ICAD Inc (ICAD) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the iCAD Inc. 2005 financial results conference call. [OPERATOR INSTRUCTIONS]

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

Please proceed, sir.

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 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 filings with the Securities and Exchange Commission.

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

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

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

We would ask that participants in the question and answer session please limit their questions to one and return to the queue, and refrain from making any statements.

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

Thank you, Kevin.

And thank you, ladies and gentlemen.

In the fourth quarter of 2005 iCAD achieved record quarterly orders and unit sales in all current product categories.

Over 150 iCAD systems were shipped in the final quarter of 2005, including five of our new Total Look systems for the comparative reading of film-based breast studies on digital mammography viewing stations.

Through a difficult year, we advanced our fundamental business and strategic plan with key product introductions and improvements, more effective product marketing, a doubling of our domestic sales force, added sales relationships with more key industry OEMs, and implementation of improved opportunity and sales management tools.

Looking ahead we have committed to near and long-term growth in our core digital and film-based mammography markets.

Our new Total Look comparative reading product has been well received.

And creates the opportunity to apply our digitizer and hardware engineering advantages in the growing digital mammography market.

We are also working on Computer-Aided Detection Solutions for computed radiography or CR breast imaging systems, an additional form of digital mammography pending FDA current-- FDA review currently in the United States.

Which we believe can contribute as a source of growth in Computer-Aided Detection sales in 2006.

Our PowerLook viewing product for film-based mammography and CAD has been equally well received.

And represents the first of what we expect will be a series of products providing benefits of digital mammography to film-based mammography practices.

We're very pleased with the progress of our developments for colonic polyp detection tools.

We believe there is a significant and growing market opportunity relating to growing interest in screening for colon cancer.

Our planned products are designed to support screening through radiographic examination, what is called CT Colonography or Virtual Colonoscopy.

Initial plan products are designed to assist in identification and description of colonic polyps in conventional colonography.

Future products in this area will seek to reduce the uncomfortable and unpleasant patient preparation now required for radiographic colon examinations and studies.

This objective is sometimes termed electronic cleansing or electronic prep.

We are now scheduling discussions with the FDA to review our plans, strategies, and schedule for seeking approval for our initial colonic polyp detection products.

And a schedule for FDA submission will be determined at that time.

We anticipate that clinical and field testing of our systems for detection of colonic polyps will begin shortly.

The same market factors that lead to an increased commitment to development of products to support colorectal screening, have led us to a less favorable view of the opportunities associated with previously announced long nodule detection programs.

We are deferring additional work in this area until and unless justified by indications of greater market potential.

In April of 2005, our principle competitor claimed that iCAD infringed on certain patents of that competitor, and began a process leading to counterclaims by iCAD and arbitration of the conflicting issues.

In addition to creating a substantial legal expense for the Company, these proceedings have consumed significant management time and Company resources of all kinds.

ICAD has stated that we do not believe we infringe on any valid and enforceable patent of our competitor.

And though our competitor does infringe on valid and enforceable iCAD patents.

Post-hearing submittals were completed February 28 of this year and a decision by the arbitrators in this matter is expected at the end of March or the beginning of April 2006.

This arbitration lead to discussions regarding merging and combining the two conflicted Companies.

Extensive due diligence and negotiation efforts occurred from October 2005 through February 2006, when iCAD withdrew from such discussions.

Excuse me.

Under the terms of a confidentiality agreement entered prior to merger discussions, we are unable to disclose or discuss the results of our due diligence or the reasons for our decision to terminate merger discussions.

While such a merger appeared likely, the Company did not recruit and hire to fill key vacant marketing, sales management, and product development management positions.

Since the termination of merger discussions in February of 2006, iCAD Management has worked aggressively to manage and reverse the distractions and adverse impacts on personnel and morale associated with the possible merger process.

We have hired a well-regarded search firm to assist us now in locating candidates for our available senior positions.

In mid-September 2005 a major clinical study was published in the New England journal of medicine.

Comparing the benefits of film-based and digital mammography.

Results showed among other findings, that digital mammography showed superior performance in detecting cancers in dense breasts and for young women.

Characteristics relevant to a minority of current breast cancer screening patients.

We believe lower than anticipated third quarter revenue from film-based CAD systems is due in part to the release of this study, and in part to the loss of our former national distributor for film-based CAD systems.

Performance in the fourth quarter strongly suggests that this market paralysis was temporary, with market interest, activity, and film-based product sales recovering as a result of a analysis of study data by users of all type, and improved iCAD product marketing and sales.

Notwithstanding multiple challenges and distractions during 2005, we made significant progress in product development and engineering, marketing, sales and channel management, customer and professional services and manufacturing operations.

In product development and engineering, the pace of product releases was the highest in iCAD's history.

Principle releases included the Second Look 300, a product which has become our key and most popular product for film-based mammography practices.

We've improved this product significantly with additional releases during the year.

We released an improved Second Look Digital Computer-Aided Detection solution for GE Healthcare, our largest OEM customer, which demonstrates increased sensitivity, reduced market rates and a marking logic that makes it easier for customers to use.

We have added Second Look Digital CAD solutions for Hologic, Siemens Medical Solutions and IMS Giotto.

IMS is an Italian manufacturer of digital mammography systems and our-- our sales to IMS are for further sale outside the United States.

We've also introduced a PowerLook viewer option, a very, very exciting option to our customers.

Which provides film-based mammography practices the ability to look at CAD and breast studies on a digital mammography viewing station and gives them significant benefits in zooming, windowing, leveling, and measuring the characteristics of a suspect feature or lesion.

We have improved our PureLook digitizer technology considerably enhancing image quality and consistency and setting the groundwork for our new comparative reading products.

Our Total Look integrated hardware and software solution for the digitization and integration of film-based studies for comparative reading on digital mammography workstations solves the real problem.

For new and recent purchasers of digital mammography systems who face the need to bring old film-based studies into the analysis process.

We have also advanced in development of Computer-Aided Detection solutions for the emerging computed radiography market.

As I mentioned earlier, we believe this is an area in which there will be significant growth, which we anticipate will begin in 2006.

In marketing iCAD made organizational and personnel changes at the beginning of the fourth quarter.

Meaningful achievements, some resulting directly from such changes, include the development and launch of our new bridge to digital and ClickCAD marking programs, supported by direct mail, telemarketing and advertising, and increased emphasis on lead generation by iCAD.

Through multiple direct mail and out-bound telemarketing programs for the benefit of iCAD's direct sales efforts and the efforts of our resellers.

Improved and increasingly competitive product marketing tools and collaterals, the confront directly the question of why a customer should buy CAD, why they should buy it from iCAD and why they should buy it right now?

We have increased and made our trade show participation more directed to the key questions we believe define customer conduct and sales.

We have increased support of clinical and research studies, highlighting the advantages of iCAD products and solutions.

Recent clinical studies in support of iCAD products include findings that our products demonstrate superior cancer detection and digital mammography, that our cancer detection performance is equivalent in dense breasts, that our products demonstrate superior detection of subtle lesions and chest wall lesions, and that telemedicine, telemammography, is effective and permissible for digital mammography and CAD.

The remote reading of digital mammograms is supported with the view towards pending iCAD products that we believe will enable and facilitate such workflow for resource constrained film-based mammography practices as well as for digital mammography practices.

Key to all of us, our achievements in sales and sales management included a doubling of iCAD's domestic sales force, the people who work for us, selling iCAD products and assisting our resellers and OEMs, we doubled that group from eight people to 16 sales professionals.

We've provided increased support in training of resellers sales personnel to make them more effective.

In the fourth quarter we implemented salesforce.com as an effective web-based solution for lead generation opportunity and sales management.

The value of this tool cannot be estimated.

We added Hologic and Siemens Medical solutions as active and contributing OEM sales channels for our Second Look digital CAD products and more recently we added IMS Giotto as an international seller of our digital solutions.

In a recent announcement, we've indicated that we expanded the range of iCAD products marketed and sold by Siemens Medical solutions to include our new Total Look Solution for comparative reading.

One important initiative that is working has been the effort to increase our participation and success through national buying groups and group purchasing organizations.

We are seeing the results of these efforts now.

And finally, in an area in which we're particularly satisfied, we were designated to provide at least 100 film-based Computer-Aided Detection solutions by the Chinese Anticancer Association, providing the CAD solution for a new million women's screening program, that will help bring the benefits of breast cancer screening to rural China.

During this same period, iCAD increased it's strategic emphasis on development and growth of residual and continuing revenue sources.

Including ClickCAD, fee per procedure and fee per period models, for delivery of CAD solutions, and increased attention to the opportunity and service and extended maintenance revenue sources.

The benefits of these efforts are anticipated in future periods.

As much as any other part of our business, ClickCAD promotion was delayed and deferred by the other priorities we faced.

And new ClickCAD sales have been reduced as a result.

Purchase of additional Click keys in contrast has increased with 29 keys sold in the fourth quarter, representing a tripling of second quarter key sales and almost a doubling of third quarter key sales.

That math increases our commitment to improve performance in this area, and we have increased ClickCAD specific marketing and advertising accordingly.

In customer and professional services, supporting iCAD's objective of increased control over the sales opportunity and over subsequent customer satisfaction, we have expanded our staff of field service engineers and assumed more control over presales product demonstrations, post-sales installations and related customer training.

In manufacturing operations over the course of 2005 we managed a complete transition in both products and contract manufacturing facilities while successfully meeting current production demands.

I'd like to make several closing notes before going to questions.

First, I will not be making any projections or giving any guidance in this conference call.

Secondly, there are two areas in which I cannot expand on the information provided today by our earnings release or my opening comments.

With respect to the arbitration with our principle competitor, our intellectual patent counsel has advised us to restrict information provided in advance of the arbitrators pending decision, to those points we have already made today.

Finally, our merger discussions with our principle competitor and the results and information reviewed during our due diligence are strictly protected by confidentiality agreements entered between the parties.

To honor the terms of these agreements and we should and must, we are unable to provide any further information on the proposed merger, the results of our due diligence, or the reasons for the vote by iCAD's Board of Directors to terminate merger discussions.

With these limitations, I welcome and look forward to your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Stephen Dunn, with Dawson James.

Please proceed.

Good morning, Scott.

Thanks for taking my call.

Good morning, Steve.

I'm not asking for '06 guidance, but what I would like is if you could help me with the relative to Q4, the trend in sales levels and expense levels.

In other words, you know, is Q4 for the top line representative in your opinion?

I'm going to defer from guidance that might be quantitative, Steve.

And instead say that we believe that we have an increased number of products that are now mature and well into the sales cycle for a significant pipeline of customers.

We have a significantly increased team of trained and effective iCAD salespeople and we are working to improve the effectiveness of our reseller, OEM salespeople and those factors lead us certainly to plan for growth and to take the steps that we believe can create that.

And that that really extends across the current product line with the objective of seeing some additional benefit pending the timing of FDA approval of computer radiography for breast examination.

We see that as a potential additional source of revenue during the year.

Okay.

And I guess for legal expenses, the merger and the patent issues.

Can you characterize the legal expenses that spilled into this year as well?

Or --

Well primary--primary expenses would have been those relating to preparation of post-hearing briefs.

There was little engagement in the period from January through February other than preparation by the legal team of the brief on which the arbitrators will make their decision.

That should be less than the previous quarter.

On the other hand, the efforts that were involved in the due diligence and the negotiations that were aimed at a combination of companies will probably be at about the same level.

I wouldn't see those as being significantly reduced through February.

Clearly in future periods we anticipate that both those have gone away.

Okay.

What's the average tenure of your sales reps now?

Do you know the number and months?

No.

But we could probably work to that.

Okay.

We have eight regional managers, and I would say that they have been there, most of them have been there two years or more.

Annette Heroux, our CFO, is here with me.

There maybe several of them that have been there for a year to a year and a half.

But I don't think anybody's been there for less than that period.

Of the eight territory managers that we have hired to expand our sales force, the average is probably five to six months.

That group has all been on board since probably the beginning of the fourth quarter and about half of it was hired during the third quarter.

We've had no turnover in the sales force.

We haven't lost anybody.

And the performance of each person-to-date has been pleasing and has avoided any need to do terminations or make changes in those areas.

How many months do you figure before a new rep, is mature enough to start generating sufficient sales?

We would look at about 90 days for that.

Three months.

And I'd make a little bit of a distinction in terms of our new Total Look product line, that's a network product, a rather complex one.

And we would -- we would really look at that as taking at least another month before people are facile in the presentation and closing of the sale for that product.

But from our perspective, these are all effective salespeople at this time.

And we are managing and measuring them accordingly.

Okay.

Are we going to have any on the lung cancer module that you've kind of diverted resources to, we're not going to have any write-offs during '06 for that project delay, are we?

No.

Okay.

Thanks.

I'll jump back in the queue.

Thanks, Steve.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of [Paul Henning], Private Investor.

Please proceed.

Scott, could you please provide me with some additional detail and color on the national account program?

Thanks very much.

Sure.

I'm actually pleased to do that.

This is an area that we identified as an opportunity for iCAD.

And equally an area in which our competitors appeared to be more successful than we were.

And we have invested time and attention and effort in trying to build this program.

National accounts I think are defined -- the success of a national accounts program has two elements.

The first is are you contracted?

Have you been identified by that national account as a company that provides products they'd like to acquire.

And subsequent to that, have you worked with the account end taken full advantage of their ability to market your products through their organization and to support you in realizing real sales.

We, we have -- in the past I think done better with the first and the second.

The national accounts that the Company has had involvement with have included Kaiser, Health Trust, CareCore, MAGNET, MedAssets, [MHA Direct].

But the results of those relationships have not been extraordinary.

More recently we enter into an agreement -- a new agreement with Amarinet that was announced in November, I think that press release was, become effective at that date.

Reflecting the change in the way we deal with this kind of partner, we've now received some 96 leads from Amarinet and in November and December, sales accounted for almost 500 -- a little over $550,000.

Health Trust is a group where we have made the effort to become a better partner, and 2005 sales there were just over $0.5 million.

Magnet is a group where--where our relationship has been a good one and we have made it better.

In 2005 we had about $1.25 million in sales through the Magnet account.

MHA about $200,000.

CareCore somewhat less.

Broad link Kaiser, this is an account that we had joined with in 2003.

In many cases we have found that the products that we offer to Kaiser, film-based products, do not meet their needs, and that they have been buying iCAD products through our OEMs in conjunction with digital mammography purchases.

This remains an area where we think there's probably a greater opportunity.

And we're going to continue to re-enforce our sales and marketing efforts within this account.

In general we anticipate some additional national account GPO relationships and we believe we'll continue to be more effective in taking advantage of them.

It's been a positive achievement during the year.

It's going to continue to contribute in 2006.

Thanks very much.

Your next question comes from the line of [Corey Tobin], with William Blair & Company.

Please proceed.

Scott, good morning.

Good morning, [Corey].

A couple of quick questions if I could.

The backlog, you mentioned the press release is about 800,000 or so.

Can you just give us a feeling for--is this--how you look at this number is this up from where we were last year in Q3, respectively?

I guess that's the most important one.

Is that up?

I'm sure we've had a backlog of any significance.

Okay.

So this is-- Sorry.

This reflects -- this reflects a couple of things that are driven by changes in our sales management.

And I think in part by our implementation of a much better opportunity and lead management system.

In the past we have had a disproportionate percentage of our sales occur the last two weeks of the quarter.

And that puts the Company at risk.

That was a risk that we -- we saw the results of in the third quarter of 2005.

The sales management approach that we currently use is much more effective in judging and monitoring the process by which an opportunity becomes a sale.

And advancing that within the quarter.

So that we've been able to balance out much more the receipt of orders.

And we've been able to achieve what we need to achieve without seeing a major miracle at the end of the third month of the quarter.

One of the results of that has been to help us balance production and to allow for a backlog.

Which we've really never had before.

In the fourth quarter that backlog included some advance orders by our digital OEMs that were for delivery subsequent to December 31.

But it also included orders that had come in within the last week to two weeks of December that we did not feel compelled to rush out the door in a hurried and often difficult process.

So we simply rationalized the business with a better flow of leads, better managed through a sales and contact lead system.

And better handled by the sales management infrastructure that we had in place.

That's great.

So I guess -- sounds like very good news, right?

More operational procedures in place or systems in place, if you will.

A backlog for the first time.

The --

Corey, may I interrupt for a second?

Please.

There's actually one other benefit in the fourth quarter that is less easily reported.

But we entered the fourth quarter with an inventory of the products in the hands of our resellers and our channel.

And during the fourth quarter that inventory was reduced by some 5 to $600,000, the estimate of our sales force.

So what when we look at the whole quarter and ask, how many people made a decision to purchase iCAD products, we have the $6 million that we shipped and booked.

We have the almost $800,000 that represents the backlog that was ordered and that we did not ship.

And then we have what appears to us to be at least another $0.5 million of inventory that was reduced and went into customers hands.

And I think that among other things brought overall channel inventory down by about half, to a level that in many respects represents reseller demonstration and evaluation goods.

And is the right kind of scale for us to have in channel hands.

That's great.

It sounds--it sounds like it was a very successful quarter.

Which just raises the question, with all of the positive trends, it sounds like are happening, why the hesitation to give guidance just in a qualitative sense?

Is it, is it just because you're still -- because of the turnover in the sales force?

Because -- I'm sorry, a better way to phrase it, because of the recent adds in the sales force, we're still trying to figuring out exactly the productivity levels that will come from there?

Or is there some other factor that's making you hesitant to give a loose indication of where revenue should trend?

I think with the sample of one month -- I'm sorry, of one quarter, it's just premature to provide any quantitative guidance or projections.

Okay.

Understood.

Two other quick ones if I could, please.

On cash flow any thoughts on what you're thinking in terms of operating cash flow for '06?

Just in a broad sense.

I mean should we expect it to be neutral or is there a chance that it's negative again in '06?

Our plans and projections are to ensure that it is no worse than neutral.

And to the extent that we can control that that would certainly be our objective.

Great.

We do have our first quarter and there will be legal expenses which are not yet estimable for the first quarter.

But even accommodating those, that remains what our plan and our target would be.

Great.

And then one last question.

You mentioned recruiting for some senior positions, if I heard correctly.

Yes.

Could you--do you care -- could you just comment for a couple of seconds on which positions you are looking for-

Sure.

In terms of recruiting?

Thanks.

Our -- within the sales and marketing group, we have two principle vacancies.

The former Vice President of Sales and Marketing position is open.

And the former Director of Marketing position is open.

And as you can probably understand when it appeared that we were likely to complete a merger in which those positions would have been eliminated, we did not seek to fill them at that time.

We are looking to replace the Director of Marketing, and in filling the position that was formerly occupied by the Vice President of Sales and Marketing, we're redefining that position slightly.

Our National Sales Manager has stepped up and is performing an excellent job in management of the sales force.

Our International Sales Director similarly has stepped up.

We believe that gives us the opportunity to hire somebody who will take on broader responsibilities as the customer facing leader within iCAD.

That would be to take responsibility not just for sales and marketing, but for professional services, our field and internal customer group, and ultimately for product management, which is the group that tries to determine where customers have needs and align the Company's development and sales efforts with those needs.

We will identify that role initially as the President of the Company, rather than as the Vice President of Sales and Marketing, and provide that person with the authority to assist us in always being effective in working from the customer back rather than from the Company out.

So that's an organizational shift.

It's one that provides back-up that is absolutely essential to me, and reflects the view that we have that we have to be customer centered.

The other position that is available is a position in management of our research and development effort.

And similarly we believe this gives us an opportunity to identify and secure a very senior team member who can broaden the definition of that role and better link it with the product management and customer defined priorities of the Company.

We have, I think, had a real benefit.

Our sales team is topnotch.

Now the way that it's executed has been exceptional.

And that has made the vacancy less damaging than it might have been in the sales position.

Marketing position clearly there's damage not to have that filled.

The research and development team that we have is equally topnotch.

They are self-motivated.

They're not concerned with needing to create the links directly to sales and product management.

They've been productive.

What we want to do so is to be able to provide added value through the management process.

And to do that we're looking at recruitment firm to help us find people that we may not now be familiar with, who can make iCAD a better Company, and provide us a world-class management team because those are -- those are the things that will make us most successful.

Okay.

And any thoughts on timing?

I'm assuming it's as soon as possible?

It is as soon as possible.

And we -- it's as soon as possible I guess is the only answer I can provide.

Great.

Scott, Annette, thank you.

Your next question comes from the line Don Frank, with Don Frank Associates.

Please proceed.

Scott, I think it was a great quarter.

I have a couple of questions.

I've heard that the Chinese have sent a small delegation to iCAD in New Hampshire.

How are we progressing and expanding our toe hold in Chinese mammography and CAD?

And what is the realistic potential in China for iCAD?

We did have a delegation from the Chinese and Anticancer Association and members of the Ministry of Health and our reseller in Beijing who joined us in New Hampshire.

Spent almost a week with us, learned the meaning of Texas barbecue, which they may not forget soon.

And demonstrated really a pleasing level of competence and preparation for rolling out iCAD's products.

Among these were the people who as engineers will be installing and supporting the products.

And they're very impressive people.

The first shipments to China were received and are now being installed.

And they are being distributed among a series of rural hospitals to provide the first evidence of the benefits of Computer-Aided Detection in screening.

We are going to be in China in April, a number of us, working both on rollout of the product, on assistance in developing clinical protocols for measuring the success of the product, and on promotion to some hospitals that are not members of the Chinese Anticancer Association.

There's every expectation on our part, on the part of our reseller and on the part of the administrators of the CACA that there will be additional orders this year.

I think the pace of those orders will result in part from how much support we provide in the early stages of rollout and we're providing as much as we can.

There's a minimum under the contract.

The reality is that as breast care screening becomes more prevalent through China, the concept of 1 million woman screening could easily become a 10 million or 100 million woman screening, and I believe we're uniquely positioned to benefit from the growth of breast care screening, mammography screening and CAD.

And we're working really diligently to build and justify the relationships on which future business will be based.

Thanks, Scott.

On virtual colonoscopy, I understand a recent test showed no advantage for conventional colonoscopy over virtual.

And you've already commented a bit about that.

Is that the -- are those study results accurate as far as what you can announce?

Well there are--there are mixed results studying virtual colonoscopy as contrasted with optical or sigmoid colonoscopy.

I think that the trend is towards a recognition that not only does virtual colonoscopy provide an effective benefit, but it's more likely to be employed by the millions of men, 50 years of age and older, who should have screening and haven't done it because the prospect is so unappealing.

There are longer term objectives in what we're doing in the area of rectocolonic cancer the screenings support.

Which aim at what might be considered a Holy Grail.

The ability to do a Computed Tomographic study without preparation, without what's sometimes affectionately called the green death.

That evacuates the bowels and that allows them to be expanded for better -- better definition of features within the colon.

That's a long ways off.

But it's one of our future product objectives, and it's consistent track with the initial objectives of identifying an characterizing colonic polyps by type and definition and size.

And in that manner assisting the physician in more effectively analyzing a CT radiographic study of the colon.

We believe that this is an area when you look at American Cancer Association statistics, this is the number two cancer killer.

And it is one where appropriate intervention doesn't simply cure cancer, it avoids it.

When we speak of the identification of polyps, those polyps are not cancerous.

They're not cancerous yet.

Being able through a relatively benign procedure to snip and remove what could be the source of colonic cancer is a wonderful result.

Now the numbers support the benefits of this.

The population supports it.

The use of radiographic tools and CAD appear to be effective.

We see this as a very significant market opportunity in which iCAD can and plans to be a leader.

And we're excited about it.

Thanks so much, Scott.

Your next question comes from the line of Jeb Terry with Aberdeen Investment.

Please proceed.

Good morning, Scott.

Good morning, Jeb.

Scott, can you provide any color in terms of the breakdown in the units and address the particularly the efforts in the small clinic market, including ClickCAD and other products?

Sure.

Give me half a minute here to just pull the right documents together.

In the fourth quarter our digital sales of--totaled 77 servers and device licenses.

We had seven Second Look 700 products, which as you know from previous conversations are in inventory we're simply depleting that inventory.

We had 61 Second Look 300 and 200 systems.

Five Total Look systems.

We were disappointed to see only three new ClickCAD installations, but correspondingly we were pleased to see 29 additional procedure keys.

Interestingly the number of procedure keys we sold in the fourth quarter is almost half the total keys we've sold in 2005, that's clearly what we want to see from our ClickCAD business.

But we want and will see the number of installations increase with an approved -- an improved attention to that market segment.

Perfect.

Thanks very much.

You're welcome.

Your next question comes from the line of [George Whiteside] with SWS Financial Services.

Please proceed.

Good morning, Scott.

Good morning, George.

Congratulations on the quarter.

Thank you.

I know it was encouraging to see the pick-up in activity versus the prior quarter, where you had some slippage because of the types of issues that you've already discussed.

In regard to the lung CAD project, which you've scaled back, do you anticipate that you're going to have any write-offs in connection with that?

There will be no write-offs.

Everything involved in that program was expensed as it was incurred.

Excellent.

And I presume that with you're having enhanced your sales force, that in spite of the fact that you're bringing them up to speed rather quickly, that you probably will have some additional marketing and sales expense in connection with that activity?

Well, our marketing and sales expenses in the fourth quarter were I think above the go-forward level for several reasons.

First of all, after the third quarter it was clearly necessary to charge the marketing effort, to invest immediately in communication of the clear selling proposition that would lead to purchases, especially by buyers with film-based practices.

We saw an increase in direct marketing in telemarketing, in advertising.

Some of which will be continued but probably at a slightly moderate the level.

In the fourth quarter we see the expenses that are incurred in the largest trade show we have each year, the RSNA trade show.

And that is a period expense.

So we'll see that again in the fourth quarter of '06, but it will be reduced in the preceding quarters.

And we had some termination and separation benefits in that sector that we took in the fourth quarter, which were--I would say material.

About $150,000 and they will not be recurring.

Thank you.

You're welcome.

Your next question comes from the line of Larry Ceisler with First Southeastern Securities.

Please proceed.

Good morning, Scott.

Hi, Larry.

Just a kind of elaborate on what you had just discussing with regard to Q4.

Can you give us some color on the differences between expenses for Q1 and Q4?

You've mentioned some of the extra expenses in Q4, but perhaps, you can give us a little bit of an understanding about the differences again between Q1 and Q4.

Sure.

And I think this is a key question.

Because when we look at our results in the first quarter on revenues that are comparable to those in the fourth quarter, we demonstrated a profit and in the fourth quarter we demonstrated a significant loss.

And I think it's important to really look at those two quarters to understand what happened and to be able to consider what is likely to happen going forward.

So I'm going to take a minute with this one if you don't mind.

Thank you.

In general operating expenses increased about $2.4 million between the first quarter of 2005 and the fourth quarter of 2005.

And I'm going to walk through where that came from.

About 1.2 million of that, certainly the largest by any measure, was legal.

And we've talked about that, we know we're going to see some of that in the first quarter.

But that in general that number was a disproportionate expense for us in the fourth quarter.

We also had some search fees, the work that we're doing with the executive recruitment firm does carry with it expenses up front.

And we have incurred some of those in the fourth quarter.

Within the sales group, the largest increase after legal was in what we call commercial sales operations.

A portion of that is good news, by the way.

It's commissions and we did pay some outside commissions that were of benefit in being able to generate sales through our OEM sales partners in particular.

But in that area we had almost $200,000 in severance and separation-related expenses for two positions.

Overall sales and commercial operations were $600,000 higher than they were in the first quarter.

Most of that--the largest portion of that was in the severance area.

And in additional staffing, because we're also covering the additional eight territory managers in that.

Our marketing expenses were almost $300,000 higher in the fourth quarter than in the first quarter.

Of that probably $90,000 relates to a new call center with about a $30,000 a month additional overhead.

That first of all was responsible for helping redirect the marketing, secondly took control of lead capture and lead management, and thirdly now begun to promote the ClickCAD and fee per procedure programs more aggressively.

We did have increased advertising, increased trade show, that probably accounted for about another $200,000.

That number, by the way, probably not too much difference in that number as we look forward.

I'll step back a bit.

I would see the sales number going down.

Because some of that is related to one-time and separation benefits.

I would see the admin numbers as I indicated going down significantly even in the first quarter.

But certainly beyond that.

We incurred about $200,000 in expense in what we call network administration.

And there are two components to this.

About half of that was the purchase of equipment that we could be using to support our customer resource management and opportunity and contact lead system.

During the fourth quarter we terminated a contract we had had with a systems vendor that we expected would provide us an enterprise-wide lead and contact information system coupled with inventory management, production planning and ultimately accounting.

We had paid that company about $116,000.

We found that we were not achieving our objectives.

We terminated that agreement while we're suing to recover that, there's $115,000 charge in what we call network administration relating to that prepayment and our efforts to get it back.

In one area we made a fairly significant change in the way we tried to define future products and coordinate and management the development and product delivery process at iCAD.

Implementing a product management system and there are two budget categories that we show in the fourth quarter that did not exist in the first quarter.

They are called women's health business development and CT imaging business development.

They are the people and the resources responsible for product management.

In the first case of our digital and film-based mammography systems and of our Total Look and PowerLook systems and in the second case of the emerging CTcolonographic products.

And together they represent about $250,000 in additional expense.

These are people who were formerly in the budget in different places.

But they now have responsibility for driving these programs through the organization and over the long-term they're very critical in reducing unnecessary costs in product and program development and in increasing sales.

So those are increases that you would expect to see continuing going forward.

In operations, which for us is manufacturing operations, there was about $160,000 increase from the first quarter to the fourth quarter primarily related to our total changeover in products between Q1 and Q2.

And some inevitable scrap and obsolescence issues associate with the older discontinued products.

Should not be a carry-forward issue.

Okay, that seems to be the number.

One quick question along the same lines.

Are you looking for some additional costs with regard to virtual colonoscopy, since we, this is obviously a product that we want to develop, in a big-time manner?

I think we're staffed for this.

It is a product that we anticipate will be moved through OEM partners, which are to a certain extent already in place.

Okay.

Can you tell us a little bit about that?

If I may.

Before we go on.

The biggest expense associated with the development of the colonography program will be the FDA fees.

Right.

And those are likely to be 100 to $125,000 to the FDA.

And some costs associated with the preparation of submissions.

Now we have begun the appointment-setting process with the FDA.

I'm told we should be in there within the month, is our expectation.

And that will give us a much better picture of the form of submission that we would expect would be received favorably by the FDA, and with that we'll have a better idea of what work is necessary to put that submission in place.

Great.

Thank you very much, Scott.

That's a nice job there.

Thank you.

Your next question comes from the line of [Joe Rudy], [Saxen Securities].

Please proceed.

Scott, how many units in the fourth quarter were sold to or purchased by Hologic?

Joe, we're not going to break down the digital by OEM, because the OEMs have indicated they would like that information to be maintained less publicly.

We've got two OEMs that do not report publicly as contrasted with Hologic.

I think that what --

So that's been a change since last quarter?

It has been a change since last quarter.

Okay.

We had a conversation also earlier in the year--

Joe forgive me.

May I finish?

Joe, may I finish?

We only have a limited amount of time, so I want to get my questions in, you answered the question.

Earlier in the year we had a conversation in reference to the conference over in Dubai.

How you guys did not come up on the list of exhibitors.

And you had said you had believed that you were sharing a booth with Hologic.

Was that ever confirmed?

We were with a Hologic reseller who is responsible for that territory.

Okay.

The -- originally last quarter we had said that there'd be a submission in the first quarter for colon.

Evidently as of now we're not expecting that.

We're expecting that within the next 30 to 45 days?

Our schedule for a submission for colon will depend on the results of our conversation with the FDA.

And in particular their guidance as to whether a submission would be received favorably under the 510K or under the PMA guidelines.

Okay.

So once again that's a change from last quarter, which was a change from the previous quarter of when the application would be put in for colon cancer.

Correct?

I think that was a statement.

Okay.

You had said that there was a radius--a submission put in for computed radiology?

No.

No.

Can you then clarify then what you had stated in the beginning of the conference call?

I indicated that we have done development on systems for computed radiography.

Okay.

For those systems to have an impact in 2006, the underlying use of computed radiography for screening mammography must be approved by the FDA.

Okay.

That's an application that is in at least one case in place and we believe near conclusion from a manufacturer of computed radiography equipment, there maybe others.

But the expectation in that we are working with those manufacturers is that when they get approval, we're able to provide the CAD solution that complements their CR system and device.

Okay.

Back in January you also received an approval from the FDA on a manufacturing site, I believe, up in Massachusetts, for InfuMedics.

Is that correct?

No, I don't think so.

On 1/13/06?

In January?

It's on the FDA website.

Compumedics?

No InfuMedics.

I don't know the name.

Okay.

Did you -- maybe I don't have the name correct.

Did you receive an approval for another manufacturing site in January?

We received approval for our current manufacturer in Walpole, a firm called Proven Process.

Yes, that definitely was not the name that the FDA has.

Okay.

Is that because of the increased demand that you see or is that just in preparation for this year and next year?

As I indicated in 2005 and more recently, we've completed a complete shift in product and in manufacturing facilities.

So that Proven Process was the firm that we selected as the ongoing source for most of our film and digital products.

The relationship has been a good one.

We're pleased with the results-to-date.

Okay.

On lung cancer.

We also had a conversation earlier in the year on lung cancer.

And we were still waiting for -- there was no response back from the FDA since the -- since the end of last year.

And actually I'm pulling it up here right now.

And we're still very hopeful in the beginning of this year.

What changed from January 'til now?

A month and a half later?

When we have competitors that are, touting the market and touting, the demand in the market.

It just doesn't make sense.

While we've been in the last couple of quarters getting, hurt in breast--in the breast cancer market.

Your competitors and some of your partners have been touting the market.

And have seen no impact to you on the negative side.

If anything, some of these companies, Hologic being one of them, has just been blowing away estimates quarter after quarter.

Joe, you're dealing with a couple of different questions.

Let's stay with lung for a moment.

Sure.

There is no company to my knowledge that has provided public evidence of any success in products for Computer-Aided Detection of lung cancer.

Nobody.

And the evidence that we have suggests that that is not a viable market relative to the other opportunities available to iCAD.

And that is evidence that we have worked hard to generate, it's an area where we have done a lot of investigation because this is a decision we have to make about what the opportunity is for our Company relative to the potential competitive advantage of our skills and of our core competencies.

But is that-

Lung--make the cut.

Scott, is that because the FDA's come back and asked for additional information, that's just too costly to pursue?

No.

We have yet to receive any response from the FDA.

So the application still up in the air with the FDA that they may come back today, tomorrow, next month, in six months with an approval?

Yes.

Okay.

And I'm on the FDA website.

It is InfuMedics.

InfuMedics Incorporated in Massachusetts.

So.

Institutional ownership has changed drastically since last quarter.

Has there been any focus for the Company to go back out again and gain institutional confidence and, ownership in the Company's stock?

During the period of negotiation of merger since that termination and prior to announcement of Q4 earnings, there has been no effort to promote the Company or to provide additional information to new or current institutional owners.

Your next question comes from the line of [Scott Warner], Private Investor.

Please proceed.

Scott?

Hi, Scott.

How are you.

Okay.

First, primarily the personnel.

First, having to do with, I know, in the one source that you all got rid of I think around the third quarter, I'm thinking -- they had a lot of people with feet on the ground.

But I was wondering if you could just make an estimate of how many effectives they had in the third quarter versus the 16 effectives that we now -- excuse me every, I think it's around 30 or 40 effectives that we have out in the field of the resellers sales personnel.

And then what you might see going forward say six months to the end of the September quarter?

Could you give us some rough figures on how much maybe we've grown from effective salesman representing us, as one source, and then going to our relative-- to the ones we have now and going say six months forward the end of the -- say the end of September?

Sure.

I think that's a good question, Scott.

And with your permission, I'm going to rephrase it a bit.

Sure.

I think part of what you're referring to, is the fact that iCAD began 2005 with a national distributor, a Source One Healthcare.

Which as a company really liquidated in the third quarter.

And as a result the efforts of their sales team positive as they may or may not have been, were gone after that point.

We -- we found that as of the third quarter given that Source One was aware of the fact that the company was going to be disposed of or sold, had lost most of its field sales capability.

The number of people who were still with the Company was probably down to a handful.

We actually were able to move a couple of their people into either reseller positions or positions supporting us.

But for practical purposes Source One was not able to contribute in the third quarter.

The company compensated and I think the success of that is reflected in the fourth quarter with increased sales activity by our own people, doubling of that.

And the real attention to identifying where we had nominal resellers who were, in fact, committed to promoting the iCAD product and willing to be trained and supported in promoting it and selling it better.

And that's a process that began towards the end of the third quarter and continues with acceleration during the fourth quarter and first quarter.

It's -- of necessity a rough estimate.

But I think that as of the third quarter we probably had depending on how you count the level of maturity and preparation of our own team, maybe 10 iCAD people who were effective and hitting on the necessary cylinders in the field.

These are iCAD employees?

ICAD.

These are iCAD.

That's now 16.

That's not -- I'm talking about resellers now.

I understand.

The resellers that we had at that time numbered probably 40 to 50 of whom a very rough estimate is that 10 to 15 were what we would think of as being qualified, trained, motivated and effective.

I think since that third quarter we've probably doubled that number.

In fact, there's a sales training for one of our regional resellers going on right now in the conference room next to my office.

We've made it a priority to provide better tools, better training and better support to the resellers who will reciprocate with more activities in their areas.

And that's been successfully.

If we look further ahead, Scott, saying that we had a limited number of resellers who were -- who were well trained and well motivated going into the third quarter coming out of the fourth quarter we probably have some 12 to 15 resellers with perhaps 30 people who we would qualify as effective and committed.

I'd certainly like to double that over the course of the next 6 to 9 months.

I think that in addition to the potential for some additional iCAD salespeople, the real potential exists to make the resellers who are familiar with the market generally and who are familiar with customers in their areas increasingly effective and increasingly motivated in promoting iCAD solutions.

Does this summarize -- would you say then that we can look from the mostly massive guys at One Source--Source One, whatever they were, maybe five or 10 guys up to now, perhaps, 30 plus and effective.

And now if you look out six months, maybe another 10 or 20.

We could be --significantly could be going from say five or 10 to maybe 50 or 60 the end of the September quarter.

Would that be a fair ?

I think that's very accurate.

Scott, I want to add something.

For us to be successful in growth, we need to bring together the right product, the right salesperson, and the lead that identifies the perspective customer.

And we have, I think, demonstrated that we have the right product available now.

Made significant improvements in having a sufficient number of the right salespeople available, a growing number and with a significant change point in the fourth quarter taking responsibility for lead development and opportunity identification which we now manage for the benefit of our own salespeople and of our resellers salespeople.

And that's the way it needs to operate.

Okay.

Now on the next question.

I thank you on that.

Has to do with personnel and more on Total Look.

I know this is a new thing for us, and it's a complicated, sophisticated thing for the sales staff.

Anybody to get--get in there and really know it, it takes some sort of maybe 90 days, 120 or something.

But what I want to know is, first of all, compare our product to whatever R2 has out there.

And then later talk about the total market for the product ours or theirs worldwide, what you would say was--were prospects for this?

In terms of the competitive comparison with our competitors product, the evidence that we have is from customer sites that have replaced the evaluation versions of our competitive product -- competitors product with iCAD's product.

And they -- they indicate that they prefer the iCAD product for a number of reasons, which from case to case include the effectiveness of the product, the value, the price of the product, the ease of use of the product.

That is antidotal information, there isn't a great deal of deployment that we can observe of our competitors product.

And we're just beginning to deploy our own.

But the choices that have been made that we can observe and the choice for example, of Siemens Medical solution, which elected to take the iCAD Total Look product and not the product offered by our competitor I think are very positive indicators.

All right.

How does that -- I know the product retails from what I hear out in the field as a 40,000 or maybe 50,000 list price.

What's the total market out there for this product, that they, R2 and us?

What can we look forward to as a real live market for this product?

Well, I think the market opportunity is every new or recent digital mammography installation.

Because that's the customer who has the comparative reading problem, Total Look addresses.

All right.

I'd contrast that, Scott, with the market for the CAD systems that we are--we're pleased at the progress and the growth in Second Look digital products.

But they're primarily in the United States where reimbursement for Computer-Aided Detection helps the customer with the economic judgment to acquire Computer-Aided Detection.

We don't have that requirement with our Total Look product.

It's not reimbursement driven, it's productivity driven.

And as a result the international market of forward digital mammography systems, becomes a much more realistic opportunity for iCAD in the promotion of the Total Look product.

I guess as an example, if I may, one of our earlier callers talked about iCAD in Dubai of all places, and the reason that we were there with a reseller, with one of Hologic's distributors, is they had an interest in Total Look.

Where previously they had not had a very strong interest in t Computer-Aided Detection, the Total Look product is something that they believe they have customers who need it and will buy it.

Can you quantify maybe what you feel over the next say, next 12 months, what might be the total opportunity?

We don't have yet have and the Siemens isn't ready to sell.

Their guys aren't trained yet.

But what do you think the market place opportunity--where are the potential ones?

I think what the answer would be, how many new digital systems are projected to be sold in 2006.

Okay.

And there's some very different estimates based on what appears to be a major growth in the rate of digital sales over the last quarter.

But I think people generally believe that could be 1,000 units.

And that's a global market.

And it has the potential to increase in part as a result of the digital mammography study that was released in September of 2005.

Okay.

That would be expecting market force.

That would be on top of those prices that already have gone digital.

I don't know what number--what number is that that has gone digital?

I'm more familiar with that number domestically, and that number is between 800 and 1,000 units, depending on whose estimates you look.

So we're talking at least 800 as a potential?

Say the--through calendar '06--2006?

I think so.

I think contributing to that, Scott, to the extent that computer radiography receives approval by the FDA As people anticipate hope it will, that'll contribute more digital transitions and more Total Look opportunities.

Okay.

I thank you for that.

OI have one little thing that you can clarify.

On your announcement today, on my Internet talked about orders or something for the Chinese, and yet the 100.

But we heard about those 100 back a couple of months ago.

And then I heard that you actually had shipped some in China.

So I'm confused about, is there an order for 100?

Is this an addition that we've shipped, or what?

I'm confused about the number.

Sorry for the confusion.

The contract we have with the Chinese is for a minimum of 100 units.

We have shipped 20-to-date.

All right.

And those 20 went by sea at customer request and are now being installed.

What quarter does that shipment take place?

That took place in the fourth quarter.

Okay.

So we have -- therefore, the balance rather on are contracted for?

So far all that's all we have is a contract?

That's part of the backlog?

No.

No.

That's not backlog.

We don't have purchase orders for those yet.

That's a contractual obligation of the customer.

And we are working with them and I think very effectively to justify additional orders and to justify some upgrades in viewers and other tools, which the delegation that visited us like -- quite liked as appropriate ways to further deploy iCAD products in China.

Okay.

I'm confused I guess between an order and a when an order-- a contract is not an order.

I'm confused, I guess.

Well, the distinction would be that the contract does not have a firm ship date.

I see.

It rarely includes an obligation.

That's something which we can't recognize or book or ship or do anything with.

Okay.

An order would be a firm order for a fixed price for a fixed delivery date.

Which becomes a sale after it is shipped, invoiced and fulfilled.

Got you.

So we don't have those orders yet.

Okay, thank you, Scott.

You're welcome.

Your next question comes from the line of Jeb Terry with Aberdeen Investments.

Please proceed.

Scott, just a follow-up.

Is there a way you can address what might be happening in adoption in the lower volume clinic world?

That is the nondigital clinic marketplace or at least the high-end, that can afford a Hologic or GE or Siemens digital?

Okay, I lost the track, Jeb.

And I'm sorry.

Just the ten--are we seeing a ramp-up in the adoption and smaller lower volume clinics so the nondigital market is what I'm really-- the non high-end digital market is what I'm looking for color on?

We don't see -- we don't see a great many digital purchases by smaller clinics.

I think that the digital mammography study probably helped to move them off the fence and back into the we're going to buy a film solution category.

Because the digital mammography study quantified some of the benefits of digital mammography relative to film-based.

And it moved many people into the market for digital but it moved some of the borderline cases, especially those who had economic constraints into a recognition that they're not ready for digital yet.

So it unlocked the market in some respects.

I think that -- and I believe Hologic as they've indicated in their calls, still sees the higher volume clinics as being the primary source of orders for digital mammography systems.

And we're seeing the lower volume clinics more active at this point in the replacement of their film-based systems and in connection with that often in the acquisition of CAD.

Great.

Thank you, Scott.

You're welcome.

This now concludes our Q&A session.

I'll now return the call to management for closing remarks.

We appreciate your time and your interest and look forward to our pending report on form 10K.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation. [OPERATOR INSTRUCTIONS]