ICAD Inc (ICAD) 2019 Q2 法說會逐字稿

Greetings.

Welcome to iCAD, Inc.

Second Quarter 2019 Earnings Conference Call.

(Operator Instructions) Please note this conference is being recorded.

I'll now turn the call over to Jeremy Feffer with LifeSci Advisors.

Mr. Feffer, you may begin.

Thank you, Rob, and good morning, everyone.

Thank you for participating on today's call.

Joining me from iCAD are Michael Klein, Chairman and Chief Executive Officer; Stacey Stevens, President; and Scott Areglado, Chief Financial Officer.

Earlier this morning, iCAD announced financial results for the 3 months ending June 30, 2019.

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

I encourage you to review the company's filings with the SEC, including, without limitation, the forms -- 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, August 1, 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?

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 CFO; and Stacey Stevens, our President.

To begin, I'd like to reiterate our clear vision for iCAD.

In Detection, the company's unique AI technology has the potential to transform Cancer Detection, enabling iCAD to further evolve into the leader in clinical AI solutions.

I emphasize clinical AI as it reflects our continuing long-term expansion of our AI imaging detection capability beyond breast cancer AI.

With the December 2018 FDA approval and the ensuing U.S. commercial launch of ProFound AI, our latest deep-learning cancer detection software solution for 3D digital breast tomosynthesis, we expect iCAD's technology to facilitate vast improvements in workflow, reading time and clinical efficacy.

For our customers and their patients, ProFound AI offers the triple win of: one, finding more cancers; two, fewer callbacks; and three, over a 50% reduction in reading time compared to reading 3D tomo images alone.

Indeed, we can now clearly state 6 months after the introduction of ProFound AI that we are gaining meaningful traction in the marketplace.

In fact, the FDA study results delineating this triple win were recently published in a primary industry publication called Radiology.

Additionally, in just the past 48 hours, the study results were highlighted by a major industry online publication, AuntMinnie.

Moreover, just yesterday, these results were forwarded by RSNA to their over 54,000 physician readers.

The publication was entitled, "AI Improves Efficiency and Accuracy for Digital Breast Tomosynthesis."

Independent publications are always the most credible source of information, and it's gratifying to see our outstanding FDA results receiving such broad coverage.

In terms of traction for iCAD overall, I'd like to spend the majority of my time discussing the significant momentum we are generating across our product lines and businesses.

In our Detection business, our ProFound AI product is experiencing strong growth.

In our intraoperative radiation therapy business, Xoft, there are recent and very positive reimbursement developments that could emerge for us as we head into 2020.

We believe that the newly proposed radiation oncology codes, which focus on the value of care versus volume, have the potential to fundamentally enhance the value proposition of our Xoft radiation therapy business.

I will provide additional details on this momentarily.

Though Scott will provide granularity on our financials, let me provide an overall view of our business, both at midyear and for Q2 2019.

Revenue for iCAD increased 13% in the first half compared to 2018.

Demonstrating accelerating momentum, Q2 revenues increased over 19% when compared to Q2 2018.

Our balance sheet has significantly improved, bolstered by our recent financing.

We ended the quarter with $19.6 million in cash and cash equivalents as compared to $12.2 million at the end of 2018.

We believe we are in a solid financial position to continue executing on our growth strategy, while making absolutely certain we properly balance expense deployment with revenue growth.

Looking at the specifics of top line growth for our 2 core businesses, our Detection business grew 17% for the first half of 2019 compared to the period of -- in 2018 and grew at a rate of 31% year-over-year in the second quarter of 2019.

Of this, 31% growth in Detection business, software license sales grew by 53% over Q2 2018.

This growth was achieved with a gross margin of 84% in Q2.

We are pleased with this performance and are enthused about the growing contributions from ProFound AI.

Between new 2D licenses and ProFound 3D AI license sales and upgrades, we have now achieved our goal for the first half software sales, with the highest percentage being licenses for our new ProFound AI 3D offering.

Every single U.S. sales reps generated sales in Q2, and we are pleased with the proliferation of sales in all regions nationwide.

As reflected in our financial results, license Q2 software sales are also -- also increased sequentially in Q2 over Q1 2019.

We are achieving our goal of penetrating both U.S. and OUS markets.

As I will delineate in a moment, 2D sales in iCAD represent a very valuable market, particularly in Europe, where 3D tomosynthesis is more in an early adopter phase relative to the U.S. As important, we believe the momentum we have established with ProFound AI is both sustainable and scalable.

In July, we were pleased to announce that SimonMed Imaging, a very large outpatient imaging provider with 150 locations across the U.S., will be implementing ProFound in its centers.

This is the largest physician-owned imaging provider with a nationwide footprint.

They are also extremely innovative, and in our view, a market pacesetter.

There has been considerable public relations activity on this expanding relationship, and we anticipate there will be more.

We are expecting a busy second half of the year in terms of ProFound AI activity in SimonMed sites throughout the country.

The majority of this will be ProFound AI software on GE equipment, but also 3D AI software on Hologic tomosynthesis systems, and likely their installed Siemens 2D tomo systems as well.

What we are seeing is balanced sales into both iCAD's current installed base of 4,000 sites, where we have placed prior generations of 2D CAD systems as well as sales of iCAD's products into accounts that have not previously been iCAD customers.

This is a strategic imperative and objective of ours, as it expands our installed base end market in mammography but also provides enhanced market access for other clinical AI solutions that we anticipate will be introduced in the future.

We expect this market dynamic to continue throughout the remainder of the year and beyond.

Paralleling this trend is the continuing tilt of our sales through our direct sales channels using our expanded U.S. commercial infrastructure.

Our goal is to continue this approach, while making products available to partners in both OEM and PACS channels.

This is a delicate balance that can only be successfully implicated through the continued bolstering of the iCAD brand.

We have concerted efforts underway to ensure that ProFound brand and differentiation is well established.

And at the center of this effort is our ProFound Institute, which we will formally launch in the coming months.

We expect the ProFound Institute to be an educational forum that will position our offering through expansive customer education efforts, focusing on how to differentiate AI solutions and how customers can make informed choices when making decisions on AI technology.

Our differentiation is only as good as our ability to inform customers and patients about our unique advantages and innovation lead.

We recently announced that ProFound AI for 2D mammography had received CE Mark approval in Europe.

This is an important market opportunity for iCAD.

With Europe -- while Europe contains just 9% of the world's population, it has more than 23% of the global cancer burden, with breast cancer being the most common cancer among European women.

We already have a substantial installed base in Europe, providing opportunities for the upselling of existing accounts.

We also view ProFound 2D AI as an opportunity to create substantial new business, while many sites have been late adopters of 2D technology, targeted sites, therefore, represent an opportunity to move from earlier generations of 2D CAD, or in some cases, no CAD at all, to our new deep learning technology, 2D AI offering.

In Europe, the current opportunity for ProFound 2D AI has as much sales potential as ProFound AI for 3D tomosynthesis.

We can now upgrade current or new iCAD customers to deep-learning ProFound 2D AI as well as sell our new 3D advanced AI technology.

We successfully introduced ProFound AI for 2D mammography at the important SIFEM medical conference in France in late Q2.

ProFound AI for 2D mammography, along with ProFound AI for 3D digital breast tomosynthesis, were featured in the well-attended iCAD exhibition booth, and we received highly positive feedback and customer commentary on both AI offerings.

Now while we are working to optimize what I call the business of today, we are now beginning to invest in the business of tomorrow.

We have a strategic imperative to be at least one generation ahead of any other mammography AI technology that may enter the market.

This was one reason for our recent financing.

In addition to building a robust commercial infrastructure in the first half of the year, we also began to accelerate our efforts around our initiatives in breast cancer risk assessment and prediction.

This important initiative reflects our planned movement beyond the detection of cancer under what is currently an age-based screening model and reflects our future effort to move into the exciting realm of being able to predict cancers even before they emerge and are detected.

The foundation of this capability is our exclusive risk predictions license agreement with researchers at The Karolinska Institute in Stockholm, Sweden.

This collaboration with Karolinska will allow us to lead the way to a newly emerging model of risk-adaptive imaging.

This is consistent with the emerging trend towards individualized patient screening with more frequent screening for women with greater risk profile.

As part of this effort, we are refining our AI capability and programming to correlate radiomic or imaging information with genomic data in addition to over 25 risk characteristics.

Each woman has their own unique risk profile, and we will assess that.

This will move mammography towards more personalized detection and perhaps more targeted treatment regimens, all enabled by leading-edge iCAD AI software tools.

In the area of risk prediction, our accelerating efforts will focus on the ability to accurately predict the development of breast cancers within the coming 12 to 24 months, which is often the interval between the current age-based screening regimens.

There is no other product on the market today that combines a highly sophisticated level of image analysis and individual predictive risk characteristics.

We intend to have a commercially available product in the market in 2020.

We anticipate having some regulatory work ahead of us.

We anticipate unveiling some of what we will be releasing in 2020 in the risk and prediction area at RSNA 2019 in Chicago in early December.

It was with this focus of investing in risk prediction and transforming breast care detection that led to the successfully completed financing in June, which resulted in us raising $9.4 million in net proceeds.

A portion of this is going into the acceleration of our risk platform.

Other funds are going into our promising Therapy business, which I will discuss shortly.

We are grateful to all of the investors, many new to iCAD, who participated in this financing and continue to support our efforts.

Additionally, as we detailed on our last call, our targeted detection sales team staffing is now essentially complete with all major U.S. geographic markets covered.

We also have distribution in over a dozen countries outside the United States, and we'll continue to grow and bolster our distribution efforts in Europe and other parts of the world.

We are also now actively exploring and beginning to assess the Asian market for mammography AI.

With newly 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.

While we've developed both a robust commercial team, we recently also added a new capability and resource to call on the high-level economic decision-makers of key customers and major hospital systems.

This will allow us to more actively pursue sales at the national account level, group purchasing and the integrated delivery network level.

We have now deployed a stratified sales capability at the clinical, technical and economic level, which is essential for higher volume sales to large health care systems, large luminary sites and enterprise-level national and regional accounts.

As sales grow and new AI capabilities are introduced, we will continue to add additional commercial personnel as needed to cover more rapidly growing areas as well as bolstering resources in more densely populated areas where health care facilities tend to aggregate and the proliferation of sales may move swiftly.

Now in prior calls, I used the metaphor of our need to synchronize 3 clocks or cycles as a way to describe the buildout of our commercial efforts.

We have now synchronized the 90- to 120-day cycle time for: one, training reps; two, the sales process from initial presentation to close; and three, installing and integrating software licenses within complex user environments.

We have done what could have taken 3 to 4 quarters in only 2 quarters using, what we refer to as, an "economies of speed approach."

As previously reported and projected, we have correspondingly increased our operating expenses in recent quarters.

We believe we are now seeing the clear benefits of our expanded direct sales and commercial build-out efforts, and we expect to continue to generate high-margin revenue in the quarters ahead.

Again, we will very mindfully add sales resources as the sales pipeline warrants and in areas where customer demand may exceed our ability to appropriately and expediently sell to and service accounts.

I'd like to now discuss our Therapy segment.

At midyear, sales of new Therapy products, which can lead to future disposables and recurring revenue, we were up 28% over last year.

Therapy product revenues and shipments can be quite lumpy, and our large volume first quarter sales were virtually double Q1 product sales for -- over Q1 2018.

2019 midyear total sales were tempered by Q2 sales that were 2% lower than last year's Q2 total sales.

Thus, for our first 6 months, Xoft therapy product sales were up the above stated 28% compared to the 6 months ended June 30, 2018.

Total therapy products, which includes all products and recurring sales, were up 6% over the first half sales.

In the area of reimbursement, which has long been a gating item for the dramatic acceleration and adoption of Xoft radiation therapy products, there are potentially very encouraging developments.

CMS recently proposed a new payment model for radiation oncology.

In early July, CMS proposed a radiation oncology bundled payment model that explicitly incentivizes providers to choose high-quality, cost-effective care, which, if implemented, would have a considerably favorable impact on Xoft IORT business.

We look forward to the potential implementation of this model, which according to CMS, could be in place as early as January of 2020 or in April.

We see the later date as more likely.

This radiation oncology model could level the playing field for a single procedure procedures -- rather single procedure technologies that prove as effective as procedures that occur over many days or even weeks.

In sum, the new model places value of care over volume of care and procedure duration.

Recently published clinical data demonstrates the equivalent outcomes of our IORT single-fraction, 10-minute procedure when compared with external beam radiation therapy that can take weeks.

This is, therefore, very important referential clinical study data that we anticipate building upon.

The proposed CMS rule is subject to a 60-day comment period, and we anticipate quite a bit of jockeying in the months ahead.

Associated with this development, another important use of funds from our recent financing was the securing of capability and the hiring of in-house expertise in the CMS reimbursement area as well as the overall economics of care.

This is an important and timely addition to our team.

Other aspects of the Xoft business, which are now being more significantly funded, are accelerating and now moving at the rate that would allow technologies to be released into the market in the second half of 2020.

Our June financing has allowed us to accelerate applicated development in several new growth opportunities for Xoft.

Treatments for glioblastoma and rectal cancers are now on an accelerated track.

Although Xoft products are FDA cleared for use throughout the body, we do need safety and clinical efficacy studies to catalyze the adoption of the applications now and the applicators now under development for these new indications.

The brain and rectal applicators will take us beyond our current offering for breast, gynecology and skin cancer indications.

We see these applicators in additional cancer indications as both logical and essential extensions of our product platform.

We have one additional opportunity that may be more than an extension of our current platform and could represent an exceedingly large and incremental new growth market.

This is the use of Xoft radiation therapy during the course of robotic surgical prostatectomies, thereby delivering the same concept as in breast cancer surgery, where radiation therapy would be delivered real-time in a nonshielded room during surgery and done so in minutes versus days or weeks of traditional radiation therapy for prostate cancer.

Clinical use trials and product testing is already underway.

In fact, just last week, we started treatment at a large luminary site in Florida with a newly designed treatment balloon, and we are working with a world-renowned da Vinci robot surgeon, who has done more robotic prostatectomies than anyone in the world.

This physician has trained dozens of fellows who are now following our progress and its significant potential as we proceed with studies and testing over the coming quarters.

According to the top robotics surgeons we have surveyed, as much as 30% to 40% of radical prostatectomy patients could benefit from this real-time same-day surgery and radiation therapy combined procedure.

The potential size and impact of this IORT of Xoft's, an intraoperation radiation therapy for prostate cancer, could be larger than current indications.

Again, our recent finding has allowed us to accelerate -- our recent funding has allowed us to accelerate more expanded clinical and human-use trials and will result in studies at multiple sites, potentially in both U.S. and OUS locations, and the formation of a multidisciplinary high-level prostate advisory board comprised of surgeons, radiation oncologists and physicists.

We are starting this effort now.

In sum, Xoft is a core technology that is significantly extensible to other clinical applications.

Our current estimates are that the rectal, brain and product applications will take us 12 to 18 months to get to market, with possible beta launches to targeted luminary sites around the globe a bit earlier.

All of these initiatives position Xoft as a core technology provider with a range of treatment capabilities that are enormously scalable.

We are investing to achieve the upside these opportunities present and now have the adequate capital to bring these offerings to market.

Between the developments with CMS that we'll know more about in Q4 and the introduction of new applicators in late 2020 and beyond, we envision Xoft as a growth business, particularly as we look towards the latter part of 2020.

It is possible that a somewhat earlier upward torque could be achieved perhaps before these indications are launched, but only after we know more about the aforementioned CMS results in Q4 of this year.

On our first earnings call, delivered by our new executive team following Q3 of 2018, we spoke about the goal of releasing the intrinsic and hidden value in iCAD technologies.

With the recent financing, combined with intense focus, execution and diligence study of our promising core technologies in Detection and Therapy, we can now characterize both of iCAD's operations as growth businesses.

It will take the previously mentioned time frame to further accelerate our therapy business, but we believe we are now beginning to realize the vision stated above: the goal of releasing the intrinsic value and capabilities inherent in our core technologies.

Now with these comments on specific programs, actions and some highlighted financials, I will now turn the call over to Scott, so he can provide a more comprehensive review of our financial results.

Scott?

Good morning, everyone, and thank you, Mike.

Before I begin with the financial highlights, I would like to note that during my comments today, I will be referring to certain non-GAAP financial measures.

Management believes that these measures provide meaningful information for investors and reflect the way that we view the operating performance of the company.

You can find a reconciliation of our GAAP to non-GAAP measures at the end of our earnings release.

With that covered, I will now summarize our financial results for the second quarter ended June 30, 2019.

As Mike mentioned, we are pleased with the results for the second quarter of 2019, with total revenue of $7.3 million, representing an improvement of $1.2 million or 19% as compared to the second quarter of 2018.

The increase in the second quarter was due to the strength of our detection business, which grew 31%, representing the $1.2 million of revenue growth in the quarter.

We continue to see success in our direct business with the primary growth driver in our 3D products.

The second quarter of 2019 also had increases in our OEM business with the primary increase in 2D products.

We expect our distribution and OEM 2D business to continue to be a component of our ongoing revenue, especially OUS where the adoption rates for 3D imaging are slower than the United States.

Service revenue declined slightly to $1.4 million from $1.5 million in the second quarter of 2018.

As I have mentioned previously, service revenue has lagged as the introduction of new products can cannibalize service revenue for customers who receive a one-year warranty when upgrading to our new products.

As a result of this effect, we expect service revenue to remain essentially flat throughout 2019.

In the therapy segment, revenue declined slightly by 2% to $2.1 million as compared to the second quarter of 2018.

The decrease was driven by a decrease in product revenue of 23% to $545,000, which represented 3 control units sold in the second quarter of 2019 as compared to 5 in the same quarter of 2018.

As Mike mentioned, Therapy revenue tends to be lumpy.

The product decrease was offset slightly by an 8% increase in service and supplies revenue from $1.5 million to approximately $1.6 million, due primarily to increases in disposable balloon volumes and service contract revenues.

Service revenue continues to represent approximately 2/3 of the overall revenue for Xoft which can compensate for the effect of timing on product revenue.

Moving on to gross profit.

On a pure dollar basis, gross profit for the second quarter of 2019 was $5.7 million as compared to $4.8 million in the second quarter of 2018, representing a $0.9 million year-over-year improvement.

On a percentage basis, gross profit for the second quarter of 2019 was 78% of revenue, which was flat as compared to the prior year quarter.

Detection gross margins were 84% in the second quarter of 2019 as compared to 86% in the comparable quarter of 2018.

As I noted in the prior quarter, our margins in 2019 have seen higher direct product costs of our improved server platform to support 3D images and higher costs in our install and clinical operations.

This supports our strategy to improve our customers' experience in these significantly more complex sites.

We believe our success in our early installations will translate to reference and testimonial sites to help build our business in the future and enhance the ProFound AI brand.

Gross margin in the Therapy segment was approximately 65% in the second quarter of 2019 as compared to 61% in 2018.

Therapy gross margins were slightly higher in 2019, due to the mix of higher service revenue in the quarter versus product sales, which have a lower margin.

Now on to operating expenses.

Operating expenses for the second quarter of 2019 totaled $7.2 million.

This represented a $1.5 million or 26% increase from the $5.7 million in the second quarter of 2018.

The increase in operating expenses is due primarily to the planned increase in marketing and sales expenses of approximately $1.1 million and G&A of approximately $0.3 million.

We continue to invest in the commercial infrastructure to support our sales objectives for 2019, with the primary increases in direct sales personnel, distributor management, service support and the associated costs as well as trade shows and travel.

G&A expense had an increase of approximately $0.2 million due to increased legal and personnel expenses.

Looking ahead, we expect that the second half of 2019 will show increases in quarterly expenses as we look to both near-term opportunities to build market share as well as investing in sustainable long-term growth as reflected in Mike's comments.

Now summarizing our profit metrics.

GAAP net loss for the second quarter was a loss of $3.5 million or a loss of $0.20 per share compared to a net loss of $1 million or a loss of $0.06 per share in the second quarter of 2018.

This reflects increased operating expenses as well as a $1.9 million noncash loss on the fair value of the convertible debentures outstanding.

As I mentioned during our prior 2 quarterly calls, 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 the corresponding increase or decrease in value flow through the P&L.

The increase in the value of the debentures from $9.5 million in the third quarter -- in the first quarter of 2019 to $11-point million in the second quarter of 2019 was due in part to the increase in the trading price of our common stock at June 30, which increased the value of the conversion feature embedded in the instrument and forced a $1.9 million noncash charge to earnings in the quarter.

In the future, we would expect that movement in our stock price, along with changes that affect the other factors embedded in the evaluation of this instrument, will cause additional changes in the balance sheet liability, which will also flow a noncash charge through earnings until such time and 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 second quarter of 2019 was a loss of $1 million compared to a second quarter 2018 non-GAAP adjusted EBITDA loss of $0.3 million, which reflects the increase in operating expenses.

Moving on to the balance sheet.

As of June 30, 2019, the company had cash and cash equivalents of $19.6 million compared with cash and cash equivalents of $12.2 million at December 31, 2018.

As Mike previously mentioned, in June of 2019, we issued approximately 1.9 million shares for net cash proceeds of $9.4 million, which strengthened our balance sheet to support our commercial strategy.

We believe the flexibility this strong financial position provides will allow us to invest in initiatives during 2019 and 2020 to build long-term growth and value.

We continue to be mindful of balancing our expenses and cash with revenue growth as we look ahead.

We are pleased with the results of our first half of 2019 and continue to work aggressively to execute on our strategy in the second half of the year.

This concludes the financial highlights section of our presentation.

I would like -- now I'd like to turn the call over to Stacey.

Stacey?

Thank you, Scott, and good morning, everyone.

We are pleased with our overall results in the second quarter and first half of 2019.

And as you just heard, our performance was particularly strong in Detection, a clear indication that our ProFound AI product has quickly begun to establish itself in the market.

The demand continues to grow as anticipated for this revolutionary product offering, and importantly, customer feedback continues to be highly positive.

In addition, as Mike mentioned, the new proposed bundled payment radiation oncology model in the U.S. could be a significant driver for our IORT 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 continue to be very pleased with the initial progress and success our sales team has achieved in our first 2 full quarters of selling ProFound AI.

We are utilizing a multi-channel sales strategy, and we now have 12 sales territories in the U.S., up from 6 in 2018, and we continue to see a greater percentage of our overall business coming through the direct sales team.

In addition, we are engaged with a multitude of key integrated delivery networks and group purchasing organizations in order to establish beneficial long-term agreements for iCAD.

Finally, we continue to focus on integrating ProFound AI with key imaging, OEMs and PACS companies.

We are seeking larger deal opportunities and beginning to achieve success, similar to our recently announced deal with SimonMed.

We expect to continue to gain meaningful traction with ProFound AI in the second half of 2019.

We are pleased with the progress we are making with both our imaging OEM partners and the PACS companies.

GE has now fully integrated ProFound AI into their price books and we expect others to do the same in the coming months.

Fuji has emerged as a more significant market share player, and we will be focused on our Fuji relationship in the second half of the year as their interest in ProFound AI continues to grow.

Also, our PACS integration work continues to advance nicely.

We continue to expect that we'll have multiple formal PACS relationships in place before year-end, which will enable us to leverage the large installed base of these companies.

We continue to work to mutually align our technical resources and software releases to maximize customer workflow and the value proposition of our combined solutions.

Turning to Europe.

As Mike highlighted, our ProFound AI 2D product received CE Mark and has been successfully launched in Europe.

Given that the 2D market is still growing in Europe, along with thousands of 2D systems in the European market that do not currently have an earlier generation CAD system or a deep-learning AI solution, we believe demand for this product is going to be strong and expect that it will contribute meaningfully to our growth in 2019.

In fact, we have already received several orders for ProFound AI 2D in Europe.

Moving on our rapidly expanding distribution network in Europe now includes 10 distributors, covering 16 countries, including our newest geographies, Belgium, Luxembourg and the Netherlands.

We have recently recorded sales in Greece, Austria, Taiwan and Malaysia.

I'm pleased to report that our French direct team recently completed an important sale into the VD Group in Paris.

The VD Group is a premier group of imaging centers in France that includes 24 locations.

We will be collaborating with them on a number of promotional materials and PR campaigns, highlighting our relationship, and we expect that this sale and partnership to drive significant product awareness across France.

I should add that we continue to strengthen our OEM relationships in Europe, and we were pleased with the performance from this channel in the first half of the year.

There are multiple large tenders bidding across Europe in the second half of 2019, and we believe that we are well positioned to compete for these tenders.

From a marketing standpoint, I am pleased to report that we successfully executed a soft launch of our ProFound Institute, which I introduced on our last call.

This is a premier online educational platform that will include clinical and educational resources for ProFound AI.

Specific content includes a podcast, webinars, videos and clinical resources and additional video content is in development.

We intend to continue building out content over the next 12 months.

As I stated in our last call, we believe ProFound Institute will play an important role in communicating the benefits of ProFound AI to potential customers.

We firmly believe that product differentiation is best established through customer education, and this is an area where the recent financing has helped us achieve our goals.

I'd also like to highlight that ProFound AI was recently selected as a 2019 MedTech Breakthrough award winner.

ProFound AI was selected as the best new technology solution in the radiology category.

More than 3,500 global nominations for these awards were submitted to an independent third-party organization.

So we are quite pleased with this accomplishment.

Looking ahead, we have a couple of major conferences coming up.

First, ASTRO 2019, our largest radiation oncology show, will take place in Chicago in September.

We will be showcasing our IORT solutions across multiple clinical applications, including brain, rectal and prostate treatments, with expert KOLs experienced in treating patients with our platform.

We are also planning to host an investor luncheon as well as an evening customer event on Monday, September 16.

More details will be forthcoming on these events in the next few weeks.

Later in the year, in December, RSNA will take place also in Chicago.

We'll have a significant presence at this event, as always, and expect to showcase exciting new technology developments in the AI space there.

Now moving on to Cancer Therapy.

Product sales in this segment increased 28% in the first half of 2019 as compared to the first half of 2018.

This growth was primarily driven by continued strong performance in our breast IORT business.

Globally, we placed 11 therapy systems in the first half, which included 8 IORT systems and 3 skin capital systems.

We continue to be pleased with our growing installed base, which currently includes approximately 50 U.S. centers and over 50 OUS centers treating patients with our IORT and GYN applicators.

We continue to experience strong global market interest in general IORT applications, including prostate, brain and rectal treatments as a result of key clinical research being conducted globally.

In fact, additional research, with encouraging early results, is currently being completed for new applications in the U.S., Russia and Canada.

Importantly, we continue to expect the completion of additional general IORT applicators in 2020.

As you can see, we continue to experience a number of positive trends in our IORT business, with the potential new radiation oncology model Mike discussed, possibly on the short-term horizon.

As such, we continue to view IORT as the most significant long-term growth driver in our Therapy segment.

On the skin side, we continue to pursue partnerships with commercial and clinical partners and have a number of compelling new business opportunities we are currently pursuing.

I hope to have additional details to share here later in 2019.

So in summary, we achieved significant progress on multiple fronts in the first half of 2019 as we continued the successful rollout of ProFound AI and completed a financing that we believe will accelerate long-term growth and help us to create a sustainable leadership position for iCAD for years to come.

We will now open the call for questions.

Operator?

(Operator Instructions)

Our first question comes from the line of Per Ostlund with Craig-Hallum.

Congratulations on the first half results.

I want to start with ProFound for 3D, logically, since that has been -- obviously, it sounds like a very good launch to date.

And I know you don't really want to get into the habit of providing placement numbers, because I think that's a difficult thing to unring the bell once you do it, but I think that you have spoken a little bit about kind of having a 500 placement target for the year.

Is it fair to say at this stage of the game that you're tracking well against that expectation?

And when we think about the sales process, just how much besides the expanded OEM capability?

So beyond GE, just how much is the clinical aspect of ProFound AI versus the previous product resonating with customers?

Yes.

On the number of units sold has -- on a combined basis, if you look at all 2D and 3D, has approached the 300 software license level, with the overwhelming majority of those 300 being 3D sales.

And as you may recall, we had projected a target for 3D units to, in fact, be a majority of those sales, and we are -- we have indeed achieved that goal, and we expect to build on that goal for 3D as the predominant player in terms of the mix of those 300 licenses.

We do expect that we will continue to see 2D growth or see enhanced 2D growth because of the launch of ProFound 2D in the second half and that may compete with 3D growth, particularly in the European market since both opportunities are very large.

And then on the clinical aspect of the -- of your question, we continue to get tremendous commentary and enormous amount of press about the results.

But also, not only the results about our FDA study but individual accounts that are beginning to collect and prepare abstracts and presentations that will ultimately show up in the back end of this year and presented at ASTRO or other shows.

And that will be a major tipping point Per, because no matter how good our FDA clinical results are and how much other press and radiology or even RSNA articles or -- and many -- the most impactful clinical data results are going to come from the individual sites.

And since many of them has just started ramping now, we're going to start seeing those results in the back half of the year, particularly in the fourth quarter, and be able to substantiate the FDA results with accounts on an individual basis.

It is interesting, and you'll see some press on this shortly.

There will be some information coming out not only on the clinical performance of ProFound AI but a very specific set of comments that we will likely be issuing a press release on about the importance of time savings, since radiologists and particularly mammographers are some of the busiest professionals.

The value of time saving has become a huge issue, not only because the economics of it but for radiology, fatigue and just the burden on increasing number of patients with a number of images that's a strong multiple of the existing 2D images.

So we're now starting to see data come out and sites talk about the time and workflow reduction in addition to touting the 8% increase in sensitivity and the 7% improvement in specificity or reduced callbacks.

Excellent.

Excellent

I'll just add -- hey, Per, I'll just add to that.

I think the first 6 months have been incredibly gratifying for all of us, right after so much effort put into releasing this product.

But we are hearing every week from customer sites and radiologists who are telling us that ProFound AI found cancers that they acknowledged they would have missed, right?

So the patient value proposition here is just so strong.

And as you know, there's never been another product on the market that showed such increases in both sensitivity and specificity.

Usually, those metrics go in other directions -- in opposite directions, right?

So I think that's been the real win for us is to really understand the real impact that this is having on patient care in the market.

Very good.

No, that makes sense, and it's consistent with what we've heard as well.

Stacey, you mentioned 2D in Europe in your commentary, and you touched on a little bit of what I wanted to ask about there.

But just curious as far as the early interest in ProFound 2D AI in Europe following the French launch and the CE mark, just how much do you think the AI product tips the scales in Europe toward more CAD use in Europe because you've spoken before about how CAD itself is underrepresented?

So when you think about your commercial strategy, and I appreciate the commentary around your -- the commercial organization and capability you have there.

But from a messaging standpoint, how are you going out to customers and sort of positioning the 2D AI product?

Yes, it's a great question.

I think, in general, Per, the interest in AI solutions for mammography in Europe has increased, and a lot of that has to do with the improving clinical performance, right?

So particularly, in the area of specificity, right, some of the older generation CAD products did not perform as well.

They had decent sensitivity, but the false positives were relatively high, and ProFound AI has a very significant improvement in that area.

So that is something that we are really highlighting as a key part of the value proposition.

And just as the general topic of AI, in general, has gained a lot of traction in Europe.

And as you know, there are over 6,000 2D systems in the installed base in Europe still today.

There's been a slower transition to 3D.

So I would say, probably only 10% to 15% of those 6,000 systems have an older generation CAD product.

So there's a lot of opportunity here.

And as I mentioned in the script, there are quite a few tenders that are going on in Europe that we're positioning ProFound for 2D.

And we'll also see some impact from customers who will buy combo licenses, 3D-2D combo licenses.

There still are sites that -- in Europe that are doing 2D imaging in conjunction with 3D imaging as well.

So I think it does have an impact.

It's going to take some time, right, to get all the education out there in the market and their sales cycles and the time that these tenders take to transpire.

But I do think that it's going to have a significant impact on our ability to grow the European geography.

And I'll just add to that, that the 3D tomo market has been used for the most part in Europe for diagnostic use when the patient has called back, not for the initial screening but we believe that with the reduced reading time and with the success in the U.S. and all the press about increased detection with 3D tomo, it's going to start moving into the screening regimen itself and slowly start creeping into the 2D area.

But until such time, as that really hits the tipping point and inflection point, we want to be in the market with 2D and ultimately update folks as they make this transition to 3D.

Some accounts may go directly from old generation 2D systems to 3D, but we want to have an opportunity for them to upgrade to a 2D deep-learning technology under the ProFound AI name.

And we clearly differentiate AI from CAD to reflect the deep-learning capability we're introducing into 2D as well as 3D.

Excellent.

Excellent.

Makes sense.

I wanted to come to Therapy, but just because it dovetails off of your comment on AI, Mike, as far as ProFound as a platform goes, you've talked about prostate MRI as a potential opportunity to extend ProFound into especially with some noncompetes, I think, maybe coming up this summer and also beyond prostate MRI into other cancers and other imaging modalities.

Just wanted to see if there's an update on that?

And what are the chief gating factors, I guess, to extending ProFound into those other areas?

Yes.

With -- the good thing is that we have the algorithmic capability in-house to move in this direction.

We have images and data, which is key.

As far as the gating item, as in almost all areas of AI, it's all about more data.

As I often say, "Data isn't king, it's the kingdom." We are currently in negotiations with a couple of very large facilities and health care systems, some in U.S. and international, to access thousands of cancers and normals that when run through the algorithm and properly [truthed] can allow us to move very quickly.

So that is the gating item, Per.

Some of these cancers to acquire them cost some dollars because people don't just give it up for free.

So the recent financing is also allowing us to move in this direction.

Obviously, we're keeping our eye on our core businesses.

And I've mentioned the movement from detection to prediction and in Xoft -- on the Xoft side from current indications to new indications.

So we have to balance the extension of AI into these new areas.

But clearly, since I've mentioned that mammography, in general, only represents a portion, and in fact, less than 20% of all the imaging that can be done in radiology, there's a huge market opportunity beyond mammo, which is, obviously, the reason for your question.

So this is a key area for us, but again, we're balancing this with our expenses, and we are continuing to move it along.

So we're making concerted progress there, and we'll have some more updates on this in the months ahead, because we're keeping our eye on this very closely while also balancing the businesses of today and the businesses of tomorrow with our cash and with our operating expense usage.

Our next question is from the line of Francois Brisebois with Laidlaw.

Just a couple here.

We touched on a lot of initiatives you guys are taking in a lot of different segments of the business.

Can you talk a little bit about what top line run rate would make you feel comfortable to start looking at getting break -- cash breakeven?

Or is that something we're still just trying to build and invest in, in growing the long-term business?

Yes.

I think it's the latter, Frank.

I just -- I'm not sure -- we're still, as Mike mentioned, we're still trying to balance our expenses, identify clinical areas for us to go into, invest in prostate, invest in new applicators, and those have a longer ramp for revenue.

So I think there's going to be a balance of trying to keep those expenses going for the future as well as looking at our current business.

But right now, we're just focused on executing today and getting through the next quarter.

Yes, a number -- I'll just add on to that, Frank.

Obviously, a number of our analysts had projected positive EBITDA for Xoft within the next 2 -- roughly 2 quarters.

And what we effectively did in this last financing was trade that near-term positive EBITDA for substantial increases in the top line revenue growth in outlying quarters.

So we're trying to balance the continued movement of Xoft into a growth business and acceleration of our Detection business into prediction and balance that with our EBITDA goals.

We have adequate cash to hit those goals, but it is a delicate balancing act, and we recognize that we need to achieve on both fronts, but we have -- we are currently in this investing for growth, and we believe that with this recent financing, we have significantly incrementally improved our long-term revenue outlook.

Most of that, as stated, is going to come in the back half of 2020.

Understood.

Okay.

So the top line, I was thinking maybe the second half of '19, we should already be seeing some top line growth, but a lot of this investing that we've been doing is more of a second half 2020 in terms of top line.

Is that correct?

I'm just trying to get a feel for the rest of this year, first.

We'll see continued top line growth in the businesses that we're in today.

But for the breakout of more substantial and incremental revenues that would come forth with the movement from beyond detection into prediction, and the revenues that would come with that, which would also keep us one step ahead and very differentiated on the Detection side, and with the new revenues for Xoft, these are going to move current projections to higher numbers, but again in the back half of 2020.

So we continue on trajectory with the business we're in today.

So I want to separate those points because the business we're in today is not being compromised in terms of the top line.

It's just that while we're building -- while we're carrying forth on the business of today, Detection and all of our Xoft operations on the therapy side, that's moving forward as previously indicated, and we're building a second, you might say torque up or incremental revenue ramp, and we're expending dollars to have that occur in the back half of 2020.

Okay.

No, that's very helpful.

And then just lastly, I just wanted to touch on quickly on the CMS proposal for guideline changes.

You mentioned that early July and then 60 days, I was just trying to get a feel for -- you talked about January or April 2020, you were heading more towards April.

Could you just remind us of, if things kind go the way to basically encourage quality over quantity a little bit here and everything can go the right way for Xoft, when should we expect this to kick in?

Can you just remind us of the time lines there with April that you mentioned?

Yes.

Sure, Frank, it's Stacey.

So the proposal was published in July.

We're in a 60-day comment period now, and we will see the language of the final proposal in November.

And in November, we'll find out the implementation date, whether that will be January of 2020 or April of 2020.

The buzz sort of around is that it's more likely to be April of 2020 just by the time CMS completes all of the administrative work and they sort through any issues that may arise during the comment period.

So we're actually expecting that it will likely be April of 2020.

But as you know, the way the proposal is structured is that CMS has created this bundle payment system for radiation oncology treatment in 7 treatment categories, including breast cancer.

So now going forward, beginning likely on April 1, hospitals and radiation oncologists will get paid this one set fee regardless of which treatment modality they select.

So as you know, one of the major factors that's been holding back more widespread adoption of breast IORT has been that there is a significant difference in the payment value that the radiation oncologist gets paid for treating in the OR in 10 to 15 minutes with breast IORT versus seeing the patient for 6 to 7 weeks of external beam radiation.

There have been financial incentive to deliver the 6-week

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total payment and the radiation oncologist's payment will be the same regardless of which treatment modality they select.

And those values have been

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significantly greater than our reimbursement value today for the procedure.

So we need to wait and see how this comment period goes.

We know that this is going to end up positive for IORT.

It's more of a question of sort of on that positivity scale, is this sort of incrementally positive or game-changing positive.

And the reality is, it's likely going to end up somewhere in between.

And so we'll wait until November to see the final language and then we'll assess the impact on our business at that time.

Understood.

And then just if I can just state a quick last one here.

You mentioned in terms of potential gating factors, the first question about expanding beyond -- I guess, I'm trying to get a better feel for competitively how you feel about your advantage?

And obviously, the algorithm being in-house seems huge.

And then other than that, I guess, it's money to potentially buy out the data for different cancers.

Is this something that in terms of the competitive landscape that you are concerned that others with potentially bigger pockets could go out and just buy this data from cancer clinics to prevent and then develop their own algorithm?

Or what is it about your algorithm that you feel so comfortable on the competitive side?

Well, we've been working on this for 15 years, Frank, or actually even longer.

So we've developed, obviously, a base of knowledge.

It's real important to have world-class algorithm people.

It's also really important to have 4,000 unit install base and growing.

Clinical connectivity is critical.

It's one of the reasons why we form advisory boards.

We keep expanding our advisory boards to stay with the clinical thought leaders, and of course, it's the reasons we're at all the trade shows, and we have clinical salespeople that worked actively.

And the other way that one needs to win is to understand all the channels, not only being direct because you can pull it through the accounts but working with some OEMs, working with the PACS companies that are moving the images in the cloud.

So the intimacy of the space, knowing the go-to-market strategy, the depth of experience and having the largest cancer repository of breast cancer that is of AI interpreted images in the world is a huge differentiator.

But in order for us to stay ahead, we need to continue to press forward, and that's why the reason we're moving into prediction, because we take our large database, which we believe is, again, larger than any existing out there of AI-interpreted breast cancer images and then add that to the already existing risk factor databases out there and the one with Karolinska and then genomic data.

We've now moved to an entirely different capability.

So it's back to my point that we intend to be on the next generation of technology, not just in detection but in prediction by the time folks hit -- by the time competitors enter into the market.

We do believe there will be eventually folks in the market, we intend to -- It's one of the reasons we have this direct sales force.

We're working with all channels.

And it's also one of the key reasons for the ProFound Institute, which is an essential branding instrument that the more people know about why our AI technology is differentiated, and that triple win I talked about, the better we do.

And whoever tells the story best and whoever educates the customers to know the difference and know the trade-offs between sensitivity and specificity, wins the game.

So it's a matter of continued branding, continued differentiation, building the best team possible, getting the data possible and moving quickly.

We're running like a -- we're running this like a start-up company, although it's a public company.

That's the culture.

We're running as if people are right over our shoulders 3 feet away, even though that may not be the case.

That is our assumed behavior in terms of the speed of

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We have reached the end of the question-and-answer session.

And I'll now turn the call over to Michael Klein for his closing remarks.

Well, thank you, operator.

I'd like to close by reiterating our priorities going forward, all of which are intended to tap into and optimize the previously unrealized value inherent in our Detection and Therapy offerings.

One, we want to optimize the commercial success ProFound AI for 3D breast tomosynthesis on a global basis as well as our recently launched 2D offering.

Our commercial efforts are well underway, and we are excited about the compelling growth prospects for our ProFound offering.

Two, we want to continue to increase our customer base for the Xoft business, specifically focusing on IORT for breast and gynecology, creating new opportunities for the subsequent introduction of new products, such as rectal, brain and prostate, which represent our new application areas.

And we want to leverage the continuing momentum derived from the new positive clinical data as well as potentially the emerging new reimbursement dynamics that many have asked about and we've spoken to.

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

With these remarks and a high level of continued enthusiasm, I leave the team here.

Thanks all of you for your support, and we look forward to sharing our results for the third quarter on our next call.

Thank you.

This concludes today's conference.

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