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Edited Transcript of ICAD earnings conference call or presentation 30-Oct-19 12:30pm GMT

Q3 2019 ICAD Inc Earnings Call

NASHUA Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of ICAD Inc earnings conference call or presentation Wednesday, October 30, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeremy Feffer

LifeSci Advisors, LLC - MD

* Michael S. Klein

iCAD, Inc. - Executive Chairman & CEO

* Richard Scott Areglado

iCAD, Inc. - CFO

* Stacey M. Stevens

iCAD, Inc. - President

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Conference Call Participants

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* Brian W. Marckx

Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst

* Brooks Gregory O'Neil

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Per Erik Ostlund

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to iCAD, Inc. Third Quarter 2019 Earnings Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to Mr. Jeremy Feffer. Please go ahead.

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Jeremy Feffer, LifeSci Advisors, LLC - MD [2]

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Thank you, Lexy, and good morning, everyone. Thank you for participating on today's call. Joining me from iCAD are Michael Klein, Chairman and Chief Executive Officer; Stacey Stevens, President; and Scott Areglado, Chief Financial Officer.

Earlier this morning, iCAD announced financial results for the 3 months ended September 30, 2019. Before we begin, I would like to caution that comments made during this conference call by management contain forward-looking statements, 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 form -- the company's Forms 10-Q and 10-K which identify specific risk factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Further, the content of this conference call contain time-sensitive information that is accurate only as of the date of this live broadcast, October 30, 2019. 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, it's my pleasure to turn the call over to Michael Klein. Mike?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [3]

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Thank you, Jeremy, and good morning, everyone, and thank you for joining us today. I am joined on today's call by Scott Areglado, our CFO; Stacey Stevens, our President.

We are pleased to have the opportunity to speak with you today and provide an update on our strategic progress, financial performance and present more specific details on both current and future growth plans.

To begin, I'd like to reiterate our clear vision for iCAD. In detection, the company's unique AI technology has the potential to transform Cancer Detection, enabling iCAD to further evolve into the leader in clinical AI solutions. I emphasize clinical AI as it reflects our continuing long-term goal of expanding our AI image detection capability beyond breast cancer AI.

In our intraoperative radiation therapy business or IORT, there are promising reimbursement tailwinds in 2020 that we are appropriately noting and carefully tracking as we await further guidance and clarity from CMS. I will focus my remarks today on the progress we are making in executing on the vision stated above.

With that as an introduction, let's get right into our results and progress. Let's start with an update on the success and momentum we are continuing to experience with ProFound AI, our latest deep-learning cancer detection software solution for 3D digital breast tomosynthesis.

We are now 3 full quarters into the U.S. commercial launch of ProFound AI, following the December 2018 FDA approval. As a reminder, for our customers and their patients, ProFound AI offers the triple win of: one, detecting more cancers; two, fewer unnecessary patient callbacks; and three, over a 50% reduction in reading time when compared to reading 3D tomo images alone. Importantly, these benefits are being validated in the marketplace by our sales results and other important achievements.

I will provide a high-level overview of the market landscape for ProFound AI, and Stacey will provide some further important granularity and color. I'm pleased to report that our detection revenue grew 55% in the third quarter of 2019 as compared to the same period of 2018. Of the 55% growth in the detection business, software license sales grew an impressive 98% year-over-year. On a sequential basis, detection revenue increased 17% over the second quarter. Over the first 9 months of the year, detection revenue was up 30% over the same period last year.

I should also add that we continue to grow our business from a position of financial strength. We ended the third quarter with $17.4 million in cash and cash equivalents as compared to $12.2 million at the end of 2018 and remain well positioned to continue executing on our growth strategy.

With that, let me now discuss some of the operational details driving our improving financial metrics. We are beginning to compete for and close a growing number of larger transactions. In the third quarter, this included a large account with Jefferson Radiology, which is our first sizable all-Hologic account. We closed several other similarly large-scale accounts in the third quarter and still others remain in our sales pipeline.

It is important to note that larger accounts intrinsically have longer sales cycles. These accounts with multiple sites and multiple licenses which introduce more of the associated privacy and security issues and longer implementation times take longer. We expect this trend to continue as we are now actively penetrating larger accounts.

Also contributing to a lengthening sales cycle is the increased interest we are seeing from university and academic institutions. These locations tend to have more bureaucratic approval processes, so deals take longer to close than they would at a similar or more modest-sized for-profit clinical site. Of course, our increased involvement with larger accounts and the growing interest from academic institutions are quality problems to have and are indicative of the significant market demand and uptake we continue to experience for ProFound AI in new and expanded areas of the health care ecosystem.

Based on our initial success with ProFound, we continue to thoughtfully add direct sales reps to the U.S. -- or rather in the U.S. to strengthen our commercial capabilities. In addition, we have realigned certain territories to intensify coverage in those sales areas where we saw the most success in the first half of 2019 and/or see accelerating success in the quarters ahead.

I should note that while our outlook for ProFound AI remains very bullish, we believe that there is now an anticipated likelihood of seeing a possible competitive entry in the U.S. in 2020. We expect to better calibrate this as we approach our big Q4 trade show, the Radiological Society of North America or RSNA in December. By year-end, we'll be a full year ahead of any potential competitors in the commercial marketplace, and we are confident that our innovation and competitive edge will remain robust, and our differentiation will further expand.

Today, iCAD has an installed base of over 4,000 accounts and 6,500 installed software systems. This installed base, along with 2 decades of clinical acumen and image analysis experience gives us a significant commercial advantage. We are mindful, however, that customer decisions have the potential of facing moderate headwinds as purchasing cycles extend with a software-focused competitive entry. We are carefully monitoring this.

One of the core reasons for our June 2019 financing was to accelerate the development of our next-generation algorithm designed to further extend our technological advantage. This effort is well underway and expected to result in next-generation AI technology that will be commercially available in 2020. Our 2020 next-generation ProFound AI release is being built on 300% more imaging data. It's worth noting that iCAD possesses the world's largest collection of breast AI images collected from multiple vendors. With 6,500 software systems installed and an approaching year or approaching full year of ProFound AI installations for 3D tomo, we have ready access to an enormous data repository.

As I have said before, with AI, data is not simply king, it is the kingdom. Our deep pool of accessible breast imaging data, combined with our clinical connectivity and world-class AI algorithm team, we'll generate yet another quantum leap in detection capability in 2020. One outcome will be our emerging AI prediction capability in addition to detection, as we anticipate a significant expansion of our ProFound capability as a more comprehensive platform.

I'd now like to take a moment to discuss our PACS strategy which I have highlighted in the past. We remain very active in partner discussions with many of the leading PACS players and continue to drive towards formalizing these relationships.

Just as our technology is rapidly evolving, that of software-intensive PACS companies, with their inherent ability to capture, archive and transport images in the cloud, is rapidly evolving as well. Aligning design architectures, user interfaces, SaaS-based cloud computing and associated revenue models have a higher level of complexity than mammography hardware platforms. Although these agreements are complex and time intensive, the result will be more seamless on-demand AI access, significant clinical utility and then anywhere, anytime, pay-per-use recurring revenue solution with even greater revenue predictability as we look ahead. We will provide full transparency as this model emerges in 2020 and beyond. We believe that PACS partners will be an increasingly potent distribution channel and an obvious complement to both our direct sales and our OEM channel partners.

Moving on to Europe. We are already expanding our AI footprint in this market. We now cover 18 countries with 12 distributors. In the third quarter, we added 2 new distributors that will cover Italy, the Czech Republic and Austria. I would highlight that our new Italian distributor, [SAOK], only works with the largest and most prominent companies in the imaging market. So we are very pleased to have them on board as a distribution partner. We will continue building our distribution capability OUS.

Also in the third quarter, we completed our first sales in Greece, Austria, Taiwan, Malaysia and Belgium. We are very pleased with our momentum in Europe, where sales of 2D CAD currently remain a large market opportunity, while 3D tomosynthesis is significantly earlier in the adoption phase relative to the U.S.

We remind our investors that ProFound AI for 2D mammography recently received CE Mark approval in Europe. This is an important market for iCAD as the European population accounts for more than 23% of the global cancer burden, with breast cancer the most common cancer among European women.

While we are currently encouraged -- while we are encouraged about growth of ProFound AI and believe we are still rather early in the adoption cycle, iCAD continues to work towards deepening our capabilities in breast cancer detection. Specifically, as referenced above, we continue to develop tools that will allow our customers to predict breast cancers before they emerge and be able to take appropriate action.

We clearly see the emergence of what is increasingly being called risk-adaptive screening from an age-based screening model. Our efforts are well aligned with the emerging trend towards more individualized patient screening, with more frequent and personalized screening for women with higher and more concerning risk profiles. So while we intend to remain a next-generation ahead in ProFound AI for detection of cancers, we also remain equally focused on a commercially available breast cancer prediction product in the market in 2020. We believe we will have the first and likely the only product on the market with a highly sophisticated level of image analysis combined with individual predictive risk characteristics and will also incorporate genomic data.

Recall, our previously highlighted exclusive agreement with the prestigious Karolinska Institutet in Sweden. This agreement gives us access to over 70,000 cases with 8 years of risk characterization along with genomic data. We will provide a more thorough update on this project at the Radiological Society of North America Conference, held in Chicago, early this December.

Let's switch gears and talk about our Xoft business. As we have discussed in the past, our radiation therapy revenues and shipments can be quite lumpy, and this is what we experienced this past quarter. Capital equipment cycles are also longer than most software purchase cycles. The timing and size of certain deals closing can have a significant impact on our quarter-to-quarter performance. Tempering this is the fact that 2/3 of Xoft's recurring revenues -- or rather Xoft revenues are recurring revenue, and those are service contracts, x-ray sources and disposables that are used on a per -- for our applicators on a per indication or per treatment basis.

For reasons I will discuss and have been presented since Q2, we anticipate Therapy sales to continue to be steady state over the next several quarters, yet resulting in increased sales momentum in the second half of 2020 as our new line of applicators for new cancer indications are introduced.

Recall that our Q2 financing was based on funding and initiating clinical trials for already FDA-cleared offerings in rectal, brain and prostate cancers. This effort is underway. We are also within several months of new data on the largest number of breast IORT cases yet and with the longest period of follow-up to date. This is a very important driver of future adoption.

We spoke at length on our quarterly calls about the newly proposed payment model for radiation oncology from CMS. We can only speculate on the prospect of these codes being introduced when we completed our Q2 financing in June. In July, however, we saw the issuance of proposed codes from CMS. In spite of the significant upside potential that these codes represent for Xoft business, we believe that the uncertainty around the timing and the final details of the proposed changes has resulted in some hesitancy in the market as customers calculate the impact of the proposed codes on their total radiation therapy operation.

CMS codes represent a clear focus on the quality and value of care over quantity and volume of care. This is a basic tenet of the proposed codes. This focus and this tenet is potentially very advantageous to single-treatment IORT technology.

To restate what we know about the new codes, CMS did indeed propose a new radiation oncology bundled payment this past July. This proposal specifically includes Xoft breast IORT codes, that would cover 40% of existing sites in areas populated by more than 10,000 individuals. The likely -- the remaining 60% of sites would remain under the old payment model.

We are now beyond the 60-day period of commentary that ended mid-September. The July issuance from CMS indicated that we would learn about the final implementation plan in Q4 of 2019 for a possible commencement in either January or April of 2020. The judgment of our consultants, inside experts and others in industry and/or close to CMS is that Q3 2020 may now be the more likely implementation time frame with notifications several months ahead of that. We are looking for further guidance, updates and clarity from CMS as is the rest of the radiation therapy community as well as treating sites.

As previously stated, many radiation therapy customers are challenged by this uncertainty. The current lack of further clarity and guidance from CMS continues to make us reluctant to project more than steady state revenues for the next several quarters, although we continue to be encouraged about the potential increase in both applicator and Xoft controller volume in the second half of 2020 as clinical trials mature.

Correspondingly, we continue to pace our investments at levels consistent with anticipated sales volume, while modestly and appropriately investing in carefully chosen long lead-time items that would allow us to accelerate commercial activities when the codes are fully implemented. Of the 3 new applicators and indications being introduced in 2020, that being rectal, brain and prostate cancer in 2021, we are particularly intrigued at the long-term opportunity for this stated prostate cancer indication.

As a reminder, we are evaluating the use of Xoft radiation therapy used during the course of robotic surgical prostatectomies, thereby delivering the same one-and-done treatment concept as we perform during breast cancer surgery, where intraoperative radiation therapy is delivered real-time, on-demand in a non-shielded surgical suite. We've already conducted initial feasibility testing at Celebration Hospital in Florida. The concept is to deliver radiation therapy during the course of robotic surgical procedures and to do so in minutes versus weeks of follow-up traditional radiation treatment for prostate cancer. We believe that combining Xoft prostate IORT, simultaneous with robotic surgery while the patient is still in the surgical suite represents an entirely new category of prostate cancer care. A category of 1-day, on-demand radiation therapy in a non-shielded room with Xoft's IORT portable technology, accompanying and potentially even potentially incorporated into robotic surgery technology itself. This project is now underway.

As I said on our last call, according to top robotic surgeons, we have surveyed as much as 30% to 40% of radical prostatectomy patients could benefit from this new category of care for prostate cancer. We see the potential impact of Xoft's intraoperative radiation therapy prostate catch indication as significant, but it will -- rather, the clinical study elements for this offering will mature in 2021. So we anticipate continuing with measured and properly paced investments in our 2020 applicators, and as just mentioned, prostate in 2021. All of these new cancer indications to Xoft will involve post-market trials for new and dramatically expanded indications that are already FDA cleared.

We also believe that Xoft's breast IORT capability, even with the current uncertainty on the timing of new reimbursement codes, may be the best kept secret in women's health care, or certainly, the best kept secret in breast cancer treatment. Imagine, a single day lumpectomy combined with just 10 minutes of radiation therapy and accompanied by real-time breast reconstruction.

It's time that all women learn about this treatment option. It's an option that thousands of women have chosen and has clear data that shows equivalent to many weeks of radiation therapy. Our goal in the months ahead is for every woman to become very aware of this treatment option and that it exists and is available. All women need to hear and know about the technology, which is FDA cleared and now has many years of follow-up data. And it's proven to be as effective as weeks of traditional radiation therapy.

Building awareness for IORT is part of a significant public relations thrust that is now underway with our newly built-out, now in-house public relations team for both iCAD and Xoft. In fact, we've already had more media exposure this month, breast cancer awareness month, than in any quarter in the company's history.

Let me conclude with an example from just 2 days ago, October 28. Medical Device and Diagnostic industry, MDDI, is a widely distributed online and print publication. The October 28 featured article, that their entire readership is entitled, 10 Ways Medtech Is Battling Breast Cancer, Xoft's IORT technology is highlighted right upfront as example, #1. The author highlights the extensive clinical studies and positive study outcomes of single treatment IORT at Vanderbilt University. All women have a right to know about this very viable breast cancer treatment option. It has been well vetted, has excellent clinical data and has been available for over a dozen years in many countries worldwide. We anticipate significantly more of this type of media coverage and also exposure direct to patients in the months to come. Patients and clinicians have a right to know, and we have an obligation to do this for all constituencies.

I will now turn the call over to Scott, so he can provide a more comprehensive review of our financial results.

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Richard Scott Areglado, iCAD, Inc. - CFO [4]

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Good morning, everyone, and thank you, Mike. Before I begin with the financial highlights, I would like to note that during my comments today, I will be referring to certain non-GAAP financial measures. Management believes that these measures provide meaningful information for investors and reflect the way that we view the operating performance of the company. You can find a reconciliation of our GAAP to non-GAAP measures at the end of our earnings release. I will now summarize our financial results for the third quarter ended September 30, 2019.

As Mike mentioned, we are pleased with the results for the third quarter of 2019, with total revenue of $7.9 million, representing an improvement of $1.7 million or 27% as compared to the third quarter of 2018.

Our top line results continue to be driven by the strength of our artificial intelligence business, which grew by $2.2 million or 55% to $6.1 million as compared to $3.9 million in the third quarter of 2018. As a reminder, Q3 2018 was the last quarter of detection sales prior to the FDA clearance of ProFound AI. While the results versus the prior year quarter are impressive, we are also pleased with our sequential double-digit growth over the last 3 quarters as another indicator of the commercial success of our ProFound AI product.

With several quarters behind us, we have seen some emerging trends in the AI business. Our direct sales have grown sequentially from Q1 to the current quarter, with 3D ProFound product sales contributing to the majority of the increase.

However, 2D Density and upgrades are providing meaningful contribution to our overall direct sales. Our OEM business has been primarily 2D sales, both in the U.S. and OUS. However, we expect OUS to continue to be primary markets for 2D and 3D as both are growing OUS.

Service revenue continues to lag. Service revenue declined as compared to the prior year quarter and has been essentially flat on a sequential basis. As I have mentioned previously, service revenue has lagged as the introduction of new products cannibalize service revenue for customers who receive a 1-year warranty when purchasing our new products.

Finally, our U.S. business is the significant driver of our overall revenue increase and has been primarily 3D sales.

Moving on to the Therapy segment. Revenue declined 22% to $1.8 million as compared to the third quarter of 2018. The decrease was driven by a $293,000 or 42% decrease in product revenue as compared to the prior year quarter. We sold 4 controller units in the third quarter of 2019 as compared to 3 in 2018. However, the 3 units in 2019 were at lower ASPs as we pay down our inventory of used controllers. As Mike noted, Therapy tends to be lumpy, but we expect relatively stable results from this segment over the next several quarters.

Service and supply revenue of $1.4 million was down 13% year-over-year, due primarily to decreases in disposable volumes -- disposable balloon volumes and service and source contract revenues. Service revenue continues to represent more than 2/3 of the overall revenue for Xoft, which helps mitigate the effect of timing of higher priced controller product revenue.

Moving on to gross profit. On a pure dollar basis, gross profit for the third quarter of 2019 was $6.1 million as compared to $4.7 million in the third quarter of 2018, representing a $1.3 million year-over-year improvement. On a percentage basis, gross profit was 77% for both the third quarter of 2019 and 2018.

Detection gross margins were 83% in the third quarter of 2019 as compared to 88% in the comparable quarter of 2018. As I have mentioned, our margins are impacted by higher direct product costs of our improved server platform to support 3D images and the higher cost in our install and clinical operations, which continues to support our strategy to optimize our customers' experiences in these significantly more complex sites.

Gross margin in the Therapy segment was approximately 57% in the third quarter of 2019 and 2018. However, Therapy gross margins can vary each quarter due to product mix.

Now on to operating expenses. Operating expenses for the third quarter of 2019 totaled $8 million. This represented a $2 million or 34% increase from the $6 million in the third quarter of 2018. The increase in operating expenses is due primarily to an increase in detection operating expenses of $1.6 million, which was composed of $400,000 in R&D expenses and $1.2 million of marketing and sales expenses. These expense increases reflect the ongoing and planned future improvements to our AI algorithm, development of new products such as risk as well as the investment in the commercial infrastructure responsible for driving top line growth in the detection segment.

On the Therapy side of the business, operating expenses increased $300,000, reflecting modest investments as we try to balance continued development in support of the business with revenue. Looking ahead, we expect operating expenses in the fourth quarter to be trending similar to the third quarter as we continue to focus on both near-term opportunities to build market share as well as invest in sustainable long-term growth.

Now summarizing our profit metrics. GAAP net loss for the third quarter was $3 million or $0.15 per share loss compared to a net loss of $1.4 million or $0.08 per share loss in the third quarter of 2018, which reflects increased operating expenses as well as a $0.9 million noncash loss on the fair value of the convertible debentures outstanding. As I mentioned during our prior 3 calls, we issued approximately $7 million of convertible debentures in a private placement that are convertible into shares of iCAD stock at $4.

On a non-GAAP adjusted EBITDA basis, the net loss for the third quarter of 2019 was a loss of $1.4 million compared to the third quarter 2018 non-GAAP adjusted EBITDA loss of $0.4 million, reflecting the increase in operating expenses.

Moving on to the balance sheet. As of September 30, 2019, the company had cash and cash equivalents of $17.4 million compared with cash and cash equivalents of $12.2 million at December 31, 2018. As a reminder, in June of 2019, we issued approximately 1.9 million shares for net cash proceeds of $9.4 million, which strengthened our balance sheet to support our commercial strategy. We believe the flexibility this strong financial position provides will allow us to invest in initiatives during the remainder of 2019 and into 2020 to build long-term growth and value.

As I outlined above, we continue to be mindful of balancing our expenses and cash with the revenue growth as we look ahead. We are pleased with the results over the first 9 months of 2019 and continue to work aggressively to execute over the balance of 2019 and into 2020.

This concludes the financial highlights section of our presentation, and I would now like to turn the call over to Stacey. Stacey?

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Stacey M. Stevens, iCAD, Inc. - President [5]

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Thank you, Scott, and good morning, everyone. We are excited about the momentum in our business overall, and I'm pleased to provide you with updates around the initiatives to accelerate our growth and expand our global footprint.

Our performance continues to be particularly strong in detection, a clear indication that ProFound AI is truly penetrating the market and adoption is accelerating. It's really gratifying to hear stories every single week from our customers about the positive clinical and workflow impact this solution is having on their practices and most of all their patients. We know that more cancers are being found earlier and faster and that this revolutionary and first of its kind solution is changing the landscape of breast cancer detection.

Additionally, as Mike highlighted, the new proposed bundled payment radiation oncology model in the U.S. could be a significant driver for our IORT business and bring much greater access of this technology to patients, perhaps as early as mid-2020.

With that, I'd now like to provide you with an update on our specific activities in both Cancer Detection and Cancer Therapy. Let's begin with Cancer Detection. We continue to be very pleased with the initial progress and success our sales team has achieved in our first 3 full quarters of selling ProFound AI. Most importantly, we are now closing larger-scale accounts and the deals in our pipeline reflect this new dynamic as well.

Mike highlighted Jefferson Radiology, a large Hologic installation in Hartford, Connecticut, but we also signed large contracts with Allegiant Health, part of the Henry Ford hospital, a leading health system in Michigan; Covenant Health, a regional health delivery network in Knoxville, Tennessee; Grandview Hospital in Philadelphia and the Kettering Health system in Ohio. We also continued to make progress with large integrated delivery networks and group purchasing organizations during the quarter. And while these contracts take time to develop, we are pleased with the progress we are making towards ultimately securing these national contracts.

Turning to Europe. I'd like to focus on our agreement with the VD Group in Paris. As a reminder, the VD Group is a premier group of imaging centers in France, that includes 24 facilities. After reporting the initial sale to this group last quarter, we completed a significant amount of marketing around this relationship in the third quarter. A press conference was held at the hospital within this network to utilize our technology, and in addition, an aggressive PR campaign in France yielded multiple media articles highlighting ProFound AI in both health care journals and mainstream media. We believe this increased visibility, along with the strong positive response to the launch of ProFound AI for 2D will drive further ProFound AI sales in Europe. And we already have a number of strong leads for the fourth quarter in 2020.

I'd also like to highlight that in September, we announced that the results of our reader study for ProFound AI for digital breast tomosynthesis or DBT were published in the peer-reviewed journal, Radiology: Artificial Intelligence. As a reminder, the study showed the concurrent use of ProFound AI increased sensitivity by 8%, reduced false positives and unnecessary recalls by 7% and slashed the reading time for radiologists by 52.7%.

The reader study examined the performance of 24 radiologists, including 13 breast subspecialists, reading an enriched set of 260 DBT cases, both with and without ProFound AI. The publication of our reader study in such a renowned peer-reviewed journal is a significant milestone for iCAD that further validates ProFound AI as a world-class deep learning workflow solution that offers real-world benefits to radiologists and patients alike.

Now looking ahead, RSNA, our industry's biggest trade show of the year, will take place in early December in Chicago. We will be hosting our Medical Advisory Board for a breakfast meeting on December 1, which will include a feature discussion on our emerging risk assessment tool for breast cancer. We are pleased to be working with a powerful group of key opinion leaders, who are considered the leading thought leaders on risk assessment and the future of breast cancer detection.

On Monday, December 2, we are hosting an investor lunch, that will feature a number of speakers, discussing the clinical and business impact of ProFound AI. Further details will follow-on this, and please reach out to us directly if you're interested in attending.

In addition, on Monday, December 2, we will host an evening customer cocktail reception, featuring global KOLs, again, discussing how ProFound AI has revolutionized breast cancer detection.

And finally, we will have multiple presentations occurring throughout the show on advances in mammography for cancer detection and risk assessment in the AI Pavilion as well as the Innovation Theater. We will also host peer-to-peer learning events in our booths throughout the day, each day.

Now moving on to Cancer Therapy. We had a highly successful ASTRO meeting in Chicago in September. We featured the latest updates for the Xoft system, including our new applicators for treating with minimally invasive robotic surgery for prostate cancer, advanced prototypes for early-stage rectal cancers and applicators for treating brain cancer, where we have some really exciting research being conducted in Russia.

We also had a successful presentation of clinical data from the Vanderbilt University School of Medicine study, supporting Xoft IORT for early-stage breast cancer.

In addition, we hosted a well-attended investor event at ASTRO.

Through the first 9 months of the year, globally we have placed 15 therapy systems, which included 8 IORT systems and 7 skin capital systems. We continue to be pleased with our growing installed base, which currently includes well over 100 centers, treating patients globally across multiple clinical applications.

We are very excited about the future of our IORT business and continue to work on completing research for new applications in the U.S., Russia and Canada. We are having many conversations with customers and potential customers about multiple IORT applications, including prostate, brain and rectal treatments, and we expect to introduce our new applicators into the market beginning in late 2020.

So in summary, we are in a strong financial and operating position from which to drive long-term growth. We see a number of positive growth dynamics on both sides of our business, and we remain laser-focused on creating a sustainable leadership position for iCAD for years to come.

Now we will open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Brian Marckx with Zacks Investment Research.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [2]

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Just want to get some clarity on some terminology. When you mentioned close an account, does that mean that you make -- relative to detection, does that mean that you've made an initial sale? Or does that mean that a contract was signed? Or does that mean both? Or does that mean something else?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [3]

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The -- you want to answer? Yes, the closing of an account would -- for us, means both contracts signed, product was shipped, implementation issues have been resolved and we could recognize revenue with the completion of that. So when we say close an account, all those elements have to be done.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [4]

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Okay. And for the larger customers, when you sign -- when they sign a contract, is there any risk -- for the multi-site larger customers? Is there any risk that they don't buy what -- they don't eventually purchase what the original agreement is?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [5]

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We only -- we may have contracts that would indicate that there'll be an initial install, and there may be promises of additional installations down the road, but we don't forecast that. We just project what we know is going to be what is signed, what do we expect to be delivered. And any promises of future revenue or opportunities are not included in any of our projections. We only reflect things that we know for certain, have non-contingencies, will or have been shipped or will be shipped and are contractually committed to.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [6]

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Okay. Mike, I wonder if you could just talk about -- you mentioned the new competitor about to enter the market. And if you can talk about that in the context of what you see as maybe the top 3 reasons why a prospective customer -- we're talking about detection in the AI platform, why a prospective customer may not purchase whatever that might be, the reasons might be, whether it's budget-wise or competitive entrants or -- if you can just kind of talk about that a little bit? And then relative -- specifically relative to the new competitor, are you seeing prospective customers delaying purchases until this new competitor enters?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [7]

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Well, let me answer the second part of the question first. No, we're not seeing that currently in terms of a delay. We do anticipate that, that dynamic could occur as we get into 2020. The competitors that we envision could enter the market in 2020 are really the same people that we see in Europe, where the 2D market has been also growing and where we've seen other parties in the market as well. And we've seen them trying to get through the FDA and enter the U.S. We can't handicap and calibrate the FDA. So we just don't know precisely when they might show up on this side of the ocean, let's say.

In terms of differentiation, we do. One of the major reasons for the financing in Q2 is the continued acceleration of AI technology, as stated, with more data to really stay a generation or even 2 generations ahead, and also the movement into prediction and also the ability to look at prior images. So that kind of differentiation, which is today, really based on detection of current images, will include, as we move into 2020, moments in time, which is, let's look at prior year's images. Let's look at today's image, and let's look at what the predictive capability is for the future. So this is the differentiation that we're bringing to the market in 2020, and we think will keep us a generation ahead.

And along with that, our ProFound AI algorithm, as I stated, it's going to have 3x as much data, and with that higher detection, fewer callbacks. So we feel very comfortable with our competitive advantages, building out the sales capability and extending.

Having said that last point, when a new technology does come on the market, there is a tendency for folks to want to see what the other parties may bring to the market. We expect that, that could have a tempering effect as those parties get introduced. We're expecting to also learn a lot more about this at the RSNA show in December.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [8]

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Okay. A couple on Therapy. You mentioned that your consultants think that it's more likely a Q3 2020 event when it may be implemented. Can you talk a little bit about why they think it's a Q3 event now and not earlier in the year?

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Stacey M. Stevens, iCAD, Inc. - President [9]

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Brian, it's Stacey. So a lot of that has to do with comments that came through in the commentary period and some of the comments that came in from some of the societies and also some of the large hospital systems is that it would take them a little bit longer to implement the change that is being proposed. And this is not atypical for CMS. Typically, things do not happen along the initial proposed time line. We've seen that happen many times in the past. So nothing is for certain at this point. But one thing we do know is that CMS is required to notify the stakeholders at least 60 days in advance of implementation. We expect that we'll actually get that notification with -- period will be longer because everybody who's weighing in on this is really requesting that CMS give as much notice as possible and publish the final language of the ruling as soon as it's available. So we don't know for sure, but this really just comes from what the experts in this area are telling us and sort of what we picked up at ASTRO is that kind of mid- next year is now the more likely time frame.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [10]

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Okay. Great. And one more on the Therapy side. Prostate cancer, you talked about that some initial studies are ongoing. Is -- do you have a time line when you think you may have something to talk about data-wise relative to those studies?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [11]

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Well, we've done a few initial cases. We will do expanded cases starting probably late Q4, but more likely in Q1. The initial studies that we will -- and actually, we've done this a little bit with our initial cases is imaging data, phantom studies, which basically show that the dose was delivered at the proper depth, proper shielding has been put in place, the design of the clinical study and the endpoints still have to be finalized as well as the selection criteria. Because we're looking at cases that have typically gone beyond the prostate capsule itself, which means more advanced cancer. So we have to look at the selection criteria.

And then, of course, the endpoints will be key because we're doing this for clinical adoption. It's already FDA cleared. So we want to make sure the endpoints are robust and has an appropriate amount of follow-up to compare to folks that will not get radiation therapy following radical prostatectomy. So there'll be a comparator to not doing radiation therapy, and therefore, the follow-up period will need to be determined.

Some of these studies can take -- in terms of follow-up, can take 6 months, 12 months, some a little bit longer. And those are the reasons why we project 2021. That may not mean, however, since it's FDA cleared, that sites will not begin to utilize the technology before the study results will come out under evaluation or an IRB. But when we talk about clinical studies, we're talking about to get broad and wide adoption, these clinical studies will need to be -- we believe, these clinical studies will need to be at their endpoints or have interim results, and we don't expect that to mature until 2021.

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Operator [12]

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(Operator Instructions) Your next question comes from Per Ostlund with Craig-Hallum Capital Group.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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I'm going to stay with Therapy here as well, just since that's where Brian left off. Just maybe start with a quick point of clarification. Just as it pertains to the notification versus the final rule. So the notification of the clinicians, the centers that are going to be subject to the rule has to happen by a certain point, but do you still expect the final rule itself that delineates the particulars of the alternative payment model, do you still expect that before the end of the year?

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Stacey M. Stevens, iCAD, Inc. - President [14]

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Right now, we don't, Per. The latest estimates on the publication of that final language is sometime in Q1, more likely earlier in Q1, but that's what we're hearing right now. Right now, I think we feel pretty confident we will not see the final language before the end of the year.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Okay, okay. And then I guess on that point or on the point of the payment model and some of what you've talked about in terms of your public relations effort, you've talked in the past, I think, fairly extensively that one of the gating factors to IORT adoption is awareness. Clearly, you're taking a number of steps to do that to be in a position to kind of go on the offense when this model in whatever form it takes, comes into play. How much of the groundwork, how much of the market development have you started to undertake now? And how do you think about the delineation between your market development activity and what you might actually see clinicians undertake? Because I think that, in my mind, a big issue with the awareness is you haven't had clinicians that have really had much of an incentive to actually evangelize on behalf of the technology. And if that changes with the implementation of the RO model, how much of that market awareness do you see just happening organically because the clinicians are going to be more in a position to go out and talk about the benefits of IORT?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [16]

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Yes. Good question, Per. And let me first say that one of the things that our Q2 financing enabled us to do was go out to all of the sites that treated under what we called our expert trial and gather the data that had already been generated over many years and, in fact, had already been -- had patients followed by 5 years. And these were multiple sites.

And so the collection of that data, which actually cost some money, which was very helpful in Q2 has allowed us to pull together the information that was already our information, but not yet put into a form or in a publication-ready capability. So that is information with sites that had previously not been seen, that we'll be able to -- and we anticipate being able to talk more broadly about post publication. And as I said, we expect that in the early part -- more likely the early part of Q1. There'll also be reported 10-year data for the target trial, hitting its 10-year point of follow-up. It'll be very robust.

As far as new sites that can, let's say, evangelize new trading sites, we have a number of sites, as Stacey mentioned, over a dozen sites this year, of which 7 or 8 of those were IORT. New sites tend to be -- especially in an environment that we've been operating, tend to be very prolific and they're purchasing the technology because they want to be able to talk about it in their catchment area, and all of them have various degrees of studies underway to prove the technology. It's not only to bring another patient in their areas, but to also justify the purchase to administration.

So we have a group of emerging advocates and studies underway in some of the more recently installed sites. And those sites are both in the U.S. and outside the U.S. So I think the answer is, yes, to new advocates. And yes, to there's a lot of data from already treating accounts that hasn't been collected and curated that we'll be hearing about in the months to come.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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Okay, very good. So then let's turn to detection. Obviously, just a stellar quarter there, the launch of ProFound seems to continue to run at a very nice pace. So I want to say that coming out of the last quarter call, Mike, you mentioned that, that budget cycles tend to be more of a boom to you in Q2 and Q4, and thus, maybe, by definition, a little more squarely in the other quarters. And yet, you pretty much trounced of our model in terms of Q3 detection revenue, which is very good to see. How -- I guess, just maybe you referred to a number of things in prepared remarks, but just kind of want to come back and maybe unpack a little bit of what drove that sequential strength? And how much of this is just powering through, frankly, those budget cycles and just being able to show the value of ProFound to prospective sites? How much of this is the early contribution from Europe following the 2D CE Mark there, contributing to the sequential gain? How much of it is helped by these larger accounts already contributing in Q3 and so on?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [18]

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Yes, I think -- I am always concerned about Q3 in any business I've been in, at least in radiation oncology and imaging, because of the summer vacation cycles as well as the -- as well as from a procedural basis, volumes can be down on a treatment basis. So Q3 is always concerning.

What we saw a lot in Q3 was a contribution -- we started seeing some measurable contribution from OEM partners in Q3. In reality, they actually sell their products, their gantries in Q2, but we don't actually get the orders for those gantries for the AI technology in Q3. So that was clearly a benefit to us, and quite honestly, a positive surprise for us as we entered into Q3. So in some ways, these were Q3 sales that wound up -- of gantries, that wound up coming through OEM channels into -- in Q3.

The other thing is we have an expanding relationship with a number of other OEMs, one of which is Siemens, and Siemens started procuring 2D technology and now with the ability to buy 3D, we started getting some uptick there. That was positive.

And I think what we're also seeing is that we have a very large funnel and we've been very guarded about how to predict that funnel because a lot of these larger sites take time. And what we have found in a couple of markets, particularly in Q3, is if we get an install in one area or one region, that there is a bit of a viral effect and that folks want to -- folks across the street or down the road want to jump in. So that might take 1 singular opportunity and turn it into more than 1 opportunity in the market. So we saw a bit of an effect of that in this quarter.

So I think it's a combination of OEM sales coming in, a new OEM partnership emerging in Siemens with 2D and 3D and some viral elements that occurred in Q3, as sites get installed and then folks down the road get kind of a little bit of AI envy and want to jump on the bandwagon.

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Richard Scott Areglado, iCAD, Inc. - CFO [19]

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And Per, just for a little color here. Q3 '19, OUS grew about 20% sequentially over Q2 '19, just under 20%. And U.S. is still a significant portion of our business, but the OUS expansion, I think, will continue to drive additional opportunity for us.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [20]

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Okay. Excellent, Scott. Mike, since you talked about OEMs, I'd be remiss not to mention the Jefferson Radiology deal. Congratulations on that. Can you characterize the sale there? Was it collaborative with Hologic? Was this your direct sales force going in and kind of taking that deal down on its own? And maybe just as a broader question, and I know we've bandied about this in the past. But just at a high level, are you still -- are you seeing primarily sales into existing 3D gantries that have -- that are just sort of waking up to the appeal and the value of ProFound? Or are you seeing a number of new deals for you coming on the heels of fresh 3D conversions?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [21]

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Yes. Well, first thing I'll say is that of our 4,000 sites and 6,500 software installs, of the volume of 3D deals this year, that more than half of them have come from accounts that we didn't have either 2D or 3D. So by definition, these have been new accounts. But it also means that existing accounts may have 2D and we were able to upgrade them.

As far as the dynamic of accounts that we sell into, recognize that the focus of many of our OEM partners is typically on the now about 400 tomo systems that they're selling new every quarter. And we partner with them to a certain extent, either directly or reps can work together. But the market that we've been very successful in, since that's only 400 accounts per quarter, is the now 8,000 unit installed base. And those accounts are less likely for OEMs to go into because they've already sold the account, unless that account is going to be upgrading to get another technology, but is already an existing 3D account, they're less likely to move into those markets. And this is the very reason why we built our own direct sales force, was to call on a large already installed base and be able to have direct access and customer intimacy and sell them on the program.

So we do collaborate in many areas. We work with GE, we work with Siemens, we work with Fuji. Our relationship with Hologic, we do not have on a formal basis, and it's not atypical for sales reps to -- if they find it to their mutual advantage to work together to be able to collaborate.

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Stacey M. Stevens, iCAD, Inc. - President [22]

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And Per, in the case of the Jefferson account specifically, that was an installed base Hologic account. So it was not a new sale. And we sold that account directly, not really a ton of collaboration there, but it was a huge account, 11 Hologic gantries, and we were able to very successfully communicate the strong value proposition of ProFound AI to that customer, and they really understood it and understood the impact it could have on their workflow and from a clinical standpoint.

So that's the type of account that we'll really look to -- once they have some experience with the product under their belt, we'll look to work with them to actively market sort of the outcomes and the impact that the product is having on that practice and use that to then go to other Hologic accounts to be helpful in the sales process.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [23]

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Excellent. Excellent. Okay. The last one for me, and I guess that kind of does dovetail off of that response, Stacey. So you've talked a bit, again, here, I think last quarter, about the importance of that peer to peer. And I guess, I like your term like AI. And when -- I think when we spoke coming out of Q2, you talked about having some of your early adopting sites potentially being in a position to publish clinical data, their experiences sometime in the fourth quarter. Is that still on track for that? And then maybe just to piggyback off of that. When we look at RSNA coming up in early December, you talked about having the prognostic in a number of discussions and the things around that. Do you expect to actually be able to showcase an early edition of that? And then how about the retrospective view of past mammograms as well?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [24]

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Yes, we will. We've stated for a while, and we will indeed be able to show as Stacey has too referred to as advanced prototypes of the 2020 technology at RSNA. We will be showing both current cases, today, the ability to look at cases previously, to be able to see what previously may have been visible or to be able to show the degree of change from year-to-year, and we'll also be showing our risk prediction capability. And again, that's from our associated work with Karolinska.

Clinical data, one of the challenges with RSNA, there is a lot of clinical study underway. And sites really love the idea of being able to compare how they performed before and after, although at the same time, it's often challenging because it's difficult to report out about things that you missed that you could have gotten. But nonetheless, there are a lot of these cases that are being evaluated.

The RSNA time line for abstract submittal happens in Q2. And so we won't have the -- a robust amount of the clinical data that we know is already underway as the abstract time lines came in Q2 before a lot of these sites had the ability to mature. But we will have a number of folks speaking on the ongoing studies. And we've also done webinars and we'll do many more as part of what we call the ProFound Institute. Folks actually talking about their cases, what they experienced. This one image, and out of 300 they missed, but they could have got with AI or AI showed it, and even folks who've actually participated in our reader study are actually starting to talk about and put into the form of webinars -- because they only got to see a couple of hundred cases put into form of webinar, what they saw or what they didn't see before AI and then with the inclusion of AI.

So we'll see the initial wave of some data in the fourth quarter, but a lot more as we approach Q1 and Q2, the data matures. And then we have other shows, such as the European show that will be very timely in terms of abstract submittals, and we'll be able to hit those deadlines.

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Operator [25]

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Your next question comes from Brooks O'Neil with Lake Street Capital Markets.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [26]

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I'd just like to ask a quick -- hopefully, quick question. That is, could you talk just a little bit about the total addressable market you see for ProFound? You talked about 4,000 installations and 6,000 softwares. I mean could you talk about how many installations do you think are possible in both kind of number of installations and dollar figure and then maybe do the same for Xoft? That would be a huge help.

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [27]

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Yes. On the Xoft side, we see a global market of 36,000 gantries or image capturing systems. In the U.S., we see 18,000 of these mammography imaging technologies. Of the 18,000, we track 8,000 as having converted to 3D tomosynthesis. So we see that as an immediately addressable market. We also see that 8,000 expanding by a little over 400 per quarter. So we envision by the end of 2020 that the addressable market in the U.S. will be 10,000 3D digital breast tomosynthesis systems, and that is an addressable market in the U.S. And outside the U.S., we see currently 1,500 in Europe and another 500 to 1,000 outside of Europe. So together, we see -- we envision by the end of 2020, that the addressable market will exceed the U.S. 10,000 and get to about 12,000 total.

Now in terms of the size of that market, if I was to take the ASP and assume that both our ASP and supporting service contracts were installed, and in this example, I'll just say, 9,500 installed because that would be -- 9,500 would be the U.S. converted market to date and outside U.S., 9,500, that would translate into a market -- a served market potential of 300 million; and as that grows to the full installed U.S. base, the opportunity of 18,000 sites represents a $600 million market potential?

And since that's based on 18,000 sites, if you look at the worldwide installation opportunity or total available market, it would be double that $600 million. That would obviously be assuming we got all -- we got our product installed that the ASP mentioned at our ASPs in all markets, that would be a $1.2 billion market.

As far as Xoft goes, there are, we estimate, 2,500 sites in the U.S. that do radiation therapy with a total of close to 5,000 locations that -- or I should say, shielded rooms, where radiation therapy could be deployed. So at a minimum, we see 5,000 sites in the U.S., and we actually see an equal number outside the U.S. So again, about 10,000 sites.

What's unique about the Xoft technology, which if you fully loaded the cost of the controller, the balloons and the radiation source contract would be a contract of about $300,000 to $325,000, depending on where we are in the world, is that it not only -- not only can this $300,000 to $325,000 offering, assuming source contracts and a reasonable amount of balloons, apply to those 10,000 sites. Now keep in mind, 5,000 U.S. 5,000 outside the U.S., but because of the non-shielded nature of this technology, we are not limited to those hard-coated shielded rooms. The technology can be mobilized. The technology from one location to another. The technology can be moved to procedural rooms. So you vastly -- you literally can port it or mobilize it to lower-cost theaters of operation, if you will, because of the non-shielded room. And as one example, in Malaysia, where we sell -- I'm sorry, in Taiwan, where we've sold 10 systems, those 10 systems are using 30 to 40 different accounts. And it moves from account-to-account almost daily basis, and the volume secured from those 10 systems is dramatic. So hopefully, that gives you a sense of the growth opportunity for both sides of the business.

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Operator [28]

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We have reached the end of our question-and-answer session. And I will now turn the call over to Mr. Mike Klein for closing remarks.

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [29]

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Well, thank you, operator. I'd like to close by reiterating our priorities going forward, all of which are intended to tap into and optimize the previously unrealized value in both our detection and Therapy offerings: One is to maximize the commercial success of ProFound AI for 3D breast tomosynthesis on a global basis as well as our recently launched ProFound 2D offering. Our commercial efforts are underway, and we are excited about the compelling growth prospects for our ProFound offering, both for detection and shortly for prediction.

Number two, to continue to increase our customer base for Xoft business, specifically IORT for breast and gynecology and new applicator areas and leverage the continuing momentum from the new positive clinical data as well as potentially emerging dynamics of CMS.

Third and finally, to achieve meaningful timely progress in expanding our product road map and advancing our strategy to capitalize on the substantial growth opportunities we see in clinical AI beyond even the breast area, leveraging our unique set of competencies and allowing us to establish a sustainable leadership position in high-growth markets on a global basis as we evolve into a clinical AI company.

With that, thank you for your support, and we look forward to providing you with further updates on our future progress in the coming months. And please enjoy the rest of your day.

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Operator [30]

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