ICAD Inc (ICAD) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the iCAD Inc. fiscal 2005 second-quarter earnings conference call.

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

We will be conducting a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS).

As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Kevin McGrath of Cameron Associates.

Thanks and good morning, everyone.

Before I turn the call over to Scott Parr, CEO of iCAD, I need to inform you that certain statements made during 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 and uncertainties of patent protection, the impact of supply and manufacturing constraints or difficulties, product and market exceptions, possible technological obsolescence, increased competition, customer concentration, and other risks detailed in the Company's 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 those forward-looking statements which speak only as of the date the statements was made.

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

Now, without further delay I will turn the call over to Scott Parr, CEO of iCAD.

Ladies and gentlemen, good morning.

The following factors contributed to second-quarter results.

First, a shift occurred in the market towards more affordable computer-aided detection systems which benefited our Second Look 300 and the Second Look 200 product lines and delayed or displaced potential Second Look 700 sales that we had projected for that quarter.

We are working to take full advantage of this trend which we believe benefits iCAD over our competitors.

We have upgraded the 700 product line with our new Fulcrum Digitizer, improving performance while reducing build cost.

By combining this enhancement with price incentives, we have already secured orders for seven Second Look 700 systems in the third quarter, in excess of the total sales for that product line in the second quarter.

Price competition became an increasing factor in the second quarter as our principal competitor sought to reverse its declining market share by matching and in some cases coming in below iCAD's price levels.

During the quarter, we used about $276,000 in rebates and price incentives, together with some selected bundling of software options, to offset -- successfully, we believe -- the majority of such competitive situations.

While price competition is expected to continue in the third quarter, we do not believe that iCAD needs to be less expensive than our competitor to get the sale.

We are increasingly able to emphasize to prospective buyers that our products are not only more affordable than those of our competitor, they are superior in objective definable performance and operational characteristics.

These are messages we have not communicated effectively enough in the past.

Concerned about potential price competition, our resellers and distributors worked effectively to reduce their own previous inventories during the second quarter.

This accounted for about $1 million in iCAD product sales in addition to shipments by iCAD.

Another way of saying that is that customers purchased about $1 million more in iCAD solutions than we reported sales for the quarter.

The good news is that we believe our channels now have limited inventory.

In the second quarter, we recorded sales from each of our recently added channel partners, including Hologic, Siemens and Fusion.

We have not, however, accomplished the more rapid growth in contribution from these channels that we believe is achievable.

In general, this is a result of iCAD's sales force being too small to concurrently service, support and promote start-up in multiple new channels.

It is also in part a reflection of historically poor product marketing on iCAD's part.

We have made progress in addressing both these factors.

We have begun a program to more than double the number of sales representatives iCAD can apply to reseller, channel and OEM start-up growth and opportunities, increasing from nine current regional managers to a total of approximately 20 field salespeople organized under our existing experienced sales teams.

We are working to have these additional salespeople fully in place by year-end, and have begun the process with initial appointments already.

Additional salespeople pay for themselves very quickly and we plan to keep adding them as long as they do so.

We have also started to see the benefits of the new marketing and brand program which much more effectively communicates the quality and superiority of iCAD products.

This is particularly critical in making a distributed sales force, the sales force of our resellers, our distributors and our OEMs successful in selling iCAD products.

You can see some of the initial results of this program by glancing at our new Website at iCADMed.com.

That will also give you an opportunity to see some of the increased success we are having with public relations activities.

I suggest you pull down some of the recent TV coverage we have received from network affiliates in the Boston market which is posted on our new site.

Finally, we have made an investment in an improved, integrated sales and customer relationship management system which ties our enterprise information systems together.

Prospect and sales information systems which were fragmented and contributed to difficulties in execution at the end of the second quarter are scheduled to be among the first parts of the system implemented.

We currently expect this portion of the system to be completed before year-end.

We believe that this kind of information will be of great help to us in better managing our sales activities.

Our previously described patent-related binding arbitration with our principal competitor is proceeding.

A three-arbitrator panel has been named and a hearing is scheduled for October 18 through the 21st of this year.

A final decision by the arbitration panel is scheduled on an expedited basis for December 2, 2005.

Because we are in the middle of discovery in this arbitration, we prefer not to comment in detail on the merits of our position.

Nothing that has happened to date has changed the views we have expressed previously.

We continue to believe that our competitor's assertions of patent infringement against us are without merit, and we are moving forward to press our defenses as to those patents.

We also continue to believe that our competitor infringes the patents that iCAD has asserted.

I would also like to comment on our regulatory plans for new products for lung nodule and colonic polyp identification.

Our submission to Underwriters Laboratory and the FDA for approval of a CT product for the identification of lung nodules has proceeded through initial stages as a software-only submission, and now appears to require only validation on the specific viewing work stations, initially those of TeraRecon and Viatronix, that will be offered by our OEM partners.

We have completed that validation with respect to TeraRecon and it was submitted this week to UL for final review.

Additionally, our development work on a CT product for the identification of colonic polyps, an area we are very excited about, has accelerated.

We expect to submit our pre-market notification 510-K application with the FDA seeking clearance for the sale of our product for use in colonic polyp identification no later than the fourth quarter of this year.

That is earlier than we had originally anticipated.

Before taking questions, I want to talk about the benefits of providing projections and more detailed sales information.

We do not believe that sales levels in the second quarter reflect a new baseline for iCAD sales, and we expect sales will be higher in the third and fourth quarters based on all the information that we currently have.

Beyond this general statement, we will not provide specific projections or additional prospective guidance at this time.

We will review that decision in the fourth quarter, with the objective of providing additional guidance at that time if it is appropriate and prudent.

With respect to more detailed sales information, we have several analysts covering iCAD and several more who have expressed an interest in beginning coverage.

To effectively model future performance, the need details, including a breakdown of our sales by category, which we have not consistently provided.

At the end of the first quarter, we did not provide unit information, which creates something of a hole in the research models they are attempting to maintain or create.

This conference call this morning is not the appropriate place to rectify that issue.

It is our plan, however, to provide a more detailed historical breakdown of sales by model, class and type in our pending second quarter 10-Q.

This will pull together information on 2004 and on our first two quarters of 2005 which we believe will be helpful to you and to analysts and help support potential research coverage for iCAD.

I would like to take questions now.

(OPERATOR INSTRUCTIONS).

Stephen Dunn, Dawson James Securities.

You won't give any specific sales guidance.

Can you say relative to 2004 sales of 23.3 million how you see 2005 ending?

When I talked about sales guidance what we intend to do is to help break down what the sales in 2004 was driven by in terms of unit contributions by product class, and to take that same approach for the first and second quarter of 2005, permitting a baseline, Steve, and also the ability to see trends in our market and extrapolate from that.

I don't expect to provide specific guidance on financial performance for future periods.

Of the legal expenses, you have incurred $535,000 in legal expenses related to the arbitration, is that -- how do you expect that level of legal expenses going forward into Q4, or was that a lot of upfront costs?

In terms of level of magnitude, I don't think that's an unreasonable expectation for us to have for the third and fourth quarters.

It is a little difficult to judge because some of that is defined by the position that our adversary takes, but I think it is the right level of magnitude.

Richard Yett, Monness, Crespi & Hardt.

You outlined a program of increased marketing personnel and so on.

Naturally that is going to impact your expenses.

I believe that your marketing and sales expense increased by about 5 or 6% from the first quarter to the second quarter.

Can you give us an idea of what we should look forward to in the forthcoming quarters?

The actual sales and marketing increase from the first quarter to the second quarter was modest.

As we look at adding salespeople, the consistent rule is that by giving people several months to begin being productive, we end up with a fairly short period in which those people are not paying for themselves with increased and additional sales.

The outright cost for each salesperson is probably on the order of $30,000 during that period.

Per person that is a magnitude of some $300,000 in potential additional expense, which we believe pays an immediate and a continuing return.

Part of what we understand today is that we have in many ways been overwhelmed by the number of opportunities that we face.

The time and the energy and the sheer personal time required from each salesperson to manage a growing number of channel partners and of salespeople for each such partner within her or his region has become crippling.

And by adding resources there where there's a modest initial cost and a quick linear return, we also expect to see a geometric return because we're going to be making channels that have been delayed too long in being productive more effective more quickly.

By channels do you mean resellers and other wholesalers?

I am in particular focused on the new channels that we have added this year.

The answer of course is yes to all of those, but we have added some channels this year that have the potential to contribute much more significantly to sales performance than they have to date.

Hologic is an excellent example.

Fusion.

Siemens is a new channel where we believe we have great potential in digital sales.

We have been frustrated because the time required to do the training and field support, and to introduce the field salespeople of each such channel to our product and to the best way to sell it has been an immediate draw from the time available to support existing prospects and the closure of existing leads.

And that trade-off is part of what we saw in the second quarter.

To avoid that, we need to be able to support more concurrent activities in following current leads to closure and delivering those sales effectively, while bringing up to speed sales channels that will contribute to increased contributions in future periods, and to a certain extent in the current period.

Just one other question along this line and then I will jump back.

Yesterday, Hologic reported that they delivered 64 of their digital mammography units.

Can you tell me what percentage, what number of those products iCAD products were part of?

I am not certain how many of those products went out with digital systems, but the number that went out with iCAD systems would have been less than 5.

Notwithstanding a real willingness on the part of Hologic's management to work with iCAD in building our share of their sales to an equivalent or better position with that of our competitor.

The shortfall really represents our inability to spend enough time with the specific salespeople in the field.

I believe that in the case of Hologic we're talking about some 40 Hologic field executives, sales executives.

And what we have learned is that we earn the right to be Hologic's partner by earning the attention and the support of each salesperson one at a time.

And we do that with an investment in time, communication, and teaching.

And we fell short in the second quarter.

Arnold Frank (ph), DeFrank Associates.

Scott, it sounds like you are addressing those issues as they have come up.

I have a question about the recent announcement by R2 on the 26th, the DMax.

Do you have any comments about that?

Boy, it's nice to be a private company.

I wish we could do a release like that once in a while, if only for the sake of humor.

You'll note that that release contained no quantitative information.

There was no indication as to how many units had sold.

We simply believe that that part of the market has been substantially shifted to the meat of the market which is where our more affordable systems are prevalent.

I would point out that the announcement for the DMax does incorporate several features in addition to computer-aided detection.

It incorporates a newly available and certainly more expensive digitizer that has been incorporated into that line by our competitor, which in many ways increases their cost of goods disadvantage relative to iCAD.

It includes a system to assist in the digitization of prior film-based mammography studies which they offer, and I think quite rightly, to help companies in the transition from film to digital.

And we have a comparable product that is shortly going to be available.

And it appears to include a CAD module for digital mammography, which is really contrary to where we see the market, as our approach to working with GE and Hologic and Siemens has been to protect their right to offer that portion of the solution.

It would appear that the DMax reflects a more overt decision to compete with the OEM channels and not necessarily to see them as customers where their success is important to ours.

So, an interesting release.

I don't think anybody missed the significance of the timing.

We in our one-to-one context in the second quarter cannot identify a single sale of that product, which isn't to say that we would necessarily have seen them if they went into the existing installed base for R2 or if they went into customers who were looking for a digital solution and elected to purchase from our competitor rather than from GE or Hologic or Siemens.

I am curious what the reaction of our customers at GE and Hologic and Siemens was to that release.

I suspect it was not entirely favorable.

Brooke Moore (ph), Evergreen.

This is a nice opportunity to ask a couple of questions that now with all the rules and regs we can't.

The commentary that you made regarding the colon system, could you review that a bit?

I was trying ferociously to make some notes here, but I think you said something about it's going to be ready the fourth quarter of this year, which is ahead of schedule.

(multiple speakers) the submission for regulatory approval, Brooke.

And regarding that particular product, what would be the size and scope of the market for something like that?

Can you comment on that?

Yes, and it is also something we will talk a little bit more about in the quarterly report, because I think it is an important area to communicate.

We are increasingly of the view that the ultimate market for computer-aided detection of colonic polyps is as large as the market for our mammography products, certainly less mature.

And we have to begin with the recognition that there is today no fully supported screening program for colon cancer, and that there is no reimbursement for the procedures that relate to screening for colon cancer.

But it is not unreasonable to foresee changes in those areas.

There is an awful lot of attention in this area.

Screening clearly helps.

And there's increasing literature to that effect, and there is increasing interest in being able to do that screening using non-invasive imagery, using computer tomographic studies, where the benefit of a product from iCAD is to, we believe, increase the productivity of the physician and reduce the number of colonic polyps that may be missed.

Very similar to what we're doing with respect to breast cancer, where an iCAD product assists the radiologist in seeing or finding something that might otherwise have been missed, there is typically a constructive action that that radiologist takes, a biopsy or treatment.

In the area of colonic polyps and rectal colonic screening, there is similarly a positive constructive action that can be taken in the (indiscernible) of the polyps within a given size and configuration range.

There has been a lot of feedback that we have solicited and received about this product, and that we have increased, as you may perceive from the change in schedule, the resources that we have addressed to this and the priority that we give it within our organization.

It is also an area where there are not at this point many competitive issues that need to be addressed and where we feel we will have a pioneering and a leading position in the field, which of course carries benefits as well as some educational disadvantages.

This is exciting.

I am surprised by the timing, quite frankly.

But I am seeing that you mentioned the new Website, I am assuming that you will be updating us on the progress of this and other products.

Is that correct?

We certainly will do all that we are permitted to do under current regulations.

Correct.

One other quick question if I may.

Regarding the -- what you had said is that you felt that iCAD had done historically not good marketing, and that you were really working diligently to get that in a much better amount of time and effort for it so that the population at-large is more aware of what is going on.

You mentioned TV coverage and so forth.

Are you going to go to print and all of these other things, or is it just going to evolve slowly, and you're going to see how one thing plays out before you do something else regarding the media?

We have a new leader in this area, a woman who came to us during the first quarter with the objective of trying to clean up and improve what had been fragmented and really ineffective marketing prior to that.

And she has done a very good job.

It has been a balance of working to establish the iCAD brand to make clear the point -- which may sound simple, but turns out not to be as you kind of use it and pass it along and translate it and hand it off from people in iCAD's headquarters to our sales management, to our sales team, to the sales managers for a distributor or for an OEM, to the regional sales executives to the field salespeople, to the people who actually see the customer -- and that is, why do you buy an iCAD product?

What are the three reasons that it makes sense for you to purchase a Second Look 300 instead of a competitor's specific model?

Those messages were really muddied, and too often they came down to the fact of it costs less.

And that is not the right answer.

Value is certainly important, but the right answer is it is better at finding subtle calcifications, it integrates better with a DICOM network, it's more easily upgradable, and in addition to that it's a better value.

Those are the blocking and tackling parts of building a brand that is framed in terms of the quality of the products we deliver to our physician practitioners and to their patients, who we have to think of as our ultimate customers, and do that in a way that's easily understood having been handed off four times.

A lot is lost in the translation in other words.

Especially if the original message was not sufficiently simple and clear.

Andrew (indiscernible), Meserow Financial (ph).

Can you talk about the competitiveness or complementary function of this Dilon imaging technique, breast-specific gamma imaging that is out there with several household names of hospitals adopting this thing?

Is that complementary to iCAD?

Dilon is a nice product and I think they have executed well.

It's a different imaging technique which would typically be used for diagnostic purposes after screening that would be done with an x-ray and the benefit of iCAD's computer-aided detection.

We actually have a number of resellers who are selling both the iCAD product and the Dilon product, and they find them to be quite complementary.

So this Dilon product is prior to a biopsy (multiple speakers)

It may avoid the need for a biopsy, which is part of the benefit.

It actually gives more information without invasion than an ultrasound might, and it helps a doctor make what is often one of the more difficult decisions, and that is to do nothing.

So it differentiates between cancer or benign tissue?

It helps the radiologist be more confident in the differentiation that the radiologist would make.

You refer to R2 as your lone or sole competitor.

You don't feel -- this is in conjunction to an iCAD system.

It is complementary.

It is complementary, and in much the same way we feel that products that deal with MRI of the breast or CT of the breast are complementary, because they tend to be used for both economic and clinical reasons after an initial indication of a potential problem.

We are right at that first stage of screening which is where we are of most benefit.

Although we are also used in some diagnostic procedures, it is clearly the screening area where people find the product to be of greatest benefit.

And that happens as a first step that can lead to the Dilon product or to the confirm or the MRI product, or a variety of tools that become increasingly expensive, increasingly expensive for procedure, increasingly tied to the ingestion of chemistry or to the injection of things -- all of which kind of take place before you get to any surgery or biopsy or cutting.

May I correct one thing?

This is with respect to the competition.

We of course have two competitors who have been approved by the FDA.

I'm sorry;

I forgot the other -- Kodak, isn't it?

That's right.

And different issues entirely.

Virtually -- the major part of our competitive environment is clearly defined by the relationship between iCAD and R2.

The timeline that you talk about with a colon and breast (indiscernible), how much longer is the period between which you would accept or receive approval and be able to actually get revenues because reimbursement came into play?

The ability to establish reimbursement is what kind of timeframe?

The ability to establish reimbursement is a nice-to-have but not a necessary-to-have in both the lung and colon applications.

The first real benefit that we see for both these products is probably best illustrated by a physician that we talked to recently who does colonic studies, and because of the amount of information that he needs to read, tries to restrict himself to two a day.

Because going through that entire body of information, of images and visual information, is just difficult to maintain concentration and not run the risk of missing things.

His view is that with the benefit of iCAD's product to help highlight and move from one potential area of risk to another, that he can double or more the number of such procedures that he can do and interpret.

Those procedures may carry with them significant reimbursement in many cases.

So the fact that the computer-aided detection component doesn't incrementally add to the reimbursement doesn't mean that there isn't a really valuable economic benefit to the physician in being able to increase throughput, productivity, and ultimately the number of procedures that can be administered.

So there is a somewhat different economic argument in the case of both lung and of colon which is related to the sheer volume of information associated with each of those studies.

Mark Moskowitz, RBC.

My main question was just asked about the timeline.

But I had a more general question and I hope that it didn't get already repeated, but I'll ask anyway.

Mark, could I interrupt you for just a second?

It occurs to me that I really didn't answer the timeline question in the context of that.

May I do so?

Sure.

I mean, I would want to know in particular the timeline between what has to happen with both lung and colon to get it to and past the stage where you can start making them, and how you would ramp up?

Right.

Let me take them one at a time.

With the submission to UL this week of the confirming information with respect to the TeraRecon work station, we expect that we'll get a pretty prompt response.

Nobody can assure it, but we certainly have a level of confidence that the review will be completed because the system does do what we said it does.

Our target for the lung product had been to be able to preview and promote it, together with one or both of our OEM channel partners, at the Radiological Society of North America show.

And that is scheduled at the end of November each year, and we appear to be on track for that.

Typically, what we would do would then be to work through a period in which pilot products are being used in the field and beaten up and abused and improved, and that it may be one or two quarters past that when we start to really commit to full commercial release.

There is some potential upside in this in that this large market in overseas markets for the lung cancer detection, the lung nodule detection product.

And there is sometimes the opportunity to accelerate introduction in those markets.

But what inevitably happens is that we improve the product from the point at which we introduced it at a trade show and begin pilot testing.

And our commitment to make and retain the standard and image of quality for the iCAD brand and for our products really compels us to do that and not to rush it.

And I think our OEMs are in line with us on that.

So did you basically say that some time in the beginning of the second half of '06 is a likely time then?

I would actually be a little more optimistic than that, Mark.

I think some time in the first half of the year.

And whether it is early or late is partly going to depend on where we see the opportunity to make meaningful improvements.

So that is pretty well tracked to what our consistent schedule for release of a lung product has been.

I think when we turn to colon, we really see that we are ahead of the guidance we have given in the past, which in some case has said we don't expect to see anything from this until 2007.

And in this instance I think we expect -- we believe it is very likely that we will see benefit from a colon cancer product by the end of 2006, but it again relates to the trade-off between how much better can we make this with an additional investment in the development based on the pilot studies and the information they yield us, and how important is that to our market?

And we believe the answer is very important.

Scott, statistically looking for errors compared to your current product for breast, finding cancer in the lung or in the colon, is that a harder job for you?

Have you done studies where you can see how much better you do than typical x-rays at this point?

There are some very crude studies that have been done.

The answer to your first question, though, is it's harder.

And it's harder in part because we're dealing with a three-dimensional object rather than a two-dimensional object, and we are dealing with a lengthy series of images and views.

The good news is that that part of the challenge is behind us.

We are dealing with that.

We have been dealing with that issue for quite some time.

But where there is a challenge is in getting enough case information to be able to train our software algorithm to recognize the right patterns by feeding it enough examples of those patterns.

That's in a surprising way the lung pole in the tent when it comes to development and release of a product in a new application like this.

And we are now starting to see an increasing amount of data that we can use in our development, our training and our programming.

And until we have been able to get further into that process, the ultimate level of sensitivity I don't think we can estimate it yet.

So in other words, you know that you are well ahead of what is out there now, but how much better you don't know yet?

That's right.

And that would be with respect to colon.

We are not ahead with respect to lung or other products that are out there.

They perform adequately.

We see our opportunity in lung as being defined by having some good channels.

But where we see the opportunity for superiority at this point is really in the area of colonic polyp detection.

Joe Rudy (ph), Sachony (ph).

Can you give us an approximate timeframe on when we will hear back from you on the finalization of lung cancer?

We have not gone through this process yet.

I'm given some very encouraging timeframes by our regulatory group, because we're really being asked to simply validate on a particular hardware device.

I will take a step back and explain the approach we took to regulatory here was to go to Underwriters on behalf of the FDA and to seek approval for a software module which could then have been installed without further approval on a wide variety of work stations.

And while the regulatory appeared quite comfortable with the software module, as a matter of policy, they decided the really wanted to see it on each of the hardware platforms with which it would be sold.

We think that is going to be a pretty short process.

It certainly would be -- I do not in any way expect it to interfere with our plan of being able to begin promotion and demonstration of the product at the RSNA show.

So I don't think that regulatory here is going to be in any way a gating factor (multiple speakers)

You can comfortably say you think it's going to be within 30 or 60 days? 90 days?

If I had to give you an answer based on the experience we have, I would be real comfortable with that.

But there's probably a real answer, and it's one I should have asked our regulatory person who was in training for the last two days.

So I simply didn't have a chance to ask him do you think this is days, weeks, months, minutes, hours, years?

Originally when we put in the application we were looking at approximately a 90-day turnaround.

It has been about 120 days, and it took them -- so basically you are saying over 90 days to come back to you and say they want to see the software actually on the systems.

We presented something new to them, and the entire program under which this review process can be delegated by the FDA to UL is itself new.

And a part of that we know was a matter of UL looking for guidance from the FDA to ask how to do this.

And another part of it is that we, as you see in a number of areas, we operate in a fairly lean fashion.

Our regulatory group during this period also had a surprise FDA audit and audits by a couple of major OEMs, all of which are to be expected in our business and all of which went superbly.

But when the FDA comes to your door and says well we're here for a regular surprise audit, everything else gets put on the desk.

And this was one of the things that I think got put on the desk for a bit, and appropriately so.

So the good news is we're not seeing this as in any way line delaying our commercial plan for this, and we got through with superb results a series of examinations by the groups that we're accountable to, and can only have improved our relations which each of those.

You don't see that as a -- obviously you guys didn't see that as an announceable event, the fact that the communications (indiscernible) the software basically got the green light, but they just wanted to see it actually on the systems?

I think, Joe, that the real objective we had was to be able to announce the completion of the process rather than necessarily complicate or go through what is of necessity and more complicated description.

And rightly or wrongly --

That's fine.

Any other insider sales you see coming and hitting the market?

I have not seen any.

There have not been any recently.

Do you see any coming up that you know of?

I am not aware of any, Joe.

Has there been any communication as far as with any companies as far as a merger or a buyout that maybe you could talk about, maybe that the Company has turned down?

I kind of have to answer this one the way I have in the past, that it is nothing we would ever be able to comment on and you shouldn't infer anything from our choosing not to comment.

My last comment then, which is something that I hope we do rectify rather quickly.

This is about the third time I have been on the calls for about a year and a half now (indiscernible) I have been on calls.

And the third time that I have heard that we have kind of dropped the ball with the resellers and with customers with educating them, holding their hand, and which has been basically a loss of business for us.

I hope that is something that we can correct immediately and get these sales closed, help the resellers get their sales closed, which will, obviously, benefit iCAD tremendously.

The third time almost with dropping the ball on that, Scott.

For a $20 million company, $30 million company, my conversations that I've had with you and with Kevin, it's too small of a Company to be dropping the ball on things of that nature in my opinion.

Hopefully we get something nice from lung cancer soon.

I appreciate it, Scott.

Scott Warner (ph), a private investor.

A little thing.

I couldn't quite hear reference to the legal costs of 535,000.

Going forward this quarter that we are in, which is the third quarter and the fourth quarter, what did you say about the amount?

I indicated the level of magnitude was probably about correct.

So, you're going to continue with the 500,000?

The total amount is really a function of how our adversary chooses to conduct parts of the process.

Not entirely within our control.

But when you say -- I'm not sure when you're talking about the 535 we registered in the second quarter, are you meaning that the total might be the same for the rest of the year or do you mean for each quarter?

I would say that for each quarter we are looking at that level of magnitude plus or minus.

It's not a number we can specify.

It seems higher because I remember (indiscernible) the R2 thing a couple of years ago I thought was only running around 400,000 a quarter.

No, we were paying $1 million a quarter (multiple speakers) for a number of quarters.

One of the real benefits, and I think this is worth emphasizing, is that the expedited arbitration process, while it concentrates some of these expenses, it just reduces the total period over which we see expenses again and again and again.

And I think we have been helped by the management of those expenses by our law firm, which is doing a good job in this respect.

The next thing -- the previous gentlemen hit this a bit, but I am going to say it again because I have been on these conference calls three or four or five years.

The disappointing sales over the years -- and he touched upon it -- the resellers and all, and the fact that -- remember the last conference call exactly three months ago you said we would be hitting greater revenue than ever before.

Well, we're actually 32% below our highest quarter in revenues, which was the December quarter, which is also I know your strong quarter.

But you were off by that much going back.

And I am concerned that first we heard about the incident with (indiscernible) and after a couple of years of poor results we learned that iCAD is locked into this through the ISSI acquisition.

And then we severed that.

Then we heard about the new resellers and again only spotty results.

And about five or six months ago you replaced your sales and marketing directors, and then on July 1 of course you announced this shortfall.

Well, I am concerned -- what is different now, Scott?

Why should we have confidence in the iCAD organization, the total organization, that you have got it in order now, that we have got the resellers on and you've got the internal sales force that's going to be helping them learn about the product and help them sell?

What is different now?

Because each time you seem to say what the gentlemen said before, that we recognize our problems but we are rectifying them.

What is different now that I should have confidence and want to retain my stock?

Scott, I think there are a couple of different answers to that.

The most obvious is that in some cases you may choose not to be confident until the results are demonstrated, and that there are no descriptions of corrective action or descriptions of plans or steps taken that will be particularly comforting.

But the reality is that we confront new problems and new opportunities with each successive quarter and with each successive change in the market, the product mix, the demand cycle, the regulatory environment.

In this case, as the Company has grown from 6 million to $23 some-odd million, our systems fell behind.

And the lack of correct sales information contributed to a poor level of execution in the second quarter.

We have been pretty candid about that, and we have also indicated that there are several steps that can be taken to assist that and that we are underway.

One of those is to increase the number of salespeople.

One of those is to improve the marketing.

And I am empathetic with the fact that you feel you have heard that before, because this is something we have been trying to achieve for too many quarters.

Here I guess I would say to you look at it; take a look; wait and see what it does.

We have also addressed -- I should say we are beginning to address the underlying information and systems issues that arise almost inevitably, not just through growth.

It's rough enough to grow from 6 million to 24 million to try to build a company that's many times that level of magnitude in sales, but we have done it by bringing, and from some perspectives four companies together, trying to integrate and blend their information systems, their manners of doing business, their very cultures.

And it's kind of like trying to build a house.

And I have done this, so I recognize the difficulty.

It's easier to build a house from scratch than it is to renovate a house and add on to it.

Different problems arise in each case.

Your frustration is noted.

The fact that we take it seriously should be evidenced by the actions that we are taking.

But from some perspectives, it is not inappropriate for you to say show me rather than tell me.

On the same thing, you mentioned that the quarters ahead would be better.

You didn't quantify.

Does that mean -- we expect of course the third quarter, because sales were pushed back from second quarter to third quarter; we would expect that to be better.

But will the fourth quarter be (indiscernible) will it still be improved -- an improvement over the third quarter?

I suspect so, yes.

Lastly, are there any changes in the sales, marketing area at the top, or are they still with us?

The ones since March when you brought in new people.

March quarter.

The people who have been responsible for the successes of the Company as well as for this disappointment are very much still with us and they're very much engaged in contributing to future successes.

Stephen Dunn, Dawson James Securities..

Just a little housekeeping.

On the inventory level, it looks like it creeped up a bit from the first quarter about $700,000.

Is that -- I hope that's not unsold Second Look 700s.

Can you comment on that?

It absolutely is.

We projected those sales, and not understanding that they wouldn't materialize, those units had to be built in advance.

So we have eight Second Look 700s in stock.

The good news is that as of this point we have orders for seven of them.

But I have to say to you, I will be happy to see that device moved from outside my office door.

Judd Perry (ph), Aberdeen Investment Management.

One thing that seems to be missing in some of this discussion is with the dramatic drop in the high-volume units, that means you had a pretty sharp increase in the low-volume units.

And I was wondering if you might be able to comment -- I know you will more in the 10-Q -- but can you comment on the environment following the Aetna policy change, and then kind of generically how things are going with ClickCAD?

The Aetna policy change appears to us to have significantly accelerated the attention of all potential CAD buyers, but especially of the kind of community population base, the smaller to midsized firms.

That is reflected, we believe, in our pipeline information.

And I will put a caveat at that because we have already acknowledged that the information system that we have with prospects or leads is one of the areas where we must and are taking steps to improve it.

But the pipeline looks very good.

And it looks good from two dimensions.

The first dimension is how big is it.

How many people are there who we're tracking as potential buyers of iCAD systems?

But the second dimension that can sometimes be missed is how deep into the pipeline are they?

Have they been quoted?

Have they had a demonstration?

Are they working for budget?

We see -- this is not an overnight or an impulse purchase, and we see a larger group of potential customers into the budgeting and approval cycle than we have in the past.

That seems to us to be a very positive sign right now.

Now, as to the total number of units, you are right in observing that the 300s and the 200s improved in general terms.

And I talked about not giving numbers without giving all of them, but in the first quarter there were some 33 combined 200s and 300s;

I don't have the breakdown with me.

That number went up to 45 in the second quarter.

ClickCAD accounted for 15 sales in the second quarter and accounted for an additional 10 ClickCAD keys or renewals.

So looking at that number in particular, I have to say this is an area where we are hopeful that recent added channel partners will add to the quarterly level of ClickCAD sales.

But like each of the other channels where we haven't had the bandwidth to provide sufficient support to achieve that potential, I think this is operating below potential.

I am presuming that relative to pricing in the lower-end units where you're not confronting an R2 competitive environment, can you comment on kind of -- on just what that environment is like?

We are confronting the R2 products at lower and lower points in the market, because that is the only place for R2 to go right now.

So what we're finding is that R2 has been very aggressive in trying to position its core products down.

We're not seeing much in the way of activity for the DMax I commented on earlier, but there is a high-end product that is somewhat comparable to where our 700 was positioned.

And we've not seen any activity for that product.

The lower positioned parts of the R2 line have been addressed against the 300 and against the 200, and we have where it's necessary responded with the rebate program that we talked about in the press release and in my comments earlier, and some bundling that would add software which -- or accessories, which typically have little cost to us but can increase the opportunity for closure and for a prompt sale.

What I looked at in the second quarter and actually was pretty satisfied with, after all of the rebates were in, after all of the price concessions, after everything that was necessary to be able to continue to dominate in this area, our margins were still at 76%.

And when we disaggregate all of the different price points and compare them to what in some ways are declining costs of goods as our engineering continues to reap benefits in this area, that is pretty good.

And that is still the point that we focus on in thinking about how profitable is each segment of this business and how well-positioned are we to enhance our ability to sell as the clinically and operationally-superior product while maintaining the value position.

I think we are real well-positioned for that.

That's very impressive volume increases.

And it's good to hear you have got an answer on the pricing side.

I guess on the digital side as well, it would appear there would have to be reasonable strength in that area notwithstanding the Hologic comment.

In digital -- and again, I will provide some metrics here.

In digital it is always difficult to present accurately, because the digital product includes two different components.

It includes a server component that would be used when a customer has one digital mammography system, and then there are additional keys that are really software upgrades that can be used to support additional picture devices, additional digital mammography devices.

And they're priced a little bit differently.

When we look at the total number of units we typically count those separately.

In the first quarter we had a total of 47 of those; in the second quarter we had 46 total digital units.

When we break them, the total CAD servers or what would be thought of as the senior portion was at 33 in the first quarter and 30 in the second quarter.

And the keys went up first quarter to second quarter.

I think this part of our business, Judd, is changing a bit.

There was a time when the digital component was more aggressively promoted by the digital OEM.

Today, I think they are relying on us to do more of that, which compounds and supports the benefit of having additional salespeople so that we can support those sales opportunities among the increasing number of other sales opportunities.

Wayne Motonvale (ph), (indiscernible).

Scott, a couple of quick questions here.

Did you break out the percentage of sales between digital and film?

And if not, could you do that?

I did not break it out.

Let's see if I have that handy so that I can give it to you.

Wayne, the digital sales during this period -- and these are rough numbers -- were about $1.4 million.

And the film-based sales were about 2.7.

And then in addition to that, we have digitizer sales and supplies and service that are accounted for as separate lines.

And that I think -- that should total to about 4.2.

That is -- that may be a little bit distorted because I'm showing all our rebates against the film-based side, and there may have been some modest rebates against the digital as well.

And speaking of rebates, was this -- the amount of rebates as a percentage of sales, let's say, was it atypically high this quarter or is this pretty standard?

Can you talk about (multiple speakers)

It has not been standard.

It's a tool that we've used in the second quarter to be able to address price competition specifically, and in some cases on an account-by-account or channel-by-channel basis.

I anticipate we are going to see some -- whether this particular promotional tool or others used in the third quarter.

The benefit of doing it this way is that we do not reduce the perceived suggested list price for products in a manner that would make it difficult to recover that or retrieve that when as we certainly hope we succeed in the market, and we're not seeing the price competition that we are seeing right now.

Steve Maser (ph), private investor.

With respect to your gross margins, I was noticing that your first six months improved to 78% from 68%, which is certainly one of the positives here.

What is your anticipation going forward into the balance of this year and into the first quarter of next year with regard to margins?

The key to that will be pricing and what happens in the market.

I think that if we were able to maintain at or near the current levels, that we would be doing well over the next quarter.

As we look further forward, I would certainly like to see those margins increase.

Now, there a couple of factors that I think are going to contribute ultimately to the fallout -- to the final margin number.

The first is that the Second Look 700 product is going to be a product which is offered at a net margin level below the 76%.

Based on our experience in July, we now see where that sweet spot is.

And the margin on that product is probably going to end up being closer to 65%.

The contribution that that makes in gross dollar terms to both sales and gross margin is still higher than the 300.

So we're willing to accept that business, especially as we kind of play that hand out.

Over time, I think we are going to see the 300 product with different variations and a lower overall build cost reclaim that part of the market, and margins should increase commensurately at that point.

But there will be a (multiple speakers) -- Hello?

Kevin?

I don't know.

There's somebody else on the line, Scott.

I am not sure who that is.

I'm sorry, though.

I hope that answers your question.

It does.

And obviously, your margins are good.

And if you address properly, like I am sure you will, the issue of the marketing staff -- because with the kind of margins have, as long as you get that sales for supporting the many OEMs that you have in the various partners, that is really the key to success.

And I don't think I have to tell you that.

But I am along with the other gentlemen hoping that you guys get this thing moving in the right direction for the next six months at least, and further on.

One last question with regard to the colonic polyp identification system.

Could you sort of enlighten me as to where that fits in with respect to colonoscopies?

What I mean by that is, is that a replacement for a colonoscopy or is that a totally different animal?

It is on the one hand a replacement, on the other hand a complement.

And this is an area where I was confused until very recently.

Colonoscopy is a procedure normally performed by an internist or a gastroenterologist where a fiber-optic tool is inserted and actually used to probe the colon after the colon is purged using a kind of cocktail sometimes affectionately called green (indiscernible).

A virtual colonoscopy, which can also be called colonography, is an examination of the colon using the images that are generated by a computer tomographic study.

So we have got colonoscopy, which is an intrusive procedure, and colonography, which is a visual examination and imaging procedure.

There are lots of reasons why people would like to be able to use a colonography procedure rather than a colonoscopy procedure, not the least of which is that it is less invasive.

It doesn't require that the patient be stated.

It is a different level of purging or prep.

And it is emerging as a more and more acknowledged alternative to colonoscopy.

The reason that I describe it as well as a complement is that if a nodule is found during the colonography procedure, a form of colonoscopy is performed to be able to remove the polyp.

I will tell you for anybody that has had a colonoscopy that is good news, because it seems to me like the iCAD approach would be a heck of a lot better to all of the patients that may seek help in that regard.

We have a lot of people who sure that view, and I appreciate it.

Lawrence Feisler (ph), First Southeastern Securities.

A long conference call;

I'll make it very brief.

We haven't really touched on our opportunities in the international market.

I know with Siemens we have a real shot there.

Perhaps you can give us a few comments on that and I will just go back in the queue and listen to the answer.

I think the international opportunity needs to be looked at in a series of checkpoints.

The first and most immediate is in digital mammography, where we now have three sales channels -- General Electric, Siemens, and Hologic -- offering iCAD's products into European and a variety of international markets.

We are also, I believe, near approval.

We were expecting probably a third or fourth quarter approval for sale of our products in Japan.

In film-based products where there has not been an historic market internationally, we have begun to develop channels for the 200 and the 300 product.

Some contribution already and I think modest contribution through the remainder of the year.

For lung and colon products, I think there is immediate international opportunity through the OEMs offering those products because they have strong international market presence.

Thank you sir.

At this time there are no further questions. (technical difficulty).

Mr. Parr, do you have any closing remarks, sir?

I would like to thank people for their attention this morning.

Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude your presentation and you may now disconnect.