ICAD Inc (ICAD) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2006 iCAD earnings conference call.

My name is Latosha and I will be your coordinator for today. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to Mr. Al Palombo of the Investor Relations firm of Cameron Associates.

Thanks very much.

Good morning everyone.

Before I turn the call over Ken Ferry, President and Chief Executive Officer of iCAD, I need to inform you that certain statements contained in this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve a number of known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

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

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

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

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

With that said, I will turn the call over to Ken Ferry, President and Chief Executive Officer of iCAD.

Good morning everyone, and welcome to iCAD's Q3 earnings conference call.

With me here this morning in Nashua are Darlene Deptula-Hicks, our CFO, Jonathan Go, our Senior Vice President for Research and Development, Jean Boyle, our Vice President for Service, Jeff Barnes, Senior Vice President for Sales, and Stacey Stevens, our Senior Vice President for Marketing and Strategy.

The third quarter of '06 can be categorized as one of significant progress for iCAD in many areas across the Company.

First, we have recently completed hiring of the senior staff with the additions of Darlene Deptula-Hicks, our CFO, whom you will hear from a moment, Jean Boyle, our Vice President of Service, and Jonathan Go, our Senior Vice President for Research and Development.

The latter two hires, Jean and Jonathan, each with extensive backgrounds in the PACS and workstations space, will enable iCAD to broaden its strategy in the healthcare market that is rapidly embracing the adoption of digital technology.

In addition, from a sales and marketing standpoint we have made significant progress with our go to market strategy.

We now have 14 fully trained senior sales professionals, an indirect channel sales manager, an international sales manager, and two inside sales representatives in place.

Our goal is to continue to expand direct and indirect coverage further by year's end.

This is tremendous progress as compared to a quarter go when we fielded less than half as many productive salespeople and had an ineffective indirect channels program.

We have equally made strong progress in marketing, where we are embarking on an ambitious rebranding effort that will be unveiled at the RSNA tradeshow next month in Chicago.

More on this later from Stacey Stevens, our Senior Vice President for Marketing and Strategy.

Second, we're working closely with and actively expanding relationships with OEM partners.

The rapid adoption of full field digital mammography, combined with the recent FDA clearance of the first computed radiography solution for mammography creates a scalable range of digital mammography solutions for a wider range of customer segments, for example, high to low volume sites throughout United States and Europe.

And so goes digital, so goes the high adoption rate of CAD as well.

Third, we're striving to achieve operational excellence in all functions of the Company.

Our initial focus is all customer facing activities.

This is closely followed by those that directly improve our financial position, such as focused efforts to reduce analog inventory and increase inventory turns going forward.

With all this said, I'm pleased, but by no means content with our progress.

We must maintain this pace of change and continuous improvement to fully capitalize on the opportunities ahead of us as the mammography market rapidly adopts digital technology.

And now I would like to turn things over to Darlene Deptula-Hicks for a more detailed review of our quarter's financial results.

Hello everyone.

Hopefully you have had an opportunity by now to review the recent press release announcing our third quarter results.

Let me begin by saying that we're very excited about our third quarter performance and pleased to report that total revenue for the third quarter was $5.04 million, an increase of 48.5% from $3.39 million in the third quarter of '05.

Total revenue also increased sequentially by 30.2%.

As expected this growth was fueled primarily by the increased demand for our digital CAD product, as our customers accelerate their transition from film-based analog mammography systems to full field digital technology.

Because of this market shift, our digital revenue for the third quarter of 2006 increased by 167.9% to $3.1 million from $1.1 million in the third quarter of 2005.

Digital revenue also increased sequentially by $1.4 million or 79.3%.

This favorable shift to digital technology has (technical difficulty) in the past contributed to a decline in our film-based analog business.

For the third quarter of 2006 our analog revenue decreased by 31.2% to $1.3 million from $1.8 million in the third quarter of 2005.

Analog revenue also declined sequentially by $149,000 or 10.6%.

While this transition to digital technology had a significant positive impact on performance, we're taking corrective actions to improve our analog business going forward.

Lastly, our service and supply revenue increased 70% in the third quarter of 2006 to $704,000, as compared to $414,000 in the third quarter of 2005.

Service revenue declined slightly sequentially by 5.5%.

This increase year-over-year is due primarily to focused efforts to increase our service value to our customers, resulting in an increase in service contract penetration.

Gross margin for the third quarter was 76.3% compared with 72.7% in the prior year quarter.

This increase in gross margin is primarily attributable to higher gross margins realized on our digital products.

During the third quarter we increased our inventory reserve by $263,000 for identified excess and obsolete analog inventory.

Gross margin for the quarter, if adjusted for this inventory reserve, was 81.5%.

Net loss for the quarter, including stock-based compensation expense of $221,000, was $1.1 million, or $0.03 per share, as compared with a net loss of $2.6 million, or $0.07 per share, in the third quarter of 2005.

Net loss if adjusted for stock-based compensation would be $900,000, or $0.02 per share.

As the result of a strong third quarter performance, revenue for the nine months ending September 30, 2006 of $13.3 million was essentially even with the previous year of $13.6 million, or just a slight decrease of 2.6%.

Year-over-year digital revenue increased $3 million, or any 82.1%.

Analog revenue declined $4.3 million, or 49%.

And service and supply revenue increased $858,000, or 69.1%.

Gross margin and for the nine-month period of 2006 was 77.8%, compared with 76.4% in the prior year nine months.

As I mentioned earlier, this increase in gross margin is primarily attributable to higher gross margins realized on our digital product.

Gross margin for the nine-month period if adjusted for the increase in inventory reserve of $263,000 reported in the third quarter, would be 79.8%.

Net loss for the nine-month period of 2006, including stock-based compensation expense of $767,000, was $5.3 million, or $0.14 per share, as compared with a net loss of $3.1 million, or $0.08 per share in 2005.

Net loss if adjusted for stock-based compensation would be $4.6 million, or $0.12 per share.

This nine-month net loss also included several onetime charges for legal defense, severance and recruiting costs.

We're also pleased to report that we exited the third quarter with a healthy backlog of $1.4 million, which is an increase of 49% over the June quarter ending backlog of $941,000.

We expect that the majority on this backlog will ship during the fourth quarter.

At September 30, we had cashed and cash equivalents of $5 million as compared to $4.6 million at December 31.

Accounts receivable at September 30 was $1.8 million as compared to $4 million at December 31 year-end.

This reduction in accounts receivable was primarily due to experiencing more linear orders and sales during the third quarter.

Inventory at September 30 was $3.8 million, as compared to $2.5 million at December 31.

While our digital inventory turns are high, our mature analog product inventory and supporting spare parts have been experiencing lower turns.

For the third quarter of 2006 cash from operating and investing activities used $1.3 million, and cash from financing activities provided $2.8 million net.

The cash provided through financing activities was primarily attributable to the $3 million in convertible promissory notes issued in September to officers, directors and several other investors.

Our current headcount is 84 full-time and 6 part-time employees, for a total of 90 employees.

This is a net decrease in headcount of 2 over our December 31, 2005 total headcount of 92.

While we have made significant changes in senior management and the sales organization and have increased headcount in marketing, overall there has not been an increase in total headcount.

We expect to fill several more nonmanagement positions, particularly customer facing positions, during Q4.

At this point I would like to pass the discussion on to Stacey Stevens, our VP of Marketing and Strategy to discuss the rebranding and repositioning of iCAD and the upcoming RSNA.

Good morning everyone.

I'm pleased to announce that we have made significant progress in the past couple of months in our efforts to rebrand iCAD and to fundamentally reposition the Company.

The goal of this substantial marketing effort is to establish the Company previously perceived as the value player in the industry as an innovative and visionary market leader.

As part of our focused effort we have partnered with two world-class marketing and communications firms with proven success in the healthcare space, Philip Johnson Associates and Swartz Communications.

Working with PJA we have developed a new compelling differentiated value proposition for the Company that will convey a strong leadership orientation.

The value proposition will really focus on the things that matter most to radiologists, such as having the best sensitivity for finding the most subtle kinds of cancers, and breakthrough workflow solutions that enable greater efficiency and productivity.

Along with that, we're in the process of developing a comprehensive integrated communications effort that will include not only a new positioning strategy for iCAD, but also a new advertising campaign, a complete redesign of the Company's website, online communications, thought leadership activities, and the development of a new tradeshow presence.

The unveiling of the powerful new Company branding will occur in just a few weeks at the upcoming Radiological Society of North America tradeshow, which is the largest medical tradeshow in the world, and typically attended by over 60,000 healthcare professionals.

We will showcase a stunning new booth there, the largest in iCAD history, and we have put together a very strong preshow marketing plan designed to drive significant customer traffic to our booth.

Another important piece of our marketing strategy has been a significantly increased focus in the area of public relations.

As I mentioned, we hired Swartz Communications, the second-largest independent healthcare PR firm, to represent iCAD.

We're working with Swartz to develop an aggressive targeted media program that will promote iCAD with the goal of driving demand for CAD on both the local and national level.

An important aspect of the PR campaign will be regional or grass roots campaigns in markets where iCAD technology is being used to drive awareness and demand.

The goal is to secure as stories as possible in each market across multiple media outlets, including print, broadcast, Web and the hospital network.

We're already seeing increased coverage of iCAD in the healthcare journals, including Medical Imaging and Advances, as well as an heightened interest in iCAD technology from the mainstream media as well.

The initial focus of our work with Swartz will also be capitalizing on the RSNA meeting as an opportunity to introduce the next phase of iCAD to key members of the media.

We have accomplished a lot in a short period of time, and we're really looking forward to the unveiling of the new iCAD in just a few short weeks.

From the RSNA forward iCAD will carry a very different look and feel than the past, which will be represented in all the ways that we communicate to the outside world.

We intend to aggressively drive to this leadership message to our customers, and we're confident that this powerful new branding will have a very positive effect on our business going forward.

Operator, we are now prepared to take questions.

(OPERATOR INSTRUCTIONS).

Stephen Dunn, Dawson James.

Congratulations to everyone on the team for a great quarter.

A couple of housekeeping questions maybe for Darlene.

I missed what the stock-based compensation was for Q3.

For Q3 it was $220,000 roughly.

I'm sorry, $220,000.

Yes.

It is kind of hard, your backlog increased but your inventory is like $50 different than your Q2.

Did you increase your reserve or was that just a coincidence?

We did increase our reserve by $263,000.

As I mentioned, our digital inventory is turning quickly, but we do have some excess and some obsolete analog inventory that we have got programs to work those down.

Well, it is interesting your digital sales sequentially from Q2 to Q3 increased, and digital sales have higher margins than the analog sales, yet your gross margin declined slightly from 78.3% to 76.3% in Q3.

Did you make a pricing change on your digital side or is there a mix thing that I'm not aware of?

No, let me just maybe correct you there.

Our gross margins for the third quarter increased -- oh, I see what you're saying.

You're comparing it quarter over quarter.

Yes.

Sequentially.

So your sales mix was even more heavily weighted towards digital, yet your gross margin declined.

So I've got to think there is either a pricing difference or something in there.

Again, you would need to back out that $263,000 inventory reserve, which was a onetime charge in September.

If you back that out of the numbers, it would be an increase sequentially.

It was what? 81%.

Yes, 81.5% for the quarter.

It was north of 81% for the quarter, Steve, if you took out the inventory reserve reflecting the much richer margins on digital products versus analog.

Now that makes sense.

I guess the last housekeeping question is could you characterize your backlog?

What makes up the increase in the backlog, if you could characterize it somehow?

The increase in backlog I would just in a ballpark sense say is roughly probably two-thirds digital and about one-third analog.

Without the exact numbers in front of me what I would say is that the digital backlog is consistent with the strong demand we saw throughout the quarter.

What I would say about the analog is that we saw a stronger demand for analog at the latter month of the quarter, which we hope will follow through into Q4.

I think that we were pleased with our September performance as it relates to analog, as well as the amount of backlog we built contrasted to prior quarters.

I think as you see look at the makeup it is probably two-thirds, one-third.

Probably the most positive aspect of that, beyond the sustained digital performance, is the fact that our analog backlog is growing as well.

That in part is a function of having more feet on the street and a stronger indirect channels program than we have had in the past.

We're already starting to see some benefit from that.

My last question, and i will jump back in the queue here.

Just kind of looking forward if you could give me a quick update, again, your colon polyp software?

And I just wanted to know if you have thought about rethinking the lung CAD software?

We just had the Siemens lung CAD approved two weeks ago, and then last week we had the New England Journal of Medicine showing that screening for lung cancer caught significantly more stage 1 lung cancers, and that perhaps that would become the standard of care in screening.

I was wondering if there is any change in the thinking on the lung side.

To start first with the colon, we actually had a meeting last Friday with the FDA to really understand in a proactive sense what will be required from a submittal for our colonic polyp detection product.

And I think we made very good progress with them in understanding their requirements.

And our hope is that next year we will be very productive and concise with what we submit with our regulatory filing for colonic polyp detection.

Our timeframe has really not changed.

The fourth quarter of '07 to the first quarter '08 for commercial product, pending all the work we have to do between now and then.

As it relates to the lung, it is certainly very interesting information.

I think at a minimum what it does is validate the value of early screening in all cancer areas.

And certainly adds the question as it relates to CAD and lung as well.

We are working through our strategic plan, as I speak.

And we will reevaluate in light of these recent public events where that might play in our strategy as we build a CAD platform algorithm that is extendable well beyond mammography.

Any guidance for Q4 or '07 or whatever you feel comfortable with?

We're hoping to provide guidance at some point in '07.

We're not at this point providing guidance.

Well, I will jump back in.

And, again, great quarter guys.

[Bill Roulette], H.C. Wainwright.

Nice quarter.

I would just like to ask about the competitive situation.

When you've got Hologic acquiring R2, how does that change things for iCAD and for other companies in the field?

I think it creates tremendous opportunity for us in the field right now.

When you listen closely to Hologic's strategy as it relates to the acquisition of R2, clearly the highest priority is optimized performance between the digital detector in the CAD and the market, not necessarily proactively supporting their prior OEM partners, such as GE and Siemens and as well the CR players that are moving into this space such as Fuji, and at some point [ACVA] and others.

It really creates an opportunity for us to work with all of the companies that provide mammography equipment that compete directly with Hologic, and obviously the near exclusive provider that we provide the value to them and their customers as part of this equation.

We're pretty excited about that.

We think we had made tremendous progress with all of these companies.

But with that said, I also want to point out that one of reasons we're building a very strong direct sales team is so that we can build brand preference for iCAD directly with the end-user customer, and not strictly rely on the OEM partners as we like to describe them, companies such as GE and Siemens.

I would expect over time there will be other entrants in this field from a competitive standpoint.

Clearly with the market leader having been acquired, and with the acquiring company's priority not to proliferate the CAD software into the market with all mammography providers who are their direct competitors, it has opened up the competitive situation, and we intend to take full advantage of that, expecting to see other players come forward.

However, it is still an environment that requires an FDA filing under a PMA, so the barriers to entry are significant, and it will take time for emerging companies in the CAD space to enter this market.

Our intent is to blanket the market with competent representation, with very strong relationships at a strategic level with the mammography providers, with the exception of Hologic.

And to really go after this business aggressively, making it more difficult for these companies to enter the market.

[Joe Rudy], [Saxony Securities].

Good morning.

Good job on the quarter.

First, I've got a couple of questions here.

First, do we have any follow-up with Fuji 510K that you can give us?

We had our meeting at the FDA with a number of the same people that we would be working with regarding Fuji this last Friday.

About a week earlier, we had received another round of questions from the FDA.

And we felt at that time that the level and the depth of the questions were beyond the scope of what had been set as a precedent with other submittals for the full field digital sensors with the various manufacturers.

We have written a letter of concern and escalated this beyond the reviewer to two levels above that individual, with our concerns over the scope of the questions we're being asked to respond to.

With that said, we then had a conference call last week with the section chief, the reviewers and so forth.

And they're going to send us a response this week, which we hope will be a scaled-down number of questions as it relates to our submittal.

Our submittal was received on July 13, and following the guidance we received, consistent with other full field digital submittals, had we followed that process, as we have in the past, we would have expected to have FDA clearance by now.

We hope to hear something back relative to our concerns this week.

We are prepared to respond immediately, but the exact timing of when we will have FDA clearance with Fuji is not clear.

We did book our first order with Fuji for a customer in Singapore, where obviously we don't have the requirements of the FDA.

We intend to ship that order in the October/November timeframe.

So we technically will do business with Fuji, but obviously the major demand will be the United States, and we will probably know better in the next week or two how quickly we will have clearance for Fuji in the fourth quarter.

Are you expecting for it to be in that fourth quarter?

I would hope so.

I think at this point in time I would be surprised if we don't have clearance at some point in the month of November.

That would leave us probably realistically with one month of selling time with Fuji.

One of the positive aspects of that is our agreement is such that we will do the installations for Fuji.

And as a result of having a very experienced team in the field, we think we can ramp up quickly.

I just want to follow up a little bit more on R2.

Can you give us any opinions on R2's success, or lack of success, in the third quarter when it relates to iCAD and R2 going -- battling for one customer, or even with your conversations with the OEM partners?

Why don't I ask Jeff Barnes, who is here, our Senior VP of Sales, to respond to that one.

Thanks for the question.

One comment I would make looking at external data is MD Buyline provided information in the quarter that reflected a fairly material shift in the number of customers that are asking for review of quotations for CAD for mammography by MD Buyline, which is the -- I think as you know, the third-party based out of Texas.

Historically the number of requests for quotation review favored R2 versus iCAD, and that shift to more iCAD quotations being asked to be reviewed occurred in the quarter.

I thought that was very encouraging.

The other point I would make is that it is well-known that Hologic has decreased the number of the feet on the street as it relates to selling CAD.

Since R2 no longer exists, the Hologic CAD representation is somewhere in the 6 to 8 range throughout the country, at the same time while we're actually increasing or ramping up our feet on the street.

Let me just -- I may come back to that one in a second or two guys.

I know you don't want to give guidance, Ken, for the fourth quarter.

Can you give us any indication of whether we are expecting an increase year-over-year, or at least sequentially quarter over quarter?

What I would say, Joe, is that the digital demand that we talked about on our last quarter's call, and what I feel strongly we delivered on this call, we don't see that demand changing.

The digital business feels strong from a demand standpoint.

When you point to the big leading manufacturers, people like Hologic and GE and Siemens, the leadtime that they are quoting to their customers for mammography equipment that is a digital based product, is substantial.

We're hearing three and four months leadtime.

That would be a good indication of where the strong demand exists.

And we don't see that demand shifting in a negative sense anytime soon.

Obviously, the availability of the systems and the production quantities have some variability, if you will, and demand for what we do -- or timing really I guess is a better way to describe it.

I would also save I think the analog business is not nearly in the decline that it would appear based on our sequential quarters.

I think it is in part due to the digital demand.

Certainly a pause as a result of computed radiography entering the space.

But in our case we just have not had strong coverage in that area.

When I look at our rapid decline, I can only assume we will improve in that area because we will have a much stronger go to market strategy, a much more pervasive channel strategy going after the analog business.

And it will be even less contested, because clearly that is not a priority for Hologic.

And Jeff can attest to the fact that he has got a number of calls from former or soon-to-be former R2 distributors where Hologic has decided to use their master distributor to represent the sum of their products.

Our opportunity, just as we have to take on direct salespeople from former R2, we now have the opportunity to take on some of their most successful distributors, as they are either coming to the end of their contract or their contract have been terminated, and that should give us an opportunity to strengthen our coverage in the analog space as well.

That, I think, is to a great degreed the upside, if you will, going forward combined with one last point, and that is CR.

We feel clearly have seen very strong momentum without one dollar of revenue from computed radiographer.

And I certainly expect by the end of this quarter for that to kick in and to serve us well going into '07.

Are we going to hear anything soon, or have we delivered anything under the China agreement?

Nothing beyond the initial shipment that was made at the end of last year.

Do we expect to ship anything in the fourth quarter?

Not as it relates to China.

As I mentioned, we have an order for Singapore for Fuji CR.

That will certainly be an international shipment.

But nothing beyond that at this point.

Can you give us any sort of like internal or even external market potential for iCAD for next year?

The way I would look at it is really start with the digital space.

The best way to reference that is Hologic is very open in their calls relative to the rapid adoption of digital technology and the unit volumes that they have been experiencing per quarter.

If my numbers are close to correct, if you look at their first quarter unit shipments of digital contrasted to the guidance they gave for the fourth quarter, it is about a 50% increase in unit sales.

My understanding was something like 154 systems were shipped in the third quarter.

Their guidance was about 10 more than that in the fourth quarter.

Their earnings I understand are next week, so we will probably get an update on whether they achieved their goals.

But if you just look at that second half actual for Q3, combined with their guidance for Q4, and then you look at their guidance of unit sales for '07, you're looking at I think a runrate of about 640 systems if you annualize their second half projections.

And their guidance, as I understand it for '07 was 700 systems.

With a sum of 500 systems sold this year, if their numbers are correct for Q4, going to 700 next year, that is a 30% increase in unit volume of full field digital.

I think GE, particularly with their summertime introduction of their new, wider detector called, Essential, also is experiencing a very healthy uptick in demand, both from their installed base and their stronger competitive position for competitive transactions.

If you just combine that with the overwhelming interest in CR for mammography that has surfaced -- if you go on and look at some of the data there, there has been a tremendous response to CR from [Ammo] for the lower volume settings.

I just think it all bodes well for very, very strong digital adoption in the marketplace.

If you look at the historic numbers that Hologic has quoted, over 80% of their digital sales included CAD.

If you just look at that rapid adoption of digital, you look at the high penetration of CAD, I think it really bodes well for a very, very bright 2007.

And I think that, combined with the efforts we're making to substantially strengthen our go to market strategy, gives us cause for confidence and optimism for next year.

I'm not trying to backdoor you into giving guidance for next year, but can you give us any sort of range here on an actual dollar amount on a market potential, a realistic market potential for iCAD?

I think it really gets down to how much digital business do you think will go down in the market?

I think, obviously, if Hologic has guided 700 units, one could certainly assume they might be getting as much as 50% of the business.

If approximately 1,400 full field digital systems go down largely between Hologic, GE and Siemens, combined with as many as 500 or 600 new or upgraded CR solutions, that could create as many as 2,000 digital transactions.

Obviously, you have to look at the adoption rate of CAD, and you could ballpark that at a minimum I think of 80%.

I think that number is conservative.

You've got to back out realistically the number of transactions that will be somewhat exclusive to Hologic.

But I think you can easily see your way towards maybe as many as 1,000 digital transactions available to us in a non-Hologic setting.

And I think that would bode very, very well relative to the overall opportunity.

Can you give us any indication on has the Company been out on any institutional roadshows, or are we intending on going out on any?

We have in the last 30 to 45 days probably done about 35 investor meetings.

About four weeks ago Darlene, Stacey and I embarked on, as I like to describe it, the roadshow from hell, where we did Boston on a Monday.

We did New York on a Tuesday, Chicago on a Wednesday, San Francisco on a Thursday, completing 21 investor meetings, and then red eying from Los Angeles back to Boston on Thursday night.

While we're not intending to keep up that pace, we would like to be out each month at least one or two days communicating our story to the Street, because I think the rapid adoption of digital technology, the radical change in the competitive landscape, and the tremendous progress we had made in this Company are substantial enough to convey on a consistent basis.

Now that we have our third quarter results in play, it makes it much easier than looking back on Q2, which seemed like a long time ago, and was not at all a reflection of the future of our Company, much more so what we have just accomplished in the third quarter.

I'm done, Ken.

Very good on the turnaround.

[Judd Terry], Aberdeen Investment Management.

Great quarter folks.

Congratulations.

Just a couple of housekeeping things.

Depreciation for the quarter, what was that?

I guess I don't have the depreciation number right in front of me, but it was actually a pickup for the quarter because there was an error made earlier in the year.

Overall depreciation was an increase, just north of $100,000.

Stock-based comp again was $220,000, is that right?

Yes. $221,000 for the quarter.

Is that reasonable to assume going forward?

No, I believe going forward it wouldn't be any more than that.

CapEx?

Very small in this Company.

Not a lot of money at all.

I think there was $150,000 approximately for the first nine months.

It is not a capital intensive business.

We do tend to move some inventory into capital equipment if we're going to do it, for example, for the [Click] CAD and things like that.

But this is not a capital intensive business.

G&A, you did a great job of bringing that down.

Is that something -- is that a level that we should consider going forward?

I would say at this point for the quarter, actually G&A came down for the quarter.

Part of that was because -- it compares -- comparing quarter over quarter, basically research and development expenses came down because we completed some research and development last year on our Fulcrum digitizer and we also had a lot of patent arbitration proceedings with R2 last year that were not part of this quarter.

Having said that, offsetting it there has clearly been an increase in sales and marketing spending.

You will continue to see that.

I think this next quarter going forward will be a little bit more reflective of what things look like.

Is there may -- if you could comment on a concentration with GE?

And then in the past there is used to be some disclosures on number of digital units.

I was curious if that would be available.

What we will do in the Q is to have a new template which will have total digital business by dollars, as well as total analog business by dollars, and total service and supplies by dollars.

We're not going to disclose units, because obviously if one took the numerator and denominator approach, you could figure out what our average selling prices are which is probably not a good thing to have public.

What I would say is that obviously GE commands a comparable share to Hologic as a market leader.

And we have seen a dramatic shift in their loyalty, and a dramatic shift in our volume with GE.

But with that said, we have seen a significant uptick, as you can imagine as our business has grown in the digital space with all of our OEMs.

We have been pleasantly surprised to see Siemens really come on strong in this space over the last quarter as well.

We are seeing significant increase from all the companies.

And as I tried to communicate earlier, we're not backing off from business, whether it be directly through Hologic, because a customer is an iCAD customer, or expresses a strong interest, or we will go after the business direct.

And that is one of the benefits of a very senior strong continent sales team as we do forward.

I would expect that mix is going to shift, particularly as you bring on the CR players -- Fuji, I certainly hope this quarter.

We're in very active contract discussion with ACVA, very close with ACVA on an agreement.

They would probably be in the latter half of next year in the United States market.

They would like to be marketing our CAD today in Europe and the United States with their full field digital system.

I think you're going to see the mix, if you will, change quite a bit because the players and their allegiances, if you will, are changing.

But with that said, I can't emphasize enough the importance of a very strong, competent direct sales team supported by a very, very sustained marketing program because at the end of the day, we have to drive demand for CAD.

We have to communicate the differentiation of our product in the marketplace directly to the customer, and hopefully partner as closely as we can with the OEMs, but by no means exclusively rely on those companies for our demand going forward.

Speaking about the partnership with the OEMs, and Mr. Go being present, could you perhaps address where product development -- if roadmap is the right term, but at least directionally when you intend to go with product development in conjunction with those OEMs?

Sure.

I think that the way I would describe this is it is multifaceted.

First and foremost, the obvious is optimized performance.

The more cancer cases, as an example, that we can get from GE and the more we can optimized our CAD for their sensor and how it generates images, we will certainly improve our performance with GE from a sensitivity, specificity and reduction of false positives.

There is also discussion around what I will describe as advanced applications.

More analytical tools that would allow more than just playing marks on an image that relate to potential cancers.

There is also a very strong interest in the area of connectivity.

As we move into a digital world and we look at both the workstation business in conjunction with the PACS business, there is quite a bit of discussion around that area as well.

We have had very successful multiday in person meetings with GE and Siemens to kind of map out the roadmap.

And we're very actively talking every other week or so in conference calls and also point meetings to develop and implement the roadmap, which will build differentiated capability over the next one to two years with those companies.

I'm very, very excited to have Jonathan onboard because his background, both from a 3D workstation, for a PACS standpoint, and an extensive background running large, successful R&D organizations in healthcare is in my opinion an absolute perfect fit for his counterparts in companies like GE and Siemens, and ultimately Fuji.

In his former roles he has had a lot of experience doing that.

And I think it will only bode well for us as we structure these development roadmaps going forward as well.

Is the inference then that we will have tailored products, perhaps the right words is embedded in those offerings from GE, AGVA, Siemens, etc.?

Yes, absolutely.

I think each Company has their own view of the business and has their own strengths in the market.

An example would be people like Fuji and ACVA are very strong in the PACS space.

So their orientation on connectivity might be higher than, say, Siemens, that might be more interested in advanced applications or optimized sensor CAD performance.

I think in time we will have what I will call parallel development roadmaps with each company.

Some of the core functionality that would be part of a general release will be common to all those companies, but there will also be differentiated functionality that would only be offered in conjunction with those companies going forward.

I'm encouraged because the collaboration has been very, very constructive and very productive.

I believe that these companies fully understand the importance of doing this, and have been very receptive.

And I personally set in on a number of the meetings to work collaboratively with us going forward.

We will begin some of this with demonstration works in progress at the RSNA, and that will be followed over the next 12 to 24 months commercially into the market.

Does that imply also near exclusivity certainly within the marketing at RSNA in terms of your presence within their respective booths and in their collateral materials?

I think it is very clear from a competitive landscape that they have all the incentive and motivation to promote iCAD, and very little to support their primary competitor.

I believe that that is a pervasive aligned view between us and the companies.

We are certainly talking and planning to have demonstration in our booth, as well as in their booths at the RSNA.

And I think is just a reflection of the reality of the market.

Now that the acquisition of R2 has closed, as I believe it did back in the July timeframe, without doubt these companies get it.

They know who is here to be their near exclusive partner, willing to work very strategically, as well as in customer facing environments.

And I think that in the short period time that we have had, we have stepped up and proven that we are prime time player and can support them towards a leadership position, both in full field digital mammography as well as CAD.

I think you can always describe these situations as a work in progress.

But I think we have a tremendous progress with these companies and we intend to continue that momentum.

Well done.

Congratulations -- a very excited future.

Scott Warner

Well done there, Ken.

I have a question first on the potential Fuji business from units of theirs already placed overseas and say in the States, which we would then -- our salespeople -- our marketing and service staff would then install -- if we could install our machine -- our module, I guess you might call it.

What number of units are out there that are waiting for us to go after them?

That is a good question.

Fuji has thousands of installations.

Obviously, the United States, a very big presence, also a huge presence as you would imagine in Japan.

And they've got thousands of systems installed.

I think the challenge though is depending on what vintage their system is, the upgrade to CR for Mammo will vary.

Obviously the systems that they have shipped in the last probably six months are much more cost-effective to upgrade than stuff that could be out there for two or three years.

For us at this point we don't have what I would call hard data on exactly what is the aged, and let's call it the compatibility for upgrade of their installed base.

But we are certainly working closely with them to exploit that in the United States.

They are obviously handling the CR Mammo upgrade directly with their customer base.

They know exactly what it takes for a customer.

And once they had made that upgrade, the CAD installation will be the same, whether it is a brand-new system or one that has been upgraded.

We're working closely with them.

As I mentioned, our contract calls for us to do installations in the United States alongside of Fuji.

And internationally we have not taken what I would call an aggressive approach.

We've really been focusing our efforts primarily on getting through the United States clearance in a go to market program because there is tremendous opportunity with Fuji in the States.

But we will certainly soon, once we have the clearance, be working with them closely internationally as well.

Are you talking, perhaps here, not going forward in new sales that Fuji makes, but how many units do you think would be a potential for us, assuming there is an 80 -- where we will get 80% perhaps of the CAD placement of 80% rate -- how many units do you think might be available to us overseas when they upgrade them or whatever?

It is hard to say overseas because obviously the CAD market is much richer in the United States.

You have reimbursement.

You have the risk of litigation.

And you've got a much stronger adoption of digital technology here.

I really can't give you what I call firm numbers outside of the States.

In the States I think as an estimate from our conversations with Fuji, our own intelligence around the adoption of CR, somewhere in the range of 300 to 500 transactions, whether they be upgrades or new are very possible in '07 for CR with Fuji.

And obviously it is a little more difficult to gauge what other players such as AGVA, Konica, Kodak when they will be in the market as well.

But they are all gearing up to have a CR product in the States at some point in '07.

I think the opportunity is going to be significant with CR, because obviously if you're in a low to mid volume clinical setting, and you have an existing CR system for more of a general use in the x-ray space, adding the Mammo upgrade could be very cost-effective and also be a very attractive opportunity to add CAD as well, since technically this is a digital system.

We're optimistic.

I can't tell you today we've got a lot of firm numbers on the opportunity internationally.

This is part of my second question.

You mention 400 or 500 units next year for Fuji -- that percent that might come from that -- our numbers.

But you also, if I understood correctly, there about 700 that might fall our way from the GE Siemens and so on in the full digital, is that correct, to add to the CR?

What I said was that Hologic has guided 700 systems for next year.

If you assume they are getting half of the full field digital business today, which is probably a fair estimate, that would imply there will be about 1,400 or 1,500 total full field digital sales.

If you combine it with an estimate of 300 to 500 CR Mammo sales, that would give you roughly 2,000 digital transactions in the market.

Keeping in mind that only about 15% of this total market has gone digital.

You've got 9,000 sites that are certified to do Mammo screening in the United States.

You have got 14,000 cameras doing Mammo screening, so this would only represent about 15% of the total installed base going digital next year.

And of those 2000 transactions, if 80% adopted CAD, that would be obviously 1,600.

If you took out 500 or 600 for Hologic, that would leave about roughly about 1,000 transactions for us, provided all of those sequence of events were to come to fruition.

That is what I -- that is the figure I roughly wrote down.

I just wanted to hear you say it totally.

Two other questions.

One, Total Look, what kind of revenue did we see this quarter, and is this about what we expect to see it going ahead or is it growing?

Total Look is bundled into our analog product sales.

We don't disclose down to the product.

But here's what I would say, is that there is a large installed base of film-based equipment.

Maybe 80% to 85% of the market is still film-based.

As they adopt a strategy for digital, whether it the full field digital or computed radiography, they have all got this very large library of film.

Total Look plays a very valuable role in digitizing all of this film library so that ultimately a customer can now create one standard digital format for the priors, as well as obviously if they go forward with ER or CR create new Mammo studies in the digital format.

What we are seeing is a significant increase in demand for Total Look tied to the digital transactions.

So that customer ultimately says, I've got to have everything in one format once I install your cameras that are digital.

We are seeing a lot of sales where customer is buying, let's say as an example, GE's full field digital system and simultaneous with that purchase they are buying Total Look so they can create a common digital library.

So the demand for the product is very high.

Would that be roughly in the same say 80% -- 80% of digital would buy Total Look?

No, I don't think it is quite that high.

I think there is varying views on when and how you digitize your prior library, and to what extent you digitize it.

But what I would say is we believe we have a very strong competitive advantage with that product over our former competitor.

I think if you combine the collaboration with these companies and the competitiveness of the product, it is going very, very well.

We certainly see an increase in demand for that product going forward, and it is very much tied to the digital migration in the market.

One last housekeeping.

Maybe Darlene would want to answer this.

What is the total dilution now with all the options granted that we have seen of people joining your headquarters?

How many -- what does it make the dilution going up from say approximately 37 million at quarter end?

What is it fully diluted now with all those other folks now that have options that have joined since say the end of the quarter?

Sure.

When you look at all the various stock options plans and warrants and the promissory notes and so forth, it is on the order about 42 million.

42 million.

Okay.

Fine.

Thank you.

That's all I have.

I appreciate it.

Al Norton, [Cairo].

I've got a question that is a little bit more basic.

I'm familiar with health care IT businesses in which the backlog is driven, perhaps primarily, by the integration and the complexity of that integration that is involved when they put in their software.

It seems like you are especially on the digital side, where you can create as many copies of that software as quickly as they are needed.

What circumstances create backlog in the digital side of your business?

The backlog is largely created based on the timing of the delivery of the full field digital equipment.

It is a very dynamic environment because the demand is so high right now.

As an example, we have some orders from let's say GE that are not slotted to ship until January.

The reason is, obviously, the customer doesn't want, or is not able to get availability of the full field digital system until January.

Obviously we are, based on their availability, to some extent planning backlog when the full field digital system ships.

With that said, we have to be fairly nimble.

We found this out very much in September because GE, as an example, came to us in the last several days of the quarter and had about four or five customers that they were in the process of shipping full field digital that they needed CAD and they needed CAD shipped out almost immediately for, which we were able to accommodate.

It is very dynamic.

Some of it is clear and out 90 days, sometimes 120 days.

Some of it is very quick turnaround where the order may have been placed with the manufacturer several months ago, and we're only finding out that they now need CAD a short time prior to their actual shipment of the equipment and they would like it to be [pinked up] obviously in a tight timeframe.

It is a pretty dynamic environment, and those are some of the ins and outs, if you will, of how we take backlog and translate it into shipment and revenue.

[Corey Ahmad], [Rice Bochner].

Great quarter.

What is the outlook for cash usage given your aggressive marketing initiatives and the hiring of additional senior managers?

Should we expect a reduction in cash in the next quarter?

Interestingly, fourth quarter is typically a very, very strong quarter in this particular industry, and we expect that as well.

Having said that, we are certainly not in a cash flow positive position at this point in time.

You obviously talked to Fuji.

Do you have a sense for how much pent-up demand there is per your solution with Fuji's customers?

Do you believe that imaging professionals out there understand and are grasping the opportunity with CR?

That is a great question.

I'm going to ask Jeff Barnes to respond since his team is actively working with the Fuji team on a daily basis.

I would say that while we don't have any hard data, there definitely is momentum that has been building for CAD for CR mammography.

Looking across the board, we are dying to get FDA approval so that we can start to fulfill some of this demand.

But there's no question there is momentum building.

And I think that the healthcare professionals out there do understand the different offerings that are out there.

Fuji and the other CR manufactures have made it very well-known there is going to be an alternative and that alternative is CR.

I think there is some pent-up demand, There are people that have been waiting -- have waited a long time for Fuji to get their FDA approval.

Now that it is out there and they are starting to install, we are anxious to follow the up with our CAD solution.

You sell a fair amount of product to Hologic and Hologic's digital customers.

Can you give us an idea for whether revenue may be at risk because of R2, and just give us a sense for whether or not that revenue will be replaced in short order?

That is a good question.

It is an interesting dynamic, because obviously there have been long-standing relationships in the field with our people and Hologic people, and there is customer demand.

We have 1,400 customers, and obviously a number of them use Hologic equipment.

It is a fluid dynamic where we have seen continued demand for our CAD on Hologic systems.

Some of those purchases come directly to us from Hologic.

Some of them come to us directly as we have sold direct to that customer and they have decoupled the purchase of full field digital from the CAD.

Realistically over time I would expect as they bring out new versions of CAD, that they do not make commercially available obviously other than to the Hologic customer, that that task may become more challenging.

With that said, it is our intention to continue to innovate with our CAD to be able to compete independent of whose camera is purchased, if need be, with differentiated capability.

What I would say at this point is their unit transactions have gone up significantly over the course of their fiscal year.

Our volume with them has continued to increase quarter over quarter.

I would expect that there will be some volatility based on possible introductions of new CAD at RSNA.

But by building a very strong, confident sales team going directly to the customer, we would expect as this market has shown a significant increase in demand for full field digital that our business in Hologic installed base will still be fairly strong.

Thank you.

My last and final question is, you mentioned ACVA, are you in discussions with Kodak regarding their CR product domestically and internationally?

Yes, we are.

We are actively in discussions with Kodak, as well as ACVA at this point in time.

[Dan Manny], [Manny Family Investment].

Good job, gentlemen.

I have a question on the -- can you give me an idea of what each transaction approximately brings iCAD?

In other words, you have 1,500 transactions.

Does your average transaction would it be $5,000, $10,000, $20,000 to put a frame on market (technical difficulty).

The way I would answer that is if you go out to the street and you were to look at a, let's call it a GE full field digital with CAD transaction, on average the street price of the CAD sold by GE -- I'm just going to ballpark it at around $60,000 to $70,000.

We don't disclose our OEM pricing.

All I would add to that is what we do sell to them, we make about 80% gross margin on the transaction.

Okay.

Got you.

Good job.

Thank you, gentlemen.

Joe Rudy, Saxony Securities.

I just have a couple of follow-up questions for you.

First, as a comment, I believe in most the recent quarter with Hologic, they did state that they expect that the acceptance and rollout of CAD would really happen in '07.

I don't know if you were on that call as well and if you heard the same.

I'm not sure -- I did read your transcript, but I am not sure I heard that.

One, can you comment on the -- there is a recent insider transactions from [Maha].

Can you comment on that, whether that is a planned sell?

I know the bulk of her assets came from when iCAD had acquired her Company.

Is this something that she is looking -- is there a specific position she is looking to unload, or is it just a onetime event?

[Maha Salam] is obviously a Director of the Company, former founder of ISSI, one of the acquired CAD companies.

And she also is an employee of the Company.

She has some things going on in her own personal life that require some capital.

Just normal sort of things like building and renovating a home, those sort of things, to have a requirement on them.

As a result, she has had a planned sale in place for some time.

Let me just add that that planned sale goes over a period of time here.

You'll continue to see that once stock hits her certain parameters.

Can you comment due to the fact of -- with the -- basically R2 little by little it seems like since acquisition with Hologic becoming a nonevent in the marketplace and the spotlight being put on iCAD, has iCAD been in any talks with any other competitors or any other companies to be acquired?

We're putting all of our energies towards being the leader and a world-class independent public company.

All of the top grading of talent that we have invested in, the diverse backgrounds that we have added, our interest in broadening the strategy well beyond mammography reflect the fact that we think we can serve the shareholder's best by being independent, by putting a compelling strategy in place, supported by a very talented, diverse team and really, really growing the topline, as well as the bottom line, that that in my opinion is the best scenario for our shareholders.

And that is what we are quite frankly pedal to the metal doing.

We are not going to look back or look over our shoulder, because the opportunity in front of us we think is tremendous, and we are just focused on that.

Next question might be for Stacey.

The rollout plan for a new iCAD, for lack of a better way of saying it, I assume that has already started taking place?

That has already started taking place, although you won't really see it reflected in earnest until about three weeks from now at the RSNA.

At that point it is really when we will publicly launch the new positioning for the Company, the new branding, start to rollout the new advertising campaign, etc.

It will become very visible in the marketplace in about three weeks' time.

The Website will be launched at the same time?

It will.

One of the decisions that we made is that as of the RSNA, if we were going to rebrand iCAD and reposition the Company, we could not then have our customers pointing them the direction of our old website or our old sales collateral.

So fundamentally on November 25, the marketing switch going to flip so to speak.

And every way that we communicate to the customer will carry the new positioning and the new branding, including the website.

Perfect.

Good job again guys.

Ladies and gentlemen, this does conclude our Q&A session.

I would now like to turn the call over to Mr. Ken Ferry for closing remarks.

Please proceed, sir.

Thank you very much, operator.

It has been a very interesting quarter.

And certainly myself and my senior team, this being our first full quarter in this position, we're very, very excited.

We're very, very enthused about our progress.

As I said in my opening comments, we're no by no means content.

We see a tremendous opportunity in the market as it relates to this digital transformation.

We see a very changed competitive landscape, and there is significant work ahead of us to capture the opportunities presented.

But I'm very, very comment that with the market dynamics, the competitive dynamics, and a much stronger team, particularly as it relates to my senior staff, and our go to market team, we are well-positioned to take advantage of this opportunity going forward.

I would like to thank everyone on my team for their significant progress this quarter.

And I would like to thank all of you that have called in to listen to our quarter's progress.

Thanks very much.

This concludes the presentation.

You may all now disconnect.

Good day.