ICAD Inc (ICAD) 2003 Q3 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the third quarter earnings conference call for iCAD incorporated. At this time I would like to inform you that this conferences is being recorded and all participants are in a listen-only mode. At the request of the company we will open the conference up for questions and answers after the presentation. At the request of management the following statement will be read. Certain statements contained in this news release contain 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 and uncertainties and other factors that may cause actual results to differ materially from those reportered and other factors that may cause actual results to differ materially from such forward-looking statements. Such risks includes but are not unlimited 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 belief, demonstrate, intend, expect, estimate, anticipate, likely and similar expressions identify such 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 would now turn the conference over to Mr. Scott Parr, President and CEO.

Ladies and gentlemen, good morning. Thank you for joining us today. I have been looking forward eagerly to today's call. We entered the third quarter with two primary obstacles to fully exploiting our advantages as the only vertically integrated provider of computer-aided detection of breast cancer solutions into profitable operations. They are both now gone.

The first of these was our continued patent infringement litigation with R-2 Technology which was financially bleeding iCAD and consuming an outrageous amount of management's time and attention. This litigation is now settled and concluded on terms satisfactory to iCAD. Legal expenses of up to $1 million a quarter and the risks that our very business could be threatened by an inappropriate court judgement are now both behind us. Our second obstacle was product distribution. With our acquisition in June, 2002, of a private developer of cancer detection software, we assumed the benefits and the risks of an existing product distribution agreement with Instrumentarium Imaging, a leading provider of mammography solutions. The benefits were significant.

That distribution agreement was valued at the time of merger at almost $1.5 million became an asset on our balance sheet. The risks, however, proved equally significant. Our distribution agreement provided Instrumentarium the exclusive right to distribute our computer-aided detection products in the United States but imposed no enforceable minimum commitment or purchase requirement. Moreover, Instrumentarium had certain limitations as a distributor which we felt would become significant over time.

In particular, one of the key strengths of iCAD's MammoReader product line is its networking capability and versatility. Instrumentarium's lack of experience in network environments made it difficult for their sales forces to effectively exploit this product advantage. More fundamentally, Instrumentarium's primary customers are at the higher end of the mammography market and iCAD saw the greatest potential for new product growth in what might be termed the middle and lower markets. Lower case volume mammography centers with increasing price sensitivity.

In December, 2002, Instrumentarium's parent company announced it had agreed to be acquired by General Electric Corporation, a transaction that was recently completed. Our initial objective upon learning of Instrumentarium's pending acquisition was to support and exploit the Instrumentarium distribution relationship through the end of 2003 while building a new sales channel that could initially complement Instrumentarium, especially at the lower end of the market and could then replace Instrumentarium completely if necessary.

In the second quarter, we laid the necessary groundwork for new resellers and channels, eliminating our dependence on Instrumentarium for key functions like sales management, lead management and account direction, while putting in place our own resources to install systems, train customers and support iCAD's products in the field. Beginning in the third quarter, based on our own new support structures, we began to put our own distribution channel aggressively into place with immediate results and success.

In October, we entered into a product distribution agreement with National Imaging Resources, or NIR, a leading medical sales and equipment organization with 39 member-dealer organizations. Under the terms of the agreement NIRs members are authorized to offer iCAD's high productivity MammoReader and MammoReader 2 computer aided detection solutions to hospitals, women's health centers and mammography clinics along with iCAD's anticipated and lower priced iCAD IQ system, which is designed for breast care centers with smaller daily patient volumes. Established in 1995 with nearly 200 sales representatives and over 500 service engineers NIR is one of the largest capital medical sales and equipment organizations in North America. Significantly, NIR is experienced in networking and fully capable of representing iCADs product advantages in this area.

Internationally we have substantially increased iCAD's exposure, in part because our new lower cost CAD solutions are particularly attractive in international markets where no reimbursement programs may exist. By the end of the fourth quarter, we expect to have active product representation not just in Canada and in the United States, but in Mexico, Latin America, Europe, the Middle East, Asia, the Pacific Rim, South America and the Caribbean. This morning I was very pleased to sign and return a distribution agreement with Mary X-ray Corporation which will focus on the promotion and sale of our new iCAD IQ products.

Mary is one of the leading distributors of radiology equipment and products in the medical industry with 38 branch offices in the United States market. They are an ideal distribution partner for our new IQ system with years of direct contact with precisely the customer base our IQ solution is designed to serve. With sales revenues in the film and chemistry segment alone exceeding $300 million annually, Mary X-ray purchases more film and chemistry for resale to small medical facilities each year than almost any other North American distributor. Our plan was to rely on Instrumentarium for sales while building these new channels.

As is evidence from lackluster sales in the third quarter, that plan did not work. I was wrong in my judgment Instrumentarium could make a continuing, even a growing contribution in sales through the end of 2003 while facing and preparing for acquisition by General Electric. Notwithstanding enormous personal efforts by key members of the Instrumentarium sales and sales management teams, purchases by Instrumentarium fell and remained below our objectives and expectations.

While new resellers began to make a contribution to sales in the third quarter, it was not realistic to expect that early contribution to compensate for Instrumentarium's unexpectedly rapid decline. Our third quarter reflects the charges associated with settling the R-2 litigation, the costs associated with changing our distribution relationships and the timing gap between Instrumentarium sales declining and new resellers contributing. In the fourth quarter and in future periods, however, that changes.

Entering the third quarter we had one domestic computer-aided detection product reseller. Today we have reselling agreements and relationships with some 30 highly motivated and highly qualified reselling organizations representing 60 to 70 effective sales offices and branches in every part of the United States. We have been adding selected resellers to this team at the rate of two to three new reseller partners per week. We entered the third quarter with our products represented, promoted and sold by some 12 Instrumentarium salespeople, some of them unfortunately distracted by the pending transition to General Electric.

Today we are beginning to train some 150 new salespeople excited about the prospect of representing, promoting and selling iCAD products. By quarter end, we expect to have achieved more than a tenfold increase in salespersons and representation and sales will follow. Finally, we entered the third quarter with only our MammoReader CAD product, a product well-positioned and now increasingly well-represented in the higher end of the mmmography CAD market, in fact, the top-rated CAD product in that market.

With today's announcement of FDA approval for our new iCAD IQ computer-aided detection system we can boast at being the only CAD company offering a series of products meeting the needs not just of higher case volume comparatively affluent breast care centers, but to half to two-thirds of the market which has an increasing interest in and increasing need for CAD but can't afford previously available CAD solutions. And make no mistake here, this is a big deal. The U.S. market for CAD solutions has been described by outside analysts as the fastest growing business segment in breast imaging.

Aggregate computer aided detection shipments through 2011 are projected to exceed $2 billion. We believe this is a clearly segmented market with larger patient volume clinics making up about one-third of the market and representing substantially all of the CAD purchases to date. Based on an FDA sample, about two-thirds of all clinics, some 6,500 in total, see less than 20 patients per day.

These clinics are under increasing pressure to acquire computer-aided detection solutions for medical, business, legal and marketing reasons but they are hard pressed to afford the solutions currently available. In a sense, the CAD systems available today are like luxury cars; complex, sophisticated and expensive. And unaffordable for the majority of potential CAD users. We see our MammoReader product as increasingly successful in the luxury car segment of the market, especially as our new resellers better exploit the MammoReaders networking advantages. Think of it as our Lexus market position.

The greatest opportunity for us, however, and the one that best exploits our enormous competitive advantages as a vertically integrated lowest cost manufacturer is to meet the needs of thousands of lower case volume mammography centers and that is what we accomplish with the introduction of our new iCAD IQ system, a product you could say opens up to very large Toyota segment of the market, providing a simple, inexpensive and robust CAD solution at less than half the price of some existing CAD products. This is a solution for lower case volume for sensitive buyers. The same customers, I might add, now buying film and chemistry and other medical imaging products from Mary X-ray, our newest distributor.

To further expand the market, our IQ system will be available to mammography facilities that cannot afford the outright purchase of a CAD system at any price 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 of about $6.50 for every CAD procedure performed, an amount that represents less than half of the standard $19 Federal reimbursement rate for such CAD procedures. This program will allow many mammography clinics to improve the healthcare delivered to women at risk, to improve their marketing position in attracting and keeping patients concerned about breast cancer, reduce the legal risks associated with overlooking early stage cancers and increasing their net revenues, all without a capital investment.

And by the way while creating a residual revenue opportunity for iCAD. 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. Our idea in developing the iCAD IQ was to develop a category-defining CAD system for this unserved market, to rely on proprietary iCAD inventions and significant cost advantages to offer a simpler, more reliable and substantially less expensive CAD solution. I believe we have achieved this goal.

This is a position our competitors with higher costs of goods and higher operating costs would be very hard-pressed to challenge. Our opportunity today is enormous. We have eliminated the barriers to our success. We have new sales channels beginning the training, marketing and selling tasks that will make them increasingly productive over the next months. We have new products which define a large market segment..

iCAD as a vertically integrated manufacturer is uniquely able to address. In the words of one of our directors, only iCAD now offers a Lexus, a Toyota and a prepaid card that let's you ride the bus. We are now executing the business, product and sales plan we have been pursuing since becoming a medical imaging company in June of last year. We are executing that plan passionately, aggressively and effectively and it will generate impressive results. I would like to thank you for your time and ask if you have any questions. Chris? Would you help us, please?

Thank you. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. If you do have a question, press the star, 1 on your telephone. If you wish to withdraw your questions, please press star, 2. Your questions will be taken in the order that they are received. Please stand by for your first question. Your first question comes from Chris Terry from First Securities.

You know your sales are going to increase here, could you go over your capital structure to support the increase in sales and so forth? And also what was your typically what were you guys burning in cash the previous quarters and what do you expect going forward?

Our capital structure is benefitted by the purchasing and selling model that we use. Our cost of goods, first of all, is very low as reflects the benefits of being an integrated manufacturer. We procure our hardware through contract manufacturing which in most cases does not require payment until after we have received payment from our customers. So that unlike many companies where the position of increasing growth carries with it an inevitable cash flow deficit and need for capital, our model actually has the potential to sustain growth internally based on the appropriate timing of purchasing and of receipts.

We expect that the ClickCAD program will contribute to this model because the initial effectively the initial prepaid phone card will cover out of pocket costs associated with our procuring the hardware and putting it in place, allowing the continued purchase of procedures to be effectively a positive cash flow without the initial negative cash flow you might otherwise anticipate. In terms of burn rate, our burn rate in the third quarter exceeded receipts as a result of the deficit and timing and sales.

We have, as you may know, the benefit of a line of credit from our founder which is extendible and increasable and that has been sufficient for all of our near-term needs and would under any of the scenarios we can contemplate remain sufficient to support growth during this period.

Is that line of credit, is that about $3 million?

It's a $4 million line of credit. There is a portion of that that is not obligated and there is the opportunity to extend that. Another question, please?

Our next question comes from William Kimbrough, a private investor.

I have two questions. First one is an obvious question. When do you think you are going to show a profit?

It is an obvious question and it's one that I think we need to address. We are confident that the results we report for 2004 will show significant profitability. The point in which we make the transition to profitability we anticipate will be early in that year. It will depend in large part on the speed with which new distribution partners ramp up and on the ability to compress the sales cycle as they introduce new lower cost products into a market which has a clear desire for CAD solutions and should be able to make much faster decisions about acquiring iCAD products because the capital obligations are lower than current CAD products or in some cases nonexistent where they elect the ClickCAD program.

What about the next couple of quarters?

I think it's unlikely we will be profitable in the fourth quarter, although not impossible, simply as a matter of ramping up all of the new distribution channels that have become a part of the iCAD team. The first quarter at this point, simply not possible to call.

Now the other thing is on this IQ system you've been describing, what do you see as the potential size of that market?

It's an interesting question because the number of facilities that offer screening mammography in the United States is about 9,300 according to the FDA. But the number of places where people do reading and analysis of films is substantially larger than that. We see the lower end market as including somewhere between five and 7,500 immediate sites in the United States, 5,000 and 7,500, and potentially larger than that as the procedures associated with screening mammography and with computer-aided detection of breast become distributed on a hub and spoke basis from central screening facilities.

So we see that as being a very large market in real terms and one which has a parallel internationally and overseas, it is accessible to us, uniquely accessible to us as the company that's offering lower cost products into very price sensitive markets and we see all of those things contributing to a presence within the middle market that our company will be able to leverage with increasing products and services that relate to and build on the initial early detection of breast cancer package and promise.

Thank you.

You're welcome. Good question.

Thank you. Our next question comes from Bill Railly from Pentegon Capital.

Good morning. I was wondering, could you talk about what you expect to be the competitive response to the IQ, what the competitors have been doing, I guess, first of all, and then what the competitive response is likely to be? To the lower cost.

The competitors, and this is a fairly close community as you would expect with only three companies currently authorized by the FDA to offer computer-aided detection, one initial reaction by the competitors has been to explore whether we would make available the iCAD IQ system to them on an OEM basis, and there are basis for that being a reasonable business model. It's premature to speculate about whether that would emerge or not. The other I think inevitable response by competitors would be to seek to distinguish themselves with increasing and different capabilities at the high end and to attempt to identify a lower cost solution with which they might enter the lower part of our market, the new Toyota market. It is difficult, we believe, for our competitors to achieve the cost structures necessary to compete effectively in that segment because they lack vertically integration and they are buying from digitizers and other components from third party manufacturers including in some cases our own Howtek subsidiary.

One more question, you've got this grant on the 3 D imaging, the Federal appropriation. What are the benefits, potential benefits of 3 D imaging and what, on the other side, what would it be in terms of an increase in cost or time or skills required?

Boy, this is an exciting area, and we met with Walter Reid and with [inaudible] this week and started to scope out how this research develops. 3 D imaging has some very important potential implications for mammography in general and for other areas of computer-aided detection that go beyond breast imaging. In breast imaging we think that 3 D imaging can come to be a tool that helps reduce the number of unnecessary biopsies, that helps, taking a step back, I would envision that screening mammography continues to be based on two-dimensional imaging because it's so cost-effective and as a first screen to try to identify whether there are problems or potential cancers that may need more exploration seems very unlikely to be displaced by any technology.

Going through that first screen there are far too many women for whom an area is identified as a potential problem culminating in a biopsy, a surgical procedure which in 80% of the cases proves to be benign. We think that the appropriate application of information generated from secondary three-dimensional detection in diagnostic technologies can by fusing and bringing together additional information about the patient and about the characteristics of the breast image, reduce and avoid that and help the physician be more accurate in identifying more cancers and in exposing fewer women to unnecessary emotional anxiety and pain in conducting a procedure which proves to be unnecessary. Within the breast imaging area, we are exciting about the way that the fusion of 3 D technologies improves the overall long-term benefit of CAD for patients at risks.

Does it require reshooting orrery scanning.

It would require shooting on a different type of device. By nature, neither digital a mammography or film-based mammography is 3 dimensional, although there are some tools that allow small areas of the breast to be imaged with a third dimension or appropriately there are 3 D X-ray systems or ultrasound systems and MRI systems that do provide for three-dimensional imaging and could be used as a secondary tool by a physician who wanted to explore more fully the features of a potential cancer before an invasive procedure or surgical biopsy.

So you say it is a whole new area with new equipment, new skill and everything else.

Absolutely. The other benefit for this is it does provide us support and assistance in beginning the evolution of our own CAD technology from single dimension, from flat to three-dimensional and that's an appropriate step as we look at the extension of what iCAD is doing from simple breast procedures into potentially areas that would include colon or chest or ovary or other areas which can provide a benefit to a physician.

Potentially big expansion.

Potentially big expansion and some very beneficial links through the scope of the engagement with Walter Reid we are also now involved with a variety of other sources of technology through the military appropriations process which provides some really great synergies.

Thank you.

Next question comes from Larry Talbin from Sector Dettwhiler.

I'm delighted to see the combination of announcements today.

Thank you.

Several items here. What sort of, the question of the fourth and first quarter results, what's involved here in getting the new dealer, new distributors up and running and getting the IQ product introduced? I presume you've got some meaningful costs there in training and marketing materials, et cetera?

We do and we have done much of that already. It's something, moreover, that we know how to do because we've done it successfully before. From our perspective, the keys to engaging and empowering this sales force are training, standardization of sales procedures, being able to provide, for example, Powerpoint presentations and tools that help guide the sales process as the reseller engages with new prospects and new customers, and continuing support through our own field sales support group.

What we tell the salespeople turns out to be very simple when they ask how do we sell this product, we told them, ask your customer if they use a spell checker. Smart people, people who are well-versed in their profession, experienced, we all use spell checkers and for a physician the use of computer-aided detection is no more or no less a benefit in helping us avoid oversights that the spell checker can help find. A very simple way of suggesting here's a product that's going to help you to reduce the number of mistakes that you make, it's going to help you provide better healthcare, it's going to reduce the risk of being sued for oversight, for missing a cancer.

It's going to be reimbursible so we can bring out a pencil and a calculator and in most cases show the clinic how they can afford to buy the system with new revenues associated with reimbursements for the procedure and at the end of it we can tell them with complete sincerity, women are going to stop coming to your clinic if you can't tell them that you are using the most effective tools to avoid mistakes, errors and oversights.

That turns out to be a fairly simple sell which makes it easier to turn on and to train the new salespeople that we are bringing together into an iCAD team. There is an underlying structure, a structure that provides for management of leads, for management of sales information, for support of a reseller in the field and the customer on the site that used to be done by Instrumentarium and that we had to put in place in the third quarter. That's by and large done.

So that's all in place?

That's all in place.

Good. Initial costs from that are absorbed in the third quarter, then?

That's correct.

Very good. There is also announcement of approval of a fulcrum digitizer. Can you tell us about that, what the significance of that is?

Sure, fulcrum is our new lower priced medical digitizer. It's at the height of the IQ system. We designed the fulcrum, invested millions of dollars and two years in creating a product that we felt would be ideally suited a product, to the conversion of mammographic films into digital form for computer aided detection and reporting results.

The F.D.A. approval that we received covered the use of the fulcrum digitizer with our current MammoReader product, a product that is now configured with multiwebbed digitizers and carried with it the ability to offer the IQ system which is a version of the MammoReader software installed on an internal computer inside the fulcrum digitizer. So that the fulcrum approval gives us more leverage in expanding the network capabilities and improving the pricing on our MammoReader line, the application of fulcrum to an integrated CAD solution give us IQ; leverage in development of product planning.

You mentioned before MammoReader and MammoReader 2. What is the distinction there?

The difference is that the MammoReader product is sold with one digitizer, the MammoReader 2 is sold with two, it's kind of like the distinction between a single and a double engine plane.

So they can have images on deck instead of delaying.

Exactly. There are actually two benefits, one its faster when you have a lot of films which makes this applicable to the largest volume breast centers. The other is like a twin-engine plane, if one engine goes down you still get home. In a work flow that has become vitally dependent on computer-aided detection, lots of people don't want to be at risk of a single digitizer jam or failure shutting down their work flow until that can be repaired.

During your presentation I had a distraction here but I caught a number of referring to a $2 billion market over some period, I believe in the under 20 patient a day category. Can you repeat that.

I noted that outside analysts have projected that this is over a $2 billion market, that the capital goods side of CAD overall for two, through 2011. Our view is that given our ability to potentially increase demands by reducing price, we think it's a very elastic market and the measures that people use to assess it when they were looking at response to $100 or $200,000 CAD solution, they understood the opportunity for a more reasonably priced solution and doesn't even begin to address the model for a prepad phone card or bus pass solution by our ClickCAD program.

Last before I turn it over, what other, which of the former Howtek legacy operations are still continuing? Obviously the medical side.

Only the medical digitizer.

I wasn't clear from the Web site whether thing are still in operation. Thank you very much. I'm looking forward greatly to following progress here.

Thank you for your questions.

Next question, George Whiteside from SWS Finance. Mr. White side, your line is live. Moving on our next question comes from Brooke Moore from Sands Brothers.

Good morning, Scott.

Good morning, Brook.

Congratulations.

Well, thank you.

This is very, very exciting today to see all the great announcements. Quite frankly I think my first question may have already been answered. The first gentlemen asking about the capital structure which I thought was an excellent question as well as the burn rate itself when you talked about the line of credit. My question was, did you see any need to raise money to launch the IQ system? And I think you had answered that with a no, that the line of credit was enough. Is that correct?

That's correct.

Okay. One other thing just so that, I hadn't planned on asking this but regarding the Walter Reid hospital which I thought was an extraordinarily exciting situation for us, am I correct in assuming that this gives us a professional study that we can site as well as having an opportunity at the high-end of not only military hospitals but the high-end of medical facility in the world, is that correct?

I think it is, Brooke. I think the credibility that we gain by that cooperation and affiliation, not to be taken advantage of but it clearly makes a statement about the maturity of iCAD's product line and the respect others have for iCAD's technology today and as it evolves into the future.

Okay. Terrific. Congratulations again. I'll go on and listen to more questions. Thank you.

Thank you.

Our next question comes from George Whiteside of SWS Finance. Is your line live, sir? Please state your question.

Yes. Hello?

Go ahead, George. We were afraid we lost you.

I'm sorry. My question had to do with the financials. I noticed that Dow Jones had a headline that indicated that your loss for the third quarter had widened sharply and when I looked at the numbers and stripped out your two extraordinary items, the $1,000,004 of writing off the value of the Instrumentarium contract and then the $2,000,007 for your legal expenses, that you compared rather favorably, you reduced your loss compared to last year.

I think that's a fair statement. It's unfortunate that given the way that the numbers are aggregated, it's always hard to be able to explain what's the operating loss? Where did we lose money because Instrumentarium sales fell more quickly than new and distributor sales grew and because we were investing in the kind of support structure that the gentlemen preceding you had mentioned and what were we dealing with putting aside historic issues and problems? When we table it that way I am completely dissatisfied with a loss of any kinds but it's a comparatively modest loss relative to the overall loss that we are reporting for the quarter.

That was certainly my interpretation and you just confirmed it. Regarding Instrumentarium, I presume that they must have recognized their inability to meet your needs with the new product. And for that reason they relatively gracefully backed out of the situation.

Instrumentarium has conducted itself gracefully and responsibly through what could have been a very difficult process. And we continue to have extraordinarily good relationships with that team and they continue to make sales for us. So that isn't a relationship that anyone wants to unfairly categorize as disfunctional for a variety of reasons not within the control of most of the folks at Instrumentarium, it has not been and will not be the relationship we might have wished but they are good people, it's a good incremental channel for us to have and it's a good relationship for us to maintain with General Electric.

That's certainly encouraging. Thank you.

Thank you.

Our next question comes from Larry Ceisler from First Southeastern Securities.

Scott, congratulations. Just a real quick question that we haven't really covered. In view of the fact that we have so many new folks selling our product, who on earth is going to be servicing the product for us? Will it be the NIR folks or will it be some people that you will specify that will be in charge of that?

We really have several lines of service. Beginning, of course with our own ability to handle the help desk and the first line of customer support as we have historically for some 30,000 high-end customers in printing and publishing and photographic markets. Our relationship with Instrumentarium was a unique one for Howtek and now iCAD because in the past we've done that and we know how to do it well. So the first step has been to simply return to that model as a first level of contact with customers. When the necessity exists for field service and field support we have two options.

NIR as you correctly observed, is a group which is distinguished by its ability to provide on-site service. And a group which looks at service as a very important revenue and profit opportunity. So it's pleased to offer it. Mary X-ray, our newest distributor is similarly equipped, lots of ability to deal with on-site service, although in the case of Mary, the IQ product is designed to be more like a product that you would buy at a discount store where if there's a problem you drop it in the box and ship it back to iCAD and we ship one to you overnight so you're back in business.

So no more than maybe a 24-hour downtime?

And in some cases what would we would call a hot swap where we would precede the return of the product by sending an article out overnight. We also have underlying that a nationwide third party service organization called access services which is able to provide service in any areas in which the resellers are either not located or not able to perform.

At least we are hitting that one pretty hard. That's all I have.

It's so critical and it's one of the reasons that it took us longer than I would have liked to move from dependency on Instrumentarium to independence at an automonous dealer channel. If we had done that before we were ready to support the customers, it would have been an unmitigated disaster. We invested in that and now we are able to support the customers even better than they were supported in the past and that will prove to be a benefit in increasing sales rather than a potential liability.

Do you think from some point from a pure reputation standpoint we can challenge the G.E. type of image that they currently have with their customers?

Strategically challenging G.E. tends to turn you into a puddle on the road. I think more reasonably our business model is one that complements G.E. and offers benefits in areas in which G.E. in part because the of overhead and cost structure is not traditionally effective. I certainly wouldn't want to offer a product line or a position in which we had to defeat G.E. to be successful. In fact, by virtue of this relationship, we see some synergy between G.E.'s digital mammography succeeding and iCAD products being in demand because that's a good thing because our incentives and our successes are aligned.

Thank you very much.

Thank you. Our next question comes from Scott Warner, a private investor.

Well done this quarter, well done. It seems, you whizzed through it, I was wondering how did you set up the distribution for IQ so quickly?

Well, thank you for noticing that. It's actually something we are pretty proud of. The first reason that we were able to set up distribution for IQ, and really I think for the MammoReader line as well so quickly is that we know how to do it. We've assembled a team here that includes some very experienced sales and sales management professionals, they've succeeded in doing this before and what they've achieved in a remarkably short period of time is something I give them tremendous credit for. I think the second factor is that IQ is a hot product and the MammoReader coming off of top ratings from M.D. Byline is a hot product.

As we approach potential resellers, each one of them seemed able to identify immediate customer opportunities where they really wanted to be able to get that product and put it in the face of people they thought could become immediate buyers. Thirdly, I think we did our homework correctly. We have invested in a very sophisticated reseller and sales management system, an Internet-based system that allows us to track what resellers are doing by account real time, to identify action items, to identify follow-up items and to provide value-add to the resellers as they encounter and work with actual prospects. That's a system that we call communicate and collaborate, and it is one of the tools that helps us bring resellers up to speed more quickly and manage them more effectively.

Great. Listen, picking up on something you said about having the system to monitor on real time what's going on, I have sort of a double question on cost of the ClickCAD card that these guys have to buy ClickCAD and in a matter of weeks, very short, how many people have actually signed on to take this machine for free and then buying your card at the same time at whatever price that is?

Scott, we are not allowed to promote it to real customers until we receive FDA approval. As a result, we get orders in-house but they are orders that are either international orders where we are able to price or order from people who are so convinced we are doing the right thing they wanted to get to the head of the queue. We have a great opportunity at the end of November at what's called the RS&A show, or the radiological society of North America show, it's the single great gathering for medical imaging professionals worldwide, and historically we've been there in Instrumentarium's shadow.

This year we will have a very real presence, the brands will have a presence, the IQ will be aggressively promoted and the ClickCAD model will be aggressively promoted. That will be a starting point in many ways for the ClickCAD program. And as you can imagine with a couple of weeks before we head to Chicago the weekened after Thanksgiving everyone here is excited and maxed out in putting together a program for that show and setting the groundwork for it to be a very successful one.

Thank you Scott and well done, again, I say.

Thank you.

Next question, Lenny Bergen from Bergen Capital.

I came on late on the call but I wanted to ask you in terms of the addressable market, can you just size up, I know you were talking about the smaller centers that do breast screening and I was wondering if you can quantify the opportunity both domestically and maybe worldwide in terms of the number of sites you think this new hproduct can actually address.

Sure. Let's begin domestically because the international numbers are a little less precise. Domestically there are some 9,300 sites qualified to offer screening mammography. Taken together with the private practices or reading groups or satellites that they may use to pull in patients, our view is that the total market for computer-aided detection solutions is probably between 11,000 and 13 or 14,000 units in the U.S. There are today probably 1,100 units have been sold. So call that a market that is 90% unpenetrated.

FDA data suggests that just about one-third of those sites see more than 20 cases per day, and our experience is those are the folks who are buying CAD but the ones who are buying CAD are actually seeing 100 or 150 or 200 cases per day which tells us that that top third is its pretty spread out in terms of a bell curve. At the top of that bell curve it turns out to be pretty easy to afford a computer-aided detection solution. A site like Boca Raton Community Hospital which may see 200 patients per day is recognizing three quarters of $1 million in new revenue associated with CAD reimbursements, they can afford to buy CAD system without a lot of difficulty.

Going back to the FDA data, they say that about one-third of the sites see between ten and 20 cases per day. If you take somebody in the middle of that, let's say 12 cases per day, their new revenue is going to be about $56,000, that's a lot harder to use to justify $100 or $150,000 buy. But it's not a bad thing to be able to justify a $70 or $60 or $55,000 buy. That's the real market for the IQ and if you just kind of do the rough math and assume it's one-third of the ten to $12,000 total, it gives you a sense of the scale of that market.

What about internationally?

If I could continue. The last third of the market which does less than ten cases per day is also considered to be just under one-third and that's a part of the market we think would be more likely to be the prepaid ClickCAD part of the market and it is -- taken together the number of sites is somewhere very rough numbers between 4,500 and 6,500, or 7,500 sites. And when you look internationally, my numbers unfortunately get muddier, in part because we have been focused almost exclusively on the U.S. market. With our MammoReader product, we are now beginning to explore the international market with the lower priced IQ product and the response we are getting is very positive but hard to quantify at this time.

A layman's question is why would it necessarily be just appealing to the lower end market? Just because of the price or because of the limitations on how fast it can process?

As we market this we make an intentional division between networkable and not networkable products and we do so consciously because we want to be able to protect different and complementary market positions. So at least in its initial introduction the IQ is a stand-alone automatic system without the capability to integrate to a hospitals network. If somebody wants that we want to push them up to the Multiread system and the Multiread 2 system and that's a pretty good pricing model for us.

Thanks.

Our next question comes from Larry Talbin from Sector Dettwhiler.

What kind of continuing revenues do you get on a sale placement?

There is a continuing service component for each of the high end products and the MammoReader and the IQ products that are sold to customers and those typically can range from six to ten or 11% of the initial selling price on an annual basis with a portion of that shared with the servicing and supporting reseller. Over time that can become a very nice source of incremental margin and of profit. We are starting to see that now as we see accounts which have been in the field past their initial one year warranty and are coming to be covered by continuing or extended maintenance programs. The ClickCAD program, of course, is designed entirely to be a residual based business model and there the opportunity is gauged by how many cases per week the site might be buying clicks for.

We get the normal technological obsolescence factor here where after five or ten years people want the latest, fastest, current model.

In some senses, yes, but in some senses we would like to be able to keep customers current with their initial investment but be able to offer new value and new capabilities that we might be able to incrementally charge for. That's a matter that I think binds us to our customer rather than requiring the customer every three years to be angry that their system didn't last longer.

Okay.

I would add, by the way, as we look at this new model, the new market that is not well served today, there's a tremendous opportunity to create almost a franchise in the customer relationship if we handle it correctly, provide value, provide responsible, respectful service and continuity in adding to the solutions they come to need as their practices become increasingly digital. This is an opportunity with lots of legs.

Thank you.

Thank you, Mr. Parr I am showing no further questions in queue.

I appreciate the time and the attention and the good questions and look forward to speaking with you again at the end of our fourth quarter.

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