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Operator
Good morning and welcome, ladies and gentlemen, to the second quarter earnings conference call for iCAD, Inc. At this time, I'd like to inform you that this conference is being recorded and that all participants are in a listen-only mode.
At the request of the company, we will open up the conference for questions and answers after the presentation. Certain statements contained in this news release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from such forward-looking statements.
Such risks include, but are not limited to, uncertainties associated with litigation and or government regulation. Changes in Medicare reimbursement policies, competitive factors and other risks that are detailed in the company's periodic filings with the Securities and Exchange Commission. The words, believe, demonstrate, intend, expect, estimate, anticipate, likely and similar expressions identify forward-looking statements.
Readers are cautioned to avoid placing undue reliance on such forward-looking statements which speak only as of the date the statements were made.
I will now turn the conference over to Mr. Scott Parr, CEO and President. Please go ahead, sir.
- iCAD, Inc.
Ladies and gentlemen, thank you very much for joining us today. iCAD is currently pursuing a two-pronged business strategy. Our initial objective was to establish a competitive position in the higher case volume segment of the mammography market and to do so on the basis of our technological superiority in certain categories. We are well on the way towards accomplishment of this goal. Since FDA approval of our MammoReader computer-aided detection system in January 2002, iCAD has established itself with approximately a 10 percent share in the installed higher case volume CAD market. Our market share of new end-user orders during the second quarter of 2003 was, we believe, substantially higher.
In May 2003 the MammoReader was designated the top-ranked computer-aided detection system for early breast cancer detection by
a respected independent evaluator of medical capital equipment. This assessment contributed to our success in the second quarter and is the basis of increasing recognition of iCAD products and of the iCAD brand.
In July, we announced the iCAD IQ computer-aided detection system designed specifically for an estimated 3,000 clinics that perform less than 15 mammography procedures per day. the iCAD IQ is simple to operate and self-training, has been designed to fit within the limited space requirements of smaller mammography clinics and will be priced 30 percent or more below currently available CAD solutions. Shipment of the IQ system is scheduled to begin within 90 days.
With the iCAD IQ product, we have targeted the lower case volume segment of the market on the basis of our competitive cost advantages which we achieve through our vertically integrated corporate structure. We believe that the iCAD IQ can provide our company with a sustainable competitive advantage among smaller and more price-sensitive mammography and breast care centers. Our goal in developing the iCAD IQ was to create a category defining computer-aided detection system for this substantially unserved market relying on proprietary iCAD inventions and significant cost advantages to offer a simpler, more reliable and substantially less expensive CAD solution.
Our IQ product will be available to mammography facilities that cannot afford the outright purchase of a CAD system through a simple fee per procedure program that we have branded ClickCAD. Under the ClickCAD program, IQ systems will be installed in qualified mammography clinics at no up front capital cost. The clinics will then pay iCAD a fee approximating $6.50 for each computer-aided detection procedure performed. This amount represents just about a third of the standard $19.13 federal reimbursement rate for such CAD procedures.
This program, we believe, will allow many mammography clinics to improve the healthcare delivered to women at risk to improve their marketing position in attracting and keeping patients who are concerned about breast cancer, reduce the legal risks associated with overlooking early stage cancers and increase the clinic's net revenues. All without a capital investment.
We believe ClickCAD is an exciting program that uniquely positions iCAD as a provider of affordable CAD solutions to mammography clinics that have heretofore been frozen out of the market due to economic circumstances.
During the second quarter of 2003, Instrumentarium Imaging which has been iCAD's exclusive distributor for MammoReader computer-aided detection products, received record orders for 24 MammoReader systems from its customers and shipped a record 17 MammoReader systems to end-user purchasers leaving a small backlog at the end of the quarter. As of this date, approximately 70 MammoReader systems in total have been sold and installed by Instrumentarium.
During the second quarter, in preparation for iCAD's release of our new IQ products and in preparation for the proposed acquisition of Instrumentarium by General Electric Medical Systems, iCAD converted Instrumentarium from an exclusive stocking distributor to a non-stocking distributor. With the exception of necessary demonstration units, we substantially depleted Instrumentarium's inventory of MammoReader products in partial fulfillment of new MammoReader purchase orders received by Instrumentarium in the second quarter.
As a necessity and as a consequence, this reduced new product orders from Instrumentarium and overall sales from iCAD to Instrumentarium during this period. This also positioned us to broaden our distribution channels with a focus on promotion of the new iCAD IQ product.
The restructuring of our distribution relationship with Instrumentarium and preparation for new product launch has involved a series of immediate and critical steps which have been successfully completed. These include the following: we have hired an experienced sales executive as Vice President of Sales for iCAD and he has made an immediate impact on current sales as well as reseller and channel development. Our new sales VP has a record of exceptional entrepreneurial sales growth including founding and building a high-tech company from scratch to sales in excess of $120 million per year.
With the new hire this week, we brought on the fourth experienced and accomplished field sales support representative with a fifth starting in early September. Among them these men and women share decades of successful activity in sales and support of medical devices, women's healthcare products, fee-for-service programs and computer-aided detection solutions. These sales reps are already a major asset to our company.
We now share MammoReader lead and account tracking with Instrumentarium and we have a direct involvement with the Instrumentarium sales team in the final states of MammoReader sales activity. As an immediate positive result, in the second quarter our close rate, that is the percentage of sales leads actually making an iCAD decision, appears to have more than doubled.
We have, to date, generated a nationwide listing of iCAD IQ reseller prospects with the contact initiated by the potential reseller in about 30 key accounts. This reseller prospect base includes candidates with a high level of sales, networking and system integration capabilities. We expect to nurture both the iCAD IQ and MammoReader sales channels in parallel so that we can respond to any opportunities and to any change in Instrumentarium's position through the Fall selling season.
This week we also hired a new Director of Customer Services to direct and manage the assumption and improvement by iCAD of the diverse help desk, training and service functions we face over the next 60 days. This woman shares our belief that this can and will become an additional profit generating component of iCAD's business.
We are now undertaking a series of iCAD brand and identity building advertisements and direction marketing programs which will lead us to the critical Radiological Society of North America or RSNA Show at the end of November. Through these, we seek to create an iCAD identity separate from and superior to that of our -- of our distributor, Instrumentarium.
In these advertisements, we are focusing in the MD Byline study which found iCAD's MammoReader superior to competitive products in all categories assessed. Direct marketing of the IQ product targeting some 6,000 lower value mammography centers and women's health clinics is poised and ready and will kick off with pending FDA approval of our new iCAD IQ solution.
We are expanding our independent trade show presence through the year end and into the beginning of 2004. And we have added independent computer-aided detection product distribution relationships in Canada, the United Kingdom, Korea, the Middle East and Puerto Rico.
Consistent with our earlier guidance, iCAD recorded a loss in the second quarter after reporting two profitable quarters. Our loss was a result of legal expenses relating to our litigation with R2 Technology and to reduced sales as Instrumentarium, our distributor, met orders through inventory rather than new purchases from iCAD.
Except for demonstration units, that inventory is now substantially gone and litigation, however critical, should not be a long-term expense. We believe our future performance will be less vulnerable to distribution and timing issues as we grow less dependent on a single product group promoted through a single exclusive distributor.
Looking forward, we expect to build on end-user orders and shipments to end-users which reached record levels in the second quarter. At iCAD, we are passionate about the ability of our computer-aided detection technology to help radiologists identify breast cancer earlier, permitting less invasive and less expensive treatments, reducing disfigurement and emotional pain and saving lives.
We are committed to making computer-aided detection increasingly affordable to all women at risk. We believe strongly that women must not be denied the benefits of early cancer detection because their breast care provider cannot afford to buy or to maintain a computer-aided detection system. Achievement of these is based on strong and profitable business operations. Looking forward, we will continue to pursue these goals. Thank you and I would now welcome questions.
Operator
Thank you very much, sir. The question and answer session will begin at this time. If you are using a speaker phone, please pick up the handset before pressing any numbers. If you have a question, please press star one on your push button telephone. If you wish to withdraw that question, please press star two. Your questions will taken in the order that they are received. Please stand by for your first question, sir. Once again, should you have question, please press star one on your push button telephone. Our first question comes from
, a Private Investor. Please state your question, sir.
- Private Investor
Hi Scott.
- iCAD, Inc.
Hi Scott. How are you?
- Private Investor
OK. I -- multi-questions. I'll do some and then come back later after all the people. I wanted to follow, but first of all, you don't show in your report for the second-quarter -- I know you got a hit because of the Instrumentarium sell-down or whatever you call it. What were the sales and units sold -- I mean -- I know -- previous quarter, first quarter?
- iCAD, Inc.
We don't record those numbers, Scott because the risk of confusion exists between what we sold to Instrumentarium and Instrumentarium sold into it's customer base.
- Private Investor
But were -- what were your dollar sales, however, in the first-quarter?
- iCAD, Inc.
I'm sorry. Of the sales in the first-quarter, there would be
. We're approximately $2.1 million.
- Private Investor
2.1?
- iCAD, Inc.
Right.
- Private Investor
OK. Something like that. Alright. And the units then actually that we sold to Instramentarium. I know it would have been -- what was that quarter?
- iCAD, Inc.
The numbers that we do not release.
- Private Investor
We don't. But you gave it this time, 17, but you don't release flat quarters?
- iCAD, Inc.
No, and I'm sorry for the confusion. The 17 ...
- Private Investor
Yes.
- iCAD, Inc.
... is the number that Instrumentarium sold to end-user.
- Private Investor
That's right. That's right. That's right. OK. I'm sorry. Yes, that's right.
- iCAD, Inc.
We're trying to do ...
- Private Investor
I was stupid there. What's -- in the R2 settlement situation, previous quarters is running around legal fees around $300,000 and this time, it's a lot larger. I want you to -- this is a several barreled question in reference to litigation is, one, why this quarter's so much larger and what is -- what is the settlement situation with them since we brought out action against them about a month ago, and what's the future legal cost assuming they don't come to the table and we have to go to trial and there'll be an appeal I assume by one side or the other. So can you expatiate there?
- iCAD, Inc.
I will and if I get the questions out of order, please duck in a correct me.
- Private Investor
OK.
- iCAD, Inc.
The legal expenses were substantially larger in the second-quarter because most of the discovery associated with the case took place in the second-quarter. In other words, the
, the statements, the research with experts who are analyzing information that the two sides to the litigation had exchanged. Most of that took place I the second-quarter. We expect that costs will be lower -- substantially lower in the third-quarter leading up to trial in the fourth-quarter.
- Private Investor
Any idea how -- getting back from the 300 range, or what would you roughly estimate? Hello?
- iCAD, Inc.
Yes. I'm trying to put into perspective. During the second-quarter, legal expenses were in excess of $600,000. I would believe that in the third-quarter, they will be below the first and the cost of trial will depend a bit on how long trial goes on.
- Private Investor
But this could draw out, I'm guessing. I know of some other experiences that one side or the other appeals and it goes on for years after. Is that a potential situation with us?
- iCAD, Inc.
I guess I'd rather not speculate and instead direct all of our -- our intentions towards achieving a positive result in the litigation.
- Private Investor
OK.
- iCAD, Inc.
I will say that the most expensive parts of litigation tend to be discovery and that is behind us.
- Private Investor
OK. Good. And then something -- can I ask you
because I'm sure other people I'm sure want to know, you talked briefly, you mentioned resellers and two channels. I'm assuming one is the new IQ and the other is the other major stuff. And can you expatiate again on the -- the new people you're bringing abroad -- aboard that are the fourth and the fifth guy and so on and that are going to be selling? I couldn't understand where they're going to direct their energies. How many are for the basic product we've been selling here before to Instrumentarium and how many would be going through the new IQ product? And ...
- iCAD, Inc.
First question. And I'm going to begin with our current channel which is the sale of MammoReader systems to what we would call, higher-end clinics through the Instrumentarium's sales channel. Our instrument Instrumentarium sales channel has been of enormous benefit to iCAD and continues to be. It is, at this point, handicapped by the fact that there can be no assurance that acquisition by GE will take place, and that if acquisition by GE takes place, there can be no assurance about the impact of that, positive or negative on the selling relationship with iCAD. And that -- that lack of information and that lack of certainty is as much of a frustration and a problem to our colleagues at Instrumentarium imaging as it is to us.
So our objective in managing the relationship through this period of uncertainty has been to invest in making that relationship productive to avoid steps that would undermine the continuity of that relationship in the event that an acquisition by GE does not take place, or in the event that an acquisition proves supportive of the continuing relationship, but to be positioned, it's adverse events that none of us can control, occur without much warning and leave us without much warning and leave us without a secure distributor in this sector. With that in mind, our sales team has been brought on first to support and not to
Instrumentarium. Secondly, to build a dealer channel for the low-end product and to begin generating sales through that second low-end product channel. And thirdly, to be positioned as a safety net if the result of a GE merger proves to be adverse to the distribution relationship between Instrumentarium and iCAD. As you would expect, it's a little bit anxiety provoking, but we're benefited by the fact that Instrumentarium is working with us on a very constructive basis to manage that relationship and not to be hurt if that relationship proves not to be a long term one.
- Private Investor
I sort of understand you. Can I just have one -- asking one clarifying question because I'm slow at picking this up? On the -- can you give us some numbers -- you mentioned fourth and fifth sales person. How many personnel, I'll ask, are involved through the fifth guy and through September, we'll say, are involved in the low end versus the original stuff where they are supplementing Instrumentarium.
- iCAD, Inc.
: Okay, we have a VP of sales. As of September, we will have five professional sales support personnel in the field, two men and three women. We will have one international sales
- Private Investor
In this country though, how many of the five are where? Which end, the low end or the support supplementing Instramantarium?
- iCAD, Inc.
Currently they split their activities.
- Private Investor
Okay, so, I mean, the same person would call and vote trying to get line up, I guess distribution through the low end distributors? Is that what you know?
- iCAD, Inc.
That's correct. They're working regionally at this point, rather than on the basis of a product channel.
- Private Investor
Okay, they have to sign up in turn some sort of distributor type places. How many distributors do you plan to have in the low end going at this IQ stuff?
- iCAD, Inc.
I would use the term reseller, Scott.
- Private Investor
Sellers, okay.
- iCAD, Inc.
So an area where we sometimes confuse ourselves because these are resellers who will sell directly to an end user.
- Private Investor
All right.
- iCAD, Inc.
Target we have will depend a bit on the scope of the individual resellers that we recruit. Our target is in the order of 50 to 70, but it could be substantially fewer than that if some of those resellers have multiple outlets and can provide exceptional coverage in particular areas.
- Private Investor
Okay, that's good. I'll come back later after other people and ask you a little more there. Thank you very much Scott.
- iCAD, Inc.
You're very welcome. Thanks for the questions.
Operator
Our next question comes from Larry
of First Southeastern Securities, please state your question sir.
- Analyst
Scott, you're really moving the company forward, congratulations.
- iCAD, Inc.
Hi Larry and thank you.
- Analyst
How do you feel about the total number of systems that we have sold versus that of the competition R2 and whoever else is out there, question one. And number two, how aggressively are we actually trying to resolve the suit with R2? In terms of settling with them, or are they with us?
- iCAD, Inc.
Okay, let me take the first question. We think with about 70 units in the field today, we feel that we have a significant portion of the overall installed market. Based on sales in the second quarter I think it's clear we took far greater than a ten percent share of new sales into that sector. That's our belief. Given that we began four years later than the primary competitor in this area, and that our brand has been somewhat obscured because we've been exclusively represented by a very active distributor, I think that our success in this period has been gratifying.
- Analyst
Good.
- iCAD, Inc.
I believe that, to continue, I believe that it can be enhanced by increasing the identity of iCAD in the potential purchaser's mind and by bringing our brand as new set of products into a substantially different portion of the market. Now your second question was, could you rephrase it?
- Analyst
And financially, how aggressively are we trying to settle out of court with these folks either from their claims against us or our claims against them to settle before we have to sit down and arbitrate and go through all this.
- iCAD, Inc.
We've been told by people experienced in this that a good settlement is always better than a good decision in court.
- Analyst
Right.
- iCAD, Inc.
As business people, I feel certain that our R2 has similar constructive views about how parties engage in and dispose of business differences and disputes.
- Analyst
Good.
- iCAD, Inc.
The court, in this case, as is true in every case of this kind, encourages settlement. I can't comment or even
- Analyst
You've said enough.
- iCAD, Inc.
The impression that there is or there is not settlement discussion in place, except to say that reasonable people, would reasonably pursuing that as an option.
- Analyst
Got it, thank you Scott. Nice job.
Operator
As a reminder, ladies and gentlemen, should you have any further questions please press the star one on your pushbutton telephones at this time. Our next question comes from John
of Northwest Securities. Please state your question.
- analyst
Good morning, Scott.
- iCAD, Inc.
Good morning, John.
- analyst
Can you please illuminate our recent registration of 500,000 shares of stock for me?
- iCAD, Inc.
Sure. As is clear from our financial reporting, litigation at the level we're involved in is very expensive. We have been fortunate to work with a law firm that shares our commitment to the objectives that drive iCAD and our level of confidence in the merits of our case. As a result, and to assist us in our own cash managements and planning, they have accepted, as compensation, 500,000 shares of iCAD common stock, which paid all outstanding legal bills and made a substantial pre payment against the cost we anticipate incurred over the following, over the subsequent quarters.
- analyst
Is that stock available for sale at this time then? Are they lockups to that position or?
- iCAD, Inc.
The stock was issued subject to an S3 registration and assuming the approval of that registration then the law firm would have the opportunity and the right to dispose of that if they saw fit. They obviously also have the right to hold it if they saw fit.
- analyst
Thank you.
- iCAD, Inc.
You're very welcome.
Operator
Thank you ladies and gentlemen, if there are any final questions, please press star one on your pushbutton telephone. Our next question comes from
of Sands Brothers, please state your question.
- Analyst
Good morning, Scott.
- iCAD, Inc.
Good morning, Brooke.
- Analyst
I was wondering if you could comment regarding pending FDA approval for the IQ system. Are there, is there any way you can comment on a time frame?
- iCAD, Inc.
It's difficult because the FDA has the right to take as much or as little time as they may see fit to review an application for approval of a device. In this case our approval by the FDA is what's called a supplement, rather than a full application, because the true difference between the MammoReader system, which has long enjoyed FDA approval and the IQ system - from the FDA's perspective is that we're changing the digitizer to use iCAD's new Fulcrum digitizer. Ordinarily, that kind of approval requires only the demonstration that similar or superior results are achieved on substituting the new digitizer for the old digitizer and we have, we believe, provided evidence of that to the FDA. They've had that now for more than a month and ordinarily, we would expect that the period remaining to us would not be a great one.
- Analyst
Thank you.
Operator
If there are no further questions at this time, I will now turn the conference back to Mr. Parr.
- iCAD, Inc.
I'd like to thank you all for your time and attention and appreciate your interest in iCAD. Good day.
Operator
Thank you, sir. Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 302639. This concludes our conference call for today. Thank you all for participating and have a great day. All participants may now disconnect.