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Edited Transcript of ICAD earnings conference call or presentation 7-May-19 12:30pm GMT

Q1 2019 ICAD Inc Earnings Call

NASHUA Jun 2, 2019 (Thomson StreetEvents) -- Edited Transcript of ICAD Inc earnings conference call or presentation Tuesday, May 7, 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

* François Daniel Brisebois

Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity 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 the iCAD, Inc. First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, Jeremy Feffer, Investor Relations. Mr. Feffer, you may begin.

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

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Thank you, Omer, and good morning, everyone. Thank you for participating in today's call. Joining me from iCAD today 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 ending March 31, 2019.

Before we begin, I would like to caution that comments made during this conference call by management that 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 SEC, including without limitation, 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. Furthermore, the content of this conference call contain time-sensitive information that is accurate only as of the date of this live broadcast, May 7, 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 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.

With me today are Scott Areglado, our newly appointed CFO; and Stacey Stevens, our President. On our prior 2 calls, I've dedicated the bulk of my comments to presenting a clear vision for iCAD. In detection, simply put, 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. With the December 2018 FDA approval and the ensuing US commercial launch of ProFound AI, our latest deep learning cancer detection software solution for digital breast tomosynthesis, we expect iCAD's technology to facilitate vast improvements in workflow, reading time, and clinical efficacy. The realization of iCAD's vision for enhanced cancer detection is now underway.

Today, I'd like to spend the majority of my time discussing specific actions we are pursuing to ensure appropriate execution of the vision I previously delineated. These actions will pertain to our detection business and our ProFound AI technologies, yet I will also provide comments on our now more rapidly growing IORT business within our Xoft business, radiation therapy business. Stacey will provide additional details and color on the specific initiatives we are executing on now, along with those we are planning in the near term.

In Q1 2019, the quarter represented a dynamic and transformational period for us. Our focus is to fully realize the substantial growth potential that resides in our 2 revolutionary technology platforms, our industry-leading capability for cancer detection and our novel electronic non-radioactive cancer treatment technology delivered to our Xoft business. We see growth for both of these innovative core technology platforms.

In recent quarters, iCAD has established a track record of successfully providing value to our shareholders. We intend to sustain this value creation and continue to leverage and accelerate our current momentum as we move forward. I will highlight this momentum in today's report. To sustain and accelerate our current trajectory, we have made important investments in human capital and are executing on a variety of initiatives aimed at increasing market awareness and enhancing access to our novel technologies. Our core technologies will only be as successful as our ability to enhance clinician and patient awareness as well as with initiatives to increase open accessibility to all available market channels.

With that, I'd like to review some specific actions and related accomplishments. Stacey will get a bit more granular on these actions and accomplishments in her commentary. As part of the investment in human capital, we have now completed an organizational restructuring, including precisely targeted strategic additions throughout the company. This includes investments in our commercial infrastructure, marketing, business development, and medical affairs. This last area, medical affairs, is responsible for expanding clinical studies, advisory board development and expansion, and an extreme focus on ensuring our products are designed in conjunction with leading-edge clinical users in mammography and radiology, in general.

Additionally, we are continuing to enhance our world-class algorithm team. We are also building upon what I would refer to as economies of speed, all the while focusing on the highest quality innovative customer offerings. Collectively, these changes and additions were made to best support the anticipated growth in our business. Importantly, our detection sales team staffing is now essentially complete with all major US geographic markets covered.

We also now have distribution in nearly a dozen countries outside of the United States. We've added sales, service, installation, and training personnel. We have now more than doubled the commercial infrastructure we had in place at the beginning of Q4 2018. In parallel, we have added additional commercial personnel and distribution capability to our re-emerging therapy business, which is also undergoing a thorough revitalization with new market opportunities presenting themselves.

You may recall that I have previously referred to 3 clocks that needed to be synchronized for top line growth success in our detection business. These were represented by the sales scale ramp of 90 to 120 days, the sales cycle itself of 90 to 120 days, and the technical work optimization cycle of 90 to 120 days. Our scaling and execution goal has been to avoid having these cycles run sequentially. Instead, we have driven to overlap and synchronize these cycles. We are well on our way to the full synchronization of these cycles. Therefore, instead of 270 to 360 days of sequential cycles, we have compressed and synchronized to 180 days or two quarters. Our first quarter sales performance reflects our early synchronization success which will build towards a full synchronization and deployment as we head into the second half of 2019.

Another example of our investment in human capital is the formation of our Medical Advisory Board, which I introduced on our last call. This impressive group of individuals includes high profile key opinion leaders from prestigious sites both within and outside the United States. All board members serve in unique leadership positions, particularly in areas of mammography, cancer risk, and prediction. I am pleased to report that we recently successfully completed our first Medical Advisory Board meeting. This isn't simply a board of prestigious key opinion leaders, authors of journal articles and studies as well as imaging society leaders. These individuals will serve as essential advisors to the company as we continue to innovate and move into new frontiers of breast cancer detection with our 2D and 3D software for breast tomosynthesis.

We continue to believe that rapid cycle innovation requires the unique fusion of academia, high volume clinical sites, and innovators working in concert with industry. We also continue to welcome strategic partners into this consortium of innovation that will now be meeting on a regular and ongoing basis. The foundation of our risk prediction initiative is our exclusive risk prediction license agreement with researchers at the Karolinska Institute in Stockholm, Sweden. Karolinska is a world pronounced institution and a leader in medical research. I am pleased to report that our exclusive agreement has now been formally signed. As a reminder, iCAD and Karolinska Institute researchers are collaborating to develop and innovative a solution for commercial use, to access an individual's probable or potential risk of developing breast cancer. This is a quantum leap beyond the detection of cancer today. The goal is to go beyond the ability to predict lifetime breast cancer risk or even a 5 to 10-year risk. The goal is to have the potential to accurately predict the development of breast cancers within the coming 12 to 24 months, often the interval between normal age-based screening regimens.

There is no other product in the market today that combines this level of image analysis and individual predictive risk characteristics. The resulting solutions will be hitherto unforeseen improvements in screening accuracy and a game-changing shift from what is currently an aged-based screening approach, to an emerging model of risk-adapted screening. More frequent screening and potentially earlier diagnosis and treatment for those who needed the most.

Over the past 18 months, we have run our algorithm on over 70,000 patients, in conjunction with Karolinska researchers. Since our AI imaging software reads and interprets radiomic information that's embedded within images and the Karolinska data set includes essential genomic and risk characteristics information. We will shortly be introducing the first radiogenomic AI solution in breast cancer disease management and we will do it within the coming 12 months.

We strongly believe in the value of strategic partnerships. We continue to achieve important progress in establishing relationships PACS companies. As a reminder, we believe we have a natural affinity and alignment with our PACS partners. They have unique focus on open-architected high market access technology and the seamless movement of images and data throughout the entire healthcare system, be they local, regional, or cross-country. PACS vendors also deploy cloud-based technologies and span the entire medical imaging ecosystem powered by an anytime, anywhere approach. This will inevitably move us over time to a recurring revenue SaaS like business model. The goal here is to offer all imaging clinicians a choice of best-of-breed software imaging capability when they need it, how they want it, and in the volume quantities that meet their precise needs. The natural resonance with PACS business partners has enabled us to establish relationships with the majority of PACS vendors and we are close to establishing formal relationships with a significant partner -- a significant number of partners in the months ahead.

In the marketing area, Stacey will provide a more in-depth update on our recent and near-term planned marketing initiatives shortly, but I'd like to highlight a few key initiatives now. First, our federal regulation that all mammography providers must include updated information about breast density in report sent to both patients and their physicians highlights the importance of iCAD's PowerLook density product, which include a density assessment software, which is now being re-branded and re-launched as our ProFound density offering.

In addition to this initiative, we will be increasing awareness of the reader study results for ProFound AI. The study result -- this study was a part of the December 2018 FDA clearance and included hundreds of images, led by 24 radiologists. Recently, the reader study's principal investigator, Dr. Emily Conant from the University of Pittsburgh presented the impact of breast density on the study's results at the Society of Breast Imaging. The sub-analysis of the reader study results showed that physicians who read with 3D tomosynthesis images and read them with our AI software had significant improvements in breast cancer detection and reading time with both non-dense and dense breasts.

Interestingly, doctors reading dense breast damages also read complex and often problematic 3D tomosynthesis cases with a 7% increase in sensitivity over 3D tomo alone and a 9.9% increase in specificity or false positive and callbacks and did it in a 50% less time period when compared with iCAD's technology when not using 3D tomo images. So, said again, when used with iCAD ProFound AI technology, we get these incremental results when reading 3D tomo images alone.

For density, this represents a triple win. One, increased detection of cancer; 2, nearly 10% fewer call back for additional testing with thermal alone; and, 3, a dramatic reduction in radiology reading time that for density is just shy of a 60% reduction in time when reading thermal images with ProFound AI's 3D solution.

The area of detection for dense breasts further and somewhat dramatically underscores our value proposition and this essential and crucial area of accurate breast detection for dense breast ProFound AI definitively enhances clinical outcomes over 3D tomo alone and does so with a 50% reduction in workflow. Again, these aren't subjective marketing claims. They come directly from the FDA reader study data for ProFound AI.

Leveraging the above innovations, initiatives, and outcomes and establishing clear differentiation can only occur with a customer base that has sufficient knowledge of how to assess and evaluate AI technologies. We see the term AI used very loosely and see the clear necessity for physicians and even patients to have a more informed perspective on how to make educated choices about clinical AI technology.

Stacey, this morning, will provide details on the introduction of the ProFound Institute. We view the creation of this institute as an essential education-based initiative to create clinical awareness of how to differentiate advances made as well as offerings introduced, particularly ones that make meaningful clinical contributions and ones that are FDA-cleared, are proven safe and effective, and also generate workflow efficiency. This comprehensive effort will launch later this quarter.

So before providing some financial highlights, I'd also like to comment on our Xoft business. Our revitalized focus on IORT, or intraoperative radiation therapy, has resulted in the highest quarterly volume of new product controller sales in several years. This has been fueled by the enhanced clinical awareness of the multi-indication uses of Xoft's novel electronic brachytherapy technology. Our scalable technology is clear for all cancers. It is mobile, cost effective, does not require an expensive or inaccessible shielded room, and is extremely flexible for use in multiple treatment venues on a global basis. As we've launched new therapy applications in gynecology and now have applicators in development for use in brain and rectal cancers, the use of our technology is now expanding beyond breast cancer. Importantly, we have treated our first IORT prostate cancer case and anticipate an expanded treatment study of prostate cancers in the second half of this year. The development and validation of a unique balloon applicator for prostate cancer's specific use is now well underway.

While I noted that the first quarter was a transformational period for iCAD and one of enormous organizational realignment, we recorded strong financial results for the quarter. While Scott will highlight an in-depth review of our first quarter results, I'd like to highlight a few key metrics that we believe demonstrate the progress we are making at iCAD, particularly with the launch of ProFound AI and our laser focus on our growing IORT efforts within Xoft.

First, for Q1 2019, revenue increased approximately $500,000 or 7% as compared to the prior year period. In the software product segment of detection, our first quarter of 2019 revenue increased 300% or 12% year-over-year, clearly indicating that we are gaining traction with ProFound AI. In our therapy business, new product sales of over $1 million in Q1 2019 nearly doubled new product sales for the same period in 2018. Our therapy business is growing with a renewed focus on IORT and new cancer indications and is clearly back on track and moving along a positive trajectory. For both businesses combined, gross margin for Q1 2019 increased to 78% from a gross margin of 71% in the same period in 2018. From a profitability standpoint, our non-GAAP adjusted EBITDA improved significantly year-over-year in the first quarter from a loss of $1.4 million to a loss of $0.6 million in the most recently completed period.

With these comments on specific actions and some highlighted financials, I'll now turn the call over to Scott, so he can provide a more comprehensive review of our financial results. Scott?

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

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Good morning, everyone, and thank you, Mike. I am excited to have recently been appointed as CFO and look forward to continuing to work with a highly talented team at iCAD as we grow the business. I would like to review the company's first quarter 2019 financial highlights, which were released earlier this morning. 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.

With that covered, I will now summarize our financial results for the first quarter. For the first quarter of 2019, total revenue was $6.8 million, which represented an improvement of $0.5 million or 7% over the first quarter of 2018. The overall increase is due to an approximate $0.2 million or 4% increase in detection revenue with growth in our density and 3D business and a $0.3 million or 13% increase in therapy revenue with the sale of 8 and 2 rental units in the first quarter of 2019 as compared to the sale of 4 systems in the first quarter of 2018.

In the Detection segment, our increased investment in a direct sales staff continues to benefit our top line as we generated a $0.3 million increase in product revenue on a direct sales basis, while our OEM revenues remained fairly consistent with prior year revenues. These gains on the product side were partially offset by some slight attrition on the service line, which decreased approximately $0.1 million as compared to the prior year period. We have seen a slight erosion in our legacy service space as our customers transitioned to our newer products and with moderate shifts in the market share of our OEM partners.

In the Therapy segment, as Mike mentioned, our improved focus on our IORT business led to a $0.3 million increase in revenue with a $0.5 million or 97% increase in product revenue as compared to the prior year. This was partially offset by a $0.2 million or a 11% decrease year-over-year in service and supplies revenue. The year-over-year decline in service revenue was due primarily to the restructuring, which eliminated our unprofitable Skin subscription business in the Therapy segment in January 2018.

Moving on to gross profit, on a pure dollar basis, gross profit for the first quarter of 2019 was $5.3 million as compared to $4.5 million in the first quarter of 2018, a $0.8 million year-over-year improvement. On a percentage basis, gross profit for the first quarter of 2019 was 78% of revenue as compared to 71% in the prior year quarter. The majority of this margin improvement in the first quarter of 2019 was in our Therapy segment as our margin increased $800,000 on a pure dollar basis and increased from 42% to 70% as compared to the first quarter of 2018. Our efforts to restructure the Therapy business in the first quarter of 2018 led to improved margins in 2019 as compared to that period. However, on an ongoing basis, this should level out as the remainder of 2018 also benefited from this restructuring in the first quarter of 2018.

Detection gross margin declined to 83% in the first quarter of 2019 as compared to 88% in the first quarter of 2018 on higher direct product costs of our improved server platform and higher service costs, as we've expanded our commercial infrastructure with clinical operations and install support. While the investments in our service and support infrastructure will have a near-term impact on our Detection margins, the additional clinical operations and install support to improve workflow and connectivity are linked to the third cycle that Mike mentioned. These investments are part of our strategy to help us with top line growth as we move forward.

Now, onto operating expenses. Operating expenses for the first quarter of 2019 totaled $6.3 million. This represented a $1.3 million decrease from the $7.6 million in the first quarter of 2018. The change in our operating costs in 2019 as compared to the first quarter of 2018 is broken down in 3 components. The first component is an approximate $1.2 million reduction in engineering and product development costs which was due almost entirely to clinical and reader study costs incurred in the first quarter of 2018 which supported the development of ProFound AI. G&A expense had a reduction of approximately $0.5 million, with savings in stock compensation, bad debt, and personnel expenses. The last component was an increase in marketing and sales expenses of approximately $0.4 million, reflecting our continued investment in the commercial infrastructure to support our sales objectives for 2019.

As we look to the remainder of 2019, we do not expect that our operating expenses will continue to show as dramatic a year-over-year improvement as the first quarter of 2018, had some significant one-time expenses that did not occur in the first quarter of 2019. On a pure dollar basis, the remainder of 2019 should begin to show some increase in expense as we continue to build out the infrastructure necessary to successfully market and commercialize ProFound AI and develop the next generation applications as alluded to by Mike earlier.

Now, summarizing our profit metrics. GAAP net loss for the first quarter was $3.7 million, or $0.22 per share loss compared to a net loss of $3.3 million or a loss of $0.20 per share in the first quarter of 2018. It is important to note that included in our GAAP net loss is a $2.5 million charge related to the fair value of the unsecured convertible debentures.

As I mentioned during our prior quarter call, we issued approximately $7 million of convertible debentures in a private placement that are convertible into shares of iCAD stock at $4. GAAP accounting requires that the fair value of the convertible debenture, which includes the value of the traditional debt instrument as well as the embedded conversion and redemption features, be measured on a quarterly basis and that the corresponding increase or decrease in value flow through the P&L. The increase in value of the debentures from $7 million to $9.5 million in the first quarter of 2019, as compared to December 31, 2018 was due in part to the increase in the trading price of our common stock at March 31, which increased the value of the conversion feature embedded in the instrument and forced a $2.5 million non-cash charge to earnings in the quarter. In the future, we would expect that movement in our stock price, along with changes that affect other factors embedded in the valuation of this instrument will cause additional changes in the balance sheet liability, which will also flow a non-cash charge to earnings until such time, in a potential conversion, when the entire then current fair value of the convertible debentures would flow through equity.

On a non-GAAP adjusted EBITDA basis, the net loss for the first quarter of 2019 was $0.6 million. This represented a $1.8 million improvement over the prior year period. As I have discussed above, improvements in revenue, gross margin, and operating expenses in the first quarter of 2019 as compared to the first quarter of 2018 had a direct impact on this metric.

Moving onto the balance sheet, as of March 31 2019, the company had cash and cash equivalents of $11.3 million compared to cash and cash equivalents of $12.2 million at December 31, 2018. We remain in an extremely strong financial position with the appropriate resources to pursue our commercial initiatives in support of the strategy that Mike has laid out. We believe our focus on our transformational product ProFound AI and on our IORT business, support our growth strategy and we are excited to aggressively pursue these objectives.

This concludes the financial highlights section of our presentation. I would like to now 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 pleased with our overall results in the first quarter and as you just heard, our performance was particularly strong on the product side of both business segments. Importantly, ProFound AI was a significant contributor to our success in the first quarter as market demand continues to grow for this revolutionary product offering and customer feedback continues to be highly positive. In addition, we sold more electronic brachytherapy systems than we have in any single quarter in several years' time, further indicating continued positive momentum in the Therapy segment of our business.

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 are very pleased with the early progress and success our sales team has achieved in the first full quarter of selling ProFound AI. We have now installed this innovative solution across a wide range of both mammography vendors and PACS reading environments, including all of the top market share players. We invested substantial effort in optimizing the workflow for individual customer sites and we are pleased with the positive feedback we are hearing from early adopters on the clinical value of our solution.

Our focus in the first half of 2019 has been on making investments to expand our direct sales team in the U.S. and Europe as well as significantly expanding our distributor relationships in Europe. These investments, combined with the early success and momentum with ProFound AI, give us confidence that we will continue to gain meaningful traction with this product in the second half of 2019.

With that, I'll begin with our recent U.S. activities in detection. As Mike noted, we now have a full sales team with all 11 reps having been successfully trained. We also plan to dedicate a national accounts manager who will focus on emerging deals across integrated delivery networks, large imaging centers, and corporate and government accounts. As part of our work with the sales team, we have completed the development of a wide range of sales tools, including an ROI tool for customers that shows the cost savings to be gained by utilizing ProFound AI. We are developing a strong economic selling model to help the sales team communicate not only the clinical benefits, but also the financial benefits of ProFound AI and this has been very well received by our customers.

Turning to our recently formed Medical Advisory Board. We are very excited about the opportunity to work closely with this group of thought leaders. The Advisory Board will provide guidance on iCAD's development of risk assessment and next-generation AI products in breast imaging to enable us to continue meeting the needs of clinicians and patients. We believe this collaboration between academia active clinical sites and industry will significantly benefit our company. Specifically, we had the opportunity to present our current work in risk assessment at the recent Society of Breast Imaging show and this group is actively guiding the definition of our solution and value proposition and working in close collaboration with iCAD and our collaborators at Karolinska. I look forward to reporting on the contributions of our Medical Advisory Board over the coming months.

I'd now like to discuss the progress we are making with our OEM partners and PACS companies. Importantly, as of late in the first quarter, part numbers for ProFound AI are now included in the GE price book and we have now completed several separate training for GE. We are very pleased with the substantial marketing effort GE launched around ProFound AI as a leading differentiator for their tomosynthesis platform. We expect increased sales of ProFound AI from GE over the next several quarters. Also, as Mike said, our PACS integration work continues to move forward nicely. We expect to have multiple formal PACS relationships in place before year-end, which will enable us to leverage the large installed base of these companies.

From a marketing standpoint, following the new proposed breast density federal regulations Mike discussed earlier, we have initiated a comprehensive promotional campaign around our density solution, which is designed to standardize the assessment of breast density in 2D and 3D mammography. We really believe this innovative technology could play an important role as healthcare facilities -- with healthcare facilities' ability to adhere to the new regulations. As such, we have really recharged our marketing efforts in this area, creating new promotional materials and hosting educational webinars, highlighting the benefits of our product along with additional PR activities. We are already seeing the benefit of these initiatives as we saw a 3x increase in density license sales in Q1 when compared with Q1 of last year.

In addition, I'm excited to announce that we are in the process of creating the ProFound Institute, an online educational platform that will include clinical and educational resources for ProFound AI. We expect to launch the ProFound Institute before the end of the current quarter, as Mike stated, with plans to continue to build out content over the coming year. We are very excited about this project and believe it will play an important role in communicating the benefits of ProFound AI to potential customers. Importantly, July fiscal year budgets will be established shortly. So we are pleased to have all of these key initiatives I've discussed in place in order to support us in these discussions.

With that, let's review our key activities internationally in cancer detection. Over the past several months, we have invested substantial effort in building out our European distribution network. We have now established formal relationships with 6 new distributors who collectively cover 10 countries and we have received our first ProFound AI order from this network. We are in discussions with several additional European distributors and expect to continue to develop this channel further into 2019.

We also have strengthened our OEM relationships in Europe, and we're pleased with the performance from this channel in Q1. There are multiple large tenders bidding across Europe, and we believe we are well positioned to compete for these tenders. We have also accelerated our marketing and PR efforts in France, one of the largest European mammography markets and have 2 customer events with leading KOLs planned in that country in the coming weeks, along with focused PR using local agency and targeting medical press. We also continue to have a significant presence at key industry events.

Most recently we highlighted ProFound AI at the European Congress of Radiology 2019 which is held by the European Society of Radiology and is the second largest radiological meeting in the world. We are targeting several additional congresses and AI-focused events in the coming weeks. Looking ahead, in Europe, we expect to formally launch ProFound AI 2D solution in the next months. Given that the 2D market is still growing in Europe along with thousands of 2D systems in the installed base that do not currently have an AI solution, we expect this product to contribute meaningfully to our growth in 2019.

Now moving onto Cancer Therapy, product sales in this segment increased 97% in the first quarter of 2019 as compared to the first quarter of 2018. This growth was primarily driven by continued strong performance in our breast IORT business. Globally, we placed 10 therapy systems in the first quarter, which included 6 IORT systems and 4 skin capital systems. We continue to be pleased with our growing installed base which currently includes approximately 50 U.S. centers and approximately 50 OUS centers treating patients with IORT and/or GYN applicators.

We continue to experience strong global market interest in general IORT applications, including prostate, brain, and rectal treatment as a result of key clinical research being conducted globally. In fact, additional research is currently being completed in the U.S., Russia, and Canada. Importantly, we also expect the completion of additional general IORT applicators by early 2020. We experienced strong interest in these new applications at the recent ESTRO 2019 event in Milan, where we also hosted a well attended global distributor summit and an educational evening event, featuring electronic brachytherapy experts discussing their experience with a wide range of applications. Additionally, 7 clinical presentations were given, utilizing our technology and our overall sales lead count was up over 80% compared to previous years.

Our OUS momentum is largely driven by progress in China, Taiwan, and Spain. In addition, we are seeing increasing interest in Japan, a large longer-term market for us. As you can see, we continue to experience a number of positive trends in our IORT business. As such, we continue to view IORT as the most significant long-term growth driver in our Therapy segment. We are currently working with several partners on the skin side. We're leading the sales and marketing efforts for that application and we continue to seek additional partners in the dermatology space.

So, in summary, we achieved significant progress on multiple fronts in the first quarter as we continued to make key targeted investments in our organization that we believe will accelerate growth over the course of 2019 and create 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) Our first question comes from Per Ostlund, Craig-Hallum Capital Group.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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And first and foremost, congratulations, Scott, and congratulations, Stacey, as well.

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Richard Scott Areglado, iCAD, Inc. - CFO [3]

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Thanks, Per.

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Stacey M. Stevens, iCAD, Inc. - President [4]

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Thank you.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [5]

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A lot to unpack here. So, if we can start with the Detection business, you've talked about a good breadth of early adopters in terms of types of sites adopting and that sort of thing. Just wondering if you can talk a little bit more about that. And now that you've got your sales force built out geographically, how important is it to have regional beachheads from an adoption standpoint too and what does that do for you in terms of sort of diffusing the technology out to the masses?

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Jeremy Feffer, LifeSci Advisors, LLC - MD [6]

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Yes. Let me take that. It is very important, Per, we started with covering 5 core markets with the goal of getting towards 13. And the reason I say 13 is that, there are 30 areas of dominant influence, basically just track where basically baseball teams are and we wanted to have -- we identified a tie, 2 to 3, that each sales reps would be tied to 2 to 3 of those areas of dominant influence. We got to a number of 11 reps. We felt that the 11 reps with another economic rep that's working with very large integrated systems was the right balance for us at this point in time. That should grow over time, but where sales are being aggregated and are becoming clustered into larger IDN purchases, that gives us really solid coverage throughout the US. So I think we're in good shape there. And again we've added the distributors in Europe. We intend to build that as well. So, for now, I think we're where we want to be, although I think we will add at least 1, as mentioned, at the economic IDN level, large system level and perhaps yet another 1 if business continues to begin to aggregate. We are now starting to see a large number of deals and a large number of GPOs and buying groups that represent opportunities that are beyond the clinical and technical level and have moved all the way upstairs to the economic level.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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Back to something you mentioned, Stacey, in your remarks. So we had noticed the stronger push by GE as well around the SBI meeting and it strikes to me maybe as a little bit counterintuitive that they have gone from exclusive to nonexclusive and they are putting a little bit more weight behind it. Certainly encouraging to see that. How much of that is just ProFound AI being a dramatically better product than Version 1. How much of it is maybe them fighting a little bit more given that they are not exclusive, and then how would you characterize potential OEM or PACS partners engagement besides GE at this point?

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Stacey M. Stevens, iCAD, Inc. - President [8]

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Yes. We're really happy, Per, with the much more aggressive marketing efforts that GE has decided to take with ProFound AI. And I think it's a couple of reasons. One, certainly the product does have substantial improved performance over Version 1 and some of the FDA claims that we have around improved sensitivity and specificity and reduce reading time are very powerful. And GE has realized that they can really lead with ProFound AI as the key differentiator for their Tomo system. We're seeing them get some momentum. We're seeing them really show a desire to take back some share from Hologic and I think you really see that and much more aggressive marketing coming from them. They seem to be making more investments in their field organization, and we are seeing a very strong desire by GE to partner with iCAD at the field level as well. And not only that, but at the corporate level. I think our relationship with GE has actually never been stronger, and we have a very positive productive working relationship with them right now. There's been some turnover in their organization at the corporate level and we have found that the new resources that are leading in that business, particularly on the commercial side are very effective and our relationship is very strong today. So we're very pleased with that dynamic overall and we expect that to continue, given that now our part numbers are actually in the GE price book and they are able to quote it on their paper.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

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Okay. And then just related to other OEMs and potential PACS relationships as well.

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Stacey M. Stevens, iCAD, Inc. - President [10]

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Yes.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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How is the engagement level there? Per, I think it's very good across the board. So we're very effectively partnering with all of the major imaging OEMs at the field level, and I think, in particular, we've really accelerated the work we're doing with the PACS companies. We probably have 4 or 5 that are teed up right now that we're in various stages of discussions about formal agreements with them that range everything from a pure set of commercial agreement to something that would be much more strategic and even embed our software over time in the PACS systems. So I think that we are making a lot of progress there. We did put a new Head of Business Development in place a few months ago, and one of his responsibilities is to focus exclusively on the PACS companies and those relationships. And he has gotten a lot of traction and made a lot of headway in. As I mentioned in the script, we are expecting to announce at least several formal relationships with these PACS companies in the coming months.

That actually kind of dovetails into something else I wanted to ask about as well. So, Mike, you spent some time on the last call talking about ProFound for the cloud. As these PACS relationships, some of them move toward greater clarity and fruition, how integral is the cloud strategy to partnering up with the vendors on the PACS side?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [12]

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Yes. It is quite integral. It enables us to transcend the server-based model with -- and all the connectivity elements and cost, both material cost and labor to just go in and do service work. When in the cloud, we have the ability to process images in the cloud, the ability to deliver software upgrades, to deliver -- the ability to deliver new releases and very seamlessly be able to integrate almost laterally into PACS capability and, thereby, instead of operating again on a local server basis, more easily and readily be able to integrate with PACS players. And additionally, as I stated in my earlier comments, the business model that they utilize, which is often a pay-per-click model, so we have a relationship with them where they are actually including our AI capability in what would be their pay-per-click or pay-per-scan model. We would transfer to them a charge for transfer fee for pay-per-click and they would then pass that on to their customers. So the business model aligns nicely, the technology model aligns nicely, and our overall philosophy of open architecture of letting everybody choose best of breed software nicely aligns.

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

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Okay. One more detection question for me, and then I'll let somebody else jump in. I'm definitely encouraged to see what sounds like an acceleration or reacceleration on the breast density side. I think it's largely been established that density is a risk factor and certainly obfuscates a mammography read. I think that that's well known. I'm curious how much you've seen the federal proposal as a jump-starter here since we already kind of had 30 plus states talking about mandating the notification. What has the federal effort done to jump-start that? And also how much -- which I'm very interested in, in Dr. Conant's presentation at SBI, how much around ProFound specifically helping improve the assessment of breast density? How much is that helping?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [14]

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Maybe I'll take the first part of that and Stacey can take the second. As far as the recent FDA notice, if you will, on these regulations that have been established, actually now for 3 years, I think it's too early to answer your question, Per, in that, I think it would take more than 1 or 2 quarters to see a clear trend. Clearly we see an uptick in the first quarter. We want to take a look at the Q2 results, Q3 -- and not only for our products, for others in general. I think that this was the year of compliance, the third year of MQSA regs being out there. So this is the year of high compliance. A lot of people knew about it already. And then the FDA came on and just kind of added that extra notes. So I think a lot of this was already baked into the market. And I think they torqued it up a bit. We clearly saw the growth as you saw from Q1 last year to Q1 of this year. But I'm not so sure the FDA nudge on this did much more than just increase awareness. I think it was really the MQSA, almost the penalty provisions that were already in place that got the market moving towards density even before the FDA made their pronouncements.

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Stacey M. Stevens, iCAD, Inc. - President [15]

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Getting to another piece of it, Per, is that, as part of building our commercial infrastructure and adding new sales reps, some of the new reps that came on got really excited about density and have really started to really position density. We have a very strong density product and it's strongly differentiated versus our competition on a number of fronts, right, and I think some of the new reps got excited and just out of the gate started positioning density as a key part of our solution and that's helping too. So we've had stronger sales focus and certainly we've put some very aggressive marketing in place. A lot of the advocacy organizations are talking about density as sort of a buzz of density in the marketplace. So I do think part of it is that our own sales team has been re-energized and is taking a more active stance in terms of positioning in as part of most deals.

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

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Let me add one other thing, if I could, also to Stacey's comments and also get back to your point on Dr. Emily Conant. When we presented our results, we presented the results collectively with dense and non-dense breasts. So I think one of the impact is that it had us go back and look at the statistics on how well we did for each of the -- each areas and we had already had this, but we presented them together. Well, pleasantly, as we looked at the most complicated and these problematic images, we found both the high sensitivity and even a better specificity, or in other words, a lesser call back rate for dense breast tissue than we did for all cancers when grouped together. And the other thing that -- and to be honest with you, it actually surprised us a little bit as we continued to parse the data and we really were focusing on breast density, the amount of time that people were spending looking at dense breasts under just using 3D tomo alone, we got a 59% reduction in dense breasts, which is greater than the 53% overall. So we tend to do quite well with dense breast tissue, which indicates that the software for even the most complicated and problematic cases tends to actually add unique incremental value over an assessment of all breast examinations where the software could help in comparison to just 3D tomo alone. So this was something we sort of knew about, but one of the outcomes of all of this is, it made us really drill down into our own data and see just how well we're doing.

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Operator [17]

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Our next question comes from Francoise Brisebois, Laidlaw.

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François Daniel Brisebois, Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst [18]

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Just a couple here. So we've hit on it a lot, but I was wondering, for the product, on the product side on the therapy, obviously there is a big jump there. Is that something when we look at the rest of 2019 that we should see as kind of the new normal or is that something that might be more of a one-time event?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [19]

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Yes. Frank, I think that it's -- quite honestly, it's too soon to tell. We are looking at our product pipeline. We did have a reasonable backlog of interest going into the quarter that didn't make through the end of the year. So some of that Q4 to Q1 growth I attribute to some seasonality and the fact that folks were waiting for budget in 2019 to be able to make purchases and make that pipeline turn into reality. For us to declare it, let's say, a trend, that would have us answer your question in the sense that it's a positive trajectory, I think we need to see another quarter at least. We are seeing what we are seeing and Stacey mentioned this in her comments as well, there were people who used to make a decision on the technology for breast IORT alone. There are clinical champions that emerged for gynecology or for brain or for other applicators that then take that position or take their desire to the technology, bring it up to administration and then when they are able, when we are able to show other indications, we build a better economic case. So I think one of the big changes is that, this multiple application strategy is beginning to take hold. But again, we're still only 1 quarter into the release of some of these applicators and we are investing in the other applicators. We'll probably add another sales rep towards the end of the year, but I think it's too soon to declare it a, let's say, a new trend line or trajectory.

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François Daniel Brisebois, Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst [20]

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And that kind of goes into my next question in terms of the applicators. I think on the Xoft side, that's very interesting with the prostate. Is this something on the detection side that you're also looking at different types of cancers or are we really focusing here with the Karolinska Institute to kind of risk stratify more towards genomics and just focus on breasts or are we looking at different types of cancers for detection as well?

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

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We look at the breast cancer model as a replicable model and part of the reason that we're going to the cloud and part of the reason -- which by the way crosses all areas of radiology beyond breast cancer and also are building out this continuum in mammography, essentially looking back at prior cancers and looking forward at the prediction of what could happen is because we believe that in our future directions, we will be able to scale this model of looking at prior images, looking at genomic data. We will be able to take that to other areas. You may recall that on a prior conference call we mentioned that we have been up -- that we have a technology that we developed that has the FDA approval in CT colonoscopy. That is a market that's been a little bit challenge to get into because of the reimbursement dynamics. But things are beginning to percolate there a little bit as the very low compliance with optical colonoscopy begins to raise in terms of concern. We have historically developed MRI solutions for both breast and prostate, which basically means we have the capability to do work in MRI. So we are clearly looking at opportunities beyond breast and I think I would summarize what we are doing by saying that there are so many different opportunities that is important for us to use our own signal/noise separation mental software to find the next best opportunities. So there are an abundance of choices and we need to make the best proper choice for the next 2 or 3 places to move, but it's unmistakable that we are planning to move in these other areas. And that's one of the reasons why we are building out our algorithm team to move faster with mammography, but also have the capability to move in other clinical AI areas, because we now define ourselves as clinical AI, not the breast cancer company that happens have very capable software.

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François Daniel Brisebois, Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst [22]

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And then just lastly, you talked about those clocks again. I'm just wondering with the economies of speed and the importance of getting these clocks kind of working in parallel, you mentioned 180 days, 2 quarters. Is this something -- I'm trying to think about the growth in the second half and how to think about it. Would you guys ever kind of hint or head towards giving guidance on the top line in the growth or is this kind of a gradual third, mostly an end of the year? How should we think of that seasonality and just trying to understand when those 180 days kind of clock in and then everything makes sense to see that top line?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [23]

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Yes. I guess the -- to your questions, that is a possibility. As we begin to get more predictability, one of the things that we also know is that there tend to be more than one budget cycle and accounts in the second half -- but a lot of accounts have their budget annual fiscal calendars start July 1, so that certainly would help in the, let's say, in the second half. We do see more of the market becoming revealed to us as we begin to interact with different PACS vendors and with different OEM solutions. So there is this general opening up of the total available market as we move forward and a lot of this again begins to unfold as the 3 clocks gets synchronized. So there are number of factors that begin to align themselves, both the synchronization of the 3 clocks, budgets within hospitals, many of which kick in the second half, and then the building relationships with PACS vendors and other OEMs that begin to give us more of a penetration opportunity. One of the ways we track this is, we look at the sales reps' pipelines and if there are, let's say, $3 million in accounts -- $3 million in opportunity in a rep, just to give an illustration, in the first to second quarter, it's typical that as we move through, and we're beginning to see this in certain areas, that the pipeline is building. So the level of interest, all the marketing tools that we provide, all the trade shows we go to, and as clinical data begins to emerge, the market in terms of interest begins to build. And that may suggest that we'll continue to add sales reps towards the end of the year or in 2020 as we move forward. But we're taking a very measured approach in the sense of not wanting to be too far ahead of the market, because there are gating items like budgets and also the clinical connectivity and working with other partners, but certainly not wanting to be behind the market. So that's how we see us moving forward, Frank.

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Operator [24]

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Our next question comes from Brian Marckx, 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 [25]

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In terms of therapy product revenue, it looks like the average selling price may have been quite a bit lower than what you had recognized historically. If you can talk about that. And then how many of the systems placed in the quarter were in the U.S.?

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [26]

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I would take the average selling price and Scott and Stacey can answer the second part of the question. Yes, there were some lower ASP units. Part of that comes from the fact that we had a fair number of these units going outside the U.S. where -- as these tend to be lower. We also tend to have lower ASPs when we sell into the skin market and, in particular, since some of the units going back to the mix of international, some of the units that go into China are hitting a price point or being sold at a price point that's on average below other U.S. and OUS price points. So that's little bit on the mix you might say for selling price. Scott, Stacey, you want to answer the question on the actual units sold?

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Richard Scott Areglado, iCAD, Inc. - CFO [27]

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Yes. So 5 U.S. unit for sale, 3 OUS, and then 1 each U.S. and OUS on the rentals.

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Stacey M. Stevens, iCAD, Inc. - President [28]

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Yes. I think that's part of what you are seeing, Brian, is that there's a couple of rental systems mixed in there, right. And so those don't recognize the upfront capital revenue that those other deals would, right. It spread out over time. So that really impacts the overall ASP. And the other thing is that, 4 of those systems were skin capital systems and they were actually used systems that we sold. So those had a lower average selling price. So when you sort of put all that together, that's why you see something that's lower than what you would normally see.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [29]

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Okay. And then on GE and ProFound AI, when did the system go into their price book and have they sold any units so far?

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Stacey M. Stevens, iCAD, Inc. - President [30]

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So it just went into their price book within the past, say, 30 days and they have started to sell it, yes.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [31]

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Okay. Stacey, you mentioned that you expected the 2D mammo ProFound AI to begin to roll out next quarter, does that mean it has CE mark?

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Stacey M. Stevens, iCAD, Inc. - President [32]

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It does not yet, but we are very confident that within the next, say, 30 days that we will have the CE mark on that product.

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Operator [33]

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

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Michael S. Klein, iCAD, Inc. - Executive Chairman & CEO [34]

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Thank you, operator. I'd like to close by reiterating our priorities going forward. One, to maximize the commercial success of ProFound AI for digital breast tomosynthesis globally. Our commercial launch is underway and we are excited about the compelling growth prospects for this product. 2, 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 derived from new positive clinical data. This is one of the reasons for the growth of Xoft sales in this first quarter was the great data that came out at the end of 2018. And third, and finally, to achieve meaningful timely progress in expanding our product road map and advancing our strategy to capitalize on the explosive growth that we see in clinical AI, leveraging our unique set of competencies and allowing us to establish a sustainable leadership position in high-growth markets globally. A significant aspect of this initiative is our work in breast cancer risk assessment with researchers from Karolinska Institute, which will be an important factor for us in 2019. With these closing remarks and a strong level of enthusiasm for the future of our company, we thank you for joining today's first quarter 2019 conference call and look forward to updating you as the year progresses. Have a great day.

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Operator [35]

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