ICAD Inc (ICAD) 2004 Q4 法說會逐字稿

Good afternoon.

Welcome to ICAD's fourth quarter and year-end 2004 conference call.

My name is Candace and I will be your conference coordinator today. (Caller Instructions.) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Kevin McGrath of Cameron Associates.

Mr. McGrath, you may begin your conference call.

Thanks, and good morning, everyone.

Before I turn the call over to Scott Parr, President and CEO of ICAD, I need to inform you that 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 at 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 that the statement was made.

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

Now, without further delay, I will turn the call over to Scott Parr, President and CEO of ICAD, Inc.

Thank you, Kevin.

Ladies and gentlemen, good morning.

Today, ICAD recorded record performance for the fourth quarter of 2004 and for the year overall.

On a quarterly and on an annual basis, and from quarter-to-quarter during 2004, we have increased sales, margins, and bottom line performance.

Our sales have grown 300 percent from the fourth quarter of 2003 to $6.3 million in the fourth quarter this year.

Sales for the year overall increased almost 260 percent to $23.3 million.

As we add additional products and sales channels in our core mammography business during the first and second quarters of 2005, we anticipate sales will continue to increase for 2005 overall.

Gross margins grew from 55 percent in 2003 to 72 percent in 2004, demonstrating ICAD's character as a medical software developer with key proprietary hardware enablers.

Our gross margins were 77.3 percent in the fourth quarter of 2004.

Performance we achieved while introducing increasingly affordable products to our market.

Gross margins of 77.3 percent, while bringing even more value to our purchasers and customers.

Our margins reflect ICAD's increasing sales in digital cancer detection markets and our continuing cost of goods advantage as a vertically integrated provider of cancer detection solutions.

As the software component of our business continues to grow as an overall percentage of sales, we anticipate margins will increase from 2004 to 2005.

Operating expenses represented 179 percent of sales in 2003, declining to 73 percent of sales for 2004 and 65 percent of sales in the fourth quarter.

We anticipate that operating expenses in 2005 will decline further as a percentage of sales, in particular, in the area of general and administrative expenses.

In absolute terms, our objective is to decrease G&A slightly over 2005 with engineering expenses relatively constant in absolute terms and sales and marketing expenses increasing modestly, in part, as a result of commissions paid on increasing sales levels.

Cost control continues to be a priority for ICAD and represents a real competitive advantage to us.

Immediately following our acquisition in December 2003 of Qualia Computing and its CADEX Medical System subsidiary, we reduced staff, closed offices, and substantially reduced operating overhead.

Reporting a first quarter 2004 loss of approximately $1.8 million, much of it non-recurring.

As a result of our first quarter loss, our net loss for the year-ended December 31, 2004 totaled $828,000 or 3 cents a share, compared with a net loss of $8.2 million or 31 cents a share for the previous year.

Since the first quarter, ICAD has been profitable.

Net income for the fourth quarter of 2004 totaled $660,000 or 2 cents a share, compared with a loss in the previous year of $1.6 million or 6 cents per share.

When we consider earnings before interest, taxes, depreciation, and amortization, or EBITDA, the progress is even more dramatic.

From an EBITDA loss of $7.4 million in 2003, we report a positive EBITDA of $1.1 million in the fourth quarter of 2004--in the fourth quarter.

EBITDA for 2004 overall was $1 million, reflecting first quarter losses.

As a result of our payment of a line of credit outstanding in 2004, interest expenses should further decline in 2005 by about $240,000, further enhancing profitability and cash flow.

Overall, our cash flow during the fourth quarter of 2005 was positive for operating activities, generating $612,000 in this area.

As a result of both operations and a financing in December of 2004, ICAD's balance sheet has never been stronger.

Cash and cash equivalents increased to over $8 million at December 31, 2004, from $5.1 million a year earlier.

Total assets increased by almost $2.5 million, while total liabilities decreased from $14.8 million to $8.2 million, with significant reductions in both accounts payable and notes payable.

We have, in the course of the year, addressed two primary concerns raised by potential institutional investors in ICAD.

Our need for cash to sustain aggressive growth rates and expectations, and elimination of a related party line of credit to the Company, which carried a high conversion premium.

In 2003, ICAD made 61 computerated detection shipments, with 16 shipments in the fourth quarter of that year.

In 2004, ICAD shipped 465 CAD systems, an increase of more than 660 percent.

In the fourth quarter, we shipped 144 early detection of cancer systems, an increase of 800 percent.

For 2004, shipments for use with digital mammography systems, a category that represented virile sales in 2003, accounted for about 30 percent of sales and about 40 percent of unit shipments.

In the fourth quarter of 2004, digital sales made up 27 percent of overall sales, reflecting the strong comparative contribution of the newly introduced Second Look 200 product line.

Our Second Look 200, which we began to promote in the third quarter, accounted for approximately 70 units shipped in the fourth quarter, with additional customers deferring purchase until release of the networkable Second Look 300 in the first quarter of 2005.

Fourth quarter shipments included approximately 20 Click CAD installations.

The pace of Click CAD installations is increasing and we expect Click CAD placements to continue to grow through 2005.

As of the third and fourth quarters of 2004, we believe that ICAD is the leading supplier, in unit terms, of both film-based and digital systems for early detection of breast cancer.

2004 has been a year of great accomplishments for us, which have contributed to, and in some cases, resulted from, our market leadership.

Including--included among the most gratifying are these.

First, our Second Look 200 product introduction .

The introduction of our new Second Look 200 solution for the early detection of breast cancer was the most successful product rollout in our history.

This product makes early cancer detection affordable for smaller women's health care providers and accessible to an increasing number of women at risk.

The Second Look 200 is savings lives today, sparing patients and families the anguish of late stage cancer detection, and saving money for the health care system overall by allowing less expensive treatment at an earlier stage of cancer discovery.

Jarred David, Radiology Administrator at Twin Lakes Regional Hospital in Twin Lakes, Kentucky, explained why the Second Look 200 is so successful at his facility.

In his words, "The Second Look 200 has taken mammography to a whole new level for us.

It used to be a service that we provided because we had to.

It made the doctors feel uncomfortable because of the litigious nature of the modality and it was a revenue loss for our hospital.

The Second Look 200 gives the doctors assurance and increases our revenue so that it is no longer a loss.

And that means that we are now providing a better, more confident service to the community.

The Second Look 200 runs perfectly.

It is always there and running for us."

Our second achievement was the introduction of a deeper procedure program we call Click CAD.

Our Click CAD program aims to make the Second Look 200 solution even more affordable and accessible.

Timothy Stevens, Radiology Administrator at Calumet Medical Center in Chilton, Wisconsin, puts it this way. "Click CAD gave us the ability to offer increased services to our community.

We did not have the capital budget to afford computerated detection, and at our low patient volumes, we would never have been able to cost justify CAD.

With Click CAD, early cancer detection is a standard of care that is a part of every mammogram we perform.

CAD is good for everyone involved.

It is good for the patient, requires no additional work for the staff, gives the doctors peace of mind, and increases our revenue.

The Second Look 200 has run flawlessly since we installed it.

The third point of achievement I want to cite is our recognition as the customer satisfaction leader in our industry by M.D.

Byline, a respected third party reviewer of medical systems and products.

M.D.

Byline has defined ICAD repeatedly as the value leader in computer aided detection.

In November of 2004 in a survey published by M.D.

Byline at that time, ICAD demonstrated an unprecedented level of superiority in each and every aspect of customer service, satisfaction, and value reported by the service.

Finally, during the fourth quarter, ICAD was recognized by internationally renowned consulting firm Frost and Sullivan as winner of the Frost and Sullivan 2004 Award for Growth Strategy Leadership, recognizing, in their words, "ICAD's exceptional execution of strategies, which has led to the Company's massive growth in the CAD systems market."

It is gratifying for all of us to receive that kind of recognition from renowned industry professionals.

In many respects, we are now completing our first year of operation as a renewed company from the second quarter of 2004 through the first quarter of 2005.

For that reason, we lack any of the historic information and trend information that would permit us to confidently make specific quantitative projections regarding performance in the periods ahead.

In more general terms, however, we can express our expectations for 2005 and beyond.

Simply put, we anticipate increased sales, increased margins, and increased earnings in absolute and percentage terms.

In 2005, we are budgeting for sales growth in our existing mammography market as a result of additional products and additional sales channels which begin to contribute early in this year.

While the contribution from additional markets in lung cancer detection and in colon cancer detection may be recognized sooner than budget, we anticipate that the contribution from new lung cancer and colon cancer detection markets will become material in 2006 and continue beyond that period.

In the current first quarter of 2005, we are adding new film based Second Look 300 and Second Look 700 products to our Second Look 200 value leader.

New digital products for digital mammography systems from Hologic, Semens, and Giotto, should each contribute additional sales in 2005.

And an updated system for GE Health Care is designed to support our continuing relationship with GE as ICAD's largest customer.

During 2005, we are also adding significant additional sales channels to both film based and digital mammography product lines.

We have previously announced the decision of Hologic to offer our Second Look 200 under Hologic's brand and trade name, a relationship we anticipate will be productive for both Hologic and ICAD.

We have not previously announced a very critical improvement to ICAD's channel partners, which we will discuss here.

Beginning in the current quarter, Fusion Sales Partners, the sales organization that handles GE Health Care's mammography product line, and our GE digital mammography solution, will begin to sell all of ICAD's film based products as well.

This adds an enormous new ally and a very important new source of sales, which is already beginning to contribute results.

On the digital product front, GE Health Care will be joined as an ICAD OEM and sales channel by Hologic, Semens, and Giotto, adding to ICAD's leadership in sale of early breast cancer detection solutions for digital mammography.

Overall, we are also anticipating a greater contribution from international markets in 2005.

Our International Sales Director is now working with GE Health Care, Fischer, Hologic, Semens, and IMS Giotto sales channels to prepare for, encourage, and support their sale of ICAD digital mammography solutions outside the United States.

With ICAD's new Second Look 200 and pending Second Look 300 products representing what we believe to be the first affordable film based CAD solutions for characteristically price sensitive international markets, we are also now beginning development of international distributors and resellers to promote these film based product lines in national markets.

Our movement into additional markets will begin with systems to assist in the detection of lung cancer.

We anticipate our first FDA filings for lung cancer applications will take place before the end of this quarter, structured with the cooperation of our OEM partners in this area, to assist radiologists in reading and interpreting complex lung images.

We believe we can bring this class of products to market with what is called a 510-K FDA submission, which requires less time and expense than a [inaudible] market approval of PMA submission.

A PMA submission for lung cancer detection, making more aggressive detection claims, will follow shortly thereafter.

We are also working concurrently on computer-aided reading and computer-aided detection systems for colon cancer applications, and anticipate a similar two-step filing strategy can assist in reaching these markets during 2006.

Our market opportunity in lung and colon cancer detection is defined in part by the number of existing and new computed tomography systems being used in lung, thoracic, and abdominal imaging.

Today, there are some 25 to 30,000 such systems installed with new installations estimated to be growing at a rate of about 15 percent per year.

Each CT installation represents a potential purchaser for both lung and colon ICAD products.

We can easily model a market opportunity in excess of $1 billion for these applications.

Increased sales contribute to [inaudible] performance, but ICAD has another source of performance leverage.

Our business today has two primary aspects with different operating profiles.

In our market for film based mammography products, ICAD offers customers a complete branded solution with hardware and software components distributed largely through resellers and dealers.

We market and sell and in some cases install and provide training for new users.

We provide frontline support and customer help desk services, all of which contribute to operating expenses.

In our digital mammography market and in the digital markets for lung and colon cancer that develop in coming quarters, we are effectively a software company with limited hardware content in our product offerings.

We are also an OEM supplier, providing ICAD's product to OEM customers like GE Health Care, Hologic, Semens, Fischer Imaging, Giotto, Telerecon, Viatronics, and Vital Images.

These OEMs assume many of the costs incurred by ICAD in our own distribution of ICAD film based products.

There are two key implications for an increase in our digital software OEM markets relative to our hardware based distribution based film based solutions.

As an increasing percentage of our business comes to be derived from software based OEM activities, gross margins would increase from current levels as we become more completely a software driven product company.

Over the next three years, as the balance of our business shifts from hardware enabled sales to software licensing, our objective is to achieve and maintain gross margins approaching those of more traditional software companies.

Secondly, our profitability overall is expected to increase as the operating margins of our business increase in the transition from distribution based to OEM business models.

Over the next three years, as the balance of our business shifts from an ICAD supported distribution business model to an OEM, our objective is to achieve maintain operating income margins approaching those of OEM supplier company-type performance.

Given our existing $45 million net operating loss carry forward, we understand that when we bring this kind of performance to the bottom line, we have a substantial tax shelter to protect.

For ICAD, the result is leverage.

As sales increase, we expect to improve gross margins disproportionately, and see earnings increase more rapidly in absolute and percentage terms that would be achievable through expansion of our core business alone.

From a manufacturer of printing equipment with declining sales, nonexistent margins, and growing losses, we have transformed ICAD into a growing profitable world leader in the development and sale of software based solutions for early detection of cancer.

We are very pleased with results in 2004 and in the fourth quarter, and look forward to your questions.

(Caller Instructions.) Our first question comes from Stephen Dunn of Doss and James.

Please proceed.

Hey, Scott.

Well done.

Thank you, Steve.

On your sales mix now, you were previously running roughly 75 percent film based, 25 percent digital.

By the end of this year, where do you see that ratio going?

Well, in 2004, the final numbers were 30 percent digital, 70 percent film based.

In the fourth quarter, digital was 27 percent of sales, in part as a result of the improved sales of our Second Look 200 line.

When we look forward to 2005, we understand that we're doing two things simultaneously.

We're bringing out the Second Look 300 product, which is our first networkable value level product, and we anticipate that sales for that product will be very large.

At the same time, we are adding major new digital distribution components, in particular, through Hologic, with contributions anticipated as well through Semens and through Giotto.

In some respects, the relationship between the pace of sales growth of those two components will define where we end up at the end of 2005.

My sense is that we will have increased digital sales in 2005.

And at a rough estimate, Steve, I would say we would be in the 30 to 33 percent range.

As we move into '06 and '07 and the lung and colon cancer products provide disproportionate additional sales, I think we can contemplate that moving towards 50/50 and ultimately reversing with the overall contribution to Company revenues being predominantly software based OEM sales and a significant and healthy component, but a reduced component in percentage terms, being associated with our branded product lines.

Okay.

So your Q4 margin, 77 percent, you felt confident that that would improve even in 2005.

Is that a fair--you know, is that a--for your 77 percent for Q4?

Yes.

And then, last question.

The R&D you said will continue, you know, roughly flattish, but with a dip in Q4 in your engineering expense.

Are you saying it's going to be flat from the Q4 level or--?

No, that's a very good question.

Engineering was high in the first quarter before we made staff reductions associated with the combination of ICAD and Qualia Computing.

When I talk about the constancy, I'm really talking about year-to year, which indicates an increase from the fourth quarter level as--in particular, as we increased the investments in more advanced [inaudible] equipment.

Okay, great.

Well, keep up the good work, Scott.

Thank you.

Our next question comes from Denny Waynestrait, Stonegate Securities.

Please proceed.

Hi, Mr. Parr.

Great quarter.

Hi, Denny.

Thank you.

I've got a quick question for you.

It just falls back on the Click CAD 200.

Do you have the breakdown of how many were--went out as Click CAD 200s and which one of them went out as--or 200s, and went out as Click CAD?

In the fourth quarter, about approximately 20 of the units that went out, went out as Click CAD systems with the sales pace really growing towards the end of the quarter.

So we are pleased with the fact that there's greater recognition of that product's value in particular applications.

It's clear that it takes a more aggressive sales effort, because many of our resellers are more accustomed to selling devices one time, rather than installing a system where the revenue and the return are recurring and continue over a period of time.

This scenario I think we are starting to get dialed in and we are optimistic about the continued up tick of this product over the first quarter and through 2005.

The people who have it, like it.

Well, that's good.

That's always a good--that's always a plus.

That's a real good plus.

Real good plus.

I guess, actually I had another question for you, but I forgot it.

Well, I'll just get back into the queue.

Thanks, Denny.

Thank you for your time.

Our next question comes from Mark Markowitz of RBC.

Please proceed.

Hi, Scott.

Nice quarter.

Thank you, Mark.

I have two questions.

The first one is I noticed that you received more funding from the government recently.

And I was wondering, are you also looking to do a meaningful business in '05 with the government or the military?

There are two parts to that.

We did receive funding through the Department of Defense to continue and expand research work that we are doing with the Walter Reed Army Medical Center, primarily on the application of computerated detection to ultrasound technologies.

That research effort is really unrelated to sale of our product into government facilities, although in the course of it, Walter Reed did acquire ICAD early detection solutions .

I think that as we look at ICAD's performance, and actually, I'll expand on your question a bit, if I may, and grade the Company on how well it has done.

Two areas in which we wish to do better are sale into government channels and sale into what are called major accounts or buying groups.

Those are both priorities for us in 2005.

There's clear activity going on in both areas.

But it's one of the few areas where I feel our competitor has probably performed better than ICAD has, which we treat as an opportunity to increase sales by remedying that condition.

Okay.

My second question was simply I was just wondering how you are doing in terms of complying with Sarbanes-Oxley?

The Sarbanes-Oxley question.

We're actually quite pleased that we have completed our Sarbanes-Oxley audit, gone through the entire process, without any indications or issues.

And I have to commend our financial and control staff, in particular, in a year in which we have been finishing the integration of several companies, that they have done so well.

This has been an expensive process.

Sarbanes-Oxley, or what is sometimes called SOX Section 404 compliance, has probably added $210,000 to $230,000 to our general and administrative expenses in the third and fourth quarters.

I'm delighted that the results of that have been to confirm that the Company is operating in every way consistent with good practice and good controls.

Thank you, Scott.

I appreciate it.

Thank you.

Our next question comes from Jim Quentin of Baird and Company.

Please proceed.

Hello.

How are you doing?

Well, how are you doing?

Okay.

I've got a--does the Second Look--the new Second Look 300, does that obsolete the Second Look 200 eventually?

No, it actually is a wonderful complement.

The Second Look 200 is a print-only version, which is meant to be the value entrant for the ICAD product line.

And the Second Look 300 is a networkable version on the same basic hardware platform, which allows the radiologist to view computerated detection results remotely from the CAD device, and to connect to other hospital information and digital image processing systems.

So in some respects, the Second Look 200 should be considered a stand-alone, print-only version.

The Second Look 300 is a version which provides a transition for smaller facilities to digital information and digital image flow.

Okay.

Also, on the distributing side of it with Hologic, GE, Siemens, and Fischer.

Are they all geared up now to--as far as like the first and second quarter of this year, to be shipping?

Let me make a distinction between--first of all, between domestic and international, if I can, Jim.

Domestically, both GE and Fischer are really in full swing.

Hologic began in the first quarter and is beginning to contribute in the first quarter, but will clearly increase in contribution into the second quarter.

And I think, certainly, our objective would be to be full stream with Hologic by the second quarter, continuing through the year.

Siemens is a quarter behind in terms of the release of our product for Siemens, so I would anticipate initial contributions in the second quarter, continuing through the year.

Giotto is likely to be at the end of the second quarter or beginning of the third quarter.

Giotto is a smaller company and its U.S. sales are likely to be limited.

In international markets, I think we have a somewhat quicker opportunity with Hologic.

GE is still--is already active.

And over the next week, we're spending some time with Siemens in Europe to go through the sales rollout plan for their non-U.S. product launch.

Okay.

Thank you very much.

You're very welcome.

Our next question comes form Denny Waynestrait of Stonegate Securities.

Please proceed.

Hi, Mr. Parr.

I remembered that other question.

It was concerning the manufacturing of Click CAD 200, or of the ICAD 200 system.

Is it currently being outsourced or is it still in-house?

It's a good question.

I'm glad you came back with it.

It's now being manufactured entirely through a contract manufacturer with whom we have worked now for several years on other products.

So as of today, there is no product that we are manufacturing inside our own facility.

All products have gone past the point of what we think of as pilot assembly.

They are now being manufactured by our contract manufacturers on a going-forward basis.

Okay.

Now, since you have your in-house facility open, does that increase your capacity any, or do you have like an overflow and your outsource guys can't keep up with the amount?

Can you switch back and pick up the slack in your in-house facilities?

Is that flexible enough?

We maintain the in-house facilities to avoid being at risk of problems from our outsourced--from our contract manufacturers.

And I guess this is just a kind of a consistent paranoia that we have and try to act on.

But when the FDA approves a facility as the manufacturing site for your product, if the only facility they approve belongs to someone else, then your negotiating position as you look at the continuing economics of that relationship are severely compromised.

And the problems that might exist if something happened to that contract manufacturer, you don't have anyplace to go quickly.

By maintaining our own certified facility, we really improve our position in both those respects.

Okay.

All right.

And do you all plan on bringing anything in-house or a new product in-house anytime in the near future?

We evaluate each product today as to whether we will manufacture it inside or contract it out.

I would say today that the only product that we are looking at and going through a strategic analysis of, in terms of possible internal manufacture, is the CAD Solution 4 digital mammography, where the product is 95 percent software, but it is shipped to our customer on a hard disk installed in a very small PC computer.

Because the process of manufacturing in that is very modest, we're evaluating whether we could reduce costs by bringing that inside.

And I expect we'll make that decision before the next--end of the next quarter.

Okay.

Thank you very much.

I appreciate it.

Thank you.

Our next question comes from Joe Rudy of Saxon Securities.

Please proceed.

Hey, Scott.

How are you?

Good, Joe.

How are you?

Very well.

I've got a bunch of questions for you, as you would expect.

First off, I just want to reiterate, lung cancer you had said that you were expecting to make the first filings prior to the end of this month?

That's correct.

Okay.

Typically, can you address a time frame on how long it would take the FDA to come back with the first filing as far as their approval or non-approval?

Well, in general, it depends on the category of approval that's requested.

For 510-K approval, the normal period is on the order of 90 days.

For a pre-market approval, the normal period is on the order of 180 days.

So that to the extent the FDA accepts and is comfortable with the initial filings that we make for lung cancer detection, it's conceivable that we will have their response within the second quarter, or very near the end of the second quarter.

If there are questions or if they ask for additional information or if they ask for a restructuring of the report, it could obviously take longer than that.

But our target is to see this available to us for sale in the latter half of the year, and I really should say, to see it available for sale through our OEM customers, who are anxious to receive it and anxious to begin promoting it.

Okay.

The estimates for this year, for 2005, from one analyst is about 14 cents for the year.

How much of that is--first off, is that a comfortable estimate for the Company?

And how much of that is dependent upon approval of lung cancer?

Well, I can't speak to the components of income that the analysts may be using.

In our own budgets, we do not show any income for lung cancer detection products in 2005, which I believe is a very conservative approach internally, but it's consistent with the view we don't want to spend anything we haven't already made.

In terms of the endorsement or the level of comfort with a particular earnings per share, we are, as you know, reluctant to give any clear quantifiable guidance because we do not have the track record that allows us to provide that comfortably.

Okay.

A few other questions, Scott.

Does the Company foresee any need to raise additional financing anytime in the near future?

No.

Okay.

Next question, has the Company received any offers from any other competitors as far as maybe for acquisition or consolidation?

And whether--no matter what the answer is to that question, just to follow-up with that, do you foresee consolidation within your immediate market, whether being a buyer or maybe, on the other side, being bought?

Boy, Joe.

You're not known for easy questions, are you?

No, I'm not.

You know, that's, you know, I ask the hard ones I guess.

Let me take the second question first.

And I think we see evidence of consolidation--.

Well, as far as---.

--In many ways around us.

The general market.

You know, the--you, know, the whole market.

I'm talking more specifically your industry within the, you know, medical industry.

You know, do you see consolidation there?

I think if you look at what has happened in the past, really in the past year, we began 2004--this--I may be a little bit off.

But it approximately began in 2003.

There were four companies that were preparing--five companies that were preparing to offer computerated detection solutions into the market.

At least two of those have been acquired by larger companies since that date.

Neuromedica was purchased by Eastman Kodak.

And a company that was based in Israel, CAD Vision, I believe the name of the company, was purchased by Siemens.

So, you know, there clearly is an interest on the part of large players who are offering imaging solutions, and the potential impact of computerated detection and related image enhancement tools, on their overall business models.

Will that continue?

You know, I hear analysts who speculate that it will and other analysts who speculate that the largest part of that is done.

As to the other question, which is, is ICAD--have we received any expressions of interest, have we made any expressions of interest.

I want to answer that carefully.

This is not an area where it would ever be appropriate for the Company to comment.

And at the same time, the reluctance to comment should not be inferred to mean either that anything of this kind is happening, has happened, won't happen, will happen.

It simply is not the kind of information that the Company could ever communicate other than in a very structured and formal way.

So I hope you will accept that as a complete non-answer, where the non-answer doesn't mean anything either.

But I think those are the rules under which we really must operate.

Okay.

Let me then, maybe, ask the question a different way.

If the right deal was made by, you know, the right party, obviously, ICAD would entertain the offer.

We will always and in every way represent the best interest of our shareholders.

Okay.

That's basically the answer that I was looking for.

The next question--.

--Because, among other things, Joe, we're shareholders.

I understand.

But there are some companies, as you know, with management who are shareholders who--whose main goal is to remain independent even if it means, you know, not doing sometimes the right thing for the shareholders as a whole.

Our goal is to do the right things for the shareholders as a whole.

Next question revolves around the sale of Desaca [ph].

And, you know, I guess most of it has been due to the lock-up period that ended the 31st of 2004.

Can you comment on, you know, the amount of shares that are available to be sold, the amount of shares that have already hit the market, and potentially additional shares that the Company knows that, you know, may hit the market as well?

Yes.

Although you have to appreciate that some of my numbers are estimates, because we don't have data on some of the points you've raised.

Okay.

When we purchased Qualia Computing and its CADEX subsidiary, we issued about 4.2 million shares--4.3 million shares of ICAD stock to acquire the interest of the non-corporate shareholder sin Qualia Computing.

And that kind of broke down into three groups.

The first group went to those Qualia shareholders who were no longer Qualia employees, and therefore, did not become ICAD employees.

And that was a total of about 1.7 million shares.

As we track--and those shares as you noted were in a lock-up until December 31, 2004 except for some 300,000 of those shares that had been registered earlier in 2004 under an S-3 registration.

So, 1.7 million, 300,000 were saleable at any time, and the balance were locked up until December 31st.

Our best estimate is that about 900,000 of those have been sold, whether through the earlier S-3 registration or through 144 filings.

The pattern of sales in this case was really very different from what we saw when we acquired Intelligent Systems Software in 2002, structured a similar lock-up, and at that time, when the lock-up ended, there were very few sales.

And most of the original Intelligent Systems Software owners still own their ICAD shares.

So we were surprised at the number of shares that came on the market beginning in December.

And I think we all saw some of the results of that.

The second category of share recipient was that group of Qualia shareholders who became ICAD employees.

And I'm going to divide that again into two groups.

But the first group received about 1.2 million shares.

Some 213,000 were registered under S-3.

And with the exception that I'll go into next, that group has by and large held those shares.

Those shares are under a trading blackout, which the company maintains for its employees, that will not expire until several days after this earnings call.

But we've gone out and informally caucused the people who hold over 30,000 shares.

And of that group, about half have no intention of selling, and the remainder talked about the sale of some 40,000 to 50,000 shares in total.

Not an enormous amount.

The third group is a group that includes individuals who were ICAD--who were Qualia shareholders who became ICAD employees, but have since ceased to be ICAD employees.

And this included some of the higher level of Qualia and CADEX managers who represented in total about 1.4 million shares.

So a big block of shares.

Of those shares, approximately 1 million have been sold.

They're gone.

And about 480,000 are held by one individual.

There has been a negotiation and buyers identified for a private placement of those shares.

That sale has not yet taken place, but I am told it is expected to take place in the very near future.

So as we entered 2005, pretty significant overhang.

By this time, that overhang is I think almost entirely eliminated unless you assume that there are significantly more sales coming out of former Qualia employees.

I apologize for the complex answer, but I know there's a lot of data that people are interested in, and I hope that was helpful.

No, that was very helpful.

My next question, and it may be more of a statement than a question, but hopefully, you can comment on what the Company has been doing.

Obviously, you know, with that large amount of shares hitting the market, you know, a million or so shares, obviously has been placed with institutions/mutual funds--have been, you know, probably the biggest buyers of those shares.

Can you, you know, expand on what the Company has been doing to increase the exposure with--of ICAD with institutions and mutual funds?

Well, there are a couple of things that we've done.

First of all, we have participated in non-deal road shows and presentations to potential institutional investors, which I think have been fairly productive over the course of the last months.

Secondly, we have tried to coordinate the relationship between our selling shareholders and forums which have provided research on ICAD and are therefore somewhat better positioned to facilitate and coordinate 144 sales and sales by insiders, because they have generated an interest on the part of institutional buyers, which can be fulfilled by offsetting transactions.

I think where there have been difficulties in some cases, and in particular, with that early group of Qualia shareholders that we have no continuing relationship with, those shares were sold through anybody and everybody and often at the same time.

So there are some things that we can do that I think are appropriate and responsible.

And to the extent possible, we have done those and continue to do those in the first quarter.

Okay.

Now the--you know, some people, obviously, listening to the call would view anybody selling, you know, from an insider standpoint selling the stock as a negative for the Company.

But obviously, many people sell stock for many different reasons and some of these people have been locked up for a long, long time--more than a year prior to even the buyout of ICAD.

And this has been their first chance actually to diversify out and take some money out of probably what is a very large position for most of these people.

Would you agree?

I think that's right.

And I think for most, if not almost all, of these people, it's their only position.

Recall that a large percentage of the people who became part of our team through the acquisition of Qualia and of CADEX had military background.

And for many there was no long career accumulating any kind of individual equity or assets.

This is it.

And I have to say when somebody who has [inaudible] for us for two years and has 150,000 shares of stock and wants to sell 13,000 so he can buy something nice for his family, I don't have any issue with that at all.

And that's the level of magnitude that we're seeing here in terms of those who are truly insiders, which is to say, employees who continue to be a part of the ICAD team.

Our next question comes from Scott Warner, Private Investor.

Please proceed.

Hi, Scott.

Good morning, Scott.

How are you today?

Okay.

I'm a little punchy from a fever, so I'm a little incoherent.

Please bear with me.

First, on the Sarbanes-Oxley, I know you mentioned the $210,000-$230,000 amount for the third and fourth quarters combined.

What would you say ongoing the hit will be per quarter for complying with that?

Well, I don't think we'll see it quarterly.

I think that we'll see about a $70,000 per year--.

--Per year--.

--Increase in our audit bills.

The largest portion of the 200 plus charge in '04 was the consulting firm that came in and established the protocols and the procedures against which the auditors could do their Sarbanes-Oxley checking.

So we may bring those folks in as kind of an over-the-shoulder support group, but I would not see this being more than $100,000 as an addition to G&A over the continuing years.

Okay.

Next, on--I remember a previous conference call, you indicated that the--I'm getting punchy here--about the, oh, percent of the marketing sales would - absolute number - go up but percentage would go down.

And yet, this quarter you went up about three percentage points over third quarter.

What do you have to say about that?

It was 1.780--.

--I think, Scott, that I indicated in the fourth quarter, because of the impact of the RS--of the Radiological Society of North America show, we take a significant quarterly increase.

And this year, that was about $270,000.

My CFO is here kind of feeding me numbers.

But that's why the fourth quarter tends to be a little bit distorted in terms of sales and marketing expenses.

Okay.

Then, do you expect in forward--going-forward quarters, what percentage--until you hit the fourth quarter, what do you see?

The previous quarter was 25.6 percent as a percentage of revenue.

What do you see it going forward?

As you said, it should decline.

Do you see that going down to 23, 22, what--if you have to make a guestimate?

Can you bear with me for just a second?

Sure.

It was 28 percent.

I would see a small change there.

Scott, one of the things that we've recognized as we've looked at the Company, and I mentioned earlier the notion that we'd given ourselves a report card at the end of the year.

The one area where I and the Management Team believe the Company has not only done a less than stellar job, but has done an inadequate job, is in the area of marketing.

And as a result, we are looking at how we can better promote the Company's products, not just through the channel, but through increasing awareness on the part of women and potential breast cancer patients.

And I recall a comment that you made at the last conference call suggesting that we participate more actively in some of the breast care awareness events in New York City.

I agree with that.

And that is an area where I expect we're going to be adding incrementally to our sales and marketing budget so that the total percentage--if you were to use the current percentage that we're looking at, plus or minus 1 or 1.5 percent, I don't think that would be out of bounds for where we'll be looking during 2005.

Okay.

If that's a the case, how can we get down, we meaning you, get down the total operating expenses so we get more dropping to the bottom line?

I know your gross profit margins are going to go up, but still, what we're seeing here is a big hit on the total operating expenses.

Where do you see that say the next quarter or the following quarter?

Where are we going to see diminution of that enough so that we can bring down a couple of cents more to the bottom line?

Well, we're going to see it in G&A.

We'll see it to a certain extent in the quarterlies that relate to sales and marketing, because we do not have the Radiological Society of America show expense.

We also will see reduced interest in absolute terms because we have paid off the line of credit that was existent from our Chairman.

Okay.

Thank you there.

Switch entirely to you were already talking about institutional activity and all.

Could you tell us, cause I know these things are public, but I am too stupid to find out where about two or three days later.

What new institutional holdings do you have and what institutions now hold ICAD?

How about that?

I do not have that list in front of me and I apologize.

Institutional holdings, I believe, were published most recently--.

--Not the amount, but the names.

Some of the names.

Well, I appreciate that.

And the name that is most prominent for me is FMR, Fidelity Management, which is the largest of the institutions reporting and they increased its position between September and February reports.

We have Dimension fund.

We have Oberweiss [ph] included.

I must apologize.

I just don't have the full list here.

Our percentage of institutional ownership increased from September to the February report.

I would anticipate it will increase again as we move forward quarter-to-quarter.

Next quarter, Scott, I'll have a better handle on who those institutions are.

Our next question comes from Jeb Kerry, Aberdeen.

Please proceed.

Hello, Scott.

Hi, Jeb.

Quickly, could you help me clarify the unit sales.

I understand 140--144, excuse me, were shipped for all of--in Q4.

Is that right?

Yes.

And that includes--is that digital and film?

Yes, it is.

And would that include the Click CAD?

Yes, it would include 20 Click CAD units.

Okay.

And is the 300 Click CADable, if you will?

The 300 is not being introduced as a Click--as a fee-for-procedure model, although we may offer it as such in the future.

So, as I understand, then it's a twin to the print-only, but with a networkable feature set.

Yes, which includes a different user interface.

Unlike the 200, which is kind of like a fax machine where you drop films in and the results are printed out, the 300 includes a screen and a keyboard so that patient data can be entered or connected to the hospital information or PAC system.

Right.

Okay.

And the--.

--Now, Jeb, may I use your question actually to add one point about the 300?

Yes, sir.

When we look at the 300, part of the business benefit to ICAD in that product is that it is a modular product and expandable, so that we can provide a comparatively well-priced entry point for a purchaser, and then, add software modules that will, among other things, support remote viewing, support additional review stations, support a connection to the hospitals, patient information systems, support archiving in a storage system for digital images or a PAC system, so that we have a very nice cornerstone upon which we can build particularly high margin incremental sales activities.

And that's a benefit for the user as well as for ICAD, because that let's them increasingly connect this system into their evolving digital enterprise.

I'm very glad you made that point.

So if the entry price for a Click CAD 300 is, call it, 100, what would the add--ultimate add-ons do to that base level?

It--remember, it's not a Click CAD, but a Second Look 300--.

--Second Look, forgive me--.

--Has a list price of $79,000 and each of the options that I've talked about would be priced from $10,000 to $15,000, in rough terms.

Okay.

That's a pretty exciting product entry.

And how is this--can you address the 700 unit, while we're talking about new product infos.

The 700 unit is in many respects the same profile as the 300 unit in terms of the software that is being used.

Instead of being provided in a countertop form factor, the 700 is provided in standalone configuration that permits, among other things, the addition of a second server to permit use of MRI results in connection with the ICAD computerated detection results or an additional server that can be used to add support for a digital mammography system.

So that at the highest end of the market, the 700 allows us to take a core product and enhance and distinguish it in ways which are comparatively inexpensive for us to do, but of significant value to the user and buyer.

And can you address overall, while we're talking about products, the pricing environment?

Sure.

In very rough terms, we begin at $69,000 for the Second Look 200, $79,000 for the Second Look 300, $129,000 for the Second Look 700.

Our digital products are priced by our OEMs, not by ICAD.

Right.

And Scott, in the past you--I know you were adjusting headcount throughout 2004 as you digested the acquisition.

What would be the headcount today and is that kind of a steady state for your future growth?

It--our current--well, let's begin with where we were in the first quarter.

First quarter, we were 111 people.

Today we are 73, including--Annette is nodding at me.

So 73, including 3 to 4 consultants.

So it's really--it has declined quarter-to-quarter until the third quarter when we added some additional staff to help with customer service.

What that headcount number alone masks is that in some cases we have been able to separate--the Company has been separated from some highly compensated individuals and other individuals who are more [inaudible] the journeyman level have been brought in to meet incremental customer needs.

I understand.

So is--with an increase in marketing, would the headcount increase over the next--over the coming years as you launch these new products or where do you see that going?

I don't see any significant increase in headcount, with the possible exception of customer professional services, where with more customers there is more of a requirement [inaudible] available for training application support and help desk functions.

But the numbers involved are modest.

I saw the 8-K from Mr. Rogers--would that pretty much be the anticipated turnover from the acquisition integration issues?

I think we're pretty stable going forward.

There is always some level of turnover, Jeb, and it's, you know, it's hard to predict when that will exist.

But we've been pretty good at retaining people.

And I see that as being consistent going forward.

And one final thing, with the ramp that will happen, as you guided, you're just--your channel partners.

Should we expect more inventory or--you've done a fantastic job-turning inventory in the past.

Is there anything going forward as these sales ramp?

We pretty much hate inventory and I don't see that increasing.

Good management of the contract manufacturing process really has allowed us to reduce that substantially and I don't--I wouldn't want to see that going up.

Our final question comes from Joe Rudy of Saxon Securities.

Please proceed.

Scott, I had one final question before they cut me off.

I guess it's like Congress.

You only a couple minutes, you know?

First off, the institutional ownership and shareholders can be found on Vickers.

They're about 30 to 60 days delayed, but they are very good with updating it pretty readily.

And that's Vickers Stock Research.

So if anybody wants to go and find out the--.

--Thank you very much.

No problem.

Can you tell us for the--what's on your agenda for the next 60 days as far as with maybe any conferences, any customers, or anything else like that?

Well, over the next month, I'm pretty much on the road working with OEM channels and international channels.

Subsequent to that, we will be back presenting the Company to forums like the AEA, Microcap and the AEA Classic conferences, and our investor relations firm is looking at other opportunities for ICAD to be able to present its message to qualified and appropriate institutional investors.

In more general terms, Joe, our opportunity in 2005 is on the plate, and a lot of what we're focused on is execution to deliver it.

That's an area where I pay close attention together with our divisional managers.

And that's the focus as we look at what we want to achieve in 2005.

Very good.

Thanks very much for your time, Scott.

Thank you very much.

Ladies and gentlemen, this concludes the question-and-answer portion of today's call.

I will turn the conference back to Scott Parr for closing remarks.

Sir?

I'd like to thank you all for your time and attention this morning, and appreciate your interest in ICAD.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.