ICAD Inc (ICAD) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the iCAD third-quarter 2016 financial results conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Zack Kubow of The Ruth Group. Sir, you may begin.

Thank you, operator, and good morning, everyone. Thank you for participating in today's call. Joining me from iCAD are Ken Ferry, Chief Executive Officer, and Scott Areglado, interim Chief Financial Officer. Earlier this morning, iCAD announced financial results for the three- and nine-month period ended September 30, 2016.

Before we begin, I would like to caution that comments made during this conference call by management that contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of iCAD. I encourage you to review the Company's filings with the Securities and Exchange Commission, including without limitation the Company's Form 10-Q and 10-K, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast: November 2, 2016. ICAD undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

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

Thanks, Zack. Good morning, everyone, and thank you for joining us today. I'll begin with a few comments on our third-quarter financial results and progress with key growth drivers for our business. I'll then turn the call over to Scott Areglado, our interim Chief Financial Officer, for a review of our financial results. Following Scott's remarks, I'll be back with a more detailed business update and to review our key initiatives, and then we will open the call for questions.

Third-quarter revenue came in below our expectations, primarily due to lower-than-anticipated Xoft system sales as customers delayed capital purchase decisions. However, we are encouraged by the progress with our strategic initiatives and positive trends in several key areas during the quarter.

In cancer therapy, we are gaining traction by increasing the number of dermatology practices that offer skin eBx for the treatment of non-melanoma skin cancer. For IORT, global procedure volume continues to grow, particularly in international markets. And we are on track to enter several new geographies over the next year that will add to our IORT growth potential.

In cancer detection, we are in active dialogue with the FDA regarding approval of our 3D tomosynthesis detection software, which has been delayed due to additional questions from the FDA. Obtaining FDA approval for our 3D tomosynthesis software is one of the highest priorities for our team and we remain committed to bringing this important tool to radiologists in the US market as soon as possible.

I'll provide more detail on these and other items in a moment, but now I'm going to turn the call over to Scott for a more detailed review of our third-quarter financial results. Scott?

Thank you, Ken, and good morning, everyone. While revenue in the quarter came in below our expectations, there were several positives in our results that I will briefly highlight.

Total service revenue for the third quarter was $4 million, which is in line sequentially with both the first and second quarters, providing a stable base for growth as we gain more traction with our key growth drivers in the business. Excluding the MRI business, cancer detection revenue was relatively stable sequentially from the second quarter, with growth acceleration anticipated from our 3D tomosynthesis product, which is pending FDA clearance.

On the expense side, we continued to closely manage our investments against our top-line results, with total operating expenses below our planned levels at $6.8 million. We finished the quarter with $10.5 million in cash and no debt. And we are still working to complete the sale of our MRI business, which will further strengthen our cash position.

While our top-line results were weaker than planned for the third quarter, we have some stable underlying trends which I will highlight that keep us well positioned for an improved fourth quarter and growth in 2017.

I will now provide a full overview of our third-quarter 2016 financial results. For the third quarter, total revenue decreased 37.4% year over year to $6 million. The year-over-year decline was driven by lower Xoft system sales. The residual effect of our reimbursement uncertainty in our skin brachytherapy business and the anticipated decline of our MRI-CAD revenue as a result of Invivo exercising their rights to a paid-up license last year.

In our therapy business, third-quarter revenue decreased 57.3% year over year to $1.9 million and down 24.3% sequentially from the second quarter, reflecting zero Xoft system sales in the third quarter. For the first 9 months of 2016, IORT balloon sales volume was up 21% to 1,183 balloons, with the US market up 15% from 652 in the first 9 months of 2015 to 751 in the first 9 months of 2016. Internationally, balloon volume increased 33% from 324 in the first 9 months of last year to 432 in the first 9 months of 2016.

Therapy service and supply revenue in the quarter was relatively flat sequentially compared to both the first and second quarters of 2016 at $1.8 million. It can be broken down to approximately $325,000 coming from our subscription-based nonmelanoma skin cancer customers and $1.5 million coming from service and x-ray source agreements from our customer base.

Moving on to cancer detection, total revenue in the third quarter decreased 20.5% to $4.1 million. As previously mentioned, the main driver of the year-over-year decrease was the impact of Invivo exercising their right to a paid-up license on our MRI-CAD product in August of 2015, as they had strong partial-quarter results prior to executing the paid-up license [agreement].

We continue to realize only the revenue related to the amortization of the $2 million paid-up license fee, which we are recognizing ratably over the life of the contract, which ends in July 2017. Excluding the reduction due to the paid-up license with Invivo, which represented a $900,000 impact in the third quarter and a $2.1 million year-to-date third-quarter impact, our core mammography business was stable both sequentially and as compared to prior-year results.

Cancer detection product sales decreased 38.4% to $2 million in the third quarter 2016, reflecting the above-noted decline of MRI-CAD product sales, partially offset by growth in our core mammography products. Cancer detection service revenue increased 8.7% year over year to $2.1 million and was flat sequentially.

Moving on to the rest of the P&L, gross margin in the third quarter of 2016 was 68.3% compared to 71.2% in the third quarter of 2015. The decrease in gross margin percent is primarily the result of lower revenue in the quarter.

Operating expenses in the third quarter of 2016 were $6.8 million, down from $7.2 million in both the third quarter of 2015 and the second quarter of 2016. This was below our expectations for quarterly operating expenses in the range of $7.4 million to $7.9 million, as we carefully managed our expenses to align with our revenue trajectory in the quarter.

We expect operating expenses to increase in the fourth quarter to the range of $7.1 million to $7.4 million, reflecting continued investment in our key initiatives and additional commercial resources in the skin electronic brachytherapy and cancer detection markets. Looking at our profit metrics, non-GAAP adjusted EBITDA for the third quarter was a loss of $1.6 million as compared to non-GAAP adjusted EBITDA income of $0.7 million in the same period last year.

With respect to the balance sheet, we ended the quarter with $10.5 million in cash compared to $11.5 million at the end of the second quarter of 2016. During the third quarter of 2016, we used approximately $900,000 in cash from operations and $1 million overall.

Lastly, we believe it is premature to provide guidance at this time as we wait for FDA clearance of our 3D tomosynthesis solution and are early in the ramping of additional dermatology electronic brachytherapy customer sites.

I would now like to turn the call back over to Ken.

Thanks, Scott. I will now provide some additional detail on the third quarter's significant developments, starting with cancer detection. As Scott indicated, and excluding the MRI business, the third-quarter cancer detection results were up slightly compared to the prior year and relatively stable on a sequential basis from the second quarter. We continue to see solid product sales results from our OEM partners and from our direct sales of PowerLook 2D mammo software and iReveal breast density software.

Looking forward in cancer detection, we anticipate a significant impact from our 3D tomosynthesis software once we receive FDA clearance. The current status with the FDA is that we received another set of questions on our PMA submission in mid-October.

We also had a follow-up call with them last Friday. We are in process of working to provide a complete and timely response over the next week. We're also preparing for a meeting with the FDA midmonth. While we are disappointed with the delay in the approval timeline of our 3D software, we continue to be very optimistic on the growth opportunity for our cancer detection business once we receive FDA clearance.

Our tomo detection solution is one of the first commercial deep learning applications in radiology and we are exploring opportunities to collaborate with other partners as we believe we can leverage our core competence in artificial intelligence and deep learning, as these algorithms are poised to be the next wave of innovation in radiology. We already have leading European key opinion leaders using the software and it is performing exceptionally well in clinical practice. And radiologist feedback has been very positive.

Similar to the results from our reader studies, these customers are achieving meaningful reductions in reading time for 3D tomo exams, allowing them to increase productivity for what is a much more intense reading process as compared to 2D.

The following is specific feedback from Dr. Laurent Levy at the Institute of Radiology in Paris and one of the leading radiologists in all of France. Dr. Levy said of tomosynthesis and our software, and I quote: Breast tomosynthesis is more difficult to read and takes more time to read than traditional FFDM studies. Enhanced read preview with iCAD's solution improves the reading experience and allows me to organize how I read these large data sets by helping me be more efficient. I believe every radiologist will want to read breast tomosynthesis this way.

As we build upon our key reference sites in Europe with our partner GE, we expect adoption to accelerate as more customers are able to access these reference centers in their local markets and fully appreciate the positive experience that existing users such as Dr. Levy are having.

We continue to work closely with GE on commercial activities and we will host an educational event at the upcoming RSNA meeting, which will feature experienced clinicians sharing their experiences using our tomo detection product.

We're also on track with the development of our next-generation version of the 3D software product, which will provide two key advantages compared to the first-generation version. First, we anticipate the next-generation software will further enhance workflow and reduce reading time for radiologists using a next-generation version of [rumor] analysis algorithm built on deep learning. Based on the positive feedback with the first-generation software, we believe this solution will be an even more powerful clinical decision support tool.

Second, we are positioning the next-gen version to be available for the use with all tomosynthesis exams regardless of the system manufacturer. This will substantially expand our market opportunity and growth potential.

On a related note during the quarter, we completed our development work for our iReveal 3D density software. This software is designed to be integrated with our 3D tomosynthesis software to further enhance the 3D interpretive workflow. This should be particularly attractive to users in the 28 states where it is mandated that a breast density assessment be provided to patients at the time of their mammogram. We filed a 510(k) submission for this software with the FDA at the beginning of this week.

We're encouraged by the increased focus by the FDA's Mammography Quality Standards Act and program, or MQSA, on breast density standardization and patient reporting and believe that there will be a national mandate that requires patient reporting as early as 2017, which could further accelerate adoption of our density software.

In terms of MRI-CAD solutions business, we continue to make progress with our strategic partner on a potential sale. Both sides are committed to completing a deal and the terms are close to being finalized. We feel confident that we will be able to close this sale in the fourth quarter or early in 2017.

Turning now to cancer therapy and starting with our dermatology eBx business, during the quarter, we continued to make good progress engaging new customers, a process that we started in the May time frame once we had analyzed a sufficient number of payment claims for reimbursement under the new CPT III code for electronic skin brachytherapy.

In the short time since then, our team has been highly active in the market educating our customers on this treatment option and developing a strong pipeline of potential new customers. We're learning that many practices are excited with the opportunity to start treating patients with electronic brachytherapy.

A recent example is Dr. Robert Scheinberg, a dermatologist in Oceanside, California, who commented, and I quote: We are pleased to resume providing a leading-edge radiation therapy treatment option for nonmelanoma skin cancer patients with the Xoft skin system. Study results suggest electronic brachytherapy is an effective treatment for patients with nonmelanoma skin cancer with few recurrences or side effects and excellent cosmetic results.

Our practice is happy to offer this promising and innovative treatment option to our patients.

We are encouraged by this commentary, which is representative of the feedback that we are receiving from many dermatology practices throughout the country. We've invested in additional sales and marketing resources in the quarter to further accelerate our ability to capture new sites.

We expect to sign additional new agreements during the fourth quarter that will mostly begin to contribute to growth in the first quarter of 2017 due to the two- to three-month ramp period for a practice once a new agreement is signed. And over the coming quarters, as we further expand our subscription customer base, we believe that our dermatology business will again deliver meaningful revenue growth for the therapy business.

We remain encouraged by the growing body of positive clinical data supporting the use of our electronic brachytherapy technology for the treatment of nonmelanoma skin cancer.

At ASTRO in September, a poster authored by Dr. Ajay Bhatnagar was presented with data showing that 96% of nonmelanoma skin cancer patients surveyed at 32 to 72 months post-treatment with the Xoft system were satisfied with their clinical and cosmetic outcomes. Dr. Bhatnagar's research also includes updated data for the treatment of 282 lesions in 107 patients with nonmelanoma skin cancer, showing only three recurrences and good to excellent cosmesis at up to six years post-treatment for nearly all patients.

In addition, we remain on track to have sufficient follow-up data from our skin study trial by the end of this year. This would put us in a strong position to publish the data in early 2017 and submit this data to CMS in June of 2017 as part of our CPT I code application.

This is a significant event as we pursue a CPT I code. It would secure reimbursement at a national level, expanding our addressable market in the Medicare regions that currently have a silent or negative coverage decision on our CPT III code.

To put this into context: there are over 7,000 dermatology practices in the country with 3 or more dermatologists. If all used our subscription-based model to treat 10 patients per month at our current average reimbursement levels, the addressable market would exceed $1 billion annually. Given the potential market expansion and adoption opportunity associated with securing a CPT I code, this is a major strategic objective for the Company.

Turning now to IORT, while we did not have any new system placements in the quarter, there continues to be positive interest in a growing funnel of hospitals looking to build a breast IORT program. At the end of Q3, we had 58 sites treating overall, including 26 international. As Scott indicated, disposable balloon applicator volume is up 21% year to date, demonstrating positive utilization at these sites.

Looking forward, we have submitted for regulatory approval for our breast balloon applicator in China, are in regulatory process in Saudi Arabia and Egypt, and initiated the process in India. We could receive Chinese FDA approval by the end of this year, which would allow us to access the large China market beginning in 2017, with other markets I mentioned potentially following later in the year.

In addition, our team is working closely with our distribution partners in Europe and Asia-Pacific to obtain IORT reimbursement in the United Kingdom, Portugal, Australia, which would also expand our growth potential during 2017. In the United States, the expansion of clinical data in support of IORT is anticipated to be an important driver of adoption.

At ASTRO this year, Dr. Alam Nisar Syed presented a poster covering clinical results with IORT from the treatment of 827 women with early-stage breast cancer at 27 hospitals. The findings conclude that IORT with the Xoft system is safe with low morbidity and excellent to good cosmetic results with a low rate of low-grade adverse events.

We are nearing completion of enrollment of our 1,000-patient EXPERT study comparing the Xoft IORT treatment to traditional external beam radiation therapy. This is a landmark study for the Xoft system in breast IORT, following patients for 10 years after treatment to evaluate the long-term safety and efficacy of breast IORT with the Xoft system and is currently the largest US trial to date for IORT.

In addition, we recently completed a powerful economic analysis study comparing IORT to whole breast radiation. The study results demonstrated that treating patients with IORT generates both a significant cost savings over the lifetime of the patient as well as improved quality of life when compared to external beam radiation in patients that meet the clinical criteria.

In the current Affordable Care Act environment, demonstrated cost savings in addition to clinical safety and efficacy is an important consideration for payers. We are in the process of submitting these results of this study to key clinical journalists for potential publication in the near future.

So before we open the call for questions, I'd like to reiterate our top priorities for the remainder of the year and into 2017. First, in cancer detection: secure FDA approval for our breast tomosynthesis software and launch into the market while also continuing to drive adoption of PowerLook upgrades and the adoption of our breast density software.

Second, in therapy: to continue increasing the number of dermatology practices that offer our skin eBx solution for the treatment of nonmelanoma skin cancer. Third, also in therapy: continue to drive the global momentum for breast IORT.

Fourth: continue to invest in clinical studies to build the long-term data required in support of the use of the Xoft eBx system for the treatment of breast and skin cancer. And lastly, continuing to carefully manage all of our costs and investments.

Overall, we really feel we are well positioned. We may be slightly behind where we would like to be at this point in time contrasted to our last call, but we're very, very bullish and very, very optimistic about our future.

So with that, operator, we'd like to open up the call to questions.

(Operator Instructions) Bill Bonello, Craig-Hallum.

Got a handful of questions, if that's okay. The first is just on the therapy side. So on the Q2 call, you said that you added 18 skin customers during Q2, with the majority going live by June 30.

If -- why didn't we see more of an uptick? I understand on the product side, but why didn't we see more of an uptick in the therapy service and supply revenue from the June quarter to the September quarter if we had 18 more customers?

I'd have to go back and check the script on that, Bill. But I guess from my standpoint, we did add that many customers by June 30, but let's keep in mind that we just started marketing in May. And we've also said that there is a 60- to 90-day window for getting these customers ramped up and treating.

So I'm not sure that it was accurate. And it may be in last quarter's script that we would have that many customers come on board and be treating by the end of June.

So in essence, what I would say is that we have seen the number of customers who have signed on increase substantially. And as you look at this, we started basically marketing again in May once we had sufficient data on reimbursement.

And when we started that activity, we had about 10 or 12 sites that were basically treating. I'm pleased to say today that we have under contract roughly about 50 sites. So I think we've shown some significant progress in the number of sites that we've been able to either bring back on board or to add as new sites in this short process since May.

The other thing I would point out is that it's a mix. The mix is what I call legacy customers that have a system they own. And in that case, what they are doing is they are signing only a source agreement. And a source agreement could be $50,000 or $60,000 per year recognized ratably. So obviously, as you do the math, that's about $5,000 or $6,000 a month. And of these 50 or so sites, that represents about half.

Of the other 25 or so, they are all in a subscription model. And only about one or two of these customers were actually back treating back in the May time frame. So today, we have probably closer to around 10 customers treating with roughly 15 or so in backlog.

And so those customers, having, again, just come on board, in terms of between, say, May and the end of the quarter, which is a 4- or 5-month window, and given that there is roughly a 60- or 90-day window to get up and treating, that I think describes the timing issue as it relates to what I'd call the service portion or the subscription portion of our therapy revenue.

So to wrap up my comment on that, Bill, I think we've made really good progress in capturing a lot more sites. I think it is a timing issue based on the way we are recognizing this revenue combined with getting more treatment volume.

Because of the end of the day, treatment volume is what the subscription model is all about. And that is starting to ramp nicely, but it will not show probably as we've said in the past really in a meaningful way until the beginning of 2017.

Okay, that's helpful. And -- okay, so that's very helpful. So about 60 to 90 days. Okay. And just -- you gave a bunch of targets or Kevin did on the last call. Maybe they were a bit on the aggressive side, I suspect.

But maybe you can give us some sense of sort of what your expectations are now. If you have 50 sites under contract, up from 10 to 12 sites, where do you think you will be exiting the year and going into 2017?

I think, as I've said, in the time frame we've been at this, we're making great progress. And so if we are at approximately 50 sites today, our hope is to be somewhere in the 70 to 75 sites by year-end under agreement.

Again, it's always a timing issue as it relates to how quickly we get those practices trained, up and running, and then what kind of patient flow. Every practice has a different demand as it relates to treatment. So you really will see varying paces, if you will, of how fast.

As we look out to 2017, our goal, Bill, would probably be to double the size of that install base. So our hope would be to have somewhere in the range of at least 150 sites treating by the end of the year 2017.

And as you look at the business model on a subscription basis, that could represent anywhere from $125,000 to $175,000 per year per site. So if we are able to achieve this goal, you can obviously do that math as quick as I can. That's a $20 million to $22 million annualized run rate. In a solution business that I would point out today is just over $1 million in annualized run rate.

Okay. That's extremely, extremely helpful. And then on the therapy -- or excuse me; on the detection side, obviously the decline mostly MRI. But should we think then of this sort of $2 million-ish of -- obviously, the service and supply is kind of run rate and recurring.

But should we think of this sort of $2 million-ish or just under $2 million-ish of product revenue as a -- until you have tomo CAD as sort of a reasonable target per quarter? Or how do we -- I know it can be very lumpy. How do we think about sort of the product potential pre-tomo?

Yes, I think that's a good way to look at it, Bill. I think that if you think about the business, it was running close to $5 million a quarter when we were getting almost $1 million per quarter in MRI revenues. So now that those revenues have gone down significantly, your revenues are probably in the low 4s. And they are pretty evenly split between services and products, so I would say directionally that's correct.

They can spike at times. As an example, in Q2, we landed a very large order from a radiology group that has multi sites. I think the order, if I recall, was really around $400,000. So we will have some spikes, but I would say if you looked at the core mammography business, which is largely 2D, and it's new placements, it's upgrades and it's breast density. That's probably plus or minus on a worldwide basis a couple million dollars a quarter.

Okay, that's helpful. And then the final thing is just maybe help us think through the range of possible outcomes based on your discussion with the FDA. I mean, ranging from that you can't resolve the questions and the product doesn't get approved to is there a potential that you would have to go back and do another reader study? Or just give us some feel for how this might play out, if you can.

Well, first I'd say that, as I mentioned in the script, the FDA gave us another round of questions. There were three questions that came in in mid-October. And we had set up a call with them last Friday.

And as luck would have it, 12 minutes into the call, the fire alarm at the FDA went off and that was the end of our call. So we really had hoped to try to resolve these questions with them over the phone in the discussion and hope that we could come closer to concluding the application. Unfortunately, because of that circumstance, we didn't have a chance to complete that.

So from a timeline standpoint, we actually have a meeting, face-to-face meeting, with the FDA in approximately two weeks. I believe it's on Tuesday, November 15 at the Agency. And that will be an important meeting where we communicate responses to their questions.

And in essence what I can say is that we stand behind our reader study and the success that we had with it, both in terms of the time reading reduction and achieving noninferiority in our overall performance with the product. And that is not in dispute. That is not in dispute with the FDA.

But as you look at the process as it relates to structuring the study, and I'll try to make this as brief as I can. In essence what you do is you develop a protocol. And inside that protocol, you define the number of cases and the characteristics of the cases that are going to be read.

In your first module with the FDA, you describe that. And they have an opportunity to respond as to whether they have input or agreement or disagreement. And we went through that process and did not receive any feedback.

We then went through the process of bringing together a very large number of cases. In our case, it was 575 cases. And then ultimately we had to cull that down through a protocol and what's called a stratification process to 240 cases, of which 75% would be benign or normals and roughly 25% would be cancers.

And we went through that process and developed essentially 240 cases out of 575. There were 50 cases that we did not put through the stratification process because our board-certified radiologist disagreed with the site that the cases came from, the findings. And ultimately, those were not included.

And our protocol -- documented protocol -- specified that he would have the ultimate decision relative to which cases would go in. And obviously having alignment on diagnosis between the site and a second reader is important so that you understand the ground truth as you ask the radiologist to read and you score how they perform.

So in essence, the FDA is asking for more information as to why these cases were not included in that stratification process. What may have happened is of our 240 cases, some number of them -- maybe somewhere between 15 or 20 -- might have ended up in the study.

And so we are having a discussion about those particular cases, that they would like to understand better why they were not in the study. And obviously, we believe it's because they contradicted our protocol.

So we are very pleased with the results of the study. We certainly believe this will take some additional explanation and discussion, and there could be some additional testing. And we have been certainly looking at some alternative testing as it relates to these cases to try to give the Agency more confidence that, as we believe, it would have no bearing on the performance of the study.

And so those are the sorts of things we're working through. We are hopeful that when we meet in less than two weeks, we can resolve this or resolve a testing paradigm that could be done quickly which could address their specific questions.

Perfect. Thank you very much.

Brian Marckx, Zacks Investment Research.

Ken, since we are on the FDA topic on the tomo product, are you confident that you can rule out that FDA will not want to see a whole new brand-new reader study?

Brian, I don't think you can rule anything out until you come to a final conclusion. I will just say at this point in the numerous conversations we've had and the corresponding dialogue, that topic has not been brought up by either side. So I am hopeful and to a certain extent I am optimistic that we will find a testing paradigm that will alleviate the need to do another study.

There is an example with a tomosynthesis system manufacturer -- I won't mention the name of the company -- that has somewhat of a similar issue relative to getting their detector approved and the cases that were used. And they did find a statistical modeling scenario that was acceptable to the Agency.

And we have worked with several PhD statisticians that have helped us to develop some complementary or alternative testing if we need to go there to validate our assumptions, which is that these cases would not affect the results of the study. And again, I think the surprise to us, to be honest, is that we had a protocol that essentially as we followed it eliminated these from being candidates for the study.

And we, quite frankly, don't agree that these are harder cases. We think they are cases just unfortunately that since they were read and had different interpretations, we don't think that's appropriate to put those cases into a study. And that was really all it came down to for us.

So we think there are some testing -- stand-alone testing paradigms that could easily resolve this. But I can't make any firm statements on that until we have our sit-down with the FDA and get their feedback on what we propose.

Okay. In terms of the skin business and the reimbursement picture, on the Q2 call, I kind of interpreted the comments to be that there was a lot more clarity in terms of skin reimbursement. And in particular how much practitioners could expect to be paid. Obviously, there may be slight differences. And that the viability of the reimbursement picture was substantially better than perhaps the prior three or six months.

And today, it's -- I don't know if I'm interpreting your comments differently or incorrectly, but it kind of sounds like maybe that reimbursement picture isn't quite as clear as perhaps it may have been on the Q2 call. Has something changed between then and now or is it maybe just I'm interpreting the comments incorrectly?

Brian, the reimbursement environment has been very consistent and stable quarter to quarter. The range of around, let's just say on average, $4,000 a patient, and that does vary by MAC and it varies by the various codes that can be billed. They are not all billing exactly the same codes. But I think we see reimbursement in the high $3,000s to as high as maybe $5,500 per patient, depending on which MAC, which region, and the specific circumstances around the care for that patient.

And that's been consistent. So we really have not had a reimbursement issue that has had any impact on ramp. And as I said earlier, our ramp contrasted to where we were in May has been pretty significant. However, based on the nature of the volume of patients at this stage as well as the way we recognize the revenue, it is not something you see as immediate as you'd like.

So I think our issue is timing as the sites ramp. And I think that we did say that by the beginning of 2017, the subscription model would start to make a more meaningful contribution to our overall revenues.

Okay. And on the breast IORT, it sounded -- again, back to Q2, it sounded as if the US breast IORT picture was firming up and there was some traction behind that. And I think you mentioned that you expected to have 70 sites on board -- and that includes the international business as well -- by the end of the year. Is that still doable, do you think?

I think it's possible. I think what we said in the prepared remarks we have something like 56 or 58 active treating sites. We do have probably five or six or seven, particularly international, that are still not technically online treating patients. One example is we had a four-system order in Bulgaria, where I don't believe they have actually started to treat yet.

So it's certainly possible that we could be up in that range. I would just say that we are probably looking at potential with, call it, the backlog of sites that still have to treat as somewhere in the low to mid 60s. So obviously with what we are able to accomplish globally in the quarter, we could certainly be at 70.

Whether all 70 would be treating might be a little ambitious. But I think we would have the potential to have 70 sites with a system and either treating or relatively close to starting up their programs.

Okay. All right, thank you.

Chris Potter, Northern Border Investments.

Ken, you mentioned your meeting with the FDA in two weeks. Can you let us know when we might hear from you after your meeting with them?

I think that obviously we are going to have a meeting with the FDA. We're going to try to resolve what would be the sufficient testing paradigm, if you will, to satisfy. And it's important, obviously, that we find some common ground from a testing standpoint. And I think we'll have to just let that meeting happen and then determine what we need to do.

My hope would be, Chris, that -- we're talking about something that could take a week or two. And if we believe we can accomplish something testing wise and submit it back to the Agency in a week or two, we are probably just going to stay focused on that and wait until we get a response from them.

But my hope would be that within, say, 30 days plus or minus of our meeting, we would have some clear indication of where we are going. And then we could consider some sort of an update.

But I think at this point, I would just stress that the meeting is very important to us to be able to really start to project what we could say and when. Until we have that meeting, I don't want to make any commitments. But I'm hopeful that within, say, 30 days or so of that meeting, we have a much clearer picture of what we're going to do.

And I think it is a separate issue for us to consider as to how we would communicate that publicly. Typically, what we would do is obviously update that either things are going well or we are dealing with some challenges or whatnot in our ongoing discussions. But ultimately anything formal would typically be once we have approval or we have something that would be material that we need to communicate in terms of what the outcome could be.

Great, that's helpful. Thanks. My other questions were asked and answered.

Jeb Terry, Aberdeen Investment Management.

Ken, is it safe to assume that GE has continued to have some success in placing tomo systems in Europe and the US?

Yes. I think GE is doing very well. They have a major milestone coming up. They have a second-generation tomo system that is cleared in Europe and is in the FDA, which they are hoping, I think, for either Q4 or Q1 of next year for approval. And has a lot of enhancements and capabilities that will make the system much more competitive versus all the competition out there. So I think they are very optimistic about their business and not too far away from a second-generation system, which will improve their competitiveness further.

Today, we estimate they probably have 500 or 600 systems out there. That's a pretty big addressable market opportunity internationally for us to retrofit or upgrade our tomo detection software to. So that's very positive and I do think they're doing well in terms of gaining new sockets. But we think in 2017 with their new product that will accelerate even further.

So 500 to 600 is total world. So Europe and US?

Yes. And I would say their install base in a ballpark sense is probably 50-50 between US and OUS. And maybe -- again, and just an estimate of about roughly 300 systems in each geography.

Okay. All right. And so if we looked out to end of 2017, and assuming they get FDA approval and the momentum in the business now, where do you think that number could be by the end of next year?

That's a good question, Jeb. I don't have their projections at this point. Particularly with a new system and the timing, I think they are being a little bit cautious until they have a better sense with the FDA as to what the approval time frame would be.

But we've got a good cohesive strategy with them, particularly in the US. They have about 35 people out there in the United States and we have six sales reps. And ultimately what we are really working on is a plan where we will take the lead in selling to their install base the upgrade to their current tomo systems while they go after new sockets.

And then secondarily, we'll support them in the sale of these new sockets as well. So we've got a good coordinated sales approach with their team. It's really just getting through this final phase, hopefully, shortly with the FDA, and we'll be out there in the market with them.

We also have the ability with our agreement with GE to sell directly. So ultimately we can sell the product directly and they can. We obviously can't sell this product to their competitors, but we will have the ability to sell the product directly, which also will help us as we really focus on that installed base so they can turn all of their attention to gaining new sockets in the market versus the competition.

In the past, there was a situation where I think Fuji was delayed in getting FDA approval -- or FDA was delaying iCAD getting approval for your CAD. And they had a -- maybe 400 or 500 sites installed awaiting that needed the CAD.

Is it fair to say that that's a valid example for this case? That GE has got sites that want CAD for tomo? I'm just curious what might be the sellthrough rate on those installed sites or if there is -- you could argue that the backlog -- that maybe too -- not the right word, but how do you view those 500, 600 sites as prospects right now? I mean, a big --?

I would say it really will depend on whether they are using tomo for screening. And so first of all what I would say is all of them are candidates and I believe all of them will want to have Tomo CAD at some point.

I think in some cases, particularly international, where tomo is not being used for screening and the actual volumes that they are doing in terms of exams from a more diagnostic standpoint, probably will not make having CAD necessarily as urgent. But I think any site internationally or domestic that is using tomo for screening is going to need to have CAD immediately because of the benefits of the whole workflow and the productivity.

So I think that as the market, particularly in the US, is moving more and more towards tomo for screening, that's going to be a big driver of immediate adoption. I would also say I think all branded systems going out will go out one to one with tomo CAD on it.

So there may be a little bit of a timing issue with the install base on some sites, but I believe that all customers that are buying new are going to buy the tomo CAD product with it. So I think you could see some immediate business. I really feel this will be a major revenue catalyst and quickly once we get through the whole process and hopefully satisfy the FDA with whatever testing that they feel is appropriate to complete our application and clear it.

Because I think you said in the past that GE has been at iCAD and iCAD has been at GE and those 35 reps are trained and the collateral materials are ready. And so getting FDA approval, there would be a -- I'm assuming there's a short transition process to actually getting to market with the product?

Yes. That's our hope. We've actually worked it to right down to coordinating every site that they have install base systems in to breaking that down by salesperson, both on their side and our side and which ones are the most important prospects to get to first.

We've tiered them so that we know exactly where each one of those sites are, and it's been a very, very, very good collaborative effort with GE. Their sales team and their support people have been great to work with us towards really making sure that we hit the ground running once we have approval.

So we think that is in the near term the biggest catalyst for revenue growth. And our hope, obviously, is we can get through this current dialogue with the Agency and be in the market hopefully in the very near future.

Thank you. That's very promising.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Ken Ferry for closing remarks.

I'd like to thank everyone again for joining us today. And while we mentioned earlier we were disappointed that our total revenue, particularly as it related to the Xoft capital system sales, was behind plan, we are certainly working to have a much stronger fourth quarter. At the same time, we're being very careful on watching our expenses and managing our cash while we stay extremely focused on these two growth initiatives.

As it relates to treating skin cancer with the eBx system, we're pleased that the progress has been substantial, going from somewhere around 10 or 12 sites to having approximately 50 under agreement and probably about 30 actively treating, we think is significant progress over the last four to five months.

As it relates to our cancer detection business, we talked in detail about where we were with the tomo detection software. We completed our reader study. We are very, very confident the results achieve the endpoints. And we're working through some other issues around additional ancillary data. And we are very hopeful that we can satisfy the Agency with some additional testing in a short period of time and have that real growth opportunity in the market.

So we are excited about our long-term future. We are very confident of our long-term future. Dealing with a few short-term issues that we need to get through, but we still believe, as we've said all along, that 2017 will be a very, very successful and strong year for the Company.

So thank you all very much for joining us today. And we look forward to speaking to you again after we complete our fourth quarter and report our full-year results. Thanks again.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.