-soft, but going forward is going to change quite a bit. So, so Dana has mentioned, and you've talked about, we released publicly these increases in the sales team. There's the four new heads and they're pretty, they're pretty senior, senior level people, some of them. So it, it will be, uh, it will be an expense that is largely isn't in our run rate for Q4. Um, and there is also, uh, some of the things Dana mentioned in terms of, uh, investments in regulatory. is part of the plan as we enter this kind of third investment phase after we've stabilized the cash burn. So you will see a bump for these initiatives in OPEX.

Okay. That's helpful detail from both of you. Thank you for that. Wanted a quick update. On Q3, you mentioned that about a quarter of the customer base had lapsed their maintenance agreements, and there was an effort there to try to renew some of that. Any early progress updates on that effort?

We, you know, because it's happened here like just the recent first quarter that we're still in the midst of, we don't have anything that we are able to disclose yet, but I can tell you anecdotally it's going well. We actually have a service pack, which is an update of quite a bit of functionality that will be released next week. So that's also spurring customers to get current on the version of the software because they want to take advantage of those new features and functions. But it is, to your point, we didn't make that information known in third quarter. And so it's something that we are tracking. And those are metrics that we plan on being able to talk about on next quarter's call.

Okay, we look forward to it. One last quick one. Just as I look ahead on your pipeline, you've got some nice new products like breast arterial calcification, potentially risk being added to kind of the suite of products that you offer. How should I think about how that impacts pricing or ASP as you kind of go out and offer these opportunities? Would that increase the subscription ASPs? Is that all going to be part of one package? How to think about that?

Mm-hmm.

Well, both products are under review with the FDA right now. So, I would say when you think about 2024, you're not going to see a big impact, right? It's going to take time to get through the FDA. They're available for investigational use right now, but under that categorization, we actually can't generate revenue from them from customers. But they're helping patients. Of course. I'm looking into the future. Yep, it's a future question. Thank you. Yeah. So the solutions are priced both, I would say, individually right so if you're an existing customer and you want to add it on you can the products are available in the cloud so they can be an incremental you know price right a revenue to an existing subscription and then we also offer you know the whole bundle so i don't know eric if you have any more like color you want to add to how we think about the pricing i think the sales team is super excited to uh again

kind of in the door with our core suite of detection products, and they're chomping at the bit to have these add-ons to go to customers with, with kind of a land and expand type strategy. So they can't get approved fast enough, I think, for our new sales team.

Yeah. Okay, good to hear. Thanks so much for taking the questions. Mm-hmm.

Sure.

Thank you. Our final question today will be coming from Yale Chen with Laidlaw & Company. Your line is live.

Good afternoon, and thanks for speaking in. Just a few quick ones. The first one is I appreciate that you provide the detail of the number of deals done in the fourth quarter. My question to that is that does the perpetual order of fourth quarter generally have for the floor numbers or a referable number for, let's say, 2024, or that also is very fluctuating quarter over quarters.

I don't know if you want to take that one. Yeah.

Yeah, please.

Yeah, yeah. I think you're asking if the perpetual deals fluctuate a lot between quarters.

I mean, I didn't know whether that's perpetuated a lot. I mean, between quarters. We have the number 80 as the one for the fourth quarter, so I wonder whether going forward, would that be a relatively consistent number roughly quarter over quarter, or that actually also could be fluctuating quite a bit over time?

Yeah, they do fluctuate a little bit. an order of magnitude, not a ton. Instead of looking forward, I'm kind of looking back at the last few quarters. I mean, we're up a bit from Q3. I think if you're trying to think about how to model it going forward, I'd probably look at... We did release the number in Q3. I think it was closer to 60 deals for perpetual, and we're up to 80-ish in... Q4. So that's a movement right there. So it, it can move around, but, um, you know, not like two extra and it's just been, it's been, it's been fairly consistent the last few quarters. I think more what, what can change with perpetual deals is the size of the deals too. They can, if you get one or two real big ones, it can, it can swing the revenue if you're, if you're trying to model. So, um, Okay, great. That's very helpful. More stable, but yeah.

Okay, that's very helpful. Maybe just one more add to here, which is now you are a pure play in the detection side. So I also noticed that the margin, the gross margin has been sort of more stable from the last quarter. So should we consider this quarter's number a reference point for 2024 and maybe beyond?

Yeah, I can't.

I can't speak to the future, but for this quarter, it is the first quarter without ZOFT and a clean view. We had the 91% margin. I think there's a few pieces in this quarter that did drive it up a tick. The mixed shift of what we sold, we sold more licenses and less hardware this quarter, so our margins are higher on the licenses, so that drove it up a bit. Going forward, if that mix shift changes more towards licenses, our margins will be better. It's more towards hardware sales and the margins will come down a little bit. So this quarter we did benefit a bit from that. I think last year we reported also in our continuing business, which would be detection alone, our margin was 85% in 2022. So I think somewhere in that range is where we're kind of looking for detection. The 85 to 91 is what we've seen to date. But it could change due to a number of factors, the mixed shift in sales, the mixed shift more from perpetual to cloud. There's a number of factors that could move that number going forward.

Okay, great. That's very helpful. It helped us doing the modeling. So, again, congrats on all the progress. Look forward. to talking with you guys there.

Great. Thanks. Thank you. As we have no further questions in queue, I shall hand it back to management for any closing remarks.

Thank you, operator. In conclusion, we're making bold moves to rapidly transform this company with a focus on maintaining stability, preserving our cash, and building a defensible and competitive long-term strategy. Demand for our technology continues to be strong, 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.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.