icad inc.

Greetings and welcome to the ICAT Incorporated Third Quarter 2020 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Thursday, November 5, 2020. I will now turn the conference over to Jeremy Pfeffer. Please go ahead.

Thank you, Mike, and good afternoon, everyone, and thank you for participating in today's call. Joining me from ICAD are Michael Klein, Chairman and Chief Executive Officer, Stacey Stevens, President, and Scott Ariglato, Chief Financial Officer. Earlier this afternoon, ICAD announced financial results for the three and nine months ended September 30, 2020. Before we begin, I would like to caution the comments made during this conference called by management contain forward-looking statements and involve our expertise regarding the operations and future results of ICAD. I would also like to note that there are certain non-GAAP financial measures management believes that these measures provide meaningful information for investors and reflects the way that they view the operating performance of the company. You can find a reconciliation of our GAAP to non-GAAP measures in this earnings release. I encourage you to review the company's filings with the Securities and Exchange Commission, including, without limitation, Forms 10Q and 10K, which identify specific risk factors that may cause the actual results or events to differ materially from those described in the forward-looking statement. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, November 5, 2020. 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 afternoon, everyone. I would like to focus my comments today on four key areas. Number one is the sales momentum we are experiencing in our business. Number two, the launch of our innovative risk assessment software, which is the only breast cancer imaging product in the market offering a near-term two-year risk assessment score, a score that indicates the future likelihood of disease. And number three, our recent distribution agreement with Change Healthcare, which opens up an expansive new sales channel of enterprise-oriented integrated delivery networks. These are clusters of strategically important clinical sites, often with one or more major academic medical center at the core. And number four, further acceleration of ZOFT IORT offering for brain cancer, which is now rapidly moving into multi-site, multi-national trial that will further validate ZOFT technology, all while simultaneously illuminating the often overlooked fact that ZOFT is already regulatory cleared and commercially available. I'd like to start highlighting a few financials, which will also address the first point above, specifically that of ICANN's sales momentum. ICANN's third quarter total revenue of $7.1 million represents a 28% growth over our second quarter. We are pleased to report that the revenue growth for our flagship high margin profound AI technology grew 44% over our Q2 2020 revenue. In our detection business, we anticipate hitting an emblematic milestone in the coming months. This is the upcoming 1,000th installation of Profound AI since our first install in early 2019. Over one third of these installations will have occurred during the course of this pandemic. This makes us especially proud to rapidly approach this milestone. We also anticipate the launch of our next generation Profound AI offering in the first half of 2021. All that we have learned along with a trove of imaging data that we've gathered since our launch of Profound AI will soon manifest in an even more intelligent Profound AI 2021 release in the first half of next year. We believe that this next generation release of Profound AI will continue to drive broader market adoption and expand our first mover advantage via unparalleled AI performance and what customers will see as a steady cadence of ever-improving AI offerings. Our value proposition is highly extensible, as there are few, if any, technologies that get better with use. We also anticipate deeper penetration into accounts as we begin to upgrade and expand our substantial install base with next generation AI technology. While our growth of AI offering and offerings is the core value driver for ICANN, we also had significant growth in our therapy business. Q3 product sales increased 250% compared to Q2 product sales. Though on a small base of Q2 revenues, We are pleased with the robust growth of Zost Capital Equipment. Zost product sales in Q3 also increased 59% over Q3 of 2019. It is worth noting that in Q3, total international sales represented 25% of ICAD revenues. In addition, Q3 2020 OUS revenues grew 80% over Q2 and actually grew 100%. over Q3 2019. Our investments in targeted international commercial initiatives and the expansion of our distribution network is beginning to pay dividends. Our growing OUS business, along with our multiple sales channels and a broad geographic go-to-market strategy, allows ICAT to have a balanced sales growth portfolio. We can now sell in over 25 countries. We believe this helps us mitigate single market challenges and provides a level of insulation should a single geographic area have a brief period of disruption. Now, while we achieved the mentioned 28% ICAD revenue growth in Q3, we simultaneously maintained the 21% operating expense reduction we achieved in the first half of this year. We were very diligent in maintaining our operating expenses at $6.7 million in Q3, the same level of expense we had in Q2. We therefore generated clear leverage in Q3 by growing our top line $1.5 million over Q2 with no corresponding increase in expenses. We are pleased that we achieved 44% growth in our profound AI product while keeping our expenses flat. This was a total company effort and an indication of rising to the occasion. Sales growth combined with cost control as well as productivity gains allowed us to significantly reduce ICAD's pre-tax loss to $1.8 million in Q3. We also maintained cash at just over $22.5 million. These numbers are part of a very deliberative plan and trajectory to achieve positive cash flow in EBITDA in our core detection and therapy businesses. For those who have asked about current market dynamics, particularly with this pandemic still with us, we continue to see fully open mammography screening sites, many with expanded hours and weekend time slots. Sites are now quite efficient at safely screening and scheduling properly spaced patients. The clinical community, as well as patients, are increasingly aware of the risk of delaying screening mammograms. With over 280,000 cancers detected in the U.S. each year and more than 1 million worldwide every year, breast cancer represents its own form of a pandemic. It's one that we've had every year for generations. It is well known that screening delays result in more serious, later-stage cancers. Clinicians, hospitals, industry, advocacy groups, and yes, even payers are all aligned in collaborative efforts to ensure that regularly scheduled screening mammograms continue and are performed with proper cadence. With that, let me move on to point number two mentioned above. This is the recent launch of our new risk assessment offering for mammography. Now, let me clarify that our profound risk product is not the same as our current profound AI offering. The current profound AI technology focuses on identifying cancers that may be detectable today. Profound risk focuses on tomorrow's possible cancers. Specifically, our risk product focuses on features that are suggestive of potential cancers that may emerge 24 months from now. Profound Risk provides a novel, one-of-a-kind risk assessment capability for clinicians and patients. It provides a personalized near-term risk score, again, looking forward 24 months. Current models are less precise and focus on either lifetime risk or five- and ten-year risk. Profound Risk is the productized outcome of an eight-year collaborative journey during which Hundreds of thousands of images were collected, and it is the result of intense efforts working with researchers at the prestigious Karolinska Institute. We believe that the fruits of this effort in many ways will define the future of risk-adaptive breast cancer screening. Let me offer one illustration of the potential value of profound risk. Through years of studying hundreds of thousands of images, we clearly observed that 9% of women have exceedingly high profound risk scores. Patients falling into this portion of the risk spectrum have an eight times greater likelihood of presenting with breast cancer in the next 24 months when compared to women who are in a general risk category. This same woman using today's advanced 3D chomosynthesis imaging supported by AI for detection may actually have an undetectable or sub-visual cancer as of right now. Radiologists supported with the world's best tools may detect no sign of cancer today, even though 9% of the 40 million women screened in any one year may have an 800% greater cancer detection risk two years from now. Now, simple math suggests a hidden impact of up to 3.6 million women each year in the U.S. alone, four times that worldwide. Now this, in our view, is truly a hidden pandemic. This data was presented at our recent Innovation Day and was published in a peer-reviewed radiology journal called Radiology just three months ago. The radiology publication, press release, and summary of findings can all be found on ICANN's website. Profound AI risk has now been introduced on a preliminary basis in both the U.S. and OUS markets. We will introduce profound AI risk for 3D mammography in the next several months in early 2021. With profound risk, we are introducing an entirely new category of breast screening care. One that may not be even on the radar screen of others operating in the breast cancer imaging area. Now, I want to be clear that we are being very thoughtful about the introduction of profound risk technology. We are following the rule that with powerful information comes a great sense of responsibility. So as such, we are actively collaborating with a broad array of top imaging professionals on how best to position and optimally deploy this AI technology. ICAD has a risk advisory board which is comprised of world-renowned academicians and clinicians from several, actually multiple, well-known sites. We are launching a product with a very high level of clinical engagement and involvement. We are launching profound risk with a very methodical and properly paced introduction. We believe this will lead to more robust adoption as we progress through 2021 and, of course, beyond. The third point mentioned above is our new agreement with Change Healthcare. and are now expanding focus on enterprise-level customers. When Change Healthcare spun out of McKesson in March of this year, they rapidly evolved from a packed vendor to a broad-based productivity and workflow solutions partner, offering decision support capabilities across broad networks of healthcare sites. Their value proposition has significant appeal. to large and sophisticated hospitals, particularly those that operate within integrated delivery networks or IDNs. These IDNs will now represent a larger portion of ICAD's go-to-market strategy. In partnering with Change Healthcare, we've opened up a new market and a new sales channel. And with this agreement, we effectively expand our commercial capability and will collaborate with multiple new sales specialists, who along with us will serve as the vanguard for an emerging pay-per-patient revenue model. And finally, to touch on point number four, my last point, I'd like to review some of the developments in intraoperative radiation therapy, or what we call IORT. Our key initiative here involves the treatment of recurrent glial blastomas, referred to as GDMs, and as we discussed at last month's well-attended Innovation Day, the updated data on glioblastoma showed significant improvement in overall survival and, as important, progression-free survival in patients with recurrent glioblastoma. Patients treated with Zost-IRT only in this trial, after they received a surgical rescission, dramatically had higher overall survival numbers and months of progression-free survival in comparison to patients who were treated with external beam radiation therapy, which was then combined with other systemic therapies, all after surgical rescission. The published data on the use of ZOF 10 to 12 minutes of radiation applied during surgery has caught the attention of physicians at luminary sites in both the U.S. and Europe and other parts of the world. It has earned us a seat at the table, which has taken the form of an international glioblastoma expert panel consisting of over 18 highly esteemed physicians represented by top neuro-oncologists, radiation oncologists, and neurosurgeons. The objective of this panel is to build consensus on our clinical trial design, the inclusion criteria, and the endpoints. The goal is to further validate Zost's glioblastoma capabilities and build upon the results of our ongoing study at the European Medical Center. First patient treatments for this multi-site international study will commence within the coming months. The study will enroll between 80 and 100 patients. over an approximate two-year time period. Progression-free survival will be one of the efficacy-based endpoints. It is a very meaningful endpoint that will prominently and regularly be reported on during the course of the next 24 months. We anticipate being able to potentially see initial data on disease-free progression, perhaps as early as mid-2021. Our efforts in glioblastoma are being led by Dr. Santosh Kesari, a world-renowned neuro-oncologist at the John Wayne Cancer Center. Now, I had the pleasure of conducting an interview with Dr. Kesari as part of our online innovation day in late October. You'll find the full interview replayed of Dr. Kesari describing the details of our study and the promises offered GBM on our website, and again, look for the Innovation Day video on our investor tab. So in summary, despite an evolving clinical operating involvement as we navigate our way through COVID, we have made significant progress on key themes, ones that I've mentioned above. And to briefly sum it up, one, we see significant revenue growth over Q2 across ICAD, and particularly in our high margin profound AI product offering, which grew 44%. Number two, profound risk for 2D and 3D introduces a new product category, a true game changer in breast cancer screening. In this area, we can clearly see that there are indeed few runners on the extra mile. And three, Our partnership agreement with Change Healthcare opens up a new sales channel, one potentially rich with opportunity from enterprise and integrated delivery networks. And finally, four, we are now on the verge of commencing an international clinical study for the treatment of glioblastoma with near-term deliverables that will likely be observable in mid-2021. We believe ICAT is well-positioned for sustainable success. We have significant growth catalysts in both detection and therapy businesses. We are confident that we have the right plans in place to execute on these opportunities. We are driven simply by a very key metric that we always keep top of mind. This is return on invested capital, ROIC, and anticipate continued positive movement towards our stated EBITDA and cash flow goals. Our strong cash position enables us to carry forth on the above stated objectives with an appropriate cadence. I'd now like to turn the call over to Scott Araglato. Scott?

Good afternoon, everyone, and thank you, Mike. I'll now summarize our financial results for the third quarter ended September 30, 2020. Given the ongoing considerations of COVID-19, we believe it is useful to compare our sequential revenues from the prior quarter in addition to our year-over-year comparisons. On a sequential basis for the third quarter versus the second quarter of 2020, total revenues of $7.1 million increased 28%. Detection revenues of $5.3 million increased 28%, driven by a 44% increase in detection product revenue, and therapy revenues of $1.8 million increased 27%, driven by a 251% increase in therapy product revenues. As Mike noted, the sequential revenue growth in our detection and therapy businesses during the third quarter was achieved while maintaining our previously implemented cost reductions with operating expenses at approximately $6.7 million for both the second and third quarters of 2020. Importantly, Our actions to reduce operating expenses in 2020 resulted in a decrease of $1.3 million, or 16%, as compared to the third quarter of 2019, which allowed us to withstand a year-over-year decrease in third quarter revenues of $0.7 million, or 9%, as compared to $7.9 million in the third quarter of 2019. On a segment basis, detection revenues decreased $0.8 million, from 6.1 million to 5.3, or 13%, which was offset slightly by an increase in therapy revenues of 0.1 million, or 4%, on a year-over-year basis versus the third quarter of 2019. Moving on to gross profit. On a percentage basis, gross profit was 70% for the third quarter of 2020, compared to 77% in the third quarter of 2019. On a pure dollar basis, gross profit for the third quarter of 2020 was $5 million, as compared to $6.1 million in the third quarter of 2019. Our margins in the third quarter of 2020 were impacted by a hardware upgrades sale that was 300 basis points on our detection margin. In addition, we seeded some new geographies in our international markets, which resulted in lower margins in our therapy business this quarter. we will continue to align the cost of sales with corresponding revenue changes and appropriately manage our cost structure. Operating expenses were $6.7 million for the third quarter ended September 30, 2020, a 16% decrease from $8 million in the third quarter of 2019, and, as I noted earlier, essentially flat as compared to the second quarter of 2020. As I mentioned last quarter, Our cost mitigation efforts aimed at aligning our cost structure in response to the impact of COVID on the company's activities included salaries, travel, marketing and sales, and other targeted cost areas, including costs that may be associated with less immediate objectives. And those remained ongoing through the third quarter as well. Overall, we are pleased with the execution of our cost control measures through the last two quarters. We will stay disciplined in our cost management of operating expenses going forward and will continue to manage the timing of our investments with anticipated revenue growth. Importantly, we continue to appropriately invest in targeted growth initiatives such as profound AI risk and GBM or glioblastoma to generate future opportunities and increase shareholder value. Moving on to our profit metrics. gap net loss for the third quarter of 2020 reflects an improvement of $1.2 million to a loss of $1.8 million, or $0.08 per diluted share, compared with a gap net loss of $3 million, or a loss of $0.15 per diluted share, for the third quarter of 2019. Note that Q3 2019 included a $0.9 million loss on the fair value of the debentures that have now been retired. Non-GAAP adjusted EBITDA for the third quarter of 2020 was a loss of $1 million, which represented an improvement of $0.4 million compared to the third quarter 2019 non-GAAP adjusted EBITDA loss of $1.4 million. Again, our net income and EBITDA are in part reflective of our efforts to align expenses with revenue expectations. Non-GAAP adjusted net loss for the third quarter of 2020 was $1.7 million, or $0.08 per diluted share compared with a non-GAAP adjusted net loss of $2 million or $0.15 per diluted share for the third quarter of 2019. Moving on to the balance sheet, as of September 30, 2020, the company had cash and equivalents of $22.6 million compared to cash and equivalents of $15.3 million at December 31, 2019. With a strong cash balance and operational flexibility, ICAD remains well positioned to continue advancing its corporate strategy. This concludes the financial highlights of our presentation, and I would now like to turn the call over to Stacey. Stacey?

Thank you, Scott, and good afternoon, everyone. We are highly encouraged by the overall performance of our business, especially in light of COVID dynamics still impacting our company, and believe we are continuing to enhance our competitive position in both segments of our business. The need for innovative technologies like ICAD has never been greater than it is today. With an enormous backlog of mammograms, which is now estimated to be as high as 8 to 10 million as a result of decreased cancer screening due to the ongoing pandemic, and the ability to offer a 10-minute IORT procedure to treat breast cancer, we continue to believe we are well-positioned for success in both detection and therapy. I would like to begin by discussing our strategy for our new Profound AI risk product. This groundbreaking technology uniquely combines age, breast density, and subtle mammographic patterns, including those that may not be apparent to the human eye, resulting in a highly accurate two-year risk assessment. We are extremely excited about the benefits this software can offer to both clinicians and especially patients, and have begun putting in place the key initiatives relative to expanding our clinical validation on a global basis, including developing KOL research sites and clinical centers of excellence with multi-ethnic, multi-geographic data diversity. All of this aimed at driving adoption globally. As a reminder, Profound AI Risk is now available for 2D mammography in the U.S. and Europe with a planned follow-on release in 2021 globally. Our goal with profound AI risk is to move mammography from what today is an age-based screening paradigm to a risk-adjusted screening paradigm. In other words, precision screening individualized for each woman. In the U.S., about half of the women who are at average risk for breast cancer fall into a dense breast category and are therefore considered to be at higher risk. In some U.S. states, these women are recommended for supplemental screening by ultrasound. This creates operational bottlenecks, as it is just not feasible to scan 50% of the population with ultrasound. Moreover, ultrasound is not reimbursed everywhere as a supplemental modality, resulting in out-of-pocket patient payment for a large percentage of women who just don't benefit from it. Profound AI risk provides more accurate stratification which may lead to supplemental screening being applied to a smaller but correctly targeted percentage of women and to lowering total cost per patient spend over time. Building clinical evidence with high-impact studies is an important focus area for us. Our first significant body of clinical evidence was generated through the recent radiology publication, which Mike highlighted earlier, In this study, risk demonstrated statistically significant superior AUC performance at two years as compared to multiple commonly used risk assessment models. AUC is a standard performance measurement for AI technology that incorporates sensitivity and specificity into a single metric of overall performance. These impressive data will be important in our efforts to drive clinical adoption of risk globally. Over the past several months, we have initiated a multi-center European initiative to conduct a global retrospective analysis of TB risk. We are currently speaking with a number of thought leaders in Italy, France, Spain, and Germany in our efforts to fine-tune the study protocol and ensure multi-geographic data diversity. A U.S. retrospective analysis of risk TB and 3D will be led by Dr. Emily Conant, Professor of Radiology at the Hospital of the University of Pennsylvania, whose data also reflects an ethnically diverse group of women with a special focus on genetically predisposed women of high risk, such as the younger African American women. These studies would represent a body of evidence needed to approach national clinical guidelines organizations, such as the National Cancer Institute and the National Comprehensive Cancer Network, for inclusion of short-term risk into their recommendations. High-impact clinical studies will also feed healthcare economics and payer relations studies that will address economic benefits of the model and improve savings to the health system over time. Profound AI risk will be a significant focus for us around RS&A later this month. We have a number of activities and promotions specific to risk planned around this important virtual event that will competitively differentiate and augment our detection portfolio since no other vendor has a similar risk model to offer. We also plan to host another Technology Innovation Day in early December, similar to the one we hosted last month, but this time with an increased focus on our detection business. We look forward to providing you with further updates over the coming months as we move forward with this exciting launch. Next, I'd like to discuss our recently signed distribution agreement with Change Healthcare in a bit more detail. We believe the ability to integrate profound AI into Change's digital mammography solutions will be a key differentiator for us. Change's mammography plus solution is an industry-leading single platform for both radiology packs and mammography reading that provides radiologists with web-enabled access from any workstation to multimodality breast imaging, including digital breast tomosynthesis. This is a software-intensive platform with the inherent ability to capture, archive, and transport images in the cloud consistent with our strategy to offer this type of business model in 2021. We believe the result of this agreement will be more seamless on-demand AI access, significant workflow efficiency, and an anywhere, anytime pay-per-use recurring revenue solution that with even greater revenue predictability in the future. Tax partners like change will be an increasingly important distribution channel for ICAD and an obvious complement to both our direct sales and our OEM channel partners. These relationships have the potential to move us from what has historically been a departmental sale to now enterprise-wide scale. We are excited about the potential these agreements could have on our detection business as we move into 2021. I'd now like to review our excellent overall performance internationally. We recorded the highest quarterly revenue in Europe in our company's history in the third quarter. Our total SUS revenue of $1.8 million represented approximately 25% of our total revenue in the third quarter. Let me review some of the key accomplishments that drove these strong international results. Q3 marked several firsts for our European team, including the first sale of Profound AI in the UK, the first sale of Profound AI in two French public hospitals, and the first sale of our newest product, Profound AI Risk, into Belgium. Risk, while in its early stages of launch still, is generating significant interest in Europe. A large prospective two-year study will be undertaken in Germany where profound AI risks will be used to determine if high-risk women should have an MRI between their two-year screening protocol. If it's successful, we could see profound AI risks integrated into the German screening program. A comprehensive PR and marketing campaign was executed across Europe in October for profound AI risk to reach journalists who were reporting during Breast Cancer Awareness Month. This campaign resulted in several articles and several physician and patient interviews on key television outlets, explaining the value proposition of both profound AI and profound AI risk. Okay, let's switch gears and discuss our ZOFT business. As you know, we are highly focused on expanding the ZOFT platform into new clinical application areas. At our recent Technology Innovation Day, we highlighted many of our recent advancements in multiple clinical areas, including breast, rectal, and brain cancer treatment. In particular, I'd like to review the most recent data from the ongoing prospective study evaluating ZOFT for the treatment of recurrent GBMs. These most recent results demonstrate significant improvement in overall survival and local progression-free survival in patients with recurrent GBMs treated with ZOFT IORPs. versus patients treated with external beam radiation and systemic therapy. This study being conducted in Russia involved 28 patients with recurrent GBMs who were treated between August 2016 and June 2019. According to the study findings, as of May 2020, overall survival after initial GBM diagnosis ranged from 16 to 59 months in the IORT group compared to 5.5 to 38.5 months in the EBRT group. Researchers concluded that IORT of recurrent GBM is feasible and provides encouraging local progression-free and overall survival with a manageable toxicity profile. As Mike noted, these data are the basis for our planned multinational study of ZOFT in recurrent GBM for which we anticipate first treatments to occur prior to the end of this year. With that, I'd like to provide an update on CMS's finalized radiation oncology alternative payment model, or ROAPM. Most recently, CMS delayed implementation of this rule until July of 2021. As you know, CMS excluded IORP from the final version of the ROAPM after initially proposing to include it. First and foremost, we believe that IORT fits squarely within the goals and objectives of the ROAPM as a high-quality, cost-effective treatment for breast cancer. We are now working with members of Congress and other interested parties to reverse this decision, and the implementation delay actually provides us with additional time to accomplish this. We believe this is a fundamental access to healthcare issue, as we know that many women are not able to comply with the full six-week treatment regimen, and this leads to higher recurrence rates, and even in some cases, the decision to have a mastectomy. With all that said, for the 30% of zip codes that must operate within this model, the gap in reimbursement has now significantly narrowed. What was previously an $18,000 gap with competing treatments is now just approximately $4,000. Therefore, ICAD will now have the opportunity to compete more effectively within this 30% of the market. More importantly, we are competing with our 10-minute procedure versus weeks of competing treatments. While this is a highly favorable competitive landscape under normal conditions, it's amplified during the COVID-19 era. As we continue our lobbying efforts to reverse this rule, we are also aligning our sales force into this new model. Moving on, I'd like to highlight some of our exciting initiatives around Breast Cancer Awareness Month, which was in October. In support of this important awareness month, we executed an aggressive public relations and digital media campaign targeted at key local markets. Our goal was to raise visibility around the importance of breast health during COVID-19. Our PR efforts resulted in numerous print articles that generated over 1,000 digital news stories with a potential audience reach of over 200 million unique visitors per month, as well as several broadcast news stories with a potential audience reach of nearly 450 million viewers worldwide. From a digital media standpoint, we sponsored a webinar with the John Wayne Cancer Institute at St. John's Health Center focused on the benefits of IORT And in addition, we produced a soft educational video to raise awareness for our innovative technology. That video was distributed on our website and throughout multiple social media channels. So in summary, we are excited by the momentum we are experiencing on both sides of our business. We are also seeing encouraging long-term trends that only enhance our confidence in ICAD's future prospects. As always, we remain laser-focused on generating significant shareholder value and look forward to a number of key catalysts in the quarters to come. Now we will open the call to questions. Operator?

Thank you. If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Well, I'm pleased for the first question. The first question comes from the line of Dave Turkley with JMP Securities. Please go ahead.

Great, thanks, and congrats on all the progress. Mike, you mentioned the 1,000 profound AIs, and then I think you said you had something like 7,200 customers in the past on your last sort of analyst day. Yes. I just wonder if you could talk a little bit about that upgrade to RISC. How seamless will that be? How easy will it be? And do you feel like you're going to target these folks first, or do you think you're going to get a bunch of new accounts that want to try this predictive software?

Yeah, good question, David. Well, we're launching with 2D, and we've launched in Europe quite widely. quite intentionally because the 2D market is growing as rapidly as the 3D market. The people move from film-based technology still to 2D. So we do envision growth in 2D and then when we launch 3D. In some ways, the 2D launch in Europe gives us a little bit of a beta to answer questions which we know we'll have. For example... The biggest question is what do we do with the information because there are no industry standards established. So that's been one of the key dynamics and reasons we're working with our risk advisory board. But what we do now know just from our early release is that what risk does for 2D is that it breathes new life and differentiation into 2D. Since 2D outside the U.S. is the more likely area where we may see some competitive entries, this ability to add risk to 2D completely differentiates us from 2D. One might also say on 3D, while we're standing here two years into our FDA approval, there will be folks that will enter the market over time. But when you combine our profound AI with now risk, you've not only significantly differentiated, At the same time, we're coming out with profound, you know, 2021, but we now team it up with profound risk, and we've got, you know, a significant differentiation. Yes, we do believe it will provide some additive revenues. We put time and effort into this. It's certainly not for free. We do believe that opportunities for profound AI, the second generation that will come out, plus risk, gives us an almost unassailable advantage in the market that will translate to greater sales as well as incremental ASP opportunities.

Got it. And I guess what I was sort of trying to hit at was you did a great job with profound AI. You've got over 1,000, and we're in a difficult environment. Knowing that you don't want to give guidance, as we're looking ahead, if you've got 3D risk next year, I mean, could we actually anticipate that your installs could accelerate, even versus what you did maybe with just profound AI as you launched that differentiated risk component? Do you think that's going to – you said game changer. I'm just trying to suss out what that might mean. I mean, it might mean you might grow faster, I guess, ahead.

I think we're living the case study nowadays. I mean, effectively what we're doing is that for women who are at higher risk, these are women who undoubtedly are going to require supplemental screening, either now or in six months, which could lead to additional screening. There may additionally be women in the low-risk category with no history of disease that are in the low category that have a disproportionately low probability of risk that may actually have longer cycles. What this will mean in terms of... our ability to scale incrementally beyond our normal path, I would say this. We certainly believe that the opportunity is there. We do think that this will provide incremental growth opportunities. At the same time, we also recognize that this is protocol-changing technology, and that takes time for people to know what to do with. in the sense that for some additional information could almost be an inconvenient truth, at least until they know what to do with that information. So I think that as we begin to work with our clinical collaborators in academia and as all of that aligns and as we start getting a cadence moving with 2D moving to 3D risk and we get the clinical pathways designed, I mean, look, we didn't develop this technology to simply put us where we would normally be. We obviously believe there's incremental opportunity. The speed of this, you know, COVID aside, will in part be determined by the elegance with which we collaborate with clinical sites and get these new treatment care patterns established. Hopefully that gives you, you know, kind of the puts and calls on the upside here, Davidson.

Yes, definitely. Thanks for taking the question.

The next question comes from the line of Gene Mannheimer with Collier Securities. Go ahead.

Thanks. Good afternoon, and congrats on the good results here. I wanted to just follow up on the prior question in terms of upselling risk into your installed base. Is this kind of an overlay or an add-on to the AI product? How will you charge for it? How much would it be? And then I had some questions on the change agreement as well. Thanks.

Yeah. For one, it will be an additive product. As stated, it's a new category. This is getting a little bit at what David was angling towards as well. So it certainly is going to be an additive product. We will quote Profound AI for detection, and this will be quoted for risk. I'm sure there will be scenarios where if you buy both, you'll get some bundled discount. But we do expect to have additive sales from this. We also believe that the fundamental sales of just Profound AI itself, detection, will be accelerated just by having risk, because some people will want the product just for risk. And you will not be able to use the risk without getting profound AI. The exact answer to what percentage, what the price will be, is one of the reasons why we say it's been launched on a preliminary basis. Because what we're trying to do is find the sweet spot in the market. We don't want to candidly price it in such a way that it is prohibitive On the other hand, we don't want to leave dollars on the table. So what we're building is economic models that show the value capability, the return of using this profile for practices in terms of incremental or additional screening. We're even building these models for managed care companies to see if we end down the Medicare path to see if there could be some incremental reimbursement opportunities. So we are cautiously moving forward with our pricing because almost like apps on your phone, we want to get people into the product, and we're still fine-tuning the price, and then we will likely, and I think you can anticipate, we'll have sort of the in-store add-on capabilities. Our goal is to get into a broad base of accounts, penetrate many accounts, as many as possible, and layer in additional features additional technology. We're not done yet. We're not done yet. We see an additional set of capabilities even beyond what you've heard today. So each account to us, when we look at the five-year value of those accounts, we don't think of it as one sale now. We think of the recurring revenue from service and the add-on sales that will come from the other products that we're going to introduce. I'm sorry I can't be too precise on the number, but I think you'll you'll be glad we weren't precise on the number as we fine-tune our price and entry points.

That's good, Mike. Thank you. With respect to the change agreement, are there anything you can share with us about their market share today, how much you think you can get, what competing products, if any, are prevalent in their base today, and When you say you're kind of moving into the enterprise with them, how would the ASP of a change healthcare customer differ to your typical sale into an imaging center? Thanks.

Well, the closest thing we could map to is what the PACS market looks like, although change is beyond the PACS company. They have unique workflow analytics capabilities that differentiate them. It is a very fragmented market. We wanted change because we see them as the industry leader. We wanted that to be sort of our flagship deal. And you know what happens when you get the flagship player in the market? You know, others can follow. It is – they do with their – and you can pick this off their website, but they've got about 400 to 500 customers that they serve in the U.S. And of that, not all of them are – or mammography customers, but perhaps around a third of them are, which may mean that they may be doing, let's say, four to five million screens annually, and their mammographic screens could be over a million to a million and a half. So what that translates into on a pay-per-click model, I mean, you could do the simple math if one was to assume a certain dollar amount per click, and that would be the recurring amount. And we get a certain amount, and... they take a certain percentage of that for representing our product. We believe this is a growing segment. We believe this segment has all the benefits of cloud-based capability, upload anywhere, download anywhere, stored in the cloud. And I should also say the margins for this business are in the 90%. And that's there are no servers. You don't need service people to go in. And it's an exquisitely elegant solution. we will provide clarity for our investors on the impact of growth on the pay-per-click model. I can tell you that for this year, we see the growth of this segment having a low single-digit percentage impact on the current year's revenue, and that's because as pay-per-clicks start being tabulated, they start off low, and then you get the full year next year, and they repeat. and it becomes repeatable and recurring and high margin, and then you lay on other deals. So it's a story that we will be building from 2021 on. But it's going to have a very modest impact this first year, but strategically it positions us for layering on other SaaS-based deals that are high margin and also allows an opportunity to replicate this with other AI capabilities.

Well articulated, Mike. Thank you. Appreciate it.

The next question comes from a pair, Ausland, from Craig Hallam, Capital Group. Corporate, please go ahead.

Good afternoon, everybody. I kind of want to follow up on Gene and David's question on profound risk. Obviously, it's early. You do have the CE mark in Europe. And just thinking in terms of kind of the positioning in the market, Europe is obviously – come a lot further in terms of risk-based screening versus age-based like we are here. So when you are over there now with a product like Profound Risk, are you finding that that's actually a lead generator for Profound proper? Whereas historically, I've always thought of, as you mentioned earlier, Mike, Profound risk would kind of be an add-on or an adjunct feature to the flagship profound AI product here. Is it in the reverse, actually, in Europe because of the pull-through or pull-forward of demand, given that they have that risk focus there?

Yeah, it's a really good question, Per, and I think it ties to sort of, I don't know, you call the business models in Europe. They track patients over the course of a lifetime. These are mostly government-sponsored health care programs. it matters to them what happens to this patient three, four, five years from now. And because of this, the price of missing a cancer that could be detected today, having it show up as a cancer two years from now, and that is advanced cancer, costs them money. So while some sites may use double readers, double human readers, and have used that as a reason to not move to, let's say, the base product for county eyes, but they might feel that the double human reader capability, at least short term, is either cost effective or clinically effective. This undeniably provides a value proposition that's meaningful to them from an economic and clinical and societal perspective. So it's the reason we launched them here, is that all the dynamics line up well in Europe. And as the U.S. becomes increasingly focused on, and we see this even on our other side of the business, on the the value of care and the value equation, we see more and more interest in the U.S. But we will be leading outside the U.S., and there'll be case studies, and there'll be generated and government programs, and we're also seeing this translating in parts of the U.S. One could imagine sites like Kaiser or, let's say, Staff Modulation Most, who also track their patients over time, would be very interested in this type of offering. And as you said, it may actually have a tailwind effect, a reverse tailwind effect, and bring profound AI-based detection today in, and as you said, almost in a reverse fashion.

Excellent. Very good. So speaking of value proposition, if we switch over to the IORT side, Stacey, you mentioned, you know, the notion of, you know, lobbying to try to get IORT included in the ROAPM next year that it's been delayed to July. given the most recent data that you have put out there in terms of patient follow-up and in terms of where the ROAPM stands today, even with your exclusion, the economics have closed substantially. Are you really focusing, or at least at this point, are you anticipating focusing specifically on those 30% of the zip codes that are going to be subject to the model Is that where your go-to-market in the U.S. really is going to reside for now, or how might you approach the other 70% too?

Yeah, great questions, Per. A couple of things in there. First of all, when we think about how we will approach CMS, and we already have reached out to CMS, and, in fact, we've already had a response back to our initial letter, which came in about a week's timeframe. CMS did commit to further dialogue with ZOFT and also other stakeholders as they think about potentially refining the model. So we don't know what the outcome of this will be, of course, but I thought it was a little bit encouraging that we received a response back so quickly and a willingness to at least have that discussion. As we go back to CMS, we'll focus on a couple of things. One, certainly this model, the final language of this rule was determined before we had the latest data published on IORT. And that latest data, as you know, has patient follow-up up to 10 years on hundreds of patients, right? We also are getting ready to publish the next iteration of the data from our own Zost-sponsored clinical study of IORT, and that is the largest clinical study of IORT in the U.S. And so we'll have a strong leg to stand on from a data standpoint. But the other big thing that we're really focusing on here is that this is truly an access to healthcare issue, and it particularly impacts low-impact women, women of certain ethnic groups. There is a lot of data out there that shows that For example, women in rural areas or who live a distance from a treatment center or represent a lower income group and can't leave, you know, a job to go get treated every day for six weeks, those women are not complying with the full regimen of external being. And in some cases, they're not getting any radiation treatment because they just can't make the commitment. And so they're either having a much higher likelihood of recurrence, right, or they're opting for mastectomy unnecessarily, right? This is just truly an access to care issue, and that's sort of really what we're pushing in our messaging to CMS. And then your question about how we're targeting our sales force. So, you know, obviously now there's a delay in the ruling, right, in the implementation, which will be July of next year. So we still have some time. But we will start to target those geographies that are in the 30% where there is that much narrower gap between us and the competing treatment. It's not to say we'll abandon the other areas, because I think that there are other dynamics going on, such as the data momentum that we have that are going to continue to give us a good chance of being successful in all of the geographies. But in that 30%, certainly we eliminate a lot of the economic hurdles that we've had to jump over for many, many years because that delta is now so small and the cost of our technology is so much less compared to the competing technologies. So I do think that's a no-brainer that we'll be able to have more success in that 30%.

That makes sense. One last question, and this one, it may be more anecdotal than truly quantitative or quantifiable. I guess, but in terms of the discussion around the backlog of mammograms that has accumulated over the course of the last, you know, six to eight months, you know, we're talking about 8 to 10 million mammograms, Profound obviously seems to have or could have an extraordinary impact on reducing that backlog. Is it having tangible impact? a tangible effect on demand from radiologists and imaging centers at this point? Are there pushbacks that they still give you, like budgeting or those sorts of things, or is the value proposition very, very clear at this point?

Yeah, I think what has happened here, Per, now that we've had a few months to evaluate the impact of the pandemic on mammography, what we're hearing both in the U.S. and the European markets is that patients You know, in the screening population, it used to be that typically 90% or so of the cancers that are found in the general screening population would be stage one, right? So, you know, very high percentage. And now we're finding with just a three- or four-month pause in screening, what our customers are reporting to us is that that percentage has gone down to the area of like 65% of these cancers are now stage one. And they're telling us that the stage 2 and 3 cancers have now gone from what was 10% to something in the neighborhood of 35%, right? So these are dramatic changes, right? And we're finding that, you know, these cancers are showing up at later stages where, obviously, they're going to require more costly and sometimes more, you know, invasive treatment here. So I think the fact that we now have data and, you know, we've heard it universally that, it is causing more of an interest in using a tool like Profound AI to, you know, be able to sort of prioritize which women you really don't want to wait to bring back in for a screening mammogram, right? So I think the difference is that now we have a little bit of data to see what happened during the first few months of the pandemic, and that's raising the urgency level.

If I can add on to that, I had the benefit of some experience here with – You might say first-generation AI or CAD. You know, in my time running R2, which is subsequently acquired by Hologic. Around the two-year point, between the second year and, like, the third year, in that window, and we're hitting that second year in December, January, the following things happen. One is exactly what Stacy talked about. The data starts hitting. And it's this data from many sites, not just one. and not just the FDA. It's the multiple data that comes in. We've got our big trade show coming up in December. The data starts coming out. Number two, you start getting a dynamic, because we target the 30 cities where there are major league baseball teams, and we go big and we do promotions. You start getting the data combined with each local market and broad communication, you start getting a viral marketing effect. a me too effect. I should have that as well. The data is compelling. Number three, you start getting a patient poll effect. You let the patients hear about the technology and start demanding it. And sites can no longer say it's not available on the market. They might be able to go down the street. And number four is something that we never, never really feature is that one of the things that people deal with with new technology is, particularly AI, is the that, ooh, what if it finds things that I didn't catch a year before? Well, what happens around this two- to three-year window is that the concerns of having this technology and finding prior challenges is actually eclipsed by the concerns of knowing the technology is available and not having it to provide to your customers. Those four elements together quadrangulate into what essentially you're asking for, which is when do we hit the inflection point?

That's great context. Thank you, Mike. Appreciate it.

There are no further questions at this time, and I'll turn the call back to Mike Klein for closing remarks.

Okay. Thank you. I want to thank everybody for hanging with us today. I know there's a lot of earnings calls today, so I'll just – sum it up by repeating some of my introductory comments and the four points. One is that in Q3 we generated significant revenue growth as compared to Q2. And, again, this was achieved through balanced sales and an array of geographically diverse customers, and Profound AI was the primary growth driver with 44% over Q2, held expenses flat, and we had strong growth in U.S. as well as OUS locations. Number two, profound AI risk could be a true game changer, and you've heard our discussions on that, and we'll be as transparent as we can with how that continues to build in the market. This product has significant commercial potential, and we're looking forward to the introduction of 3D in early 2021. And number three, our distribution agreement will change healthcare, provides us with a new channel for profound AI, and we expect that this relationship will expand and it will start layering in a pay-for-patient model, and we will precisely provide color to all of our investors and analysts on how that will build from a modest level in 2021 to, we hope, a surging tide in multiple years with high-margin recurring predictive revenue. And finally, glioblastoma, The IORT offering presents an emerging and extraordinarily large opportunity for value creation and treatment of patients. We are working with well-known clinicians, and we are extremely excited to very shortly begin our multi-site, multinational clinical trial. And with that, I want to thank everybody for hanging in with us. I know it's a busy day. A lot of earnings calls are backed up at around this time. We look forward to... talking with folks individually, seeing folks at upcoming investor conferences, and continuing to do our best to earn your trust with your investments in ICAT. Thank you very much, and have a great rest of your day.

That does conclude the conference call for today. We thank you for your participation, and I ask you to please disconnect your lines.