ICAD Inc (ICAD) 2004 Q1 法說會逐字稿

Good morning, and welcome ladies and gentlemen to the first-quarter earnings conference call for iCAD Inc. At this time I would like to inform you that this conference is being recorded and all participants are in a listen-only mode. At the request of the company we will open up the conference for questions and answers after the presentation. Certain statements contained in this news release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from such forward-looking statements.

Such risks include, but are not limited to, uncertainties associated with litigation, and/or government regulation; changes in Medicare reimbursement policies; competitive factors and other risks that are detailed in the Company's periodic filings with the Securities and Exchange Commission. The words believe, demonstrate, intend, expect, estimate, anticipate, likely and similar expressions identify forward-looking statements. Readers are cautioned to avoid placing undue reliance on such forward-looking statements which speak only as of the date the statements were made.

I will now turn the conference over to Scott Parr, CEO and President. Please go ahead, sir.

Thank you very much, and ladies and gentlemen, thank you. I'm here this morning with Annette Heroux, our Chief Financial Officer and we are very pleased to report on our first quarter since iCAD's acquisition of CADx systems and its parent company, Qualia Computing. As expected, we are reporting a loss for the quarter primarily as a result of operating expenses temporarily inflated by the combination through merger of two overhead and operating expense structures. We addressed this inflation during the quarter, reducing our combined workforce by more than one-third from 110 to 71, and by closing offices in Florida and in California.

We have taken a nonrecurring charge of approximately $525,000 during the quarter reflecting severance expenses and office closing costs. With operating expense levels reduced an estimated $1.5 million from first quarter to second quarter, this issue is behind us. We are reporting first-quarter sales of $5.4 million and gross margins of 67 percent. Our Q1 sales exceeded total combined sales for iCAD's previous three quarters. Looked at another way, sales in the first quarter of 2004 were almost 3.5 times sales in the fourth quarter of 2003, and 3 1/3 times iCAD's average quarterly sales for 2003 overall.

In the fourth quarter of 2003 we indicated that combined sales of iCAD and CADx were about $6 million, of which about 1.1 million represented an extraordinary order for digital Computer Aided Detection systems from the Republic of Mexico. Excluding that order, combined Q4 domestic sales through our various channels were $4.9 million.

In spite of inevitable distractions associated with integration of iCAD and CADx, realignment and rebranding of products and consolidation of sales channels, our sales team achieved more than a 10 percent increase Q4 to Q1 in sales through continuing channels. Gross margins, margins increased 23 percent from Q4 of 2003 and about 23 percent from 2003 overall, to our recently completed first-quarter.

Sales in the first quarter were near estimated Q2 breakeven levels of $5.7 to $6 million and in excess of projected second quarter EBITDA breakeven. Our plan to achieve and maintain profitability is simple. We will hold or further reduce our operating expense levels while further increasing sales. We expect the following to contribute to increasing sales over the remainder of the year.

First, more resellers. Quarter-to-quarter we are increasing the number and location of dealers and resellers qualified and trained to promote iCAD products. The number of trained, active and successful independent resellers and sales through these dealers have increased significantly from quarter to sequential quarter and we expect this trend to continue.

Secondly, broader and more aggressive marketing and promotion of our new, lower-cost Second Look 200 solutions for the early detection of breast cancer by smaller case volume clinics, along with our ClickCAD fee-per-procedure programs aimed similarly at smaller volume mammography centers. A critical milestone in our release plan for the Second Look 200 was achieved this past Friday with preliminary FDA approval for use of our clinically superior version 6.0 Computer Aided Detection algorithms in both the Second Look 200 and Second Look 400 product lines. We expect final FDA approval this week.

Another factor is anticipated additional OEM relationships, promoting iCAD's Computer Aided Detection solutions for digital mammography and for other applications, a value to our target mammography clinic market. While these increasing contributions should be sufficient to achieve 2004 sales and profitability objectives, there is much more. During this period of consolidation and attention to profitability, we have also succeeded in redirecting a significant part of our research and engineering resources to accelerate the delivery of new iCAD products, which apply our core Computer Aided Detection and clinical decision support technologies to additional medical applications.

We have previously demonstrated the application of our core technology platform to the identification and characterization of small, potentially cancerous lung nodules and colonic polyps which must be found within multiple sequential images of the lung or colon generated using computed tomography or CT. We are now working aggressively to deliver new products and solutions in these areas with initial product releases possible before year end.

This has been a productive quarter. In fact from our view it has been a great quarter. Following the acquisition of CADx we have consolidated and positioned our current products. We have organized, supported and greatly expanded our sales channels. We have substantially reduced overhead and iCAD's breakeven point. Our sales accelerated towards the end of the first quarter, our margins are healthy, and our products are increasingly recognized and well regarded in the medical imaging industry.

We maintained almost $4 million in cash at the end of the quarter, and we have ahead of us the benefits of launching and aggressively promoting our lower end Second Look 200, which we believe will make a significant additional contribution to second half sales.

I invite your questions.

(OPERATOR INSTRUCTIONS) Scott Warner, private investor.

Sounds like nice revenue growth there, (inaudible) that is. Couple of questions, one I was a little confused does that mean on the Second Look the approval process that was at level 6, that nothing in other words nothing since the seven weeks ago conference call that we were not able to sell any of the Second Look products because it wasn't upgraded to the (indiscernible) of level 6 idea or what?

We have been selling the Second Look 200 with the cancer detection software that was originally developed by iCAD. Those sales have been limited in part because we've been very aggressively promoting our Second Look 400 product during the second quarter. The benefits, as you may know of the cancer detection software that was acquired with CADx are enormous. It improves significantly the sensitivity and the effectiveness in detecting cancers, and it reduces the number of marks or indications that are, what we call false positives. We think that this is a real important package, especially for smaller and in some cases less well-staffed facilities, the target market for the 200.

So we have been delaying aggressive promotion of this product to allow the primary marketing of this product to include the best and easiest to use cancer detection software available. We are going to see the benefits of that, Scott, in the third and fourth quarter. During the second quarter we are going to stay the course with what appears to be a very successful promotion of the 400 product and make that cutover at quarter end.

That would impact then in the ClickCAD then which is a 200 product, that would not be going forward then?

Our anticipation was that that would begin in the third quarter, and we continue with that plan and schedule.

In the third quarter, okay. Another question somebody is going to be asking, so I might as well. First on the revenue going forward, what can you project? (technical difficulty) ranges. I do not expect precise numbers but what kind of ranges would you have going forward in revenues now that you have all the consolidation I hope behind you?

They're going to go up.

Can you give us some ideas, some guidance there?

We now have the benefit of having some primary independent research addressing iCAD expectations from the perspective of an outside analyst. In light of that our own benefit in making specific forecasts is substantially reduced, so that what we anticipate is that we will maintain the guidance we provided before, which was fairly simple and straightforward. It was to say that in the second quarter we anticipated we would be at or near breakeven and that we would be profitable for the nine months concluding 2004 but we are reluctant to provide more specific guidance with respect to revenues or other factors from the Company's perspective.

Would you comment on -- would you been doing this later perhaps -- on some of the people who have come up with their estimates and expenses and so on? Would you comment on those? Because I never asked last time and some expenses like, was left without a total picture on the operating expenses going forward. You give us numbers, percentages, based on the 6 million revenue of the fourth quarter. Would you want to comment on that again?

I'm happy to say that the analyst reports that have been issued we think that they were done with good discipline, good insight and good research. And while as you know it would be inappropriate to endorse or to specifically criticize any aspect of those reports, we are pretty happy with the results that they project.

One last question, I seemed to see something that didn't make sense to me on the number of fully diluted shares. Would you comment on what number we all should be using for fully diluted for iCAD?

Sure, if you bear with me just a moment, Scott. I am going to ask Annette to pull the appropriate page for us here, and we will provide those in detail.

38 to 40 million I suspect from my (multiple speakers).

And I will tell you that the confusion is typically shares that would be issuable upon conversion of our outstanding line of credit from our Chairman. Because we show those in fully diluted but its not our expectation that that will be converted. As of 3/31 we had just about 33,800,000 shares outstanding. Options included approximately 4.8 million. We had about 1.3 million shares issuable upon conversion of the revolving promissory note, which as I say we don't expect to see. And we had just about 1.2 million shares that were issuable upon conversion of outstanding preferred stock classes. That is a total all in, everything in, of 41 million shares.

Thank you very much.

Joe Rudy (ph) with Arista Trade Securities.

I'm got a couple questions. I just want to expand on the a little bit of the question from the gentlemen just before, you may not be able to project guidance for nine months out or whatever it might be, but you did say in the press release prior to the conference call that sales in the first quarter accelerated at the end of the quarter. Do you still see sales going into the second quarter accelerating at the same pace or greater, or are they slowing down for the second quarter?

We are very pleased with the second quarter todate.

So would you say they are in line with how the first quarter ended?

I would, yes.

Okay. My next question is and I'll ask it all in one question, can you give more of a definitive roadmap as far as any future plans as far as I know you had said by the end of the year that we might see some more applications as far as with the CAD system, whether it be with lung cancer or colon cancer or whatever it might be, can you give a little bit more specific roadmap on that? And also, do you foresee at any time in the future and when, then if you do, that potentially iCAD can become from, go from a detection company to a diagnostic company?

Good questions, Joe. Let me take those a little bit in turn. And let me walk through not just 2004 (multiple speakers).

Let me interrupt you for one second. The reason why I am -- in the last conference call I was very much harping on what is going on besides breast cancer not that breast cancer is no big deal, but the way I see the Company growing is its not only growing within the breast cancer market but also increasing to other markets as well. So that's where I see the huge growth as far as with iCAD.

And that's exactly correct, and as we look past 2004 into future years, we clearly expect significant contribution to revenue will come from areas other than Computer Aided Detection of breast cancer. And really in formulating our product development plan and schedule during the first quarter of 2004 we have been more mindful than ever of the desire and the need to be promoting products and solutions in areas other than breast cancer early in 2005 and potentially at the end of 2004. But let me step back just a bit. If we were to ask how additional contributions to sales are expected to kick in from the second quarter of 2004 through 2005 and beyond, this is the map I would offer.

the first contribution will be increased distribution. Selling the products that are now in the market that are being well received, that are competing extraordinarily well through more points of contact with potential customers. That is taking place in the second quarter, and I expect that will continue quarter-to-quarter for the foreseeable future. The second contribution will be the kick in of low-end products. Over the latter half of 2004 we truly believe that the low-end product, and by low-end I might better put the value positioned product that addresses needs of smaller clinics that just can't afford a Computer Aided Detection solutions today, we expect significant contribution in the latter half of the year.

We expect contributions by increasing the number of OEM relationships that we have in markets that are directly related to Computer Aided Detection for digital mammography and in related solutions that are a benefit to mammography professionals, and those we would expect to see fourth quarter towards the end of the year but growing thereafter. And our target is to be able to offer the first of our non-breast cancer products before the end of 2004. As you would expect, that will depend a bit on our process through the FDA. But we have framed and are pursuing product opportunities that we believe can be brought to market with the FDA's 510-K approval as well as products where we expect to be entering what is called PMA process during 2004 but will see the broadest benefit in 2005.

There are a number of contributors that we see becoming active over this period. Now as to not just detection, this is really at the heart of our opportunity and the heart of our vision. And it reflects the fact the technology that underlies iCAD's product is far more than a detection of breast cancer tool. In fact, our underlying technical platform might be thought of more accurately as a means and a technology to assimilate data about medical conditions, to identify factors that are relevant to improved patient outcomes, and then to assist in the representation of the underlying data and the conclusions drawn from that data so that it is easier and more effective for a doctor to be able to come to a decision about appropriate preclinical or clinical treatment options.

In some ways we reduce the scope of that by saying we do detection for breast cancer. And of course we do, but what we are doing within that market is identifying the factors that would tend to describe a breast cancer, assessing them, representing them in a form that helps the doctor find it, and then supporting better patient outcomes by reducing the likelihood the physician will miss a breast cancer. Those same fundamental paradigms work not just for detection but for decisions about clinical treatment and for the kind of therapy planning, therapy monitoring and follow-up that ultimately starts to describe an increasingly personal kind of medicine offered with the help and support of computer-based decision-making and decision representation tools. That is iCAD's vision.

We bring it back to specific sellable products, and those are an increasing range of products to assist in the detection of breast cancer, supplemented by products to assist in the detection of lung and of colon cancer and additional applications that will become clearer at the end of 2004 through 2005. Very compelling vision to us internally. We are beginning to offer the products that will now make that more clear to our markets and our customers.

Okay, I have two other quick questions if you don't mind. Do you foresee the Company having to raise additional funds this year?

I do not.

Also is there anything being done actively with the Company as far as to increase the institutional ownership with iCAD with the stock?

We are beginning that process with the reports on the first quarter. And we intend to aggressively introduce the company to qualified institutional investors and to begin that process in part through a presentation on May 17th at the American Electronics Association Microcap Conference in Monterrey.

Scott, thank you very much for your time.

Bob Wasserman with Dawson James (ph).

Most of my questions have been answered but I wondered if you could give us a little more color on the ClickCAD program and how that is progressing and what we can expect -- what kind of metrics are you looking for this year.

Well we are in some senses we are fending off potential ClickCAD customers in the second quarter, because we have really focused on simplifying the rollout of newly integrated products through our new sales channels. The 400 promotion that is in-place now is a sale promotion. It doesn't promote the ClickCAD program. We are very committed to a see per procedure model. We intend in the third quarter to begin aggressive promotion of that model in connection with the broader marketing of the Second Look 200 product. The rate at which that see per procedure option is adopted by smaller clinics is something that we will be determining I think pretty early in the third quarter. The early indications that we have are very positive.

Are you going about it kind of in test markets or a test distributor, or what are your plans for the third quarter I guess is when it is going to start, how soon will you know how quickly it's catching on?

We have not been pushing ClickCAD through any kind of a test program or market. Instead we have been responding to customers that have come to us and said we've heard about this and its something that makes a lot of sense for us. And we are beginning to schedule installations, which will give us a good field test exposure, not so much in the marketing of it but in the mechanic of the prepaid card system. So that's a good thing.

We attended -- take a step back -- we've got good momentum in the second quarter with a couple of programs that are in place. And one of the things that we've learned is if it's going well for you and momentum is building, don't step on it until the end of the quarter. And as a result, we are hesitant to push the 200 or ClickCAD to our market or to our prospect base until we close out the second quarter. Because the likely result of opening that up in late June is to freeze customers who might otherwise have made purchases during that period. So the aggressive promotion is for all of our products typically scheduled at the beginning month of the quarter, and that is really where we are going to start to push the Second Look 200 and the ClickCAD with a little bit of a lag but shortly following.

Is there some seasonal downturn in the summer quarter? Would it be better to wait for the fourth quarter? Or typically that's not the case?

The third quarter has traditionally been a little bit slow, but my own view is that this market is so unpenetrated that we have a unique opportunity to continue momentum into the summer quarter which takes us through several key trade shows and into what is often the best quarter of the year, the fourth quarter surrounding the Radiological Society North America Show.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Lawrence Sizler (ph) with First Southeastern Securities (ph).

Just a couple of philosophical type questions. First do you feel better about hitting some of your own internal types of targets because you have come a long way from Thanksgiving of last year and second are you having any types of major problems in blending the CADx type sales force along with the various resellers around the country?

Good question. I had a very, very pleasant company meeting early in April after we closed out the March quarter in which we were able to report that for the first time in anybody's memory at CADx or at iCAD, we had blasted through sales projections for the quarter. We did substantially better than we were projecting internally, conservatively of course, but for the first time we beat our own projections and that was a wonderful feeling. That feeling relates to your second question which I will put more broadly into how are we blending the companies. We are really blending the companies by creating an ethic and a discipline and a level of achievement and accountability that is different from what was true for either CADx or iCAD in the past. That's true in the sales force. That's true for the employee base overall. It's true in our relations with our resellers and our distributors. It has been a very positive process. I think part of it is that people sense a winner. Our resellers sense a winning opportunity. There is a spirit of success and of achievement that people communicate without writing it down. And at each level in our internal operation and our relations and work with the outside world, with sales channels and with prospects and with customers we believe we are a winner and we are acting accordingly.

Just a quick follow-up, with the same thought in mind, how do we look on the West Coast which obviously has been more of a weaker area for us?

Continues to be more of a weaker area for us. It is an area where we are seeing some of the potential increased contribution that I spoke of earlier as we consider how to bring additional resellers and dealers on; many of those will be in the western part of the country.

Thank you, Scott.

Brooke Moore (ph) with Sands Brothers (ph).

First of all, great presentation. There aren't too many questions here. After just your first presentation. My only question really is have we not had all these extraordinary expenses for the quarter, would we have been profitable?

It is speculation, but I think, yes. I think that what is key is we had undertaken a quantum change in the character of iCAD not so much for the first quarter of 2004, but for 2005 and 2006. And that's the future we secured by going through what we have in the first quarter.

I sense that but I felt the need to ask the question anyway. Also, regarding the new technology, which you've expanded on very, very nicely, as well as the improvements in the breast cancer area, can you address the bottom line? Is that actually -- I know we had phenomenal off the chart numbers before of being able to help doctors identify cancers from 14 months ahead of time; we had the ability to catch the significant number that were missed before. With this new software is that improving those bottom numbers, as well?

Absolutely. We are actually now able to increase the claim we make that instead of 23 percent of cancers, we've increased it to 25 percent, an average of 14 months earlier. And our ability to detect, our sensitivity has substantially improved. That is what the development team has cut in to the former iCAD product to this Second Look 200 that is part of the key to being able to properly exploit that product in the second half of the year. That's pretty big deal to us. That cancer detection software was superior to what iCAD had coming into the merger, and it is in our view clinically the best cancer detection tool available today.

It sounds phenomenal, but I've always felt that way. Just one thing. Adding on to Larry's philosophical, I know that in the past we've considered doing good deeds when they came along. Has anyone considered working with Avon Corporation in that regard?

Avon has a very deep commitment to the eradication of breast cancer and it is a company that we have contemplated approaching. We have not done so to date.

Okay. Thank you.

Jerry Faulkner with R. J. Faulkner. (ph)

You spent a good deal of the first quarter kind of restructuring your sales channels. And if I recall correctly back in the fourth quarter when you, once you determined that you were going to be acquiring and merging with CADx you kind of put on hold the development of some of the independent reseller channels that you had been working with. And I guess my question is whether in the first quarter was most of that quarter spent more or less getting those relationships restructured and back on line, or did you actually see much benefit from say Source One and NIR and (indiscernible) x-ray and those various channels, are we still looking to really see that kick in in the second quarter or was that pretty effective in the first quarter?

In the first quarter we saw contribution from independent resellers. We expect that to grow one reseller at a time through the second quarter and following. Our contribution from independents was higher than we expected in the first quarter was part of the reason we exceeded our expectations in the first quarter. And the balancing of Source One, which is a terrific partner with complementary independents is something that the sales team I think has done a superb job of.

Thank you.

Larry Salvin (ph) with Detwiler Mitchell (ph).

I am very pleased with the progress I'm seeing and excited about the products. A couple of specifics. What is the approximate number of installations or units represented in the first quarter, in that quarter?

If you bear with me for just a moment, in the first quarter overall shipment of units -- and we track these with -- all shipments in so I need to back out of this. But total units were 142 units, including iCAD's multi-led brand digitizers. So for CAD products it was 101 CAD products. That compares to the number that we reported for combined fourth-quarter sales of 118 CAD systems, of which as you may recall 41 were for the Republic of Mexico. So, quarter-to-quarter an increase in units. There are some review stations included in that, so that if you were to look and ask how many individual sites had systems installed, it would be somewhat less than that number but I don't have that number immediately in front of me. Good trend for us.

Also one of the interesting things from last quarter was the designation by Kaiser Permanente as a viable product or improved product or whatever we want to call it. Has that translated into any orders at this point?

Kaiser is in the early stages of its evaluation on a hospital-by-hospital basis of the product selection that is appropriate for that hospital. Slower process in some respects than we anticipated but we are actively involved with a pretty good number of potential purchasers. There has been no activity from Kaiser Permanente during the first quarter. As you may recall, that became effective January 1 of the first quarter. We do see that as being a source of business and of a long-term relationship over the balance of the year.

I would certainly expect that. That ties into the question, what do you see is the overall typical, if possible sales cycle here between or from initial contact into a hospital to actual quarter and placement for installation?

Historically that has been a six-month or more process in many cases. What has happened in the first quarter and what we see in looking at what we call our pipeline or our tracking reports for the second quarter, is that accounts that really first looked at CAD a year or more ago, are now becoming active and moving aggressively towards purchase. So that from the point of renewed contact to closure we are seeing far less than six months.

As we go to the Second Look 200 product with a lower price and ClickCAD in particular we anticipate that the sales cycle will be reduced in part because for the Second Look 200 its a smaller capital investment, and reduced even further because acquiring a CAD solution from iCAD under the ClickCAD program will generally be considered an operating decision rather than a capital decision, and those can typically be made more quickly, more easily and by a more limited number of people.

Very good. Thank you.

(OPERATOR INSTRUCTIONS) Mr. Parr, I am showing no further questions at this time.

I appreciate people's time and support here. I will update folks. Our annual meeting of shareholders is now scheduled for June 23rd, and it will be held in New York City. Annette, can you help me with the time? Is that 1:30 in the afternoon? We will be providing proxy materials in the near future, and we certainly welcome people joining us in New York for what we expect will be a good annual meeting. Thank you all very much.

Ladies and gentlemen if you wish to access the replay for this call you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 352990. This concludes our conference for today. Thank you for participating and have a nice day. All parties may now disconnect.