iCAD Q3 2023 Earnings Call Transcript

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November 13, 2023

There are 5 speakers on the call.

Operator

Good day, everyone, and welcome to the Icad Inc. 3rd Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen only mode, It is now my pleasure to turn the floor over to your host, Leonor Faber. Ma'am, the floor is yours.

Speaker 1

Thank you, operator. Good afternoon, everyone. Thank you for joining us today for iCAD's 3rd 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 that we will be making forward looking statements on the call today.

Speaker 1

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.

Speaker 1

ICAD 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 Dana.

Speaker 2

Thank you, Leonor, and good afternoon, everyone. Let's begin with our business update. On October 23, we announced that Elekta, a world leader in brachytherapy solutions acquired Zoft, Our therapy subsidiary for approximately $5,500,000 and assumed liabilities. As previously disclosed, We have been in the process of exploring strategic options for the Zopt 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 Zoft subsidiary along with both the technology and the team.

Speaker 2

We're confident that the Xoft technology under the leadership of John LaPresse 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 Hallum Capital Group, who served as advisors to us for this transaction. Let's now turn to the Detection side of the business.

Speaker 2

As we close out 6 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 6 months, we've made substantial progress executing a 3 phase transformation. Phase 1 was realigning our base Phase 2, Strengthening our foundation and Phase 3, investing in growth initiatives. Let's start with Phase 1, realigning our base. In the past 6 months, we have stabilized the business through reducing our cash burn EBITDA, which we now view as a relevant metric Indicate operating cash flow was a loss of $1,100,000 in Q3 'twenty three versus a loss of $3,000,000 In Q1 of 2023, this represents an improvement of nearly $2,000,000 a quarter.

Speaker 2

We've reduced our cash burn. Year to date, FY 'twenty three total cash burn of $4,400,000 which excludes the one time cash infusions like our projected soft proceeds Compared to full year FY 2022 cash burn of $13,000,000 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 in total ARR over the 2 year period are through the end of Q3 'twenty three.

Speaker 2

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 2, strengthening the foundation, in the past 6 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.

Speaker 2

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 of 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 2 d 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.

Speaker 2

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 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.

Speaker 2

And last but not least, the divestiture of Zoft, Coupled with realigning our cost basis and strengthening key foundational building blocks, we've completed the necessary steps to streamline operation 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 3, 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 3 phase approach: Phase 1, expanding our existing accounts Phase 2, growing our channels, both direct and indirect and Phase 3, entering new markets. These phases will overlap. However, we've clearly defined dates and gates, which are measurable criteria to act as triggers within a phase to open the gate to enter the next phase.

Speaker 2

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 3. Let's take a few moments and break these phases down. Phase 1 is expand existing accounts. This phase is focused on maximizing revenue from our sizable installed base, including Reengaging 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 multiyear commercial agreement with Radiology Partners.

Speaker 2

Radiology Partners is a leading provider of 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 The initial order from Radiology Partners recognized in 1 Q1 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 Large enterprise customers like Solis, Radiology Partners, SimonMed, Ascension and Cleveland Clinic, who collectively serve about 15% of the U. S.

Speaker 2

Mammography 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 into 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 we 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 2, which is growing channels, both direct and indirect. This phase is focused on accelerating winning new business in both the U. S.

Speaker 2

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 HealthSuite 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 250,000,000 women in the age range recommended for annual mammograms.

Speaker 2

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 1 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.

Speaker 2

Sales have declined due in part to a significant reduction in the sales force that occurred in FY 2022. In the U. S, we currently have 6 sales reps versus 12 in Q3 of FY 'twenty two. After a thorough analysis of rep performance over the past 3 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. This leads us to Phase 3, entering new markets.

Speaker 2

After measurable progress in Phases 1 and 2, we'll begin Phase 3, most likely in FY 2025. 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 calcification. In Q4 2022, we announced the development and commercial collaboration agreement with Solis. 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.

Speaker 2

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 1 and 2 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 sales force continues to secure opportunities with some of the most esteemed and prestigious Healthcare Facilities Worldwide.

Speaker 2

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 partners Solus Mammography, adding 2 new Solus sites in Texas. We expect continued expansion with Solus across new U.

Speaker 2

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 1, Expanding into existing accounts, you've heard us announce in past quarters winning deals with large enterprise customers like Solus, Radiology Partners, Simon Med, Extension and Cleveland Clinic, who collectively serve about 15% of the U.

Speaker 2

S. Mammography screening market. Great potential lies ahead for iCAD as many of these customers are in the early stages of rolling out the 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 Our direct sales force in France achieved a groundbreaking milestone by finalizing its most significant deal to date. 13 ProFound AI licenses were sold to a leading radiology group in Dijon, France.

Speaker 2

Our OUS team also signed and onboarded 2 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 8 density assessment licenses alongside the existing detection licenses sold in Q2. And several first marks 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 Appearing November 25 to 30. 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.

Speaker 2

We're featured in 4 clinical abstracts, including presentations from both Doctor. Axel Grabbingholt of Radiology AM Theodor Paderborn, Germany and Doctor. Michael Ericsson of the Karolinska Institute on new data highlighting profound risks, Short term risk assessment capabilities for evaluating development of breast cancer in the next 1 to 2 years, including a multinational validation of a clinical image based AI risk model for individualizing breast cancer screening. Presentations from both Doctor. Chirag Patel of Solus Mammography and Doctor.

Speaker 2

Tu Dao of Henry Monder 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 Pat, President of SCI We'll be highlighting new data from iCAD's 4th 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.

Speaker 2

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.

Speaker 3

Good afternoon, everyone, and thank you, Dana. I'll now summarize our financial results for the Q3 ended September 30, 2023. Please note that these results exclude the divested Zoft segment. Results relating to the Zoft segment are presented in Note 2 of our 10 Q. Revenue for the quarter was $4,100,000 a decline of $300,000 or 7% in Q3 of 2022.

Speaker 3

Q3 2023 product revenue was $2,200,000 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 $1,900,000 up 3% over the prior year. Moving on to gross profit. On a percentage of revenue basis, gross profit was 86% for the Q3 of 2023, It was up from 85% in the Q3 of 2022.

Speaker 3

On a pure dollar basis, gross profit for the quarter was $3,500,000 as compared to $3,700,000 last year, largely reflective of the reduction in revenues. Total operating expenses for the Q2 of 2023 were $4,700,000 $2,000,000 or 29% decrease year over year. This improved run rate reflects the implemented cost cutting measures previously announced. Operating loss was $1,200,000 in the Q2 of September 30, 2023 versus $3,000,000 in the quarter ended September 30, 2022. GAAP net loss for the Q3 of or $0.15 per diluted share for the Q3 of 2022.

Speaker 3

Non GAAP adjusted EBITDA For the Q3 of 2023 was a loss of $1,100,000 versus $3,400,000 in Q3 2022. Non GAAP adjusted net loss for the quarter was $1,400,000 or $0.05 per diluted share compared to $3,900,000 or $0.15 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 30, 2023, The company had cash and cash equivalents of $19,000,000 compared to cash and cash equivalents of $21,300,000 on December 31, 2022. During the Q3, the company generated net proceeds of approximately $1,800,000 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.

Speaker 3

In addition, the Xoft sale in October 2023 resulted in net cash proceeds of 4,800,000 Had the sales off occurred on September 30, 2023, our cash balance would have been $23,800,000 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 GAAP revenue and negative cash flow impact for the next 3 years. As noted in previous earnings announcement, our plan was to bring back the annual recurring revenue, ARR metric, We are introducing 3 new ARR metrics. Total ARR or T ARR represents the annualized value of License, maintenance contracts and active cloud services at the end of a reported period.

Speaker 3

Maintenance services ARR or MARR Subscription ARR or S ARR 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 the reporting period. As of the end of Q3 'twenty three, total ARR or T ARR was 8,300,000 Maintenance services ARR or MARR was $6,900,000 Subscription ARR Our S ARR was $1,400,000 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, The intent of this metric is to illustrate the pure volume of sales without the complexity of multiple GAAP revenue streams. We are pleased to report that in Q3 'twenty three we closed 60 perpetual and 7 subscription orders.

Speaker 3

This brings our year to date total to 193 perpetual and 62 subscription orders. This concludes the financial highlights of our presentation. I'd now like to turn the call back over to the operator to lead the Q and A.

Operator

Certainly. Everyone at this time, we'll be conducting a question and answer Your first question is coming from Per Ostlund from Craig Hallum Capital. Your line is live.

Speaker 4

Thanks. Good afternoon, Dana and Eric. Congratulations, 1st and foremost, on the ZOP divestiture. It's nice to see the resolution there after The process really didn't start that long ago. So congrats on that.

Speaker 4

A lot of places we could go here, I think. Obviously, looking at the release and seeing that the Zoft 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.

Speaker 4

Is there more to go there on that front? And sort of part and parcel with that, do you have a breakeven revenue level in mind

Speaker 2

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 Xoft. Just maybe one data point there. We were thrilled that Elected to both the technology and the team. There was great market potential, I think, for the soft technology.

Speaker 2

It was It's really difficult to do with 2 very different lines of business kind of under the same umbrella. So, so pleased that you're already kind of 0 what the detection business looks like standalone, so because that's 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 we can talk about kind of expense structures and where our thoughts are.

Speaker 3

Thanks, Dana. Yes, I think on the Zoft, we with the furloughs and then all the other things we did in the last three quarters, 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 Xoft I'm thinking it's going to come down significantly. We had pulled back on clinical spend and employee spend significantly. So There could be some and we did release in our 10 ks the direct Zoft impact.

Speaker 3

So there was about $377,000 loss in Q3. So that's called out. So that's what we lost from direct ZOP business. So Gary, we might pick some of that up going forward, but I don't think it will be much more than that.

Speaker 4

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 Q3 expense structure for again for detection standalone, How much might actually need to come back now that you've got the ZAF proceeds and that transaction is completed and you've raised the funds through the at the market 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 forces maybe down 50% year over year in terms of people. Is that something that gets bolstered?

Speaker 4

What else might get bolstered now that you feel like your level set around one initiative?

Speaker 2

So you're tracking right along with us. So we are going through an exercise right now to refine actually our budget For FY 2024, 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 not, 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.

Speaker 2

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 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.

Speaker 2

So we're in a fortunate position now of Having multiple products, that have been developed over the last 2 years and 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, to use the phrase not get out in front of our skis in that regard, but

Speaker 4

I'm going to come back to my first question just because my question was lengthy. Now that you have the detection business as really It's the singular focus and the cost structure is mostly, I think, set at this point. Is there a breakeven revenue level in mind, whether it's on an EBITDA basis or a cash flow basis? Or is it too early to say?

Speaker 3

I think it's too early to say.

Speaker 2

Yes, that's what I was going to say.

Speaker 3

All the initiatives 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 be breakeven, but I don't know that the cost structure is completely solidified yet. There's a lot we're looking at.

Speaker 4

Okay. That's fair. All right. I'll let some other people ask some questions. Thanks.

Speaker 2

Yes. Thanks.

Operator

Now hand the conference back to Dana Brown, President and Chief Executive Officer, for closing remarks. Please go ahead.

Speaker 2

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

Operator

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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Key Takeaways

  • Elekta acquisition of Zoft: On October 23, Elekta acquired our Xoft therapy subsidiary for ~$5.5 M (net cash proceeds of $4.8 M), enabling sharper focus on our core detection business.
  • Three-phase transformation: Over six months we realigned costs to cut quarterly cash burn by ~$2 M, bolstered leadership and rebranded, and are now funding growth initiatives without raising new capital.
  • ARR momentum: Transitioning to a subscription model drove a 30% increase in annual recurring revenue and a 16% two-year CAGR, with total ARR reaching $8.3 M by Q3 2023.
  • Strategic partnerships: We inked a 20-year global development agreement with Google Health and a multi-year commercial deal with Radiology Partners (15% of US mammography screens) to expand our AI breast cancer detection suite.
  • Revenue and profitability: Q3 2023 revenue fell 7% year-over-year to $4.1 M (product revenue down 15%), resulting in an operating loss of $1.2 M and non-GAAP EBITDA loss of $1.1 M.
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Earnings Conference Call
iCAD Q3 2023
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