ICAD Inc (ICAD) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2004 iCAD, Inc. earnings conference call.

My name is Mia and I will be your coordinator for today.

At this time all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Kevin McGrath with Cameron Associates.

Kevin will read a forward-looking statement.

Please proceed.

Good morning everyone.

Certain statements contained in this conference call 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 which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Such factors include but are not limited to the risks of uncertainty of patent protection, the impact of supply and manufacturing constraints or difficulties, product market acceptance, possible technological obsolescence, increased competition, customer concentration, and other risks detailed in the Company's other filings with the Securities and Exchange Commission.

The words believe, demonstrate, intend, expect, estimate, anticipate, likely, and similar expressions identify forward-looking statements.

Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date the statement was made.

The company is under no obligation to provide any updates to any information contained in this conference call.

With that said, I would now like to turn the call over to Scott Parr, CEO of iCAD, for introductory remarks.

Thank you, Kevin.

Ladies and gentlemen, good morning.

In the third quarter, iCAD generated earnings of $366,000, or 1 cent per share, on sales of $6 million.

Gross margins improved to 73 percent of sales in the most recent quarter, from 47 percent in the third-quarter of last year.

Sales, gross margins, and earnings all increased when compared with last year's third quarter and with the second quarter of 2004, while operating expenses remained relatively constant.

In the third quarter, about 75 percent of our revenues were attributable to film-based mammography products, including approximately $1.3 million in sales of our new Second Look 200 system, a system that targets the more than 6000 mammography centers that process less than 20 mammograms per day.

This is a market segment that we believe was previously unaddressed.

We are very pleased with the commercial introduction of the Second Look 200.

During the third quarter we shipped 52 Second Look 200 units, meeting our internal goals and production plan.

As we noted in our press release, this was the most successful new product launch in our company's history.

Because of the priority we are currently placing on maximizing revenues, we strictly limited the number of Second Look 200 systems available for anything other than outright sale during the third quarter.

As a result, and as previously anticipated, only a few systems were available for our new ClickCAD fee-per-procedure program.

During the third quarter we shipped 5 systems and 1 additional key under the ClickCAD program.

Promotion of that program has really commenced in the current quarter and we will detail ongoing ClickCAD placements with our fourth quarter and year-end report.

During the quarter we also completed the transfer of manufacturing and production for the Second Look 200 product to our contract manufacturer in Connecticut.

This relieves production constraints and increases our volume capacity in the process.

Almost 25 percent of our third-quarter revenues involve the sale of computer-aided detection solutions for digital mammography systems, which are sold through our OEM channel partners.

We believe that seasonal factors, especially poor weather in key southeastern markets contributed to a reduction in sales for digital systems from the second to the third quarter.

We expect these sales to rebound in the fourth quarter and to increase in real and percentage terms throughout 2005; in part through the very important addition of Hologic and of Siemens as active and productive digital mammography OEM channel partners.

In total, we shipped 136 computer-aided detention units in the third quarter, excluding multiple workstation licenses for digital mammography solutions.

Next quarter we anticipate increased sales in all key categories.

One important measure of iCAD's growing success in the market is evidenced by an October market outlook report from MD Buyline that compared our Second Look products for the early detection of breast cancer with those of our sole competitor.

MD Buyline, perhaps the most respected independent reference magazine in the medical device industry, rated customer satisfaction with CAD systems in 6 categories on a 10-point scale.

ICAD demonstrated the highest rating in every category, including system performance, system reliability, installation and implementation, applications training, service response time, and service repair quality.

Overall, iCAD was given a 9.4 user satisfaction rating compared to our competitor's overall 8.4 rating.

Along with these superior customer satisfaction ratings, iCAD products were found to offer the greatest overall value to customers.

As you can see from our achievements in the third quarter, our first priority is to expand our breast cancer detection business with an emphasis on the untapped small clinic market and on the growing digital mammography market.

We are demonstrating a level of success in both segments that should contribute to revenue growth in the fourth quarter and 2005.

Overall, there are some 15,000 to 20,000 mammography centers worldwide, and only about 2000 have early detection solutions.

That represents a substantial and continuing market opportunity for current and near-term iCAD mammography products.

In addition to the early detection of breast cancer, our target markets through 2006 include the early detection of lung cancer and of colon cancer.

According to the American Cancer Society, in the United States alone there are 175,000 new cases of lung cancer each year, and 160,000 deaths.

This is the highest death rate for any cancer, as 5-year survival rates for lung cancer are currently only 15 percent.

Colon cancer is the third leading cause of cancer death in the United States for both males and females.

New cases of colon cancer are detected in 140,000 people per year, and about 56,000 people will succumb to the disease each year.

Medical images currently used in the detection of both lung and colon cancer are complex and difficult to interpret, leading in many cases to delayed diagnosis and later treatment.

These contribute to both unsatisfactory detection rates and unsatisfactory patient outcomes.

Our computer-aided detection tools are designed to address this challenge.

Our lung and colon cancer detection products are designed to work with digital images created through a process called computed tomography, or CT.

This is a digital image capture technology like digital mammography, but with a very large difference.

A CT image, which is sometimes called a study, consists of multiple, potentially hundreds, of sequential x-rays that are integrated to form a 3-dimensional image of the lung, colon or other area under study.

The amount of image information the radiologist is asked to examine and interpret increases the detection challenge as the doctor moves from studying a 2-dimensional picture like a mammogram to the analysis of an enormously more detailed and complex 3-dimensional patient study.

To estimate the market for our CT-based cancer detection products, we look at the number of CT devices installed and the growth rate for these devices and associated computed tomography examinations.

Today, CT devices outnumber mammography devices, with some 25,000 CT systems installed worldwide.

Of these, some 10,000 are estimated to be in the United States, 10,000 in Japan, and a large part of the balance in Europe.

Unlike mammography installations where growth is slow or nonexistent, CT device placements are accelerating in the United States and internationally.

CT examinations in the U.S. grew from 19 million exams annually in 1992 to 45 million examinations in 2002.

USA Today estimates that 65 million CT exams will be conducted in the U.S. this year.

Because CT systems are used for both lung and colon studies, we believe that each CT installation represents a potential buyer of multiple iCAD products over time.

Because each CT device is typically associated with multiple physician review workstations at which the doctor examines and manipulates the CT study, there is also a potential for additional incremental software sales.

New markets like this are inherently difficult to estimate, but a model that multiplies the number of sites by the number of the mediate (ph) products offered by the transfer price from iCAD for each software license gives us a measure of the magnitude of the opportunity.

On this basis, looking at some 25,000 sites as if each is a candidate for both lung and colon early cancer detection solutions and estimating what we believe to be a reasonable range of software licensing fees in each case, it is possible to define an overall market opportunity for products iCAD expects to release through 2006, well in excess of $1 billion.

We have made significant progress in both product and sales channel development for both lung and colon cancer detection.

During the third quarter and more recently, we have entered into distribution agreements for these with market leaders TeraRecon and Vital Images.

We will be demonstrating works in process for lung cancer detection and for colon cancer detection at the Radiological Society of North America show, or RSNA, which opens in Chicago on November 28th.

Today at the fifth international symposium on virtual colonoscopy in Boston, Vital Images is actually exhibiting a demonstration version of iCAD's planned colon cancer detection solution.

By associating ourselves early with long-term distribution partners, we have received critical guidance in cancer detection product design and positioning, and assistance in preparation for FDA submittals.

Based on feedback from our CT channel partners, we are able to prioritize our overall development and product release schedule to achieve the most immediate contribution to iCAD sales and enhanced financial performance.

On this basis, we currently anticipate release of our CT Lung products during 2005, with revenue contribution by the end of that year and an increase in material revenue contribution in 2006.

CT Colon products are expected to release in 2006, with material revenue contribution during that year.

Two strategic directions with important implications for iCAD's financial performance underlie these product and business development strategies.

First, they make iCAD increasingly into a software company, as we apply early detection technology to medical imaging that is already digital and requires no hardware-based conversion from film to digital format.

This trend, we believe, supports improving gross profit margins.

Second, our business model is expected to become increasingly focused on OEM sales channels, which are themselves responsible for sales, marketing, product installation, customer training, and customer support expenses that iCAD currently incurs in our more conventional distribution of film-based mammography products.

This should provide the opportunity for proportionately declining iCAD expenses and increasing profitability.

In closing, I would reiterate that we are pleased with our Company's financial performance in the third quarter and look forward to continued growth in existing and new markets.

This concludes my formal remarks.

I would ask the operator to open the floor for questions at this time.

(OPERATOR INSTRUCTIONS) Raymond Myers of Emerging Growth Equities.

Thank you and congratulations, Scott, on another quarter of doing precisely what you told us you would do.

Thank you, Ray.

Speaker: I was hoping you might give us a little more guidance on operating expenses, how those will trend in the fourth quarter and in 2005, relating that to the cost cutting initiatives which I believe is nearly finished, but there might still be some further reduction in the fourth quarter, or maybe where business is going well and we're going to see some increase.

Sure.

In the period from the second to the third quarter, there was a small increase in operating expenses.

That was attributable almost entirely to costs associated with compliance with the new Sarbanes-Oxley regulations, which turn out to be a pretty complex and a fairly expensive process for us.

Looking forward, I do not anticipate material increases in the engineering or in the general and administrative categories.

We will be improving our presence in the market with an enhanced and an increased advertising and marketing program.

And I would expect at the end of '04 and going forward into 2005 that is the line that we would see increasing in absolute terms, although not necessarily in percentage terms.

Great.

Then gross margin, how do we expect that to trend?

We had some manufacturing changes that I believe are complete now.

And then also comment on the parsing out the difference in changing gross margin impact from manufacturing versus just pure volume leverage.

Well, in the third quarter we had gross margins of 73 percent, which I think are admirable for a company which is providing a workstation and a hardware-based product, over 75 percent of its revenue base.

The opportunity for improved margins, as we would see the Company moving towards what might be thought of as software margins, will emerge as product mix, shift first towards mammography products or digital mammography and then with some greater acceleration as products for the study of lung and colon cancer are brought to market.

So I think you'll see this as a gentle and then accelerating trend.

Good.

Scott, could you help us understand the significance of the MD Buyline survey?

Clearly, it casts iCAD's products in a very favorable light.

Is that something that merely reflects the strong performance of your products currently in the market, or do you think that this will promote further market gains by influencing customer behavior?

I think if we use it and communicate it correctly, which we are working very diligently to do in the fourth quarter, it will change customer behavior and increase and accelerate recognition of iCAD's product leadership and iCAD's market share.

Good.

Scott, maybe you could elaborate a little on the recent agreement with Vital Images for the CT Colon CAD.

For one thing, it mentions an FDA review requirement.

What's the timeline for getting that product on the market?

That product is a product we anticipate having in commercial release in 2006.

We will expect to see the FDA process commencing near the end of 2005 or early in 2006.

There is the opportunity for sale into international markets prior to receipt of FDA approval in the United States, but in our internal plan we are really anticipating that the increasing value of that relationship and of that product line is going to begin to grow in the 2006 period.

Having said that, as I mentioned, literally today in a show that began in Boston, the first demonstration of this product technology was made by our OEM, Vital Images, and we believe that the promotion and marketing of the product begins now and continues through commercial release.

Good.

Well, I wish I could have been in Boston today and last night, but --.

You can't set me up here or I'm going to go off.

All I can say is it's been a late night for most of the last 10 days for many of us in the Boston area.

Well, I'll just say I moved to New Jersey after about 15 years in Boston, so it was a late night for me as well.

I look forward to seeing you guys at RSNA.

Thanks, Ray.

Denny Waynestrait (ph) of Stonegate Securities.

I was wondering (indiscernible) if we've seen the full benefit of the synergy that you developed when you acquired or merged with CADx?

I don't think we've even come close to seeing the full eventual benefit.

Notwithstanding the fact that the immediate benefit has been as significant and positive as it has been, the other parts of our reasons for merger related to the products which are now in the product development pipeline, which we will begin to see in 2005 and 2006.

So I believe the benefits of that combination of companies and resources and skills will continue to pay enormous benefits over a long period of time.

Okay.

That answers my question; thank you very much.

You're welcome.

Joe Rudy (ph) of Saxony Securities (ph).

Good morning, good quarter.

I've got a few questions as you probably would expect, and then I have one comment.

I'm glad to see that Denny from Stonegate was actually on this call.

One, can you give us any guidance as far as for where we stand for the fourth quarter, now that the first month of the fourth quarter is over?

The guidance that I can give is really general and related to the revenue line.

We believe that we are going to increase revenues in every category from the third quarter to the fourth quarter, and expect obviously that that will have a very beneficial impact on overall performance.

Do you see growth at the same rate as what we saw from the second to third?

Do you see growth increasing substantially?

I'm just going based upon the fact that 30 days of 90 days is just about done, and what you've seen already so far.

I think it's too early to tell.

It's certainly too early to project with confidence.

Historically, what we've seen in third-quarter to fourth- quarter transitions is a pretty significant improvement in the fourth quarter over the third.

The other thing that we've typically seen is that a tremendous amount of that arrives in December.

As a result, early in the fourth quarter there isn't necessarily enough evidence to be able to say with great confidence we're going to knock the cover off the ball.

But that certainly would be our objective, as I'm sure you would expect.

Well, I'm a Yankee fan, so let's keep the baseball analogies to a minimum.

I stand corrected.

No big deal, I was just joking around.

Do you see any change -- let's go from the reverse.

Do you see any reason why that this fourth quarter would not be as strong as any other fourth quarter or any other increase that you've seen in any other fourth quarter?

I don't see anything that would suggest that.

Speaker: Can you also give us any type of a roadmap as far as for FDA application for lung cancer?

I know in the second quarter in the conference call we were talking about potential approval by the end of this year, and at this point the application hasn't even, to my knowledge, hasn't even been filed yet.

Do you see the application getting in by the end of this year at least?

That's actually a good question and I'd like to provide a little more detail about that.

As I indicated, one of the real benefits of associating ourselves early with the OEM partners who will take these products to market is that they give us a real world, real market guidance in the configuration and sequence of products that would be useful to them.

Earlier this year we had, in our product plan, the expectation that we would release a product that was not to be used for lung cancer detection, but would be used to be able to measure and compare the character of lung cancer nodules that had already been defined by the physician; in some respects, a practice support tool.

And that, because of the nature of its function, would have been a 510(k) product which would require far less FDA review.

When we discussed those plans with TeraRecon, the recommendation, the strong recommendation we received was that we'd defer the development of what might be thought of as the complementary utility product and move directly through the process of development and regulatory approval for the computer-aided detection product, the core product.

Because they felt it would be far easier to sell the adjunct product if we had the cancer detection product at the lead.

With that guidance we also received -- really the opportunity arose to accelerate the development of certain products for digital mammography that got us more quickly into the market with Hologic and will get us more quickly into the market with Siemens.

So it was a conscious decision to defer the lung cancer utility product, to accelerate the digital mammography product, for 2 very important OEMs.

And the net result of that, I believe, will be the acceleration of both sales and earnings through the early part of 2005.

As to the specific date for filing the FDA -- necessary FDA requirements for the lung cancer product, I do not have that to be able to offer today.

Okay.

Do we see, though, in the fourth quarter or in the first quarter of next year?

Do you have a general idea of when we are looking?

It will not be the fourth quarter.

As I say, we have played through digital mammography development efforts with substantially more immediate revenue opportunity, so it will be during 2005.

Next question as I've asked pretty much, I think, on every single call for the past 3 or 4 quarters, institutional ownership; we've seen a little jump-up from first to second quarter.

From second to third, there was basically a minimal increase and it wasn't even 1 percent.

Is there anything being additionally done?

I know you had a few road shows back in August.

Are we aggressively still pursuing institutions as far as for ownership?

Yes, we are.

I have spent a great deal of time introducing iCAD to a wide variety of potential institutional buyers.

That really has continued up to and through the end of the quarter.

We didn't feel it was appropriate to be on the road between end-of-quarter and earnings announcement.

But it resumes again immediately with the AEA classic show, which you may be familiar with in Monterey.

That runs from November 8th through the 11th, and that gives us an opportunity to bring the Company before a large number of qualified analysts and investors.

I think that's an area where we've made a significant investment in time and resources and will continue to do so to support the growth of institutional ownership.

And then I just have basically one last comment, and maybe you could give me some feedback, or if not, I think my comment will -- I'll be more than happy with just that.

As you probably know already, Scott, from our conversations between my partner and myself, we are one of your larger outside shareholders with our clients.

When we saw the stock drop from about $3.50 to below $3, the only thing that we can attribute that to was a change of a research from Stonegate Securities, and that was with Denny who was just on the phone.

And his estimates went from actually you making money in the 2004 to you actually losing money in 2004.

And it was about a 7-cent swing on both sides.

I would say that the loss of basically 6 cents, if you just keep on the track of where you're going right now even with no increase, you're still going to beat those estimates.

And I understand that the report was written with no guidance, with no research on the Company.

After I had spoken with Denny personally, his estimates were based upon historical numbers of iCAD and historical growth rates.

I'm sure you would agree that historical growth rates of iCAD do not apply to iCAD today.

What you guys did 2 years ago and your growth rates of 2 years ago, you're not the same company today.

Is that a fair statement?

I think that's a very fair statement.

Because that was one thing that bothered me very much, and again being a shareholder of the Company and seeing -- owning this thing, owning iCAD from $4.50 all the way down to $2.60 and change, and continuing to buy, it was very, very frustrating to see an analyst come out and change his recommendation without any basis for that change.

I know the Company doesn't want to address that, but I felt as a shareholder a need to address that, and I think you guys are doing a great job, Scott.

Thank you, Joe.

All right.

We'll speak in the fourth quarter.

I look forward to it.

Larry Southam (ph) of Detwiler and Mitchell.

Obviously, the year-to-year gains are spectacular and I'm very impressed with some of the new work you are doing.

I was a little disappointed in the third-quarter level of revenues, which approximated -- were not that much above the previous quarters.

How much of this was a question of pricing, your products having lower price?

How much do you think might be attributed to the weather and hurricane problems in the Southeast?

I'm sort of trying to get some flavor for, in addition, for the potential levels that we could reach next year.

Well, I'm not sure I would share your disappointment with the, what I think of as a pretty significant increase in revenues and in gross margins from the second quarter to the third in percentage terms and in absolute terms and in terms of our achievement of our plan, which is what we expected to do and we did it, and we are very pleased with that.

I do believe there are factors in the market today that we paid great attention to and attempt to address with our product positioning and the priorities that we give to promotion and marketing of different product sets.

When we discuss the pricing of products, in many ways iCAD has an enormous advantage in that area because we have the lowest cost of goods and the lowest cost structure of the companies offering computer-aided detection of breast cancer products.

And the market acceptance of the Second Look 200 product confirms in our view the price sensitivity, the price elasticity of this market, and the fact that a product which is well-equipped and equipped with the best cancer detection software we have available and is priced to offer a value to smaller clinics opens up a significant opportunity for the Company.

When we look at the market for products for early detection of breast cancer, we do tend to look at it in 2 forms; 1 with respect to this smaller case volume clinic market where with the introduction of the Second Look 200, we're very pleased and expect to see continued success.

And the other in the growing market for digital mammography where we have maintained a level of market leadership that we hope to enhance and increase as Hologic and as Siemens come to represent additional sources of revenue for iCAD products.

So I think we did our plan, we're proud of that, and we expect to continue to do so as we move forward.

Okay.

What I am still trying to get a flavor for, the volume of the 200 model, which obviously is a lower price point, just what sort of impact that had on your overall sales.

I'm not saying the sales are bad by any means, but the -- what's your -- ?

I apologize if I understood the question differently.

The impact they had on sales in the third quarter was enormous. $1.3 million in new revenues, clearly the improved margins from the second to the third quarter were in part a result of the new contribution of the Second Look 200 model.

And as we offer that product we are conscious of the fact that the price at which we offer it may be lower than the previous generation of CAD solutions for film-based mammography.

But the margins on that product are superior.

And as we think in terms of gross margins and profitability, we were very pleased with the change in product mix.

And I do expect that that change in product mix will be sustained, that over time are going to see the Second Look 200 and later products in that class making up a larger and larger percentage of our solutions for film-based mammography, while the growth in the digital mammography sector creates what's effectively a complement.

I hope that is responsive to your question.

Going back to the original question, when one looks at the -- at 5 point -- at 6 million versus 5.64, which is a nice gain in the other business, it did not seem to have quite the impact I thought we would get out of new products.

But I realize it's early.

And I'm certainly very excited about what you are doing here.

Thank you, sir.

One other question.

Both the outside review of your product versus the competition and some other MD outlook, and some other comments around iCAD.

What can you say about the competitive position, and are you seeing any price cutting by your competitor to try and maintain position?

I think it's inevitable that our competitor has been required to respond to the value positioning that iCAD has established in several of these key market segments.

I believe that our competitor is -- certainly we have great respect for that competitor.

We take very seriously the challenge that their products represent.

When we look at the market we are clearly involved in a far greater percentage of purchase decisions than we were as recently as six months ago.

And when we are involved in clear head-to-head purchase decisions, we believe that we are winning a significant share, if not most of them.

The challenge that remains for iCAD as we continue in our efforts to take market share from a very long-term market leader, is to reduce the number of prospects who make the buying decision without reviewing both alternatives, without reviewing iCAD.

It clearly still takes place.

It is by nature a difficult component to measure or to estimate, but it is really an area in which we believe we must undertake some enhanced marketing and increased advertising.

And to be able to look at the MD Buyline report as an example of the net advertising tool and put that into the hands of more of the potential buyers, we believe can help us reduce the familiarity and the recognition factor that has benefited our competitor and begin to create a clearer and marketwide perception of the value and the quality, and as reflected in the MD Buyline report, the enormous advantage in customer satisfaction that iCAD products offer and deliver.

Very, very good.

That was certainly a very impressive review.

Thank you.

You are very welcome.

Jay Brosnahan (ph) of West Park Capital (ph).

Nice quarter, gentlemen.

You had talked about 75 percent of your revenue were from film-based CAD systems.

Where do you see that percentage going through the end of the year and then out to '05 and '06 as you start to move in more of a software play?

If we look back at the second quarter, the percentage was more nearly two-thirds film-based and one-third digital.

Because of the combination of introduction of the Second Look 200 and some softness in digital sales, which we attribute in many respects to seasonal and especially weather factors that impacted our OEMs, our OEM channels, that mix changed, and the percentage has shifted as revenues went up.

Looking forward, I would look at the fourth quarter as being much more nearly like the second in terms of overall percentage allocations, that we would see some recovery in the market for digital solutions and at that the same time would expect to see increases in revenues attributable to film-based mammography.

So that's kind of a race to see which one gets bigger faster.

When we look further out into 2005, and in particular into 2006, while we see growth in the film-based mammography market segment, and in particular in the price-sensitive lower case volume part of that, we really see a substantial increase in both percentage and revenue terms in products that are either digital mammography or digital computed tomography for lung cancer detection or digital tomography for colon cancer detection.

So that it is not impossible that those ratios by the time we're looking at 2006 could flip or be -- could flip.

And do you see any of that cannibalizing any of the systems that you sell, or is that all mostly lung and colon?

With respect to -- a large portion of it, of course, is lung and colon.

I mean -- I meant -- yes, that's what I meant.

I'm sorry.

Sure.

I think there is inherently some cannibalization or potential cannibalization in what happens in the large caseload film-based clinics as they move to digital because it's really -- it's almost exclusively the large clinics that are able to afford the investment to move to digital mammography.

Now the real dynamic here is that most of those large clinics with the foresight to be looking at digital mammography have probably already acquired CAD.

As we look at that segment that is clearly the segment which has had the greatest and the most immediate acceptance and uptake on computer-aided detection solutions.

I guess it's more likely from our perspective that we're making a second sale to an existing film-based CAD user than that we're swapping a digital sale for what might have been a new film-based sale.

Great.

And then as you move to the software sales what do you think that will do for your visibility?

It seems that it's a little hard to project outward going forward, and how do you think that will help?

It is a very critical question.

And it's one that I think has two different edges.

First of all, by working with OEMs we have substantially greater market presence.

When you contemplate, for example, being represented by the GE sales force, by the Hologic sales force, by the Siemens sales force, by the TeraRecon sales force, by the Vital Images sales force and more, then in a very short period of time you are in every corner of the globe and in every reputable and major account.

The challenge I think inherent in that strategy is to identify your product and brand through the OEM sales presence.

It's a kind of an Intel Inside issue, isn't it, where the fact that you're providing a substantial additional value to what an OEM customer is providing directly to the customer needs to be reflected in some manner in the way the product is labeled or branded or presented or marketed or advertising.

And those are challenges that we are beginning to handle, and I think handling fairly well, in the area of digital mammography, where we expect those lessons to contribute to maintaining and reinforcing the iCAD brand as we expand our digital mammography channels and as we add channels for colon and for lung.

And do you think that will help you give better guidance to some of the analysts out there so we can better get a feel of what your numbers will look like going forward?

I do.

I think that as we keep adding new business segments through new partners where we have no history, no baseline and no easy way to be able to provide trend information, it's enormously difficult to make projections that you can be confident in either way.

Building history, building channels where there is more predictability because your channel partners are in fact providing estimates, will allow us to be more responsive to what I think are absolutely legitimate requests from the financial public for some better guidance about where we're going to be.

Great.

Sounds good.

Nice quarter, guys.

Jeb Kerry (ph) from Aberdeen (ph).

Can you give us some color and update on the development of your distribution channel for the Second Look 200 and QuickCAD?

I know last quarter you were still kind of in the throes of training and developing collateral materials and things of that nature?

Right.

That is something that we have been able to mature a bit by deferring for a quarter the exploitation of the QuickCAD program.

QuickCAD is a program where we believe we can reach the end-user directly.

Where we can through advertising and through some new direct telemarketing and direct marketing by iCAD, reach out to the identifiable small clinics.

And provide them information about a program that allows them to offer computer-aided detection on a fee per procedure basis at previously unavailable prices.

That approach gives us some increased control over the way in which the prospect is handled and serviced.

In many cases we expect that will lead to a lead not for a QuickCAD consumer but for a purchaser of a Second Look 200 system outright or one of our higher end systems which become leads that we use to support our channel.

We have continued to build the balance of a channel that includes a national distributor and an increasing number of regionally defined independent resellers, together with some new manufacturers reps in territories that were not being effectively reached by either.

Combining that with an outbound marketing program for QuickCAD we believe reinforces the entire distribution channel and provides some advantages to everybody who's working with us to sell iCAD products.

In your comments that there were 5 units sold or installed for QuickCAD, as a trade-off for providing units for other Second Look 200 installations, was that a function of a manufacturer constraint or of immaturity of your marketing?

It was a manufacturing plan constraint.

We had planned to manufacture and to sell 50 units, and to do that at iCAD's own production facility here in Nashua before transferring production to our longer-term contract manufacturer in Manchester, Connecticut.

And we basically executed that plan.

We built the units here that we had in the channel, in the production channel, we transferred production and we are now in Manchester and without the previous limitations on supply which were really an appropriate condition of the first stage of manufacture prior to manufacturing handoff.

When did your outbound, your direct marketing kick in exactly?

Is that a recent development?

This week.

We like the program though, it's a good way to be able to bring our identity and this particular opportunity to lots of prospects and to do it in a way that we control.

Makes sense.

Your unit volume was up 16 percent sequentially so that is very good news.

I gather then there is, because of the configuration mix as much as perhaps marketing pressures your ASPs on the higher volume clinics seems to be lower than where I had you before.

Is that a function of the fact that it's becoming more software as you say you're selling add-on functionality, as opposed to a greenfield installation or how does that work?

I think it's really a matter of more Second Look 200 units.

Because that is a product which notwithstanding higher gross margin levels is at a lower transfer price than our continuing Second Look 500 and 400 lines.

And is really priced and positioned to meet the needs of lower volume, more price-sensitive clinics.

By your comments should I infer that perhaps the SourceOne relationship isn't quite as productive as you had hoped?

I would not infer that at all.

We are working constructively with SourceOne as our national distributor and with our regional resellers.

And if there were a comment to be made it would be that there has been a stronger performance with the higher end products through SourceOne and a more immediate uptake of the Second Look product than to a lesser extent QuickCAD through the independent regional resellers.

That is not a bad balance.

Right.

And so as we speak, kind of rough numbers it looks like when you were putting all this together there were going to be like 300 sets of feet on the street selling your products.

Is that still an operable number?

When you added together SourceOne and some of the other distributors?

I think that is a reasonable number for the folks who are out there representing and promoting iCAD products.

George Whiteside with SWS Financial Services. (ph)

I was particularly pleased to see that during the quarter you had a nice expansion in your margins.

And so I personally felt very reassured by that in light of the how the stock was performing perhaps because of some other considerations including a relatively sloppy overall market, but I was very pleased to see that.

My question, I've got a couple of questions.

One is in terms of your colon cancer application, I infer from your comments or interpret your comments to indicate that the '06 launch date apparently is driven more by FDA and regulatory issues than anything else, is that an accurate assumption?

I think there is actually another factor, and that is that we are resisting substantially increasing overhead.

With a very extraordinary engineering and scientific team we are still imposing some sequence in terms of the projects that they undertake and complete.

So we really have the bandwidth to be able to do the primary work on the lung cancer product and then begin to shift more to the colon cancer product.

But without substantially adding to overhead and expenses we are not really in the position to do both at the same time.

Our business strategy is based in large part on a careful management of the expense structure, of the overhead and of operating expenses.

And for that reason we are balancing the speed to market for the colon product against the cost of accelerating it.

It makes perfect sense.

The fact you are pacing your introduction of new products so that you don't stress various parts of your overall system including the financial aspects.

We are working hard to stress as many of our people inside as we can.

But it is constructive.

It certainly sounds as though that is the case.

On the financial side, in the release your comment on the results for the first three quarters or the nine-month results, how much of the operating loss for the nine months was attributable to the expenses in connection with the merger/acquisition?

Remind us of that?

I know that --

In the first quarter, George, we had a loss of $1.9 million.

Of that amount I have Annette Heroux here who is our chief financial officer, I guess the estimate I would make without going back in and looking at it is that probably 1.4 million level of magnitude was attributable either to the excess overhead that we had through the first quarter, or to the onetime expenses associated with closing offices in Florida and in California.

And with reducing our overall staffing levels and providing separation benefits to those people who left the company which were accrued for in the first quarter.

So in other words essentially for the first nine months operationally stripping out the extraordinary items you basically were breakeven for the first nine months?

I think that is not an unfair way to look at it.

We would have to go in and dig down into the numbers with more precision but that's in the right ballpark.

We are looking at it more or less on a macro basis rather than trying to delve into the details but on an overall basis a fair statement even though it is not broken out separately, is that operationally with the orders profits that brought you to essentially a breakeven for year-to-date?

I would actually add a somewhat different perspective as well, when we look at EBITDA, at earnings before interest taxes and depreciation and amortization, even with the first quarter as it was recorded we are pretty close to a breakeven in that number now.

Our EBITDA for the third quarter was $830,000 which reflects the fact that we have some fairly material, non-cash expenses we record every quarter associated with merger accounting.

That is a very valuable piece of information.

Thank you.

You are very welcome.

Larry Ceisler (ph) with First Southeastern Securities.

Scott, tremendous quarter.

For those of us that have been affiliated, associated, been a player so to speak with you for so many years I want to thank you for letting us understand how we move from a basically 1, 2, 3 type sales situation into an OEM manufacturer, that's quite a change.

Just a couple quick questions for you, Scott.

We are seeing quite a bit of insider selling lately and for what I don't quite understand why that's happening, but I guess the question is is there anything that can be done about it in view of the fact that this is doing nothing but hurting us?

Perhaps you can comment on that and then I have one or two other questions please.

This is a good question Larry and I and would like to comment at a little more length on this.

As you know and I'm sure others know we have had insiders, officers, directors, principal employees who have made sales over the past months and quarters.

I am familiar at this point with three and there really are some different issues in each case.

I guess I would distinguish between the fact that these insiders are selling, where for example in the case of Dr. Rogers there was a sale of 20,000 shares in August which represents an insignificant portion as I am sure you understand of his holdings.

In some respects offset the fact that Dr. Rogers was willing to accept a reduction in compensation to assist us in achieving profitability.

Or those of Dr. Salom (ph) again with more than 2 million shares, Dr. Salom entered a 10-B-5 selling plan which had the potential to liquidate her holdings over the period of some 10 or 11 or 12 years.

I say that sarcastically of course.

Relatively small portion of her holdings and represents the fact that for Dr. Salom as an academic who formed one of the companies we acquired in 2002, she and her family have no liquidity and no other assets than the iCAD security.

These are not people who are selling shares because they lack confidence in our company or for any other reason than in some cases to allow them to restructure their relationship with the company for the Company's benefit.

Having said that, where the market is as thinly traded as it has been over the last months, it is clear that anyone selling, an officer or a director or a shareholder without those affiliations with the company puts pressure on the stock, on the existing shareholders and can be detrimental to the company.

I have communicated that fact to Dr. Rogers and to Dr. Salom and I believe there is an understanding and an interest and a willingness in not taking any actions that would be damaging to the company.

The issue is one which is very visible and it is one in which we believe the long-term solution is to continue to improve the performance of the company.

And to continue to seek additional institutional investors and to do so in a manner which ultimately benefits all of the shareholders.

I think that helps clear the air somewhat.

I have another question on a different topic.

If you can comment on the new Hologic relationship that had been one where they had primarily worked with our competitor, not with us.

Perhaps you can shed some light on that please?

We are very pleased and gratified at Hologic's decision to begin to work with iCAD.

We have completed the Hologic product, the software that is necessary to support their systems and we have received FDA approval for it.

We have trained the Hologic sales staff and we are seeing current activity by that sales staff on iCAD's behalf.

Because of the period, the order cycle for Hologic's products I would anticipate that we will start to see significant benefit from this relationship in the first quarter of '05 as the orders that are now being solicited reach Hologic's manufacturing schedule and shipment schedule.

But we are very, very pleased at the fact that Hologic has been sufficiently impressed with iCAD's performance and with our conduct as a company and as an OEM partner.

To honor us with what I think will ultimately be a material portion of their business.

As a final comment, I would very much enjoy seeing iCAD link to Intel as they are an OEM, so will we be.

Scott, wonderful job, thank you very much for being so lucid today in this conference call, have a great day, sir.

Jeff Neil (ph) of Bear Stearns.

Being brand new to this story I have a very rudimentary question.

Could you explain the structure of your debt obligations on the balance sheet?

I am not familiar with them being brand new to the story.

There are really two principal debt components.

One of those is a line of credit in the current amount of $3.8 million, I'm sorry, Annette is correcting me, $3.6 million which is a rolling line of credit at 7 percent, 8 percent interest per year.

The other is an obligation that we incurred to the former corporate owner of CADx of Qualia which we purchased in December of 2003.

The current amount outstanding under that note is $3,750,000, it has been reduced from $4,500,000 over the course of this year through a series of scheduled quarterly payments.

Between those two that's really the entirety of the debt obligation that we show.

And the line of credit is that with a financial institution or is that on a private basis?

I'm sorry that's a private line of credit with our Chairman Mr. Robert Howard.

Is that line of credit supported by any type of subsequent equity issues?

The line is convertible at Mr. Howard's option.

And the conversion formula is to treat the conversion date as the date at which funds were advanced or the date at which funds are converted, whichever is more beneficial to the creditor.

So that we have a potential conversion of that or the company may elect to pay it.

It is actually been static for quite some period of time now.

The option resides with the company?

The option resides with Mr. Howard.

Can you comment, if it's relevant at this point, with regards given your growth aspirations the either availability or the adequacy of your capital base to do so?

We are operating on a business and financial plan that shows our capital and our cash base to be sufficient for the business objectives that we have in the coming quarters.

Thank you very much.

(OPERATOR INSTRUCTIONS) Scott Warner, who is a private investor.

I've got a couple questions, let me start with a small one first, if I may.

You have seen some of my e-mails perhaps, I'm wondering why I get notices from two wonderful organizations of the same, (inaudible) same news announcements and so on including this conference call.

I am just saying it seems wasteful to have two organizations mailing stuff out.

Okay, that is the small one.

First I want to make sure I have it right, on iCAD shipments I know you said you shipped 52 in the September quarter, were the total units 136?

Did I have that right?

Yes, you do.

What can you give us going forward us to members on orders and/or shipments or both?

I'm afraid the guidance that I provided in general terms is probably as detailed as I can provide for the fourth quarter or looking forward.

Let me get into some other questions.

In New York here where I live, Manhattan, they have a lot of bicycle for this, walk for this and so on and they have National Breast Cancer Awareness month I believe and I have seen people marching and riding whatever for these things, what is iCAD doing about being involved with this kind of a thing?

That is a very good question.

And it's an area in which we have increased our attention really over the last month to month and a half.

And I will take a step back, if I may, Scott, I think one of the areas in which iCAD consciously made a decision that we might go back and think about again later, was to limit the amount of public relations activity and the public relations expenditures that we made historically.

I think that resulted in a lower-than-achievable profile for the company and in less awareness on the part of the women to whom this technology is so important.

Of the availability of the technology or the fact that iCAD provides an early cancer detection solution.

About six weeks ago we made some changes to our organization and some additions to be able to restructure our marketing department to more clearly define public relations and advocacy as the task of a very capable, very experienced woman on our staff.

With that start, end of September she began working with a variety of contacts to provide assistance in promotion of breast cancer awareness during October.

And to begin to set up longer-term relationships that we think can create corporate sponsorship and better media and press coverage for iCAD and for the availability of computer-aided detection as a truly valuable resource for women.

In this current October we began to see the benefit of that, actually quite a number of locally based television, radio, newsprint and media exposures of our company and of our technology.

And I believe that that number will enhance, will be increased and enhanced significantly as we move forward.

We really do see next October as being a opportunity that we want to take far better advantage of than we have in the past.

We are in a transition there.

I'm pleased with the improved results and it's an area where we are giving a higher priority to that form of introduction of the company.

I have one thought, it might be a crazy thought on this but in Manhattan at least they have tents and people donate food say for runners and all this other stuff.

I don't know if it's crazy but suppose you had a little trailer with a whole machine set up and a doctor and all that you would then have a lottery and women if they wanted to bring an x-ray or something, the first 100 or whatever, first 50 or something would be able to get a free cat scan of their x-ray or something.

I don't know if that make sense but something I just thought I would throw out.

I welcome any creative ideas.

And something that can give us exposure, we clearly will consider and try to be as creative ourselves.

I live in Manhattan and believe it or not it is almost impossible to find a location as of -- the last time I checked was about 5 months ago -- to find a location such as Sloan Kettering that has a CAD device on either a digital or on the regular x-ray film type.

I thought it might be helpful now that we are becoming a major force to at least sent out a list to shareholders, I don't know who else, of locations with phone numbers of where they are being set up if they're not actually in operation yet where they have sold equipment so we state by state can find locations.

I try to tell friends about this but I don't know where to send them and it's easier if there are places.

I just thought this would help get word-of-mouth if there are locations available.

I think you are right and it is something that we believe will be important.

My own view, Scott, is that this is something I would like to join with our competitor in doing.

That as we offer a solution to women around the country there is a point at which the competition should be put aside to be able to consolidate a list and make that available to women so that every potential source of computer-aided detection is available and accessible to them.

That is something that we have as an objective to discuss and it may well be that we will be in a position to talk more about that later.

Lastly, on the Second Look 200, was there any problem that might have affected sales in the production end of this business?

I know you're moving it to New Hampshire, (inaudible) you told us early in the meeting.

To Manchester, Connecticut.

Has this accounted for any reason we didn't ship more units because of production problems?

We shipped very unit we had in the plant.

Production problems didn't constrain our ability to introduce the product and what we wanted to do was exactly what we did.

In moving to Connecticut we do have the ability to be more flexible and to respond to increases in demand.

That really was not an option for us when we began what would be considered initial build in our own FDA approved facility here in New Hampshire.

Much more conceivable with the far broader resources of our contract manufacturer.

One last question.

Unrelated, in the CT business of 2005, 6, so on what is the software competition now or expected in that field with what we expect to be doing providing the software for lung cancer and colon cancer?

Good question.

In the lung cancer area our current breast cancer detection competitor has already been granted FDA approval for a lung cancer detection product.

Clearly would be among those that we would expect to be viable and important competitors as we enter the market.

You said that is our 2 (ph) then?

That is correct.

I see, has approval, okay.

You know, Scott that if you use that name on our conference call you owe everybody a beer.

I'm sorry.

What about colon cancer then?

In colon cancer there are a number of companies that have either discussed or announced products which assist in the management of colon cancer.

I'm not aware of any that have identified the capacity to detect it.

I think the manufacturers themselves, companies like GE, like Siemens, like Fuji, like Hitachi are almost inevitably involved in some research in these areas.

But they frequently face make-or-build decisions and our long-term plan beginning with partners like Vital Images and TeraRecon, is to be available and to become a valuable resource to those channel partners as well.

Would you say that again getting back to our "competitor" in the lung area of CT, is this -- what kind of impact is it that we are going to be second in there by maybe late by a year or something behind them?

What is that due to our coming into the field?

Makes it less expensive for us.

I think that what we look at is an example is the process in the introduction of products for the detection of breast cancer where the first entrant is not necessarily privileged.

There are significant costs that are to be expected in making people aware of the availability of a technology or solution of this kind.

Not all of which become tied to brand.

There is clearly a benefit and it's much more consistent with our approach to look towards a market which is increasingly ready to buy as the appropriate time to introduce an iCAD product that we really want to not just shelf, but to sell.

Scott, this next question I am going to state something because I don't think as a CEO, you dare answer it.

But thinking of what Bill Gates' firm does, they announce that they are going to have something, that they are a major in the field as we have become in our field today in the mammography area, if people think give us some respect because of what we are doing now in mammography, the CT people know that we are going to have something and they know that instead of buying the competitor's, they know we are going to be there an X number of months away, they might not buy the competitor's product.

I am just saying here is something to think about.

I don't know if it's legal and all but I just throw this out to the sales force people.

I think you are quite right.

And really we've been benefited by the activity of Jim Corbett who is our chief commercial officer in making been necessary contacts to introduce iCAD at the appropriate levels to these potential computed tomography driven OEMs.

We are really doing pretty well in that area in my view.

Okay, I thank you.

Good luck.

You have no further questions at this time.

I actually have one more thing to say.

Before we leave today I have the pleasure of making an additional announcement.

This morning iCAD was named as the 2004 recipient of the Frost and Sullivan award for growth strategy leadership.

Frost and Sullivan, a global healthcare consulting firm, bestowed the award on iCAD and I quote, "in recognition of iCAD's exceptional execution of strategies which has led to the Company's massive growth in the CAD systems market."

The Frost and Sullivan award for growth strategy leadership is given each year to the company that has demonstrated an exceptional growth strategy within their industry.

I would like to read briefly from the award.

ICAD was incorporated in 1984 as Howtek, Inc. and has come a long way to make its mark as one of the prime CAD developers. iCAD is considered to be the only independent, integrated digitizer hardware and CAD software company offering CAD solutions for breast cancer.

ICAD has made its presence felt in the radiologist's room by developing high-quality CAD solutions which are now in great demand due to increased awareness and screening programs. iCAD completed the acquisition of CADx on December 31, 2003, thus forming iCAD, Inc.

This has led to the teaming up of two leaders in the CAD systems market through which they are now all set to capture the worldwide CAD systems market.

Convergence of both the companies has led to merger of their sales channels and their product lines.

The company is fused iCAD's IQ MammoReader and Second Look products into one Second Look product range.

This has led to the formation of the broadest and most comprehensive line of CAD products available in the industry.

The Company is now launching a smaller and economic version of CAD, CAD mammography which can perform up to 20 cases per day.

This low-cost version is likely to further stimulate the growth of the CAD systems market in a segment were customers once found it difficult to invest in CAD solutions due to high prices.

The introduction of this product will soon stimulate the growth of the overall market.

Frost and Sullivan, and I am continuing to read, Frost and Sullivan is very optimistic about iCAD's future growth in the market due to the confidence it has on its products which show excellent performance.

These products are very easy to use, have a very high-speed of scanning and are also priced suitably to match customer budgets.

Its alliances with the OEMs of mammography units such as GE Healthcare and Fisher Imaging has also helped them to gain higher accessibility to the market.

The company is also considering adding some more systems manufacturers onto its list to penetrate more into the market.

Frost and Sullivan appreciates the strategies adopted by iCAD to create its niche in this market.

The successful acquisition of CADx, the launch of its new economy version Second Look and also its alliance with some key original equipment manufacturers has led to a huge profit for the company.

This is visible from the fact that the company has declared a 145 percent increase in its first-quarter sales of 2004.

The company is now also focusing on development of new and advanced CAD diagnostic tools.

Apart from mammography CAD the company also plans to divert its attention to develop systems for detection of breast cancer using ultrasound and the detection of colon cancer by developing virtual colonoscopy tools.

The introduction of these products in the near future will surely help the company to obtain a stronger position then before.

The full text of the Frost and Sullivan leadership award is available or very shortly will be available on the iCAD website, iCADmed.com and we will be issuing a press release at the close of this conference call to provide notice of the fact that we've received this prestigious award.

We are very proud to have been recognized in this manner by Frost and Sullivan.

And we couldn't have said it better ourselves.

Thank you for your time this morning and goodbye.

Thank you for your participation.

This concludes today's presentation.

You may now disconnect.

Have a good day.