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iCAD, Inc. (NASDAQ:ICAD)

Q1 2013 Results Earnings Call

April 30, 2013 10:00 AM ET

Executives

Anne Marie Fields - Vice President, LHA, IR

Ken Ferry - Chief Executive Officer

Kevin Burns - Executive Vice President, Finance and CFO

Analysts

Brian Marckx - Zacks Investment Research

Jeb Terry - Aberdeen

Shawn Boyd - Next Mark Capital

Operator

Good day, ladies and gentlemen. And welcome to the Q1 2013 iCAD Incorporated Earnings Conference Call. My name is Debra, and I will be your operator for today. At this time, all participants are in listen-only mode. We’ll conduct a question-and-answer session towards the end of the conference. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Anne Marie Fields, Vice President of LHA. Please proceed, ma'am.

Anne Marie Fields

Thank you, Debra. Good morning. This is Anne Marie Fields with LHA. Thank you all for participating in today's call. Joining me from iCAD are Ken Ferry, Chief Executive Officer; and Kevin Burns, Executive Vice President, Finance and Chief Financial Officer.

Following the market close yesterday, iCAD announced financial results for the first quarter ended March 31, 2013. If you have not received this news release or if you would like to be added to the company's distribution list, please call LHA in New York at 212-838-3777 and speak with Carolyn Curran.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of iCAD.

I encourage you to review the company's past and future filings with the Securities and Exchange Commission, including, without limitation, the company's Forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, April 30, 2013. iCAD undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I would like to turn the call over to Ken Ferry. Ken?

Ken Ferry

Thanks, Anne Marie. Good morning, everyone, and thank you for joining us. Our financial results for the first quarter of 2013 were particularly strong when compared to the same period of 2012. Further, we have now achieved three consecutive strong quarters indicating that our strategy and execution in the oncology market is continuing to make considerable progress.

In the first quarter, we delivered 25% revenue growth, while reducing operating expenses by 7%. When compared to the first quarter of 2012 this combination contributed significantly to the achievement of over $0.5 million of adjusted EBITDA profitability.

Growth was extremely strong for therapy products in the first quarter as interest continue to grow for the use of the Axxent Brachytherapy System in the treatment of certain breast and skin cancers.

We also had a relatively strong quarter with software products. This is encouraging as we are beginning to see a favorable market response to our new mammography CAD platform, PowerLook AMP and we are also making good progress in MRI software sales due in part to the launch of next-generation breast and prostate inhibitor products through our global partner InVivo.

With that, I’ll turn the call over to Kevin Burns our CFO who will provide you with more financial detail on the first quarter. After Kevin's remarks, I will come back and provide a brief business update before taking your questions. Kevin?

Kevin Burns

Thank you, Ken, and good morning, everyone. As Ken mentioned, we are pleased with our first quarter financial performance. It was another quarter of solid financial results including strong revenue growth from our cancer therapy products, continued expense management and a third consecutive quarter of adjusted EBITDA profitability.

We are pleased with our ongoing performance as these results confirm that our investments are producing topline results and our expense management programs continue to provide significant benefit.

We report revenues by the two main oncology areas in which we operate, specifically cancer detection and therapy. Our cancer detection revenue includes all of our image analysis and workflow products, including mammography, MRI and CT CAD platforms, as well as service revenue from these product lines. Our cancer therapy revenue encompasses electronic brachytherapy, related accessories and service and source agreements.

Now let's move on to review of our revenue for the quarter. Total revenue for the first quarter was $7.9 million, an increase of 25% from the first quarter of 2012, driven by 64% increase in our therapy revenue, and a 7% increase in cancer detection revenue. We are pleased to note that both our product revenue, and our service and supply revenue increased by 25%, which demonstrates progress we’ve made in both categories.

Cancer detection revenue for the quarter was $4.6 million, up 7% from $4.3 million a year ago, showing progress with our strategy to transition this business. In the first quarter, we announced our collaboration with Invivo, a Philips Healthcare Business and a worldwide leader in MRI.

In March, we released a next-generation platform for prostate and breast imaging solution that integrates our advanced MRI image analysis software with Invivo’s suite of MRI products. In the first quarter, we recognized approximately $50,000 of service revenue related to customization work for Invivo.

In addition from the recurring services revenue standpoint, we continue to see growth in the number of digital mammography products under service and subscription agreement, although this growth is partially offset by a reduction and the revenue generated from our analog service agreements as a renewal rate on the analog products continued to decline.

Therapy revenue continued to post strong growth increasing 64% to $3.3 million from the first quarter of 2012. Product sales, which include controllers, applicator and other accessories increased 66% to $2.4 million. In the first quarter, we sold nine controllers and 175 balloon applicators, up from six controllers and 121 balloons applicators one year ago.

Our therapy service and source revenue continues to increase and grew 59% year-over-year to approximately $900,000. This growth reflects the increase in the size of our customer base, as well as the increase in the number of minutes customers are purchasing under source usage agreements due to increased procedure volume.

Now, turning to the rest of P&L. Gross profit for the first quarter of 2013 was $5.6 million or 71.2% of revenue, which compares with a gross profit of $4.4 million or 69.8% of revenue for the first quarter of 2012, an increase in gross margin of 140 basis points.

Please note that we recorded approximately $130,000 of expense related to the medical device tax as a cost of revenue and as a result this impacted gross margin by 160 basis points. Excluding the med device tax our gross margin improved 300 points to 72.8%.

Total operating expenses for the first quarter of 2013 declined to $6 million from $6.5 million for the same period in 2012, primarily due to ongoing cost control measures. Although, expenses had been reduced significantly, we continue to invest in our growth strategy including the launch of new clinical trials, expansion of commercial activity, investments in new therapy applicators and the development of next-generation CAD products and product enhancement. Moving forward, we expect to maintain quarterly operating expenses in the low to mid $6 million range.

Regarding profit metrics, adjusted EBITDA was a profit of $592,000 for the first quarter of 2013, compared with a loss of $967,000 in the prior year's first quarter. This is our third consecutive quarter of adjusted EBITDA profitability and a nearly $1.5 million improvement over last year’s first quarter.

Turning now to other income and expense. During the first quarter, we recorded a $431,000 gain due to the change in fair value of warrants that we issued earlier in January of 2012 as part of our financing arrangement. On a quarterly basis, we marked the warrants to market and as our share price increases or decreases we will take a corresponding charge or credit.

In addition, net interest expense in the quarter was $826,000 of which $553,000 is cash payable related to the financing arrangement and the balance of $273,000 represents non-cash amortization of financing cost and settlement obligation.

On a per share basis, our non-GAAP adjusted net loss for the first quarter was $0.11 per share, compared with a non-GAAP adjusted net loss of $0.26 per share for the first quarter of 2012.

Moving now to the balance sheet. We ended the quarter with $12.7 million in cash and cash equivalents, compared with $13.9 million as of 12/31/2012. In the first quarter of 2013, we used approximately $1.2 million of cash to fund operation, compared to $3.9 million a year ago.

Our use of cash has significantly declined over the last year. We ended the first quarter with stronger balance sheet including growth in deferred revenue and lower inventories and accounts payable, we do expect to close the cash break-even for the second quarter of 2013.

In closing, I’m very pleased with our progress and the significant improvement in financial and operating results. We are well-positioned to build on this momentum and look forward to continued progress throughout the remainder of 2013.

With that financial overview, let me now turn the call back to Ken. Ken?

Ken Ferry

Thanks, Kevin. Let me begin with some comments on the therapy products then I’ll move on to an update on cancer detection. Therapy growth continued to be fueled by increased demand for the use of the Axxent Brachytherapy System, the treatment of breast and skin cancers.

When you look back over the last 18 months, we sold 13 systems in the first nine months of this period and 29 systems in the last nine months ending March 31, 2013. Also the sales mix has been fairly evenly split between dedicated skin, breast and multi-application use.

Our efforts to continue this growth pace are centered on product innovation, education and awareness, additional studies, following breast and skin cancer patients, efficacy for increased reimbursement particularly in United States and international expansion.

To this end we will be sponsoring a major IORT educational event at the American Society of Breast Surgery on May 1st in Chicago. We anticipate a rich educational discussion, focused on breast intraoperative radiation therapy, with leading breast cancer physicians will present and discuss their IORT clinical experiences.

We continue to see uptake in the skin cancer segment as both the clinical and cosmetics outcomes have been compelling. Our strategy here remains simple, advance the development of clinical data in support of the therapy, enhance awareness and advocate for national reimbursement.

Towards that end at a recently concluded Annual Meeting of the American Brachytherapy Society, a poster presentation was given, showing positive data in support of the Axxent systems use in the treatment of nonmelanoma skin cancers.

Dr. Ajay Bhatnagar from the Department of Radiation Oncology, School of Medicine at the University of Pittsburgh presented clinical outcomes data on 172 patients with 247 nonmelanoma skin cancer lesions treated with high-dose rate electronic brachytherapy with surface applicators using our system. The data presented demonstrated good cosmetic results, little toxicity and no reoccurrence at one year or more of treatment.

We hope that the increased awareness of this study will help to further adoption of the system for treatment of nonmelanoma skin cancer, as well as contribute to more favorable reimbursement overtime.

Also, we received the FDA clearance for new cervical applicator in the first quarter. This applicator will help address an unmet need to improve cervical cancer treatment on a global basis.

According to the World Health Organization, cervical cancer is the second most common cancer in women worldwide, with about 500,000 new cases and 250,000 deaths each year.

New applicator is designed to treat locally advanced stage cervical cancer in combination with the Axxent system by delivering the prescribed radiation dose to the uterus, cervix, endometrium and vagina with reduced radiation exposure to the surrounding healthy tissue. Brachytherapy is an important component in the curative management of cervical cancer and significantly improves survival.

In addition, last week, we had a very strong presence at the European Society of Radiotherapy Oncology, where we highlighted therapy products and introduce our new European Head of Business Development for Therapy Products. Presence at this Society meeting was key as we have several clinical reference sites treating in Europe and we are expanding our international presence.

As part of our global expansion plans, we executed two strategic distribution agreements for the Xoft Axxent system, one with Chindex Medical in China, the other with Medvio in Russia. These are two vast markets where there is currently greater focus on breast cancer and investments in technologies to diagnose and treat it growing rapidly.

The Xoft system is mobile, provides isotope-free radiation directly to the tumor cavity during surgery, minimizing radiation to healthy tissue and organs, and eliminating the need for a shielded treatment environment.

This is important areas like China and Russia where proximity of access to care can be difficult where our technology may play a unique role of advance in breast-conserving treatment for early-stage breast cancer where the current standard of care is mastectomy.

We will be working with our distribution partners to obtain regulatory clearance in each of these geographies and look forward to launching in these countries in the next 12 to 24 months. We expect these international markets will be a key component of our growth strategy over time.

Moving on to cancer detection, we spent the past year or so transforming our business model to one with increasing recurring revenue, new product innovation and are pleased to see the positive effects of these changes.

The first quarter's growth versus Q1 of 2012 was primarily driven by stronger U.S. digital mammography CAD sales through our OEM partners, particularly GE and Siemens, as well as a result of gaining traction with our new product PowerLook AMP to upgrades in subscription-based agreements from the installed base and new customers.

In the first quarter, we experienced more of upgrades that were taking place in digital mammography. We saw increase in demand from our OEM partners, upgrading customers from older digital mammography systems, as well as customers looking to upgrade to our new digital CAD system PowerLook.

In addition, we have seen growing interest in breast density both clinically and legislatively, having ability to add Mātakina as well power breast density module as an integrated option of PowerLook to help to accelerate the upgrade cycle overall for our latest technology.

Longer term we continue to work on the development of our family of workflow tools for the interpretation of tomosynthesis images. We believe that over the coming years the conversion from 2D to 3D digital mammography will offer a significant opportunity for our CAD technology as it should be similar to the conversion from analog film to first-generation digital mammography systems.

Turning to MRI products, in the first quarter, we completed the successful transition of our commercial business to our global partner Invivo. We also launched our first two next-generation products for breast and prostate assessment with them in March.

We see considerable potential with the new customers and through upgrades to Invivo's large installed base. We've also initiated the second phase of our joint development roadmap with addition of new product release as anticipated in the second half of the year.

And on to the top, I've got CTC or CAD for virtual colonoscopy. We had a strong international quarter with our partner Vital Images and hope to see this moment to continue along with further progress on the domestic front.

So, in summary, we have a strong topline growth fueled by the therapy business with considerable progress in the CAD software business and mammography, MRI and CT, and demonstrated prudence expense management. We hope to continue to improve upon these areas in the coming quarters as well.

And now Operator, please open up the call for questions. Thank you.

Question-and-Answer Session

Operator

Okay. Thank you. (Operator Instructions) Okay. Your first question comes from Brian Marckx, Zacks Investment Research. Please proceed.

Brian Marckx - Zacks Investment Research

Hey guys. Congratulations on a great quarter.

Kevin Burns

Thanks Brian.

Brian Marckx - Zacks Investment Research

Any other areas in the world that you can talk about that you are looking at relative to distribution of Xoft?

Ken Ferry

I would say India is a high priority. We obviously mentioned China, as well as Russia in the opening comments, but certainly we think India has a significantly large market opportunity as well. So I think we are trying to be very focused obviously Western Europe, Eastern Europe, obviously other places where we're targeting our efforts with our local European distribution partners.

But I would say one of the bigger markets, in addition to China and Russia, would also be India. I think the challenges could find or timing relative to whether the clinical or regulatory validation. So we're trying to be very focus because we think the opportunities are quite significant.

With that said, we definitely believe that if we were to find a truly large global partner, it may accelerate this process as well where we would have complementary technologies, but definitely focus on international.

We think the whole platform, the mobility, the isotope free, the targeted radiation in different applications is an extremely compelling technology for the international markets, even in some respects more so than United States. So we're pretty excited about the opportunity over time.

Brian Marckx - Zacks Investment Research

Relative to the regulatory approvals and what you need for support in China and Russia and India, and the other areas that you talked about, is the data that you already have is that sufficient do you think?

Ken Ferry

I think we have sufficient data. What you really need though in addition is you need to be doing treatments and procedures in those countries. And so I think it's a combination of having the data, having CAD treatment experience, and I do think though from a regulatory standpoint we feel very confident with what we have.

As an example, we are really pleased to have the Chindex relationship because they have fairly substantial distribution partner size. They have a very strong regulatory arm in China and so they will be able to help us in ways they would be very challenging for us to handle here from the States without having someone on the ground in China.

So they have a relative experience with a vast number of medical products that they distribute. They have a very strong core regulatory group that understands how to get things done.

So that's a very important partner to get through the whole regulatory process and we will certainly have some reference side activity as well to ensure that when we go to market we have centers of excellence that are treating in addition to having all the appropriate regulatory approvals.

Brian Marckx - Zacks Investment Research

Okay. Relative to the cervical indication application, has that started rolling out now or is that kind of a Q2 thing?

Ken Ferry

We are still in what I would call the final stages of validation at key sites and so we have not launched this product at commercial -- more traditional commercial basis yet. I would expect that we would do it sometime in the second quarter and at this point this it is going along well but we're taking whatever described as a methodical approach to ensure that we validate its performance and its ease-of-use and all the different important components before we would do a broad commercial launch, but it should be in the second quarter.

Brian Marckx - Zacks Investment Research

And is there something that you may pursue like you did with skin clinical studies with to help support use of that?

Ken Ferry

I think, certainly will. I think what our customers have asked for beyond the fact that we have endometrial applicators, they wanted a full suite of applicators for [GYN using]. So I think we are very pleased that this really gives us the full suite of applicators and helps us to address this market in a holistic fashion.

Our customers that have the endometrial applicator very pleased to now add this and then also obviously as we approach new customers to see the entire suite of capability and we will definitely pursue the appropriate clinical data to further the reimbursement opportunity as well. So it's clearly reimbursement is an extremely important component to all of our applications.

Brian Marckx - Zacks Investment Research

Relative to the Invivo relationship, the software products that you are offering, is that something that can be incorporated into their existing installed base or is this related to their new product launches?

Ken Ferry

We’re providing InVivo with a software-based breast and prostate module and we’re, obviously from a roadmap standpoint, working on additional capability. This is being sold to new customers as a new software application or set of applications. It's also being sold to the installed base as an upgrade.

We use a very different architecture, real thin client, software architecture for the products. That is not the case in the prior generation, if you will, product that they have in the market. So this would be a pretty substantial upgrade in terms of the technology, hardware and so forth.

But I think the differentiated capabilities, the value proposition around the architecture, very, very compelling. And quite frankly InVivo has said to us that they see a very rich opportunity in their install base for upgrades in addition to selling new software modules, many times bundled with their suite of coils and accessories for the MRI suite.

So this is pretty exciting. MRI opportunity, we think has been enhanced dramatically from where we were. Just a simple example is they have well over, we believe 1,200 installed customers. And we probably had one-tenth of that. So when you look at the size of the installed base, the fact that they have brought upgrades and new innovation, pretty readily to that installed base. And now they're bringing a very substantially differentiated state-of-the-art platform, both to the installed base as well as to new customers.

We think it's exciting and this notion of bundling the coil is something obviously we couldn’t do as well. So that's another advantage. And then we've got the international front, where we clearly couldn't really have the international reach with our products, using our own resources. And they have the ability to give us global reach.

There is other opportunities that we’re working on within this well as they linked in very tightly with the whole Philips' IntelliSpace portal architecture which is a multimodality workstation. And our hope would be that we will be able to put a module into that environment as well. Sometime in the future, we’ve had conversations around that type of roadmap.

And so there's lots of opportunity here. Certainly, one that we’re excited about and beyond the obvious which is getting all this innovation into this global market, it’s allowing us to save a substantial amount of money for the commercial effort that we were spending to be in the space as a standalone player. So it’s a kind of win-win all around and we’re just really getting out of the box with this.

Brian Marckx - Zacks Investment Research

Yeah. Okay. Thanks a lot guys.

Ken Ferry

Thanks Brian.

Operator

Thank you for your question. Your next question comes from the line of [Marcus Ly], Craig-Hallum Capital. Please proceed.

Unidentified Analyst

Good morning and congratulations on a great quarter. I just have one question since most of have been -- my questions have been asked. Concerning the cervical applicator sales, cervical sales or cervical applicators, can you provide details on, kind of, how that market, you’re expecting that market to shape up. Are you -- is it more of a selling into existing customers and adding that applicator or would be kind of more -- kind of greenfield opportunities with folks who aren’t using the Xoft System?

Ken Ferry

Yeah. I think the answer is both, Marcus. Maybe I would describe it as maybe the low-hanging fruit would be our installed based where customs are actively using endometrial applicator today. Adding this is a logical extension but I would also then say the bigger opportunity for us quite honestly is the some of our applications including cervical.

So the way I would look at is to say we have a very powerful platform that has the ability to treat breast, skin and GYN. And what we really believe is that there will be lot of polls to the cervical applicator for the customers that are looking to buy platform product of multiple applications. And that’s a real differentiator for us.

The principal competitor that we have in the market today is Zeiss, essentially only does breast IORT, with a very stationary system that is not mobile and the treatment times are something in the order of two to three times as long as ours.

So we have significant advantage over them in the one core area that we compete. But then when you look at the benefits of having a platform that can also do skin and GYN, we obviously have plans to do other applicators in the future. It's a real, real advantage for us.

And so I think we will market this as a extension of a very powerful platform product but certainly we can address the GYN aspect of this relative to both endometrial and cervical. So we'll have a complete product in that area. With that said, I think the platform itself is probably going to drive more sales than thinking of cervical as a standalone product.

Unidentified Analyst

Okay. Thanks.

Ken Ferry

Sure.

Operator

Thank you for your question. Your next question comes from the line of Jeb Terry from Aberdeen. Please proceed.

Jeb Terry - Aberdeen

Good morning, Ken.

Ken Ferry

Good morning.

Jeb Terry - Aberdeen

Ken, can you -- I understand you’re going to be presenting for tomorrow. And I guess my question has to do with what can you tell us about the frequency of cases being performed using IORT scan as you point out to your platform approach. It certainly looks like you’re getting some sequential traction, year-over-year traction in number of cases. But what are you seeing in terms of frequency in high-performing sites, additional sites using that number of prior installed base beginning to start to use the tools?

Ken Ferry

Sure. I guess, what I would say is it’s a mix of a number of different forces, Jeb. We certainly have sites that are very, very active in increasing their procedure volumes and let’s say using breast IORT as an example. We have sites that are just doing skin. And in the skin market, we’re seeing a dramatic increase in volumes. I mean, the numbers are staggering.

We’re now in a situation where we’re seeing over 1000 procedures done in skin on a monthly basis. So obviously a patient as an example might get something in the order of 8 to 10 treatments. So the number of treatments has gone from hundreds to thousands in the skin market.

And we have customers clearly that are using the system for both as opposed to in a dedicated fashion. So we're seeing an increase in utilization across the Board. I would say that in the skin market, it's almost instantaneous because you can buy a system. You get up and running very quickly. It's all surface applicators. It can be done in an office environment.

So it’s very, very different ramp relative to IORT which takes a very, very clear clinical protocol, I guess, breast surgeon and radiation oncology and physicists and all the different stakeholders together. That can take a lot longer to get up and running. So we have a number of sites that are in the process of getting up and running and breast IORT were brought, let say, in last several quarters.

Skin is almost ready-to-go market as soon as they buy the system and get trained -- get going with the relationship between dermatology and radiation oncology. So it’s a very different dynamic. So we’re seeing increased demand in both. And I think that as it relates to the installed base, we have people in the field that are focused on the installed base. And we do have a number of customers for whatever reasons over the years has stopped treating or has slowed down their treatment.

And we’re trying to work with those customers to really get the back up and treating in addition to all these new customers that we have brought on board. So it’s kind of a mix of initiatives all pointing in the right direction, all making progress. I think that the challenge we face in many cases is reimbursement.

And so we’re putting a much bigger investment going forward in reimbursement. We’re investing both in obviously lobbying for improved reimbursement but even more so in studies as a foundation to clinically validate the importance of the technology, the effectiveness and then ultimately reimbursement should follow.

So it’s kind of a multifaceted equation here. But I would say this, we’re reinvesting more in studies. We’re investing more in improving reimbursement. And we think that maybe the biggest catalyst to overall improved utilization, kind of, summarizing things. The skin market is white-hot. We've seen a huge increase in procedure volumes with terrific, clinical and cosmetic outcomes.

Breast IORT is a little slower to see the ramp because of the amount of time it takes for a site to get up. It can often take them six-month post-purchase to get the system in place, get the protocols defined, get all the different procedures in place to be doing breast. So it's very much a growth opportunity. But the pace, if you will, is not quite as easy and the skin overall is one with so many less barriers.

So we’re excited with the overall growth of the business. We’re excited about procedure growth. And it is absolutely reflected in the numbers that we communicated on our quarter. And when you look at our comps to prior year, the numbers were up dramatically, in just about every category that matters relative to growth company.

Jeb Terry - Aberdeen

And the margins on the skin procedures, are they comparable? Again, you are using, I guess, with more procedures as more expendables to more expendables at higher margin. So I’m assuming that applicators even though you get more easy kind of an applicator, it’s margin still pretty much as you’d express in the past?

Kevin Burns

Yeah. Hi, Jeb, it’s Kevin. Our recurring revenue is similar in the both the breast and skin segments. And the margins are very similar as well. So we’ve not seen any decrease in margin as we -- we're going to be using more source and more organically in the skin market but that’s not impacting margins.

Jeb Terry - Aberdeen

Okay. So, I’m working on -- assuming that that’s a margin in the north of your (inaudible) your overall I would say something in the 80s. Would that be on and off reservation that we are considering on the expendables?

Ken Ferry

Yeah. Nothing to comment on the specific margins, but certainly as we grow our source revenue, our total gross margin which is running in the low 70% range will increase over time because we really ramped the business certainly at the upwards of 75%.

Jeb Terry - Aberdeen

And relative to, if that can take six months to get up and running and you sold -- I’m sorry I think you mentioned you sold 29 units in the last nine months. And so there is some mix of those that would be IORT, so is the presumption then -- can I extend that in saying that they are some procedure volumes, as we look forward that might be stemming from those sales that might have been six months ago, that didn’t hit revenue in the first quarter? So, I guess -- I guess it sounds like there is some visibility throughout to procedure volume in IORT will get into the back half of this year relative to what you sold in the last nine months?

Ken Ferry

That’s right. And I think just to quantify a little bit, we have 13 systems that we’ve sold in the last six to nine months, between not this quarter and Q3 and Q4 that are not yet actively treating. So we are working obviously to get those installed and the procedure and processes in place where they can start treating. So that’s a very good backlog for us in terms of recurring revenue growth for the remainder of 2013.

Jeb Terry - Aberdeen

Okay. And then so treatments for them obviously, there seems to be a vast number of potential patients. I don't know, can you comment somewhat on frequency? I mean, skin is an 8 to 10 treatment for patients than an IORT is one treatment for patient. Any thoughts or comments you might be able to make on that and that will be all of my questions? Thanks.

Ken Ferry

I guess, Jeb, what I would say is when you think about recurring revenue for skin, it’s about sources and high end source agreements. So if we have source agreements, let’s just say in the range of $40,000 to $80,000 a year for a fixed number of sources, as we see an increase in the procedure volume in skin you're seeing customers that are buying the higher-end, a more expensive source agreements. So that's a pretty significant number. Also it's a nice -- contributed to growing deferred revenue. So, I think that that’s one angle on it.

The surface applicators are obviously reusable, so that's not something you'd see until it has extended the amount of use before they were need to be replaced. On the IORT side, obviously you get both the benefit of source revenue and a disposable balloon applicators. With that said, you don't see as many procedures today. So, obviously at this point in time, it’s probably a blend of applicators and source minutes. And so they really are a bit different in terms of how they contributed, but both contributed pretty nicely.

I think Kevin mentioned in his opening comments, we did about $900,000 in service and source agreements alone. That doesn’t include the balloon applicators. So if you kind of look at the balloons and decide that they're all part of this kind of recurring revenue stream with service and sources, you are well north of $1 million a quarter order in recurring revenue. And with the amount of deferred revenue that’s growing, that number only increases over time even ironically without new customers.

So when you add new customers at the pace we've been adding them, it’s a pretty considerable base of business that you start to build up and the flywheel effect does kick in. So we're excited about the progress, really are and we think that we just contrast this business to where it was a year or 18 months ago. It has grown dramatically. The progress has been very considerable and the nicest thing about that is that we are still in an early phase of adoption. Our addressable market is substantially bigger than the amount of business we are doing. So the growth prospects going forward are pretty significant.

Jeb Terry - Aberdeen

Thanks very much. I will let someone else ask and that will make him better. Thank you.

Ken Ferry

Sure.

Operator

Thank you. Your next question comes from the line of Shawn Boyd, Next Mark Capital. Please proceed.

Shawn Boyd - Next Mark Capital

Hi. Thanks for taking the question. On the balloon applicators, I just want to make sure I’m looking at the site and I don’t want to make too much of single quarter. But the year-over-year growth is a little slower than the year-over-year growth in the installed base of systems I believe and that would make sense. I guess, do you see mixed shift, if you are doing on in the skin cancer or the breast, help me to think about that?

Kevin Burns

That’s a good way to think about it. Shawn, I think most of our sites are increasing their volumes on a quarter-to-quarter basis. Some sites are -- as Ken mentioned, we are working with them. The primary issue is reimbursement working through those issues. So we are seeing growth in our balloon applicator sales by site. In addition as I just mentioned, we have many customers who bought recently, who are just not yet actively treating. There is a lag between a controller sales and when we are going to see that ramp in balloon applicators.

And the third piece as you said is the mix on the controller sales. We are seeing a shift in the last couple of quarters from breast only to breast and skin or just skin only. So that’s certainly contributes to other variance as well.

Ken Ferry

Yeah. And the other thing, Shawn, I would add is that the actual number of procedures that we are talking specifically on submittal breast IORT and the purchase of applicators is not always one-to-one. Some customers committed by a system when they buy 5 or ten applicators. Some customers say, we would be willing to them 25 or 50 upfront, can I obviously get better terms. And so we would obviously accommodate that. So we’ve had customers that buy in varying quantities. And so you can have a quarter where a customer, as an example in Q4 bought 50.

So then you go to Q1, just look at the comparative number and it does seem as dramatic but it does get somewhat offset by the seasonal buying. But I would say, in a directional sense, we’re seeing an increase in procedure volume from our active sites. We have new sites coming on board. Again, they do take some time to get everything protocol to clinical utilization going. And clearly, I think over the course of the year, we should just as we did in 2012, see a nice increase in the total number of applicators year-over-year, just a little bit hard right now given the ramp of the business to have, what I call a nice one-to-one comparison of procedure volume with applicator sales.

Shawn Boyd - Next Mark Capital

Got it. Yeah. That makes sense. And so it sounds like we could see a bounce back on almost, I mean, almost to the next quarter?

Ken Ferry

Certainly possible, we hope.

Shawn Boyd - Next Mark Capital

I want to see it that way. Okay.

Ken Ferry

Way before it.

Shawn Boyd - Next Mark Capital

Absolutely. Skin procedure volumes, maybe I missed that. I came a little bit late. That number was 417 last quarter. What was that this quarter?

Kevin Burns

625.

Shawn Boyd - Next Mark Capital

Got it. And to reconcile that with your comment earlier, Ken, you are foreseeing a thousand in a month now?

Ken Ferry

With 600 patients within a quarter would be about 5,000 procedures. That means, use a treatment kind of average, if you will. Yeah. So I mean, the patients that are coming in obviously several times a week for at least, about what sixty or 10 minutes of treatment depending on the depth of the lesion.

And so we probably are on a run rate of about 5000 treatments reflected in the 600 patients times the treatments now whether they all got those treatments exactly within the quarter is a question but still I would say that if you want to be conservative, 4,000 to 5,000 treatments were probably administered and you can trace that to a year ago. I mean, that’s a 10-fold increase in treatments.

Shawn Boyd - Next Mark Capital

Okay. That’s helpful. Thanks. Last thing on your therapy side, you gave us just an anecdotal comment about pipeline for our controllers on the last call, I know only two to three months since forward here. How does that look at this point? Can you -- do you see any metrics in terms of your total pipeline that you’re working there in the number of customers?

Ken Ferry

Well, the pipeline really continues to increase and I’ll give you an example is one way to look at this would be, we sold nine controllers in the first quarter. And last year, we sold six. So the good news is we grew 50%. However, last year in the first quarter, of the six controllers, two of them went to the veterinary market.

So when you look at that, it's really four for clinical human use right last year in the first quarter and nine in the first quarter, more than doubling the number of sales in the market that really at the end of the day is the most important one to the success of the business.

So that’s just an indication of the significant increase in the pipeline. And as I said in my opening comments, 18 months ago, we had a nine-month cycle where we sold 13 systems, last nine-month cycle, 29 systems. So we're pretty excited relative to the last nine months versus the nine months prior.

And I would also say, Shawn, that the pipeline going forward is strong. It is probably equally stronger than what we saw in the first quarter. So with any luck, we would anticipate having as strong or a stronger second quarter based on the pipeline that is growing.

We’re very, very encouraged by the size of the pipeline for both breast IORT as well as skin. And the skin opportunity is an interesting one because there is a number of corporate operators entering the market that are forming partnerships with dermatology and radiation oncology. And in those cases, many of these are large practices.

And by that I mean, they have many sites where they treat. And so instead of going out to sell a system to a hospital, what we’re finding is some of these corporate operators may have as many 10 to 12 officers where they treat patients. And we have the opportunity to sell multiple systems now, maybe not all on the first transaction. But what would be very nice is that if site would over the course of say one to two years puts 6, 8 or 10 systems into their entity.

So I think that’s basically a real positive in skin market with some large deals. It almost feels like you can create the, I guess, what I would use is some sort of corporate account where they would buy multiple systems over time. We’re also investing in more sale people something we’ve been cautious to do until we really felt we were chasing demand in the therapy business.

So at the beginning of the year, we added in the New England and New York markets someone that actually had been in the cat business for us and been extremely successful over the year with great customer relationships. We’re now adding an additional rep on the West Coast.

So what really was five sales people starting the year with the sales manager into applications people work in the install base is now seven people were very close on two hires actually. So we are increasing our resources in the field reflecting the fact that the opportunity for growth is there that activity level in the pipeline is growing maybe in a good way, on the western part of country very, very substantially for the skin opportunity. So we’re increasing our resources in that particular opportunity in the United States

Shawn Boyd - Next Mark Capital

Fantastic. So just to be clear here, you’ve already added to it, you have seven reps now and you’re thinking about two more.

Ken Ferry

No. We actually started the year with five. While we added one in the first quarter to get to six and we’re adding a seventh rep as I speak we’re in a final phases of making an offer to someone or final interview then we anticipate in office.

So and we’re pretty excited. We found new people, that would like to come onboard that have extensive experience in the space. We also added somebody in Europe. We brought on a very experienced individual who is based actually in Florence, Italy to work the European market for us. So we now have a dedicated business development manager on the ground in Europe. Again something we have had, not had for some time in the companies.

So we’ve added international resource that we’ve think particularly for the European market, it really help us get the market going -- get our size that are treating more and helping to build out and do more business. So I don’t want to forgot to mention that we do have incremental higher now in Europe.

We had a training event about three weeks ago for our entire sales force. That individual was here in the space for the training and is hitting the ground running based on an extensive background in the therapy space. So we are investing in additional resources and when you look at our OpEx, we’ve taken our OpEx down dramatically, down to the point where we were just under $6 million in the quarter.

So I guess what I would say is we’re making some very, very targeted investments, several more resource in the field because of fund on the pipeline are strong. We’re investing more in clinical studies because we believe, we need digital for both skin as well as progressed IORT. And we’re investing more in reimbursement because reimbursement in many cases is a local issue with regional payers and getting more resources in front of the payers showing the data, showing the compelling outcomes that we have all or part of this growth initiative for the company.

So we will increase our investment and Kevin mentioned that somewhere in the $6 million to $6.5 million OpEx quarterly. Expense range is where we will be and obviously $6 million is kind of a baseline will increase down over the next few quarters based on the investment that I just mentioned.

Shawn Boyd - Next Mark Capital

Got it. I very much appreciate all the color. The opportunity here is pretty encouraging. I want to switch just very, very briefly over to cancer detection if we can, and obviously very straightforward second quarter in a row in the high 4s, $4.6 million. I know we had a small amount of customization work in there. And we had a bigger amount December quarter, but either way we saw this now kind of flat to up a little in a business that I think a lot of sources is going to still be declining. Could you hold the $4.5 million level for quarter early on in terms of the AMP platform? But helps us out little bit, are we finally at the point we can sideline this business and not think it anymore?

Ken Ferry

Well. I certainly hope so. I guess, Shawn, the way I would answer the question is that, we are seeing several positive things. One is with what is left in the conversion from film to digital. Our major partners have got much more focused and aggressive in the market. So an example would be GE. We actually did more business with GE in the first quarters of this year than we did in the fourth quarter. They are on a calendar fiscal year as we are which is very, very positive. The quarter that GE had in Q1 was probably stronger than any quarter they had all of last year.

Siemens had a record quarter with us as well in Q1. They won a number of very large deals. So our partners have got more aggressive in the market. What they are also doing which is encouraging is they, out there are aggressively marketing upgrades. They have targeted their installed base of older digital detectors that could be five to seven years old and plus the surprise is a number of customers have taken them up on the upgrade.

So we are starting to see, which is a natural phenomenon in a market where you get to a “saturation” of a new technology as you start to see all the follow-on upgrade business. And so if you combine that initiative with say GE and Siemens taking the lead with our partners, combined with we putting our direct sales people beyond supporting the OEM partners exclusively on selling the PowerLook upgrade to the installed base.

We are starting to see some solid traction with the installed base relative to upgrades, whether it’s through the initiative of our OEM or whether it’s through our own direct sales initiative. And our sales people in the past up until the end of Q1 were spending 50% to 60% of their time selling MRI. That’s is completely out of their bag and we are obviously selling all of our MRI through Invivo.

So now, we have our resources completely dedicated to mammo and are focused on selling PowerLook into the installed base. The PowerLook has a great new platform as increased functionally on the mammography side. It also has the ability to offer the Mātakina of Volpara Breast Density module, which definitely is gaining a lot of interest and clearly whether it’s legislatively I mentioned, or clinically breast density has become an important topic and we are now officering the module integrated into the PowerLook platform and it’s a very nice package. It’s something that we are willing to sell to the customer outriders and upgrades. We are also willing to do it on a subscription basis. So we’ve got some flexibility on pricing. The other things we have going on would be, we are starting to move to bring service back in that was ultimately under our OEM partners.

So an example, as we have an agreement now with GE, where GE is essentially subcontracting service renewals for the CAD business that they otherwise would hold in-house to us, increasing the overall size of our service base. We are also offering service products that include new functionality when it becomes available, something in the past we only offered break fix.

So, I think we fully understood this transition, starting about 18 months ago, to real seeing the bigger opportunity in the installed base for recurring revenue than chasing those few sites left, going from film to digital. So, I think as you build the recurring revenue and you do upgrade business in your installed base that tends to help with the momentum. Combine that with Invivo, who we feel from an MRI volume, could clearly give us more than we could accomplish ourselves.

I’d like to hope we certainly can continue this momentum, the dynamic of the market, our approach in the mammography space in the MRI space had changed quite a bit in the last 12 to 18 months. And I do think they were reflected in the improved performance in Q4 as well as Q1. I’m not going to make predictions for Q2 and beyond. But I would just say we feel the addressable market for CAD is improving, and the approach we are taking commercially is very aligned with where the opportunities are, so hopefully it will continue.

Shawn Boyd - Next Mark Capital

Got it. Again, appreciate the color. Congrats on that and good luck.

Ken Ferry

Thank you.

Kevin Burns

Thanks, Shawn.

Operator

Yeah. Thank you. I would now like to return the call over to Ken Ferry for closing remarks.

Ken Ferry

I want to thank you all for your questions and for your continued interest in ICAD. We were very encouraged by our strong first quarter result and look forward to building on this momentum in the coming quarters. We will continue to deliver on our strategic plan, and provide you with another update after the completion of the second quarter. Have a good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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