iCAD's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: iCAD, Inc. (ICAD)

iCAD, Inc. (NASDAQ:ICAD)

Q3 2013 Earnings Call

October 29, 2013 10:00 AM ET

Executives

Anne Marie Fields – Investor Relations-Lippert/Heilshorn & Associates, Inc.

Kenneth M. Ferry – President, Chief Executive Officer and Director

Kevin C. Burns – Chief Financial Officer, Executive Vice President-Finance, Treasurer and Secretary

Analysts

Bill B. Bonello – Craig-Hallum Capital Group LLC

Brian W. Marckx – Zacks Investment Research, Inc.

Jeb Barton Terry – Aberdeen Investment Management LLC

Operator

Good day ladies and gentlemen and welcome to the Q3 2013 iCAD Inc. Earnings Conference Call. My name is Steve, and I’m your event manager. During the presentation, your lines will be on listen-only mode. We will conduct question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And now, I’d like to turn the call over to Anne Marie Fields, Senior Vice President of LHA. Go ahead please, ma’am.

Anne Marie Fields

Thank you. 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 third quarter ended September 30th, 2013. If you have not received this news release or if you’d 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 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, October 29, 2013. iCAD undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

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

Kenneth M. Ferry

Thanks Anne Marie and good morning everyone. We’re pleased with the third quarter’s results as we achieved our strongest revenue quarter of 2013. Therapy revenues in Q3 were also the strongest of the year with year-to-date revenues exceeding all of 2012, a solid comparative as we nearly doubled 2012 revenues versus 2011. Also we have sold 30 Xoft systems year-to-date equaling all of 2012 as well.

In addition, recurring revenue which is driven primarily by patient treatment volume has grown substantially. Cancer Detection revenues were also strong in the quarter and we’re particularly pleased with the growing traction with our next generation mammo platform PowerLook. We achieved strong sales to new customers and through upgrades to our growing install base also service revenues year-to-date are up 18% over the same period in 2012.

So to conclude my opening remarks, we remain very confident of the potential for the continued strong growth from Therapy products and also anticipate continued growth with Cancer Detection products driven by our progress in generating more recurring revenue from our install base. Following Kevin’s commentary on the quarter and year-to-date performance, I’ll provide you with a more detailed business update before opening the call to questions.

So now let me turn things over to Kevin.

Kevin Burns

Thank you Ken and good morning everyone. As Ken said, we’re very pleased to report that our third quarter was another good quarter of progress with solid business and financial results. This marks our fifth consecutive quarter of revenue growth and adjusted EBITDA profitability. Our investments are producing results and we expect to have continued strength in both the Therapy and Detection businesses in the fourth quarter.

Turning now to a review of our revenue. For the first nine months of 2013, total revenue increased 17% to $23.9 million, highlighted by a 41% increase in Therapy revenue and a 2% increase in Cancer Detection revenue. For the third quarter, total revenue was $8.3 million, an increase of 1.3% from the third quarter of 2012, driven by a 14% increase in our Cancer Detection revenue offset by a 10% decline in Therapy revenue.

With respect to our Cancer Detection business, total revenue for the third quarter grew 14% to $4.3 million, up from $3.8 million a year ago. In the third quarter, product sales increased 11% and our subscription based products and service revenue grew by 18%. From a year-to-date standpoint, total revenues increased 2% with an 18% increase in our service business.

Since the end of 2012, we have increased the number of customers under a service agreement by 14% to over a 1100 customers and expect the service business to continue to grow on a quarter-over-quarter basis as our focus on recurring revenue continue to gain traction. In addition, we continue to see growing demand from our install base for our latest generation of CAD platform, driving additional product and service revenue.

For the third quarter, our Therapy business generated $4 million in revenue, which was a decline of 10% over the third quarter of 2012. In the third quarter, we sold 10 controllers, 194 balloon applicators and we treated more than 1,000 skin lesions. From a competitive standpoint in the third quarter of 2012, we sold 12 controllers, 150 balloon applicators and we treated approximately 250 skin lesions.

As we have discussed in the past, we believe that was such a dynamic growth business and is more appropriate to focus on year-to-date results to remove any quarterly fluctuations. As a result, year-to-date Therapy revenue increased 41% to a $11.2 million with sales of controllers increasing 36% from 22 units last year to 30 units for the first nine months of 2013.

We sold 574 balloon applicators in the first nine months of 2013 was 431 a year ago, an increase of 33%. We treated more than 2,400 skin lesions compared with approximately 400 from the same period last year, a six-fold increase. And finally, our recurring service and source revenue increased 72% over the first nine months of 2012. Overall, we are very pleased with the top-line revenue progress in both the Therapy and Cancer Detection businesses.

Now turning to the rest of the P&L. Gross profit for the third quarter of 2013 was $5.9 million, or 71.5% of revenue which were both relatively flat on a year-over-year basis. For the first nine months of 2013, gross margin was $16.8 million, or 70.2% of revenue, compared with $14.5 million, or 70.8% of revenue for the first nine months of 2012. This is a gross margin improvement of $2.3 million. Again please note that in 2013, we are recording the medical device tax as a cost of goods and this has impacted our gross margin by approximately $400,000 or 163 basis points for the first nine months of 2013.

Total operating expenses for the third quarter of 2013 declined to $6.3 million from $6.6 million for the same period in 2012. However sequentially, our operating expenses increased by approximately $600,000 as we begin to invest in regional IORT and skin seminars, clinical trial is an incremental product development.

In addition based on the growing demand, we’ve rolled out many new marketing and engineering initiatives focused in the skin market during the third quarter and expect to see this continue into the fourth quarter. As always we will continue to make targeted investments to accelerate market adoption, increase revenues and advance our growth strategy. Moving forward, we expect quarterly operating expenses to be in the low to mid $6 million range.

Turning now to our profit metrics. Adjusted EBITDA was $545,000 for the third quarter of 2013 compared with $240,000 in last year’s third quarter. Adjusted EBITDA for the first nine months of 2013 was $1.6 million or 7% of revenue compared with a loss of $1.6 million or negative 8% of revenue for the first nine months of 2012. As I mentioned, this is our fifth consecutive quarter of adjusted EBITDA profitability and an improvement of more than $3.2 million compared with the first nine months of last year, driven primarily by revenue growth.

Looking at other income and expense items, during the third quarter, we’ve recorded a $624,000 gain due to the change in the fair value of warrants that we issued as part of our financing arrangement. In addition, net interest expense in the third quarter was $807,000 of which $569,000 is cash payable related to financing and capital lease obligation and the balance of $238,000 represents non-cash amortization of financing costs and settlement obligations.

On a per share basis, our non-GAAP adjusted net loss for the third quarter of 2013 was $0.11 per share, which was an improvement of $0.04 per share compared to last year. Year-to-date, our non-GAAP adjusted net loss was $0.34 per share compared with a non-GAAP adjusted net loss of $0.66 for per share for the same period in 2012, an improvement of $0.32 per share.

Moving now to the balance sheet. We ended the quarter with $10.2 million in cash and cash equivalents, compared with $13.9 million as of December 31, 2012. For the first nine months of 2013, our net cash used from operations was $3.2 million and total cash used was $3.7 million. For the third quarter, we used $2.5 million for operations and $241,000 for capital investments. We saw an increase in our DSO to approximately 95 days due to extended financing terms. We believe our balance sheet is strong with accounts receivable and deferred revenues up and accrued expenses down. We do expect to be cash flow positive in the fourth quarter.

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

Kenneth M. Ferry

Thanks Kevin. I’ll begin the business update with Therapy products. 2013 growth has been principally fueled by the increasing demand for the use of the Xoft system for the treatment of non-melanoma skin cancers. This is a considerable market opportunity as non-melanoma skin cancer is now considered an epidemic with over 3.6 million cases treated annually in the U.S. and approximately 1 million of these cases are eligible for treatment with the Xoft system.

Today, the standard of care for these patients is most surgery performed by the dermatologists. The Xoft system offers these patients a targeted minimally invasive treatment with significant patient benefits, particularly when used to treat lesions on the face, ears and head, which typically results in excellent cosmetic outcomes. To further adoption, we are increasing our investments in clinical studies, education, reimbursement and increasing consumer awareness.

On the topic of clinical studies, Dr. Ajay Bhatnagar recently presented the results of his skin study at ASTRO, where he has now treated 187 patients with 275 non-melanoma skin cancer lesions. At three years post-treatment, Dr. Bhatnagar continues to see highly encouraging results with the Xoft system related to cosmesis and toxicity with no recurrences of non-melanoma skin cancer. Dr. Bhatnagar’s scientific presentation was well attended reflecting a considerable growing interest from radiation oncologists related to the treatment of non-melanoma skin cancer with electronic brachytherapy.

On the topic of education, we are sponsoring four regional events on the West Coast where we have invited our local radiation oncologists and dermatologists to attend. The first two of these events were well attended from both physician specialties. We also have a number of other initiatives using digital media, direct mail and frequently updating information on our website to further support the adoption of the Xoft system for the dermatology market.

Moving to the introduction of breast IORT, we are also sponsoring a number of regional symposiums to educate and promote this potentially life-saving technology. We recently held a symposium in Atlanta, which was well attended by breast surgeons and radiation oncologists. We’re also hosting an additional symposium in New York City in early November, RSVPs to-date have been very positive.

We’re also increasing our efforts to improve reimbursement and have developed initiatives on a national and regional level with targeted payers to increase reimbursement for hospitals and physicians. An example of our progress and reimbursement is, as of November 1st, 19 States will have a positive policy for non-melanoma skin cancer versus only 10 States on July 1st of this year.

So in summary, we’re making considerable progress with the adoption of the Xoft system in the treatment of non-melanoma skin cancer and breast IORT. Procedure volume is up dramatically in the treatment of non-melanoma skin cancer and in IORT. Our balloon applicator sales are up 30% versus 2012, indicating the increased procedure volumes from the existing and new customers. All in all, we feel very well positioned in these key therapy markets to continue our progress and the growth trajectory should continue as well.

So switching gears, I’ll talk a little bit about our Cancer Detection products. Tomography CAD revenues were strong in the quarter fueled by growing demand for our next generation platform PowerLook. The increased demand came from the sales to our strategic OEM partners such as GE, Siemens, Fuji and Philips and through direct upgrade sales to our growing install base. We also experienced considerable growth in service contract sales in the quarter. This growing demand was generated a result of increased service contract sales to GE, our largest installed base OEM partner and through direct service contract sales to our broader customer base.

So all in all we’re very pleased with our progress to increase recurring revenue in the mammo product line. And while on this topic, our mammo CAD product development team recently returned from a trip to Europe where they were able to meet with several key GE Tomo synthesis sites. They experienced in exchange with the sites along with the GE Tomo development team was very timely as we continue to develop our Tomo workflow tools roadmap. The interest in digital breast tomosynthesis is growing on a worldwide basis. It should be a major growth opportunity for us in our mammo product line over the next 3 to 5 years.

Moving to MRI, we are making solid progress delivering on the product roadmap with our strategic partner Invivo. We delivered a new software upgrade to our breast module in late September and are planning another upgrade to the prostate module in Q1 of 2014. We believe the timely execution of the product roadmap combined with Invivo’s increasing commercial momentum will drive stronger license revenue in Q4 and into 2014.

So in summary in addition to my last comments on our progress with Invivo and the MRI segment, we’ve made really solid progress with the mammo CAD business and a considerable increase in recurring revenue. We were also very excited about the potential of our new software workflow tools in the development we use with reading of tomosynthesis breast images.

So lots of good moment in the business both for the therapy as well as in the CAD space. And at this point operator I think we’re ready to open up the lines to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Bill Bonello from Craig-Hallum. Please go ahead.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Good morning guys. Thanks for taking my questions. Good quarter. I’m wondering Ken, if you can walk us through the GE opportunity a bit sort of some color on how long it will take for you to generate sales once GE has FDA approval? What are the technology and regulatory hurdles that you have to clear to have a product out on the market in selling? And then just also what’s around placing CAD with the systems that GE is now placing in OUS?

Kenneth M. Ferry

Sure, I’m sure you’re speaking to tomosynthesis.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Yes.

Kenneth M. Ferry

And in essence the timing that GE has communicated for their FDA clearance is somewhere in the Q4 to Q1 timeframe, so either this quarter or next quarter, so we’re working on the assumption that should happen sometime in this window. So with that said we have had a number of discussions with them as it relates to a roadmap and the roadmap will have a number of different tools, “it’s not one specific CAD product”.

What we anticipate is bringing into the market workflow tools that will help with the reading will speed up a reading interpretation and those tools may not have the exact CAD capabilities that our product does in the 2D world, but we intent to evolve the roadmap to additional capabilities over time and ultimately have a product that does pretty much what we do in the 2D world. From a timing standpoint Bill that’s really hard to say first and foremost GE has to get their clearance and that could be anywhere from now to the end of the first quarter.

As we work through this tool set, we need to fully understand the regulatory implications and we are not at a point yet, where I could say even with the first implementation which we have a pretty good definition too that we are able to give a timeframe. What I would say is that we hope to have something available sometime in the second half of 2014 from our first product implementation, but that is all fairly fluid as we continue to define these releases along a roadmap and then fully understand the regulatory implications which will follow over the next probably three to six months. So that’s probably the best I can provide. What I will say is it’s a tremendous opportunity.

GE has done very, very well shipping and implementing systems in the international markets. The sites that our developers visited, they were very impressed with the overall product and the performance of the systems and so forth and we are in the process of developing products and support of that entire new workflow. And we’re very excited about it because we think it’s a very big opportunity. When it does get to the United States in 2014, I would say we should see some revenues in 2014, I would not back on them being very, very significant, but I would say in 2015, 2016, 2017 this could be a very, very significant growth catalyst for our business.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Okay, great. And then on the Therapy side, on the skin side, just curious if you can give us sort of any sense of trend there, you placed a number of instruments in the quarter, just trying to kind of figure out what the timing is looking like from you’re shipping an instrument to a customer actually starting up cases and then do they kind of start up full force or are you finding that their increasing utilization over time after a period of getting kind of comfortable with the instrument. I’m just trying to get some sense of what the consumable pull-through from the existing install base could do if it grows from this quarter forward even kind of independent of placing winning new customers?

Kevin C. Burns

Yes, I would say just using kind of a general framework. There is obviously two types of implementations skin and breast IORT. And the one that you’re able to get up in running most quickly is with skin. What I would say just using an average is within 30 days of shipment, a program is typically up in running. In that scenario, it does take time to ramp up patients, clearly if you’re working in a large dermatology practice. They have patients that they believe are good candidates. They have patients that probably have elected for most surgery in the past that they believe are a good fit to transition to radiation therapy.

And the whole coordination of getting these patients transitioned to a different technology combined with the radiation oncology logistics if you will of getting into the practice and providing the therapy, they take time. So I would say 30 days is a decent average. And once you start to do patients, there is certainly a ramp and there is also some lag in reimbursement to be honest. So it’s not an instant success nor is an instant cash flow from a reimbursement standpoint, but if you looked at a three to six month window, practices tend to be up in running and really cranking way so to speak in that three to six month window after they can technically be going in above 30 days.

In breast IORT, it’s a very different scenario. It’s a much longer ramp up often systems are implemented and a clinical protocol has to be established and agreed to by the institution. So that can take time. We’ve seen three months even as much as six months time before patients are being treated post-sale in the IORT space. So it’s a very different dynamic, very, very different training implication in that space.

But certainly once the sites get up in running, and they establish their clinical criteria from which patients could qualify, we definitely start to see a ramp, but it’s not nearly as quick as the skin market. But as you look at our IORT business today, we have really strong growth year-to-date in balloon applicator sales. Some of that is coming from new customers, but a big percentage of it is also coming from sites that are now up in running from systems that were sold last year or early this year that are really hitting their stride in terms of increasing procedure volume. So it’s a bit of timing dynamic in both businesses.

And to summarize, I guess I would say that the skin market particularly is one we can ramp up much, much more quickly than the IORT market.

Bill B. Bonello – Craig-Hallum Capital Group LLC

And again on the skin side for the customers that have ramped up or how is their utilization ordering of sources or what you hear back from them on patients treated? How is that comparing to what your expectations were going in?

Kenneth M. Ferry

I think it’s pretty much along what our expectations would be. So sites that are large that has been treating for the longest time are using an enormous amount of assortments. I mean they are treating hundreds and hundreds of patients. Of those that are fairly in the ramp up might be treating 5 to 10 patients a week, and so it’s anywhere from that high-end to the low-end extremes and somewhere in the middle. And then really it does have I think both the timing effect as well as the profile of the patients, the collaboration between the specialties meaning dermatology and radiation oncology as to the ramp. And I do think we’ve heard there is some lag in the reimbursement. So the good news reimbursement is very strong, bad news like with any payer, there can be timing issues in actually getting paid.

So we’re really seeing I guess a lot of different dynamics in the regions of the country, but at the end of the day, if you were to categorize a skin site that was installed six months ago to where they are today, if volumes would be pretty substantial. And our source usage minutes really reflect this really significant number of procedures that are being done on a daily, weekly, quarterly basis.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Excellent. And one last question and then I’ll hop. I know you don’t give too specific pipeline guidance or anything, but any kind of color that you can give us as you look out where we’re just in terms of what you might be expecting over the next 12 months or something on the controller side, I mean, can we keep up at the pace that you’ve been at or has that been abnormally high?

Kenneth M. Ferry

Well I guess the way I would look at it Bill is the encouraging thing if you just look again at the segments and I don’t want to minimize the fact that the system as a platform and there were customers doing both skin and IORT. But if you wanted to really take a segment approach, which is probably the most useful way to discuss this. In skin, July 1, 10 States had favorable reimbursement and now November 1 comes, and we’ll have 19 States. So when you get this favorable reimbursement shift almost doubling the number of States in July 1 to November 1, I think it bodes for a very strong continued growth in the skin market.

There are other regions of the country, other payers that we’re working on nationally and regionally, and I think we will just slug away of that if you will over the next 12 months to your question and that will continue to improve. There is also a number of payers that are silent, which in many cases they’re also paying. So I think we have a very nice growing reimbursement environment in skin. Secondly, we have the best data based on Dr. Bhatnagar’s study. And to have now up to three year data on as many patients as I referenced and as many lesions without a single recurrence of non-melanoma skin cancer combined with the cosmetic benefits, really bodes well.

And so in that particular market, while we’re proud to be treating 1,000 and 2,000 patients a quarter, the reality is there is a million patients in the U.S. alone that are eligible for this treatment. And this is pretty specific in terms of the dynamics. It’s a patient who has a lesion that is no greater than 4 centimeters wide and 5 millimeters deep, so you’ve got kind of a profile. And that is about 30% of the annual cases, but its a million patients. So our penetration of this market is very, very low in skin.

So I would be very enthusiastic about the ability to continue this pace in the skin market when you’ve got growing favorable reimbursement, strong clinical outcomes, and you’re basically attacking about 1% of the market that’s eligible today. Those are the type of tailwinds that typically say you can sustain this kind of growth. So that’s how we feel about the skin market.

IORT and breast is a little bit different. The eligible population there is about a 100,000 patients per year. So the good news is the skin is about tenfold bigger, but breast IORT is growing and it is a little bit more difficult to grow at the pace of skin. They were certain barriers. So inversely reimbursement is improving, but it does not necessarily equal whole breast radiation reimbursement for the radiation oncologist.

The five-year data from the target study was very encouraging, but it’s not ten-year data or they were not in a multiple other studies out there. So adoption I think is very, very solid for IORT, but we do face some headwinds. And I think we are very enthused about this opportunity. We think it’s a tremendous technology for the patients that qualify, but the pace of the ramp will probably not equal that of skin either due to the size of the skin market or due to some of the traditional barriers you have to overcome in a new marketplace, but we do anticipate strong growth in IORT as well.

As I look out at our fourth quarter, I was pleased to see that our funnel had an actually stronger mix of IORT opportunities versus skin. So it seems like some of the skin momentum is clearly there, but at the same time, IORT momentum seems to be gaining traction. We also had a very, very strong balloon sales quarter in Q3 in the breast space.

So I think we’re very enthused over the next 12 months to kind of wrap up on your question on both businesses. I do think that the skin business or skin segment probably has based on share size and all the other factors I mentioned more potential to grow more quickly. With all of that said, we really think breast IORT domestically as well as internationally particularly in some of the emerging markets really, really has in the longer-term tremendous potential to really have meaningful revenue impact on our business.

Bill B. Bonello – Craig-Hallum Capital Group LLC

Excellent, hey, thank you very much.

Kenneth M. Ferry

Thanks Bill.

Operator

And your next question is from the line of Brian Marckx from Zacks Investment Research. Please proceed.

Brian W. Marckx – Zacks Investment Research, Inc.

Hey guys. Kevin, can you give us what the, excuse me, film based revenue was in both Q2 and Q3?

Kevin C. Burns

In Q2, our film based revenue was about $1.6 million and in Q3 it was about $2.3 million.

Brian W. Marckx – Zacks Investment Research, Inc.

That was film based revenue?

Kevin C. Burns

I’ll say you wanted the film based, in Q3 it was $63,000, in Q2 it was a $154, 000. Those numbers I gave you were total product revenue.

Brian W. Marckx – Zacks Investment Research, Inc.

Okay. And then how much if any engineering revenue was included in the current quarter in Q3?

Kevin C. Burns

We only had about $30,000 of revenue that we recorded as engineering revenue. For us that works as excited at this point. We do expect some additional work to be completed in the fourth quarter. So most of that revenue was care of services revenue.

Brian W. Marckx – Zacks Investment Research, Inc.

Okay. And the service margins were relatively strong this quarter. Is there anything out of the ordinary that was in the quarter?

Kevin C. Burns

Nothing out of the ordinary, I think that just reflects the growth in both businesses right but the CAD service revenue growing nicely and the therapy business growing nicely with the addition of an additional customers and controllers out in the marketplace that’s adding services revenue. And as Ken has mentioned earlier, we have a lot of customers who’re increasing their volumes from a source minute standpoint. So that’s really adding to our top-line service revenue growth.

Brian W. Marckx – Zacks Investment Research, Inc.

Okay. Is it fair to assume that as utilization grows, we could see that expand?

Kevin C. Burns

It is and as Ken has mentioned earlier, we see customers ramp. Our typical customer I think is up in running and add capacity in about six months. As you probably as you know this business, the skin business really turn the corner in the third quarter. So we have a lot of customers in the last month quarter, two quarters that are really turning the quarter in terms of increasing their volumes.

So they typically start treating between four and ten patients a month and then when they’re up at capacity that’s upwards of 25 to 30 patients a month. So our high capacity sites are really started to treat a lot and that results in a lot of source revenues for the company as well.

Brian W. Marckx – Zacks Investment Research, Inc.

And that’s been directly, positively affect the margins?

Kevin C. Burns

Absolutely.

Brian W. Marckx – Zacks Investment Research, Inc.

Okay.

Kevin C. Burns

A very healthy margins in our services and in our source business as well.

Brian W. Marckx – Zacks Investment Research, Inc.

Okay. Relative to the skin studies that you have ongoing, is there sort of timelines on when you expect there maybe some interim data that you can talk about?

Kevin C. Burns

It’s a good question Brian. We met with Dr. Bhatnagar at ASTRO, which was literally about a month ago and had some great discussions with him. We did not discuss a specific timeline where there would be another update to the data. But he’s been pretty fluid in terms of providing updates not necessarily doing them on kind of on an annual cycle. So we’ll have to look into and get back to you.

Brian W. Marckx – Zacks Investment Research, Inc.

Okay. Last one is on the CTC CAD products, is there any status that you can talk about? And, excuse me, what the product and the integration with the OEMs?

Kevin C. Burns

Yeah, the major progress we’ve made is with Vital Images and it’s been mostly international. There has not been a real significant amount of revenue; you are talking about maybe somewhere in the order about $100,000 in revenue in the third quarter.

So the good news, we’re getting some international traction with it, Vital is promoting it in the international, while we’ve sold a handful domestically. But I still think we are dealing with the combination of the Preventive Task Force and all the different forces with the American College of Radiology and CMS in terms of getting a reimbursement in place for Medicare. And we really do think that business in the domestic front can grow considerably with CMS providing for reimbursement with Medicare, but that has not happened yet. And at this point, I’d think we are probably anticipating it’s going to be really to mid-2014 before we’ll know. In the mean time, it’s nice to see Vital doing steady amount of business internationally, but we still are waiting for the domestic opportunity to evolve.

Brian W. Marckx – Zacks Investment Research, Inc.

Okay. Thank you, guys.

Operator

Thank you. (Operator Instructions) And your next question comes from the line of Shawn Boyd of Next Mark Capital. Please proceed. And your next question comes from the line of Jeb Terry of Aberdeen Investment Management. Please go ahead.

Jeb Barton Terry – Aberdeen Investment Management, LLC

Good morning, Ken and Kevin.

Kenneth M. Ferry

Hi, Jeb.

Kevin C. Burns

Good morning.

Jeb Barton Terry – Aberdeen Investment Management LLC

Kevin, you mentioned on your – the growth in your accounts receivable that you had some financing programs. Can you just talk about the growth in your comp store sales, and then if financing associated with that, and then is that DSO something to anticipate and then have some follow-up.

Kevin C. Burns

Jeb, so in the quarter, as I mentioned, we sold 10 units and 7 of those were dedicated to the skin market and 3 of those were dedicated to the breast market. On a year-to-date basis, we have sold 21 controllers into the skin and 9 into the breast. While we’re seeing from a cash and financing standpoint, is that the dermatologists, the derma groups are little bit longer in terms of pain than some of the hospitals. So usually from a hospital standpoint, where we are selling the IORT systems those payment terms are between 30 days and 60 days.

And then the skin market, we are just giving some of these folks extended terms and typically those terms are anywhere from 60 days to 90 days. So that the groups are certainly finically viable, they are able to get financing, but they are just a little bit – they take a little bit longer to pay than our standard customer profile has been in the past. So our DSO did increase from an average 65, 70 days to 95 in the quarter. We do expect that to decline going forward, but it has bumped just based on the profile of our customers at this point.

Jeb Barton Terry – Aberdeen Investment Management, LLC

And I presumed, then those customers are also benefiting from this higher growth in skin cases?

Kevin C. Burns

Well, these customers are actually are high in volume business partners who have multiple systems installed. Yes, Ken mentioned earlier there is usually a lag between the time that they start to treat and they’ll get reimbursed. So the volumes on their machines, they know how to get these machines up in running usually in about 30 days, I just talked about our standard customer profile treating 5 patients a month.

These people can usually, their partners can usually treat 15 to 20 patients per month, because they know how to utilize this system at a much higher capacity. And in addition, they are also transporting these systems between dermatology groups. So they are not just treating at one location, they are using this machine on Monday and Tuesday at one facility, they are moving into another facility for another two days and even treating on weekends. So these machines are producing a lot of treatments in patients and resulting in a lot of source minutes for the company.

Jeb Barton Terry – Aberdeen Investment Management LLC

So given that the six-month lag for the ramp in cases then I would – so I would say as I will look the dispersion of units sold over the last years then they would seem then those that’s been sold in March, June have yet to fully flow through the case flow if you will, the case revenue for the third quarter and we can expect to see more cases in the fourth quarter sustaining from those prior period sales?

Kenneth M. Ferry

Yes, I think the organic growth for the customers who installed Q3, Q4 and Q1 of 2013. They are still on a growth mode. They had not reached capacity. So we are going to see additional patient growth from those systems. In addition as you said that systems that we sold towards the end of March in Q2, those are still coming on line. So this is going to have a significant compounding effect and I don’t want to get into forecasting the number of patients treated, but you’ve seen the growth and we have six-fold growth on a year-over-year basis. And our big penetration into the skin market only happened about 12 months ago. So we feel there was – we’re right on the beginning of additional growth in the skin patient area.

Kevin C. Burns

And Jeb, I think just to add to that, you look at the service line for the quarter in compare to a year ago, you’re looking at almost $1.5 million in service revenue versus $765,000. That 90% increase was driven largely by the increase in source usage. So essentially when you think about this ramp in coming on board, the biggest component of that growth was the fact that our customers are using a significantly bigger number of sources today than they were a year ago. So you can see where the lag turns into actual performance, when your overall revenues are not nearly as high as the recurring revenue piece which is really driven by sources which is driven by procedure volume. So we’re definitely seeing the benefits of that in the more systems we place obviously the less of a timing lag you would see, but that disproportionate growth on the service line is based on it just as a huge ramp in procedure volume compared to where we were a year ago.

Jeb Barton Terry – Aberdeen Investment Management LLC

So the implication is that those units that you have in the market are not nearly a capacity, number one. And then I guess number two though the first question, do the customers that you now have, do they have capacity or need for more consoles and that for more sources. And this gives back kind of an overarching question. You mentioned there is million patients potential per year for skin 10 times bigger than IORT. How is this all kind of fit into your evolving go-to market plan?

Kevin C. Burns

Well I think quite frankly…

Jeb Barton Terry – Aberdeen Investment Management LLC

I had to take people with…

Kevin C. Burns

Yes, go ahead.

Jeb Barton Terry – Aberdeen Investment Management LLC

All right, go ahead.

Kevin C. Burns

Yes, I was going to say, well clearly I think what we’ve identified is the biggest investment in our marketing plan is in skin. And we are reporting significant resources as I said in my opening remarks into this space. And it’s about regional symposiums bringing radiation oncologists and dermatologists together. It’s about investing in pursuing more clinical studies beyond what’s available today in the public domain. It’s being very, very aggressive in terms of pursuing improved reimbursements as evidenced by the 19 States on November 1 and it’s about education and awareness whether it would be in the skin segment or with consumers.

So we’re doing all of those things. And a pretty significant amount of our OpEx increase was in the marketing realm and specifically around our skin program. So we’re really trying to put more resource on that particular market. We are investing in breast IORT. As I mentioned earlier we do have separate symposiums, we’re sponsoring. We’re very successful on Atlanta few weeks back and in the middle of next week we’re going to be having one here in New York City, where we already have a very strong RSVP response. And so, we’re investing for growth, but I would say that biggest dimension of that is the skin market, no question.

Jeb Barton Terry – Aberdeen Investment Management LLC

And what kind of the sales cycle for skin in terms of timeline do you educate the dermatology and obviously it’s a bit of a different end user marketplace than the hospital can deal with it as you pointed out.

Kenneth M. Ferry

It’s also a little bit of math Jeff. We have seen where we first introduced the product to a skin opportunity that you’ve seen an order and probably the soonest is probably 30 days, but we’ve also taken six to nine months to close the skin deal, it really varies. Whole host of different issues with each of the particular opportunities, they clearly close quickly than IORT transactions. They tend not to be hospital base and obviously when you think about selling capital in a hospital environment, level layers that have to approve and so forth relating to capital budgets.

When you’re obviously selling to let’s call it an entrepreneurs and corporate operators or small business people, you can get transaction done more quickly. But we’ve had some deals pop-up at the beginning of a month and three days later they closed and we’ve had some other deals particularly in skin that two or three quarters down the road we’re still talking about. So it really is all over the math to be honest with you.

Jeb Barton Terry – Aberdeen Investment Management LLC

Okay, well, thanks very much. I’ll let someone else to ask questions.

Kenneth M. Ferry

Great, thanks Jeff.

Operator

Thank you. I would now like to turn the call back over to Mr. Ferry for closing remarks.

Kenneth M. Ferry

So in closing we’re very confident that we can carry on and have very strong positive momentum both of Therapy and Detection products businesses into the fourth quarter and beyond. Thanks for joining the call today and we look forward to updating you on our progress in the very near future. Thanks again.

Operator

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

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