ICAD Inc (ICAD) 2003 Q4 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the fourth quarter and year end conference call for iCAD, Incorporated. At this time I would 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 the conference up 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 and 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 of iCAD, Incorporated. Please go ahead, sir.

Thank you and ladies and gentlemen, good morning and thank you for joining us. On the Friday after Thanksgiving iCAD entered into an agreement to merge with and to acquire CADx Systems and it's parent company, Qualia Computing. This transaction was completed on December 31, 2003. Our objective in the acquisition of CADx was to achieve profitability and to support accelerated development of future business and product opportunities in the medical imaging field. In the 76 days since our merger was completed we have executed a careful, step by step plan to achieve and to increase profits by consolidating sales channels, by defining an industry leading continuum of computer aided detection products and by reducing operating expenses.

Today we've reported on iCAD's standalone financial results for 2003 and for the fourth quarter of 2003. Because of the enormous positive impact of our December 31 merger with CADx we do not expect these results to be representative of future performance. In my comments today I will attempt to focus more on the combined performance and achievements of iCAD and CADx in 2003 and subsequent to our merger. My objective is to provide information that will help in considering iCAD's future sales, future gross margins, future operating expenses and future profitability. Annette Heroux, our Chief Financial Officer, is here in Nashua to help me with financial questions and potentially to catch my cold.

From our Ohio office, Dr. Stephen Rogers, our Chief Scientist will join me later in this conference call for our question and answer period. Steve is prepared to provide additional information on iCAD's Research & Development program and our future product opportunities. In seeking to provide more information and guidance than in previous conference calls, I must emphasize the following: The financial guidance we expect to provide here today is based upon a number of assumptions that we believe are reasonable. Inevitably our assumptions will prove incomplete and in some measure incorrect and unanticipated events and circumstances will occur.

Our actual results of operation will vary from those projected and those variations could be material and could be adverse. We are not assuming the obligation to correct or to update the information presented here and stress that this guidance is not a representation that we can achieve any particular results. To the best of our ability we are trying to provide information that can be useful to you when it is considered appropriately. We will begin with sales. Our merger with CADx effectively tripled our sales and tripled our market share while improving our profit margins.

Together our companies accounted for almost $18 million in 2003 sales including over $6 million in the fourth quarter. iCAD sales in the current first quarter will be less than 6 million, reflecting both seasonal factors and the impact of reorganizing sales channels and creating one continuum of Second Look-branded products during this period. Before completion of our merger, in anticipation of changes in channels and product positioning, we largely suspended the development and training of an independent iCAD reseller network. We also deferred the launch of our lower priced iCAD iQ product, now called the Second Look 200, and our fee per service ClickCAD marketing initiatives.

As a result both fourth quarter and first quarter 2004 sales are disproportionately sales of former CADx products through former CADx channels. As we add contributions from iCAD products, including our IQ model, and as additional resellers are trained and active, we anticipate sales will grow significantly from the first quarter. In simple terms, we expect increased promotion and sales of our Second Look 200 system which offers a computer aided detection solution to lower case volume clinics. We expect expansion of the products promoted by CADx's former distributor, Source One Healthcare, to include the full line of iCAD products including the new Second Look 200.

We anticipate increased full line sales contributions by independent resellers, identified by iCAD prior to the merger, in particular Merry X-ray, and we expect to see the benefit of introduction and promotion of iCAD's new ClickCAD fee per service marketing program. In the second quarter we have established what we believe to be conservative internal sales projections with only modest contributions from lower case volume products like the Second Look 200. On this basis we see second quarter sales growing from first quarter levels and approaching combined sales for the fourth quarter of 2003.

This provides us, we believe, with an opportunity to exceed the expectations we are setting for second quarter performance. In the third quarter and fourth quarter of 2004, we anticipate exceeding the $6 million quarterly sales level achieved on a combined basis in the last quarter of 2003. The second factor in any model of profitability is gross margin. Our combined gross profit for the year 2003 was approximately $11 million, about 67% of combined sales. Excluding inventory reserves and merger expenses on CADx part, our combined gross profit increased during the fourth quarter to approximately $4 million, or 69 to 70% of combined sales.

Although there can be no assurance of our future gross margin rate, we expect that further increases in gross margin may be achieved as production and other economies of scale, resulting from the merger, are realized. By applying our manufacturing experience and using existing supplier relationships, for example, we believe we can reduce component and manufacturing costs now associated with the CADx product line by 30 to 50% during 2004. That will carry with it some associated cost savings in the manufacture of existing iCAD products. We believe the inherent advantage of iCAD's unique vertical integration offers us, among other things, the ability to protect and increase margins while competing aggressively on price.

The final challenge in achieving an increasing profit is control of operating expenses. We took eight weeks at the beginning of 2004, to analyze and consider this carefully. As we completed the integration of iCAD and CADx we identified opportunities to achieve post merger operating economies and we considered cost reduction strategies in light of our distribution and product plans. We determined that operating expenses could be substantially reduced without detracting from our ability to increase sales, to focus on future products and markets, and to support our customers. On that basis we took action. On the basis of that analysis we have undertaken the following profit enhancing actions: Closure of our office in Tampa, Florida, effective March 31, 2004.

Closure of our office in San Rafael, California, effective March 31, 2004. Reductions in staffing at all facilities. Elimination of duplication in marketing, administrative and other activities. In total these actions are expected to reduce projected operating expenses by approximately $1 million per quarter beginning in the second quarter. On an annualized basis this is a cost reduction of about $4 million a year. In connection with these cost reduction actions we will report certain non-recurring severance and office closure expenses in the quarter ending March 31, 2004.

Using our current assumptions regarding expected revenues, product and channel mix, we anticipate incurring reduced operating expenses of between 3.9 and 4.2 million for the quarter ending June 30, 2004. Of total projected operating expenses for this period, approximately 36% are expected to represent research, development and engineering expenses, approximately 31% are expected to represent sales and marketing expenses, including sales commissions, and approximately 33% are expected to represent administrative and finance expenses.

iCAD expects to report a net loss in the first quarter of this year before new contributions to sales become effective and before implemented reductions in operating expenses are realized. As the year 2004 progresses we expect sales levels to increase significantly and we expect operating expenses to be substantially reduced from first quarter 2004 levels. We expect to be near breakeven at sales levels projected for the second quarter of 2004, with some opportunity to exceed those expectations. We expect to be profitable at sales levels projected for the third and fourth quarters of 2004 and we expect to be profitable for the nine month period ending December 31, 2004.

Before moving on to questions, I would like to review some of the our recent achievements. As a newly forged team, we at iCAD are very proud of what we have accomplished over the last month including the following. Successful resolution of our patent litigation with a major competitor. Commencement in the fourth quarter of 2003 of distribution of our film based Second Look CAD product through Source One Healthcare, a leading distributor of medical imaging supplies and systems.

Commencement in the fourth quarter of 2003 of a relationship with General Electric Medical Systems and Fischer Imaging Corporation, both of which began OEM distribution of our computer aided detection products for digital mammography applications. Establishment of independent reselling relationships with members of the National Imaging Resources Group and with Merry X ray, both of which we believe will begin to contribute significantly over the balance of 2004. During the period of the fourth quarter CADx received FDA approval for our newest software release, including our Second Look 6.0 cancer detection software which we believe offers the very best cancer detection performance in our industry.

In November CADx made the largest single sale of CAD in history, participating with GE Medical Systems in the sale to the Federal Republic of Mexico of 41 CAD systems for use with GE's digital mammography systems. In the fourth quarter iCAD announced the award of a dual source purchasing agreement with Kaiser Permanente, the largest private not for profit healthcare network in the United States. In February of this year we revised our distribution agreement with CADx's former distributor, expanding the range of iCAD products promoted under that agreement while allowing us to increase the number of independent resellers offering our full line products overall.

As a result we now have some 300 salespeople available to promote the iCAD product line. Creation of one coordinated sales and distribution channel allowed us to converge iCAD's products into one industry leading continuum of products under the recognizable Second Look brand. This product line now reaches from the Second Look 200, at a suggested list price of under $70,000, to the Second Look AD, offering computer aided detection for mixed film and digital work flows. iCAD is now the market leader in current sales of computer aided detection for digital mammography.

And we believe our combined company's accounted for the majority of computer aided detection units sold in the fourth quarter of 2003. In the fourth quarter of 2003 in unit terms iCAD was the market leader. At eleven o'clock last night I was copied on a message from our VP of Sales to iCAD's regional sales managers. I want to share with you some of what John provided in his e-mail. This is what he said. My message is simple. It is time.

Time to believe in your abilities, time to dominate the marketplace, time to enjoy success. My vision is a simple one. iCAD will become the dominant CAD company in healthcare. I am taking everyone to the top because it is lonely at the top and I am planning on a big party there. John, thank you for stating it so well and for inviting us to your party at the top. And thank you all for your participation in this call this morning. Dr. Rogers and I now welcome your questions.

Thank you. The questions and answers will begin at this time. [Caller Instructions] Your first question comes from Keith Galley from J. P. Turner. Please state your question.

First I'd like to congratulate you all on putting together a company that certainly seems ready to grow. My question actually is to Dr. Rogers. And with the merger completed I just wonder if his Research &Development priorities have changed in any way.

Steve, what's your belief?

No, the priorities really haven't changed. We've always been committed to, number one, taking our technology platform to not just the application of processing and x-rays for the detection of breast cancer but using that technology platform to provide a continuum of CAD products for breast cancer to eventually process every piece of data associated with breast cancer. That's always been our priority and the reason for that is pretty obvious. When a customer buys an iCAD product that's a partnering relationship which we intend to nurture long-term.

Our priorities have always been to expand that continuum of CAD products for our existing and new customer base in breast cancer detection. The priorities right after that are also pretty straightforward. For about three years now we've been showing how we can take that same CAD platform and do, for example, the detection of lung nodules in computed tomography and for the early detection of colon cancer. We've demonstrated prototypes in that area. Yoy will see those things mature. And continuing on that line we intend to take this platform into other disease modalities and other sensors. So those priorities have always stayed consistent. The team we have is focused on making products that are beneficial to society and we remain focused on that goal.

Thank you.

Thank you. Our next question comes from Eric Peterson from ECP Research. Please state your question.

Hi. I've actually got three unrelated. Could you talk about the issue, if it exists, of false positives. Secondly, the whole issue of outsourcing, the Indian X-ray reading market represent a challenge to you or opportunity? And, last, could you give us some idea, let's say, maybe next year of your sales are somewhat north of 30 million, kind of what sort of pretax margins, let's say, at a 30 million or so run rate, do you think you can achieve?

Steve, may I ask you to take the lead on the false positive question? You have to take the mute button off. We may well have lost Ohio given the snowstorm. I am going to go ahead in the hopes that we are still connected here. In general, the question about the sensitivity of a computer aided detection system is a balance between how many of the identifiable cancers are picked up by the computer aided detection software and how many areas are identified as potential cancers which subsequently are determined to be false markers. There's a desire to have the highest possible sensitivity but to minimize the number of false markers because they can interfere with productivity and work flow.

One of the real advantages of the newest version of software, approved for use by iCAD generated by the development group at CADx, was a combination of increased sensitivity and reduced marker rate, or reduced potential for false positives, which we think positions the product as having the best balance between detecting all identifiable cancers and avoiding, to the extent possible, marks which may distract or not contribute to the diagnostician's decision. That's an area where we are encouraged by our new software technology and will be mapping that across all of the products we offer, whether originally products that were developed by CADx or products that were developed by iCAD. With respect to outsourcing, Mr. Peterson, I have to say we have not seen that as a very large issue in our market. And I do not see that as having a material impact on our business. The last question.

What kind of pretax margins.

I think given the modeling information we've tried to provide, what would be helpful in allowing to you make some estimates of that would be to say that the major variable parts of our operating expense line as the sales levels increase and you'd used, I think, an example of $30 million, we do show sales commissions as a portion of our operating expenses and those together with some formulaic entries, including warranty and service reserves, would tend to increase with sales. But much of the rest of the operating expense line would continue to be at comparable, absolute levels, while declining as a percentage of sales overall.

If you add up warranty, sales and the variable expenses, what percent of sales might that be? Are you talking about the 5 - 10% area?

We are talking about that range or even a bit less.

Okay. Thanks.

You're very welcome.

By the way, I am back on the line, this is Dr. Rogers. I apologize, we're in the middle of a snowstorm here in Ohio and I got disconnected there.

Sorry, Steve. Would you like to add anything to my comments about false positives.

I didn't hear your comments about false positives. Can you give me the question, I would be happy to address it?

The question was really to state our position and the impact of false positives.

The impact of false positives was studied in our rather extensive clinical trial and what we were able to show in those clinical trials is even the original versions of software, which we released in the Second Look product, there was no increase in work-up rate. There was no statistically significant increase in work-up rate with Second Look and so there was no clinical impact to any false marks we do. The reason is pretty obvious. When we mark the location the physician then reviews that location and they use their clinical judgment on what to do. So there is no clinical impact there. We also measured the time to review cases by the physician and it was only on the order of 15 seconds or so. We take the issue of false positives very seriously. In our new version of software 6.0 we reduced false positives yet again, we continue to focus on the reduction of false positives , but clinically there is no impact.

Thanks, Steve. Next question, please.

Your next question comes from Joe Rudy from Arista Trade Securities. Please state your question.

I have two questions. The first one being on, if you have a time frame on when you think you might be able to go in front of the FDA to expand not only from breast cancer but to colon cancer and lung cancer. The second question is strictly from a stock performance, over the last three weeks there seems to be a significant overhang on the stock at about 4.5, 4.70. There seems to be about one consistent seller. Do you know who the seller is, why they are selling, how many shares they had, how many shares they've sold and how many shares they have left? Thank you.

I am going to take the second question first, if I may. We do not know the identity of any seller or the character of any overhang and I apologize that we can't provide any guidance in that respect. In terms of time frame to go in front of the FDA. A part of that is going to depend on the approach we take to the commercialization of the products that we see emerging from the Research & Development activity in that they may be qualified for different kinds of FDA approval. Steve, do you want to offer any particular guidance in that regard?

Yeah, one of the really nice things about the way we've positioned ourselves in these other markets is we are very aware of what for instances, R2 has recently put in front of the FDA in the detection of solid nodules in lung cancer. So we have defined, in fact, a clinical trial. We are defining what products, as Scott just said, which products we should release and in what order. There will be more information on that as the year progresses. But we are technologically ready to put products in both of those markets. We are just trying to make the decisions on which products and in what order and exactly what the regulatory hurdles are for those products.

Next question, please.

Your next question comes from Larry Salvin from Detwiler Mitchell. Please state your question.

Good morning. You've certainly had a big, big job here in the conversions and it sounds like we are making progress.

Thank you.

One subject that finally got mentioned in the end of the last question. It's R2. My interest was, what else is happening, what are they doing competitively, what else is happening? It would seem likely that other people might want to take a push here, or are you seeing other competitive products coming along?

It's a very good question. Trying to assess what our competitor, R2, which as you may know is the only other FDA approved supplier of computer aided detection for breast cancer solutions today, trying to assess what they are doing today is very difficult. We, in our marketing and in our expanded sales effort, are finding more opportunities for our own products and in many respects seeing less coherence in the competitive position of our competitor. At one level that may simply be an inevitable consequence of R2 shipping from a distribution based to what is primarily a direct sales model.

But we are, really for the first time treating this as a market in which we can define the terms of engagement and I believe rather successfully acting on that premise. In terms of other interests, no one else has received FDA approval for computer aided detection for breast cancer. We are aware of the acquisition by Kodak of an early stage computer aided detection software development company but to date we have not seen FDA approval or any clear or identifiable plan or program for distribution of that product by Kodak. And those are really the products that we are aware of at this time. Forgive me, there is another company based in Texas which did demonstrate at the RS&A show at the end of November. To the best of our knowledge they are not mature in their process of seeking FDA approval.

Okay. Second question, in terms of your marketing, you picked up the approval, as it were, from Kaiser Permanente and I think you've also had some other hospital group or buying group approval. Can you comment on just what you are seeing there in terms of interest and obviously we will be watching the sales as we go through the year.

Sure. This is actually an area in which CADx was very strong because they had a number of what are called GPO, or group purchasing organization agreements, with hospital groups and with buying groups. And those agreements have contributed pretty nicely to sales for the combined company in 2003 and we anticipate will continued to so in the current year. Kaiser Permanente, very, very important potential customer. They are just enormously important in terms of the credibility that they bring to a solution like ours. Our purchasing opportunity with Kaiser Permanente began on January 1 of this year and we are very optimistic about how we can realize the benefits of that opportunity and that account relationship. Over the course of this year, one of the expectations we have is that iCAD's enhanced brand recognition and enhanced market share will give us an even greater opportunity to compete effectively for group purchasing organization contracts and for the business that underlies those.

What is your approximate combined market share in the industry at this point?

Well, in the fourth quarter we believe we had more than 50% of units shipped. In terms of the install base, because of the long lead that R2 has had and the period during which they have unarguably been the brand leader, we are probably looking at an install base breakdown that is 70% or more R2, with the balance being iCAD and CADx together. That percentage is clearly going to change based on the results that we demonstrated in the fourth quarter and based on our expectations during 2004.

Very, very good. Thank you.

Thank you.

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

Hi, Scott, how are you doing?

Well, I'm told I sound like an excited frog, Scott. Okay. I have several questions.

One is why in the unaudited results you all gave out about two weeks ago did you give us the sales but there were no combined companies sales estimate, close to 6 million, there was nothing about the expenses there.

Well, that's actually a very timely question in light of Larry's leadin about group purchasing organizations. We were faced with the opportunity of responding to the deadline for submitting proposals to a very large group purchasing organization. And we wanted to be able to provide them the very important information of our growth in sales as a combined company and in particular of the fact that we felt we had been the market leader in the fourth quarter. Those were pieces of information that we did not believe we could share confidentially and could not share selectively. So to be able to take the best possible competitive position we needed to get that information out, what you described as top line information out, and do so in an 8(K) at the same time that we submitted our response to proposals to these prospective group purchasing customers.

Okay. I got that.

However, at that time, Scott, we didn't have our audit done and were very reluctant to provide any final line numbers before both CADx's and iCAD's auditors had signed off on the results. So we were kind of caught in the position where to achieve the business and marketing objective we needed to get out the top line, recognizing that's not the preferred approach but that we would catch up as we have now as soon as audited results were nailed and confirmed.

Okay. Gotcha there. Can I move into part B of that one before I get to other questions. Already you were asked today was earlier having to do with the pretax margins and you said that the sales percent would remain constant somewhere less than his 5 to 10%, maybe 5 to 8 or something is what you indicated, maybe, I'm guessing that. But how, if you have to go from, you mentioned an earlier thing, earlier in the piece that was printed out for us that came earlier today in the release, reduced operating expenses from the first quarter, you gave that, you mentioned that there would be reduced operating expenses in the first quarter. But you gave us some numbers for the second quarter. I would like to have you comment from those second quarter figures which averaged about $4 million, what do you see if you to expect what you are expecting in the way of sales growth, looking at the fourth quarter, what kind of total operating expenses either in dollars or in percent would you say that the whole ball of wax would be?

Your highlighting a real problem that we had in trying to present these in as coherent and logical a way as possible because there really aren't any good base lines from which we could draw. Looking at the operating expense line, we talked about operating expenses of on the order of $4 million with all of the appropriate asterisks. We tried to break those down in terms of what percentage of that 4 million was represented by sales and marketing, by research/development engineering, and by administration and finance. The way to kind of think about what those numbers would represent, I think, going forward is to look at them against a sales base line. And one of the things we considered was simply showing percentage of sales, if that operating expense base had been applied to the $6 million in revenues on a combined basis for the fourth quarter.

Now, if do you that, what you see is that research/development engineering is about 24 percent of sales, sales and marketing is about 21, and administration and finance is about 22 percent of sales. If you then extrapolated and say sales are going to be bigger in the fourth quarter but the absolute numbers for those operating expense components are not likely to shift very much, then you can start to see the profitability accelerates when we can move above some nominal breakeven numbers, which based on current margins and expected operating expense levels are on the order of 5.7 to $5.9 million per quarter. And I think framing the kind of projections that you may seek to do for the fourth quarter with that as a baseline is probably the most accurate way to approach it.

You are saying that going forward, that the administration finance would remain around 22 percent of sales or wouldn't that go down a bit?

I would see it remaining fairly constant in absolute terms and declining as a percentage of sales as sales increase. A lot of that is, I'm sure you know, is public company related expense and a portion of it is amortization and depreciation that is associated both with the acquisition in 2002 of ISSI and the current acquisition of CADx.

Okay. Can I -

Scott, if I may, certainly as we present the 10(K), towards the end of this month, and the earnings report for the first quarter, we will be able to show a better detailed picture of the administration and finance line because a lot of the components then are stable.

Okay. May I ask another question now or should I go back in the queue? I have two more questions for you?

Go ahead.

Okay. First, what are you doing about complying with the rules concerning independent directors?

Good question. And like many companies we face a variety of changes necessary to comply with provisions of the Sarbanes-Oxley Act, some of which become effective with our next meeting of shareholders. One of those requirements is that by the next meeting of shareholders we are required to have a majority of our directors qualify as independent outside directors. To achieve that we are going to be adding several directors and one of our directors, one of the former founders of ISSI, has agreed to step down from the board early to open up a spot which can be filled by a person who qualifies under the new regs. We have identified one of the directors who will be joining us, a person with great experience and great stature in the public accounting and financial communities and we anticipate identifying and naming two additional prior to our annual shareholders meeting which this year is likely to take place in the 3rd week of June.

All right. Thank you. I have a last question is could you maybe give an idea, although it's only been a couple weeks probably the sales guys have been out there, but on both the ClickCAD for fee placements and Second Look 200 placements, what could you tell us that actually has been shipped, if your would, in those two areas?

ClickCAD will not begin promotion or sale until the second quarter. So the answer to that is none. And for the Second Look 200, we really have just begun to promote that this week. I know there's been question raised about why has it taken us so long. And the answer from our standpoint is that we needed to bring the existing CADx distributor on board and up to speed with iCAD products on a step by step basis. We believe we've accomplished a tremendous amount in the eight weeks since merger. And bringing sales organizations together, bringing new distribution partners into the picture, training them and preparing them and motivating them, it was our view and it remains our view that if we had tried to do it all at once it would have broken.

So instead we opted for a more methodical program that got the dominant products into the channels one at a time, that brought the full-line of products to Source One, that brought the full-line of products to an increasing number of independent former iCAD dealers, and then rolled out the newer, lower end products that really need some marketing support and some mindshare to achieve the fullest possible benefit. The results, I think, we've seen have been good. We really have energized our sales force and our growing outside sales force, the ability now to layer in new products and new programs much more manageable.

Okay. Thank you so much, Scott.

You're very welcome.

Thank you. Our next next question comes from Stephen Mazer, a private investor.

Good morning, gentlemen. Listen, in your recent press releases that I read this morning you indicated there were a variety of cost reduction opportunities that exist as a result of the merger. One specific area I believe indicated that you learned that the iCAD and CADx mammography product lines complimented each other more than you apparently anticipated originally. Could you sort of expand upon these areas of cost reductions and what effect they will have in terms of either percentage reductions or dollar reductions going forward and how that would benefit the bottom line? Thank you.

Sure. And I may share this one with Dr. Rogers on kind of a tag team. Let me begin by clarifying one point which Steve may also add to. As we have sensed over that eight-week period of study, where can we improve our business and where can we enhance our profitability, we found that there were a lot of areas in which the product development effort, especially for current core products, had been in some ways parallel and that that offered us some real benefits. To say that somewhat better, CADx had done a wonderful job with the cancer detection algorithm, so we were able to map that back on to the iCAD genesis products without having to duplicate that work.

iCAD had done some good work with case entry and with connectivity so that those areas in which CADx had previously been investing resources could be reduced because that work had already been done. In a simple, simple way integration of development work that had already been done got to product objectives that would otherwise have required a great deal of programming and a great deal of development time. In speaking more generally about the ability to enhance profitability, some of the areas in which savings were available were evidence, but I will use two very easy ones, we only need one trade show booth at the major trade shows instead of two and we only need to do one set of paid advertising in the media to establish our brand. We don't need to be able to have a iCAD and CADx marketing campaign separately. At the core of cost reduction, though, is the opportunity to utilize personnel resources in the most efficient and the most effective way possible.

And in our analysis we worked carefully together to identify where we could, in some cases even improve what we were doing for our customers and for future product opportunities, but do so with fewer people, do so by relying increasingly on the leverage that distributors and resellers can provide us, and doing so in a way which is, in some ways, smarter than the way we had approached it before. That allowed us to compile an estimated $1 million a quarter in savings when we look at the difference between the first quarter and the second quarter and and on a continuing basis. Of that amount, the largest percentage, I want to say, Annette, 40%? About 40% of that is reductions in payroll and personnel related expenses. The other parts fall into smaller buckets which make up the rest. Steve, I don't know if you want to add to that or complement that?

I would only add that exactly the point you made, that is with the way we designed the CADx platform we were able to quickly and efficiently incorporate the work that was being done and had already been accomplished with the iCAD research team. So that's allowing the progression quicker than we had expected to what we call the best of breed CAD, the fusion of those pieces that iCAD brought to the table and the pieces that CADx brought to the table, that was far more efficient than we anticipated and was directly attributable to the platform approach to the development of the Second Look CAD. So that efficiency was a welcome finding by us and we took advantage of it in the first quarter.

Thank you very much. That sounds very exciting, gentlemen.

Thank you, sir.

Thank you, our next question comes from Brooke Moore from Sands Brothers. Please state your question.

Good morning, Scott.

Good morning, Brooke.

You sound like I did last month. First, before I even ask a question I want to compliment you on the webcast. I was able to get my computer to allow me to do that. And it really was fantastic. I wish everybody had been able to bring that up on their computers.

Thank you, Brooke.

It was really above and beyond. I just can't compliment you enough on that. A couple of questions that I had in my mind have already been asked but you did comment a little bit on the annual meeting somewhere around the 3rd week of June, I believe you said.

Yes.

Did I hear that correctly?

Sure. And if I may, Brooke, maybe I could take this opportunity just to provide some tentative dates that people may want to calendar in.

Yes.

Which we will also post on the Investor Relations section of our website within the next two weeks. But we currently are scheduling release of our second quarter earnings for April 29.

April 29?

We are currently scheduling release of our third quarter earnings for October 28, and our tentative date for the annual meeting of shareholders is June 18. Now, that date in particular is subject to some float as we coordinate the schedules of a variety of parties and the location for that meeting is yet to be determined. We are either going to hold that in New York, where we have often held it as a convenience to shareholders who are based locally, or in our Beaver Creek, Ohio, offices, which would give us the opportunity to include with the annual meeting of shareholders a somewhat more comprehensive presentation on future technologies and a demonstration of some of what we are doing. So we will balance a little bit the convenience of New York against the more comprehensive presentation we could make in Ohio and inform people soon about what location we'll choose.

Now you commented tentatively that the quarterly numbers for the second and third quarter. What about first quarter?

We are releasing those numbers now.

Oh, okay.

I was thinking ahead to the first time quarter of 2000 - have we got this wrong? Yes, this is Q1. This is closing March, so this is Q1. This is Q3 - Brook, you're right. We are giving this inappropriately.

You're on a calendar year, right?

April 29 is the first quarter and then October 28 is the third quarter and we will provide the second quarter here within a minute or two.

Okay. I got that way, too, with that cold, it did the same thing to me.

You're kind to give me that excuse.

It's not an excuse. It's a horrible thing to have, it's ghastly. Moving on to something else, though, that came up in my mind when you were going through some of these other questions with some of the other callers. We are talking a lot about recurring revenues, of the excitement of it as soon our Second Look systems are being really released, if you will, and sold and distributed. I would suspect over the coming weeks. My other question regarding recurring revenues is when we sold major systems to, example, the Kaiser Permanente's of the world and so forth, what kind of recurring revenues do we get there?

The normal approach to recurring revenues for our product is to provide on a paid basis access to updates in the software and improvements in the computer aided detection systems. That has become a meaningful portion of revenues and will grow as the install base grows. In our ordinary sales process we look at percentages of from 9 to 12% depending on the products and depending on the level of service and support provided, as a percentage of sales price.

Sort of a contract, if will you?

Yes.

I remembered from years ago in my previous life at Carrier Corporation they made more money on service then they did on the product.

We are really kind of at a transition point as this becomes a profit center for us where historically it has been a cost center and that is one of the real benefits of creating a critical mass in terms of current sales and install base.

Absolutely. I don't know if this is appropriate or not for Dr. Rogers to comment on, but one of the companies that I followed in the past that is in women's healthcare is SiTech Corporation in the identification of cervical cancer, and I wondered if there's any, what should I say, if there's anything that we can draw from that, of the explosion of earnings and growth from that that we could put on to iCAD or if that's not appropriate?

Brook, that's a reasonable question. The experience in cervical cancer and the application of technology for the detection was an interesting model. In fact it's one that we looked at when we first started this company. The adoption of technology in the medical area is somewhat strange. Certainly in breast cancer CAD it has been slower than anybody anticipated but the market dynamics are such that not unlike what happened in psychology, that the adoption rates are increasing and the expectation is that adoption rates in other disease sites will not follow the same breast cancer mode that they will follow the cervical cancer mode. But the use of intelligent, what we call intelligence amplification software, software which helps the physician make a more intelligent decision, that is absolutely the right model and we believe that the model of increasing rates of adoption of that technology will be followed in the other disease sites and you can already see a changing in breast cancer.

Right. I was just going to say that as individually, and I don't know if it's appropriate forum to say this, but individually I will say my personal experience was that doctors did not step up to the plate on that. It was a [inaudible], if you will, as quickly as one would have expected and I am wondering if that's what really needs to be educated first, the doctor or the patient?

That's again a great point. When we go into clinics and we meet with physicians there's an educational issue there and, again, that's why we've taken what we call the IA approach versus the AI approach. In artificial intelligence we were writing software to replace the person. In intelligence application we are writing software to assist the physician. We educate them on what we're trying to do and in fact it goes back to the false positive issue, the question that was asked early in this call. When we educate them that we are providing software to help them do their job better, not replace them, we get over that hurdle, they learn how to work with our software to make a more intelligent decision and together we improve healthcare for all women. That education is slow and methodical but through our attendance at conferences, our publications of technical papers, it's a battle we are winning and to a person, every physician is absolutely dedicated to improving healthcare. We just have to educate them on how to use our software to do that.

Thank you, doctor.

Thank you, Brooke. Actually before we go to the next question I will correct so that we are working with the calendar the rest of the world works with as well, our first quarter earnings we would anticipate today, as April 29, second quarter will be July 29 and third quarter will be October 28.

Thank you. Our next question comes from Jack Westerfield, a private investor. Please state your question.

Yes, Scott, Jack Westerfield.

Hi, Jack, how are you today?

This is reminiscent of the old story I heard of the frog that got kissed and turned into a prince. A have a few questions and I will take them one at a time. One is with the usage with Kaiser that has been installed and up, I'd like a comment on what the usage is, how they look at the cost, how they look at the convenience and what their confidence is in the product so far.

As I say, the opportunity to begin to sell only began January 1, so we are still in the first stages of sales cycle with the various Kaiser accounts and it is too early to provide any data on adoption or on up take. In general, the view that led Kaiser to designate iCAD as a vendor was that the ability to balance cost against the contribution to better cancer detection needed to be more sound than it had been in the past. And that the value that was offered by the iCAD products in the market represented something of a break through in terms of cost benefit from the perspective of a very prudent and responsible financial medical administrator. They clearly liked the numbers that they were able to generate looking at the iCAD system.

Okay. Thank you. Second question will be for Dr. Rogers. In the year 2000 General Electric bought a company called Emmetron which did a full body scan from the lungs on down to the colon including all the organs in between. It cost about 950. They gave you a digitized disk that it had on it. Are we doing any work since our cancer detection algorithm appears to be much more sophisticated, are we doing any work since we are so close with General Electric of helping them integrate that with their Emmetron product that they have out for the full body scan, or is our colon and lung cancer algorithm going to be a standalone product that will compete with them?

That's a good question. Absolutely the way we've designed our software is to be plug-in-play with any vendor. We are extremely happy with our digital mammography relationship and our analog digital relationship with General Electric in mammography. But in computer tomography we are taking the approach of plug-in-play with any vendor and process for anything we can see in that data. Initially, absolutely, we are going after lung and colon but we are looking for other diseases in that same set of data, especially in these cases where you can do whole body scans. So the software is flexible enough to attack those other opportunities where the data exists. But it would be our intent to provide our software in some form with lots of collaborators, not a single vendor.

Thank you very much. The last question, Scott, and also I'd like to compliment you on the presentation. It was just absolutely outstanding. I don't know what you can say about this, but I think some of the other companies have mentioned it, but can you mention anything about the backlog for the Second Look, the ClickCAD or the current CADs that we have out?

There has been a backlog at the end of each quarter which and I frankly don't recall what it was at the end of the December period. In many cases we end up with orders which have ship dates that are into the next period. And we don't technically consider them to be backlog because they wouldn't have been shippable before December 31. So I guess a better answer is that we have orders on hand for shipment typically in the first or second month of a quarter, but we've been reasonably successful in filling the orders that have been placed and that can be delivered within the immediate period. Our manufacturing and our projections have been pretty good. We haven't been in the place where we couldn't ship much that we wanted to ship.

Okay. Thank you very much, Scott.

You're very welcome and thank you for the questions.

Thank you. Our last question comes from Scott Warner.

You answered that, before, Scott, when you gave us the July 29 second quarter date. So I don't need to ask the question.

Thanks, Scott. Sorry for the confusion.

Okay.

There are no further questions in queue.

Ladies and gentlemen, thank you very much for your time and for your questions. We look forward to talking to you again in the very near future. Thank you.

Thank you. Ladies and gentlemen, this concludes our conference for today. If you would like to access the replay for this call you may do so by dialing 1-800-428-6051, or 973-709-2089 with a pass code ID number 343231. Thank you all for participating and have a nice day.