ICAD Inc (ICAD) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the iCAD Inc.

third quarter earnings conference call.

My name is [Jehaida] and I will be your operator for today.

At this time, all participants are in listen-only mode and we will conduct a question-and-answer session towards the end of this conference.

If at any time during the call you require assistance, please press star zero and an operator will be happy to assist you.

As a reminder, this conference is being recorded and now, I would like to introduce Ms.

Anne Marie Fields, please proceed.

Thank you.

Good morning.

This is Anne Marie Fields of Lippert/Heilshorn.

Thank you all for participating in today's call.

Joining me from iCAD are Ken Ferry, Chief Executive Officer; and Darlene Deptula-Hicks, Vice President, Finance and Chief Financial Officer.

Earlier this morning, iCAD announced financial results for the third quarter of 2007.

If you have not received this news release or if you would like to be added to the company's distribution list, please call Lippert/Heilshorn in New York at (212) 838-3777 and speak with Sheryl [Pelaccio].

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involved risks and uncertainties regarding the operations and future results of iCAD.

I encourage you to review the company's past and future filings with the SEC, including, without limitation, the Company's Forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Furthermore, the contents of this conference call contain time-sensitive information that is accurate only as of the date of the live broadcast, November 2, 2007.

iCAD undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I would like to turn the call over to Ken Ferry.

Ken?

Thanks, Ann Marie.

Good morning, everyone and welcome to iCAD's third quarter financial results conference call.

It's my pleasure to report our progress during the past three months and to review the business outlook and our plans for the balance of the year.

iCAD made significant progress in the third quarter, which demonstrates that our management team's growth strategy and financial controls are on track in delivering results.

We're proud to announce that this quarter we grew revenue 24% on a comparative basis and posted our third sequential quarter of digital CAD revenue growth.

As important, we strengthened every balance sheet metric critical to building a healthy and sustainable growth company.

Our third quarter growth was led by sales of our digital CAD solutions, which posted a 30% increase over the third quarter of 2006 digital sales.

This reflects strong demand for full-field digital mammography technology in CAD.

There is still considerable room for growth in the digital CAD market, as only 25% of the U.S.

mammography systems at the 8800 certified mammography sites have transitioned to digital technology from film-based technology.

CAD is considered a standard of care in digital mammography and CAD purchases are running nearly 1:1 with full field digital mammography systems, underscoring the clinical and work flow benefits derived from CAD.

We expect to maintain a leadership position in digital CAD and to capitalize on this growing market opportunity.

As of today, our systems are connected to over 1300 full-field digital mammography systems worldwide.

Our film-based CAD sales increased by 17% this quarter, also good progress following a softer second quarter.

During the third quarter, we targeted our marking programs and channel focus on this area and are pleased with the improved performance.

Although this segment of the market is maturing, more than 70% of the mammography systems in the United States still utilize film-based technology, so we anticipate future growth in this market.

For example, even a 15% of the installed base converts to digital each year, it would leave over 40% of the 13,500 dedicated mammography systems that would be at least two to four years away from converting to digital technology.

These later converting sites are excellent candidates for film-based CAD solutions.

Our third quarter service and supply revenue grew by nearly 14% versus the prior year.

We expect to see these growth trends continue to improve as we increase our service contract penetration through focused efforts to enhance our service offerings and value to our customers.

International sales grew to a record high in the quarter, exceeding the entire first half's performance by 60%.

This was in large part due to strong demand from GE Europe and making our first shipments to GE Japan.

We had a solid quarter with Siemens in Europe as well.

Moving forward, we will continue to exploit new opportunities with additional European partner, such as AGFA, Sectra and others.

Next, I would like to provide an update on our efforts to obtain the FDA approval for SecondLook Digital with Fuji.

We are currently engaged in an administrative appeal over our most recent PMA Supplement with the Centers for Devices and Radiological Health.

We submitted an appeal document several weeks to the Director of the Device Evaluation Center for Devices and Radiological Health.

A face-to-face meeting is scheduled for December 3rd at the FDA to discuss the key issues with them.

It is our hope that this next step will allow us to make significant progress towards a timely approval.

We remain confident in our position, which we believe supports an approval and continue to be encouraged by the significant market opportunity such an approval would provide.

Moving on to strategic direction, our strategic growth plan includes expansion of iCAD's market leadership beyond mammography with applications of our core CAD technology to other areas of disease detection where there are established or emerging protocol for screenings as a standard of care, where it is clinically proven that screening has a significant impact on patient outcomes, where there is an opportunity to lower health care costs, where the screening is none to minimally invasive and public awareness is high or growing.

CT colonography or virtual colonoscopy, as it is often referred to, meets all of this criteria.

In anticipation of its development as an accepted international screening tool in the battle against colorectal cancer, iCAD is developing CAD for virtual colonoscopy.

Our CT Colon CAD software will automatically identify polyps on CTC images.

Working in conjunction with state-of-the-art 3D image visualization software from partners that include Vital Images, TeraRecon and Viatronix, our CAD's solution will highlight a polyp's location for the interpreting physician, much the same way our SecondLook automatically identifies and clearly marks suspicious areas of the breast today for radiologist.

The current status of development efforts has our colon CAD software in active clinical trials within the next 90 days or so, with the study time lasting approximately three to six months.

This would put us on track for an international release in the middle of '08 and an FDA submission via the 510-K route in this same mid '08 time frame.

Given our developing committment in this area, we are especially pleased to see the positive topline results reported from the American College of Radiology Imaging Network national CT trial.

This 2600-patient trial found virtual colonoscopy to be comparable to the colonoscopy gold standard for detecting intermediate to large adenomas.

In this trial, virtual colonoscopy achieved a 90% sensitivity and 86% specificity for adenomas 1 cm or larger and an 84% sensitivity was noted in lesions 7 mm or larger.

Specificity remained between 86% and 89% across all relevant lesion sizes.

According to the principal investigator, Dr.

C.

Daniel Johnson, and I quote, "It is reasonable to consider broader application of this relatively non-invasive imaging modality.

Hopefully, this will enhance compliance with colorectal cancer screening guidelines." He went on to state that the results indicate that most patients undergoing CTC would not need subsequent colonoscopies, sparing them of cost, risk and inconvenience of needing a second test.

The momentum toward the adoption of virtual colonoscopy as a screening modality is building and we expect the formal results from this and other studies to be a great interest at the RSNA annual meeting later this month.

On the strength of these results, we are hopeful that the American Cancer Society will include virtual colonoscopy in their next updated guidelines for cancer screening and that the American College of Radiology will formally petition CMS for screening reimbursement in the near future.

If this occurs, we hope reimbursement for virtual colonoscopy as a screening tool could be obtained by the late2008/early 2009 time frame, although the actual time line is dependent entirely upon ACR and CMS.

This would open up the clinical use to more than 80 million Americans eligible for the screening for colorectal cancer.

And now for some comments on iCAD's future strategy, we're in the process of building out our CAD offering beyond mammography to colon and other potential areas.

In addition, we're looking for opportunities to provide broader solutions targeting the radiology market.

These solutions could be in the area of work flow, image data management and diagnostic or therapeutic intervention to name just a few areas under consideration.

Over time, we will transform from iCAD to a company that provides a portfolio of solutions to radiology in the health care market.

We will provide updates to our strategy on future conference calls as things develop.

Lastly, we are very proud to be sponsoring an exhibit at the upcoming Radiological Society of North America or RSNA annual meeting.

It will be held in the last week of November in Chicago.

The RSNA is the largest medical meeting in the world with attendance exceeding 60,000, including 30,000 radiologist and other health care professionals as well as exhibitors and investors during the five-day conference.

We're looking forward to the RSNA as it gives us the opportunity to showcase our product offerings and interface directly with our partners and customers.

In addition to an expanded booth and show presence, we will be holding an investor luncheon on Tuesday, November 27th, at noon.

Should any of you be interested in attending, please contact Ann Marie Fields or [Nedia Portella] at Lippert/Heilshorn, phone number (212) 838-3777.

With that review of our business, I'm going to turn the call over to Darlene Deptula-Hicks, our Executive Vice President of Finance and CFO, to review our financial results in greater detail.

Thank you, Ken, and good morning, everyone.

We are very pleased with the strength of our third quarter and nine months financial performance and are happy to share them with you in greater detail today.

Let me begin by providing some the highlights of the quarter, which include record digital CAD revenue, quarterly total revenue up by 24% over the prior year quarter, year-to-date total revenue up 40% over the prior year, continued strong gross margins at 80%, and yes, positive cash flow for both the quarter and year-to-date.

In addition to strong topline growth, we are very pleased to report that we narrowed our net loss for the third quarter to $682,000 or $0.02 per share this.

Represents a 39% improvement when compared with the net loss of $1.1 million or $0.03 per share posted in the prior-year quarter.

With that said, let me provide you more specific insight on the financials.

We had a strong third quarter with revenue of $6.3 million, which represents an increase of $1.2 million or 24% over the prior year quarter revenue of $5 million.

Notably, our digital CAD revenue for the quarter increased by 30% to $4 million from $3.1 million last year.

This growth continued to demonstrate the CAD is fast-becoming the standard of care for digital mammography.

Our film-based product revenue for the quarter increased by 17% to $1.5 million from $1.3 million last year.

As Ken mentioned, while this is a mature product line, we are experiencing strong demand for our total products, which is utilized for digitizing film-based prior mammography exams for comparative reading current exams.

Our service and supply revenue also increased by 14% in the third quarter to $801,000, up from $704,000 last year.

We continue to focus efforts on increasing our service value to our customers, resulting in an increase in service contract penetration.

Gross margin for the third quarter remains very strong, increasing almost 400 basis points to 80.1% from 76.3% in the prior year third quarter.

We were also pleased to report that with a 24% increase in revenue this quarter, our quarterly operating expenses of $5.6 million increased only 14% compared with last year's third quarter operating expenses of $4.9 million.

Demonstrating our ability to grow revenue without scaling operating expenses at or near the same rate.

As a result, our net loss for the quarter, which included stock-based compensation expense of $363,000, was $682,000 or $0.02 per share.

This compares with a net loss of $1.1 million or $0.03 per share in the third quarter of '06, which also included stock-based compensation expense of $220,000.

We had strong nine-month performance this year, with a 40% increase in total revenue to $18.5 million as compared to $13.3 million in the prior-year nine-month period.

International sales for the first nine months of '07 were strong at $1.9 million, increasing almost 300% over the prior-year nine-month period, due primarily to traction in Europe with GE and Siemens and as a result, we are shipping our first systems to GE in Japan.

Additionally, on approximately 40% revenue growth in the nine-month period, we experienced only a 7% increase in operating expenses.

Our bottom line is continuing to show strong improvement during the first nine months of '07, with the reduction of $3.2 million in net loss to $2.1 million or $0.06 a share for the nine months, down from $5.3 million or $0.14 per share for the first nine months of '06.

As of September 30th, our head count included 97 full and part-time employees.

This is an increase in head count of 3 from 94 as of December 31, 2006.

This head count increased primarily in sales and telesales hires.

We are especially proud of the progress we have made in strengthening our balance sheet.

We are pleased to share that we were cash flow positive for both the third quarter and on a year-to-date basis.

The cash balance as of September 30 of $3.9 million shows a 6% increase from the $3.6 million cash balance at December 31, '06, and a 13% increase from the $3.4 million at June 30.

We continue to improve all other balance sheet metrics during the first nine months of the year, with inventory reductions of 40% to $1.8 million, from $3 million at year end '06, and accounts payable down 48% to $1.3 million from $2.5 million at year end.

Additionally, accounts receivable of $4.1 million is an increase of 12% from $3.7 million reported at year end.

Obviously, this is due to increased sales volume.

Next I would like to briefly expand upon some of Ken's earlier comments around our growth strategy.

As some of you may be aware, yesterday we filed with the SEC a shelf registration statement on Form S-3 for up to $75 million of common stock.

This was done as part of our strategy process with the intent to broaden and grow the company beyond just organic means.

This move will better enable us to be fully prepared to execute on our strategy and build a much broader company with a much larger addressable market.

A word regarding NASDAQ compliance, as you're aware, during the summer we received a notice from the NASDAQ that we did not comply with the independent director requirement as a result of a resignation of one of our independent directors at that time.

With the recent retirement of Robert Howard from our board, which was announced earlier this week, we have now received a letter from the NASDAQ stating that they have determined that the company is now back in compliance with this rule.

With all of these said, let me close the discussion of financial guidance.

As we stated in our press release and as we've previously guided, we expect total revenue for 2007 to be in the range of $26 million to $27 million.

This guidance does not include any potential revenue from the sale of our SecondLook Digital or Total Look projects to Fuji in the U.S.

We also expect to continue to maintain strong growth margins in the 80% range and we anticipate operating expenses will range between $5.3 million and $5.7 million per quarter for this fiscal year with the fourth quarter of '07 being at the high end of the range.

With that overview, operator, we are ready to open it for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Stephen Dunn with Dawson James.

Please proceed.

Good morning, Ken and Darlene.

Good morning.

Good morning.

I guess the first couple here are financial.

If we take your sales guidance -- so if I back it in according to my calculations, you are -- management guidance for Q4 sales revenue will be close to $7.5 million, is that correct?

Yes.

Yes, that's correct.

Okay.

And I may have missed it, I got in the call a little late.

What was your ending backlog at Q3?

We didn't announce that, actually.

Would you be willing to tell us?

I don't have that in front of me [but it was] in the press release.

We'll give that to you, Steve.

We'll give that to you.

Okay.

Also I, heard a little bit of noise out in the - out in the industry.

Did you guys issue an end-of-service letter for some of the SecondLook units?

No.

Yes, we know we did.

That's right our older analog products - the 400 and 500 products which have been around a long time.

We basically have an end-of-life strategy there.

Okay, so it's for the SecondLook 400 and 500?

Yes.

It's a very old analog CAD projects.

Right.

Okay.

So that's fine.

And your strategy is to move them up or get them to have service contracts?

Well, we would like to see them upgrade.

What we have introduced in the last quarter or so is a pretty exciting product, the 300 plus, and the real benefit of the 300 plus, beyond having strong performance on CAD is that it is very cost-effectively upgradable in the field to Total Look.

And so the idea would be that a customer at some point is going to go digital and what we're able to provide them with the 300 plus is the ability to do CAD on the film-based products.

When they go digital, they'll face the issue of how do you move their library of priors forward and they'll be able to take this, I call it, film-based CAD solution and cost effectively upgrade it to Total Look, so when they got the forward looking digital camera in CAD, they can add to that, a product that they could now go and digitize the priors, so every customer is faced with that issue.

We think this will add a lot of legs to our film-based CAD product and the customer doesn't face the dilemma of what do I do with this product when I go digital.

Do I, you know, throw it out?

Obviously, it has a lot more use based on issue they have to deal with based on an issue that they have to deal with relative to comparative reading of prior exams.

Okay.

We'll move on the Fuji a little bit.

I guess the last that was publicly announced was that you were going to have some communications with the FDA in August.

I mean this being batted back and forth.

I think it was an issue of interpretation from who the new reviewers are in FDA.

I guess is the issue -- color on the issue on this next round of discussions and the meeting - upcoming meeting on December 3rd, is the color that they are looking to require additional data or are they trying to look to rejustify the entire methodology of CAD?

It's a good question, Steve.

Basically, what you have is a major shift in resource at the FDA, so that the reviewers that are now looking at CAD are in their jobs just over a year.

Two levels of management above them are new in their jobs, less than a year, and as we understand it from talking to other companies in the CAD space, this is not an iCAD issue, this is a CAD issue in the industry.

We're not aware of any company that has had a CAD product approved since a year ago June when the new reviewers arrived on the scene.

Specific to Fuji, what we have done is we have filed an administrative appeal and we'll have a meeting on December 3rd to speak with management at the FDA about our appeal.

The basis for the appeal is that we followed a very consistent methodology that has got us multiple FDA approvals with GE, Siemens, Hologic and Fischer, and that includes a data set that is very consistent in size and characteristics and performance as we've demonstrated with the data set for Fuji.

With that said, the FDA has approved Fuji's product and we use the identical Fuji data set, yet, they have told us they don't believe the data set is reflective of a normal screening population.

So with that, obviously, they would see more data, they would like to see more characteristics of the cancerous lesions with that data and we believe that the data is very consistent and performance-wise very consistent with what has been approved in less than six months on probably five or six various supplements.

Typically, if the FDA is going to change the rules, there needs to be patient safety issues or there needs to be an overwhelming amount of clinical evidence to research that these products are not performing up to specification or causing harm.

We firmly disagree that that is going on in the marketplace.

While the Fenton study back in April in the New England Journal has got a lot of press, it has also made available 20 plus additional studies that supported the benefits of CAD, the benefits of increased detection at a much greater rate than the increase in unnecessary work up due to false positives.

So we think that the science -- we think that the track record of safety are overwhelming in favor of supporting prior processes around CAD submissions and approvals; and that is the basis of our appeal document and it's the basis of what we will attempt to communicate successfully to the FDA when we meet on December 3rd.

Now, obviously, we can't predict the outcome of the meeting, but we have employed some very experienced consultants who have worked through these appeal processes many times with other companies and we think the substances of our appeal is very, very strong and solid and we'll just have to wait for December 3rd to see how things go.

Is the Fenton study affecting the FDA's opinion?

The Fenton study has had probably some impact on the reviewers.

The reviewers, in my opinion, seemed to be more fixated on false positives versus what we think is far more important which is increased sensitivity to find more cancers.

And I think, if you look at the 20 somewhat peer-reviewed studies that are out in the literature, you will see in many cases an average increased in cancer detection of about 10% with only an increased false positive work up unnecessarily at 2%.

So if you can increase your cancer detection by 10% with only a 2% increase in unnecessary work ups, we think that's making a major contribution and substantially - substantially outweighs an increase in false positives, which could lead to an unnecessary work up.

With that said, I would also keep in mind that CAD is a detection tool, not a diagnostic tool.

The ultimate responsibility is for the radiologist to make the decision as to whether they are detecting and diagnosing cancer.

So we think that, you know, we've got a sound argument.

We certainly do understand some of the, you know, concerns that are swirling around the industry, but we think that the papers and the science very much support the benefits of this technology.

Okay.

Last question.

On your $75 million shelf to add to the radiology business, I guess, how would you characterize what you're looking at in expanding in radiology?

Are you looking at more of the data manipulation and storage kind of like a (inaudible) risk or are you looking at the actual imaging equipment?

We said earlier in the opening open comments that it's about work flow, it's about image data management, and it could also be about, you know, therapeutic or diagnostic intervention devices, so I think what I would say is that we're just widening our net.

We think the CAD business has a lot of potential for growth, but I don't see any reason why we can't kind of multitasks this strategy and expand the company such the CAD is a major component of our business but not the entire business.

I think, Steve, that we have a very senior management team with a lot of depth and a lot of bandwidth to make this a much broader company than just a CAD company.

We're going to take advantage of that talent and we've put an instrument in place that will allow to us move quickly as our business plan supports broadening the addressable markets of the company beyond CAD.

All right.

Thank you very much.

Thanks, Steve.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Dalton Chandler with Needham & Company.

Please proceed.

Good morning.

Good morning, Dalton.

Good morning.

Just as a follow-up to some of the fallout of the Fenton study, there's been some rumblings about some payers taking another look at reimbursement, United Health and some others.

I wonder if you could comment on what you're seeing there and what your strategy is to deal with that issue?

Sure.

We obviously saw the notice that United Healthcare is reevaluating whether they would reimburse for CAD.

I think that, you know, obviously, you have to start at the macro level, which is the deficit reduction act has put enormous pressure across the entire imaging market from a reimbursement standpoint.

I mean, when you just take a look at GE or Siemens or Phillips' most recent results, we all know that we have seen negative growth in the imaging products per se and it has a lot to do with the pressure on reducing reimbursement.

Now, you combine that with CMS that has also been in a mode over the last several years at a minimum to put also pressure on reimbursement and part of that is obviously the significant cost associated with it.

It's also related to increases in procedure volume.

So the climate clearly, Dalton, is to try to scrutinize and reduce reimbursement across the board.

With that said, I would be very frank to say that certain insurance will take advantage of that climate and they'll take advantage of a study that would support their ability to reduce reimbursement in certain areas.

We think it's extremely irresponsible to take the Fenton study on its own merits and flaws and use that as an instrument to reference a reduction or an elimination of reimbursement.

So as it relates to United Healthcare, we know that the American College of Radiology has written to them with a very strongly-worded letter regarding their serious concerns that they not do that.

We know of leading radiologist that are experts in mammography who have done extensive research as opposed to just one study that are also in the process of writing to them and our medical director is pursuing a face-to-face meeting with the medical director of United Healthcare, because we think it would be an extreme disservice to women to basically minimize the value of CAD from a financial standpoint.

So we're pursuing this.

With that said, our job also is to ensure people understand the benefits of CAD, not strictly from an economic standpoint.

We need to continue to demonstrate that we find more cancers and we find more cancers earlier, and to the degree we continue to emphasize that in combination with improved radiologist work flow, you know, the reimbursement piece while important will be many of many attributes to consider when you purchase CAD.

Okay.

That's helpful, thanks.

Then just some more basic detailed stuff.

I don't think you gave us a breakdown of domestic versus international for the quarter.

Do you have that?

Yes.

National was what, just under $1.2 million?

Yes, it was $1,175 million with international for the quarter.

That's total?

Total international for the quarter.

Yes.

Okay.

Just subtract that from the $6.3.

And do you have that as a component of the digital?

No.

Of the digital component?

I'm sorry.

We don't have that breakdown, right now, Dalton.

We didn't break it down but what I would say is that we had kind of an interesting dynamic, if you will, in our mix of U.S.

and international sales on the digital CAD products.

We had a huge increase, obviously in digital CAD products, primarily with GE in Europe and to a lesser extent in GE Japan as well as Siemens in Europe.

With that said, what also happened was that GE in the United States changed its revenue recognition policy for fulfilled digital mammography machines in the quarter and so what essentially happened was GE in the United States shipped a few more units in the United States versus Q2.

They shipped a significant increase over Q2 internationally, but our CAD business in the quarter went down with GE in the United States to the tune of probably about -- we're going to estimate 5 or 600K and they attributed that to a change in revenue recognition, such that they shipped slightly more units in the quarter prior, but they didn't recognize nearly as many as revenue based on a revenue recognition change.

Had they maintained their consistent revenue recognition policy, we think we probably would have seen 5 or 600 K of additional business in the quarter.

Now, with that said, it's not completely certain whether all of that overhang will come forward and we'll see it in Q4, but what we do know is we will certainly see some of that business which had an affect from a timing standpoint in the fourth quarter.

We also know that GE, having met with them in France two weeks ago today for a day, has a very aggressive fourth quarter shipment plan, double digit unit increase in shipments versus Q3 and if you combine that timing issue on revenue recognition with a very strong fourth quarter shipment plan, hence the reason why we've not changed our guidance and easily think that we can achieve at least somewhere in the range of our guidance based on that dynamic and other factors with our other partners for the fourth quarter.

And I would just add to that by saying that this first month of the fourth quarter has been an extremely strong month, so we feel very, very good about that.

The GE double digit unit growth, you're speaking domestically or is that worldwide?

It's worldwide but they are skewing more units into the fourth quarter into the United States than they did in Q3.

Q3 they were almost flat in their shipments in the United States versus Q2 and they had a significant increase in their international shipments, and obviously, that is one of the reasons why our international business was up significantly with GE.

They have flipped that back based on the fact that, you know, basically GE is working down a nine-month backlog of FFDMs right now.

So basically what they have done knowing that in the United States the fourth quarter is typically much more seasonally strong than it is internationally, they're going to skew a lot more units into the states versus what they did in Q3.

So obviously given that they have some limitation in manufacturing capacity, when you ship ten units to the states, we'll see eight or nine CAD orders, right?

When you ship ten units internationally, we'll see three CAD orders.

That didn't help us domestically in Q3 where they shipped a higher percentage of their growth internationally and then also had a higher revenue recognition change in the United States, such that a lower percentage of the shipments were actually recognized as revenue.

And just to be specific about how that affects us, GE often waits until the last week of the quarter when they know that the site readiness is there and they are very confident that they will recognize the unit in the month, they will send us an order for an overnight shipment of CAD to be installed in that last week.

You would be surprised how much business we do with GE in the last week but as a parallel to that, if they realize they're not going to recognize the revenue, we don't see the orders.

So basically we've tested this with GE, we've tested it with our field, we don't see any drop-off in the attachment percentage of CAD but we certainly saw some timing issues with GE and an increase in international shipments and hence had their attachment rate in the United States been the same as Q2, we probably would have been closer to $7 million in total revenue and we expect to benefit from some degree from that situation in the fourth quarter.

Okay.

I understand it's hard for you to answer accounting questions with regard to GE, but it sounds like they've tightened up that you are revenue recognition policy.

Can you -- do you have any insight into why they've done that, since obviously it is impacting you?

As I said, I really can't tell you for certain.

When we met in France two weeks ago, it was communicated to us by the GM of the Global Mammography Business as one of the factors that influence their U.S.

performance from a revenue standpoint and we did not get into any great detail as to exactly what their policy change was.

We'd have to ask them to answer that question.

Okay.

All right.

Thanks very much.

Thank you, Dalton.

And your next question comes from the line of Matthew Scalo with Canaccord Adams.

Please proceed.

Hi, guys.

I hope you can hear me okay.

Sure.

Sure.

Hey, I wanted to ask on the upcoming RSNA, did you mention [Akron II] data will be presented in its, you know, complete -- I guess, from the primary investigator, will there be a presentation held for the [Akron II] trial?

We didn't mention that it would.

We hope it is.

I can't tell you, Matt, exactly, yes for sure, and we know it's on a certain day and a certain time.

We do know this is get a tremendous amount of visibility with radiologist in particular given the, let us just say, the dynamics around the gastroenterologist using the gold standard colonoscopy versus the radiologist leading the charge with the virtual procedure, so I would be surprised given the size of the study and given the significant results if it's not a major session but to be honest, we're not certain.

We've not seen the program yet.

Okay, okay.

And I don't want to ask about '08 guidance, because I know the budgets are probably being formed right now, but you did talk about, you know, kind of conducting a study maybe in the first half and then filing the 510-K by mid '08.

Can you talk a little bit about the expected cost that might be associated with running a study?

That's a good question and it's a hard question to answer because we still don't have a 100% alignment with the FDA on the size of the study.

What we have basically done is made progress with them on the definition of the study but we've not concluded on it.

What we've decided is that after having spent a quarter or more discussing it with them, it's time to get it started.

It's just not something we can continue to wait on.

We were ready in Q2 to start the study, so basically we are beginning the study.

Hopefully, we'll be active before the end of the calendar year and then the reason I set a three to six-month window for the study was really so that when we have better definition, we would be able to estimate our time frame and the cost could be anywhere from, you know, a quarter of a million to a million dollars depending on what the content of the study entails.

Obviously, the issues you're dealing with are very consistent with what you're dealing with in mammography, which is the size of the study, the characteristics of the polyps you would need to be able to detect in the study and then the methodology for scoring and what level of independent radiologist, whether it be individual or panel, would be required to be utilized to basically validate the performance of your product.

I mean it's almost a deja vu, because it's the same people that we're dealing with in the mammography space.

The odd part about this to be frank is this is the 510-K and so we've never seen in a 510-K such an overly burdensome request for data collection, and so we're trying to understand how we can work through that in a productive manner and give the FDA the confidence of the performance of the product without spending, you know, six months or greater demonstrating that to a very large study.

So we're still in active discussion.

We need to get on with the study and we're making good progress getting the sites prepared and getting ourselves in a position to start to generate and collect and analyze data.

Okay.

Regardless that there might be a press release, let's say in the fourth quarter, discussing the start of a trial, then?

It's possible.

We hadn't really discussed it yet.

I think certainly as we get to the point where we've got the entire framework out in the field, we have the sites and the radiologist and the researchers all engaged.

We certainly would consider doing that.

okay.

And just -- my last question, just because I'm new with the story here, you know, you threw out the 1.175 for total OUS - total OUS sales.

Is the lion' shares of that in Europe?

You mentioned Japan a little bit.

Are those initial shipments in Japan?

Yes.

We only shipped three systems to Japan but we're encouraged by that as a good start.

Everything else was in Europe.

What basically has happened is digital mammography equipment is really growing in Europe.

GE is the market leader in Europe and they have now made a total transformation to our CAD in Europe and that took a little bit longer in Europe than in the United States because iCAD over the years had really not invested the time to build a brand in Europe as they have in the United States, and so we've had to work hard over the last year, 15 months, to really build the confidence of customers and the GE sales team that we have a very strong performing product.

We've also put ahead of sales and marketing in Paris an individual that was formerly the head of sales and marketing for R2 when they were independent.

If you combine that individual's capable and connections and experiences with the time and effort we've put in with the GE team, you know, we're now their near-exclusive provider in Europe as we are in the United States.

So I think that it's a combination of demand for full-field digital equipment combined with the, you know, confirmation of our product that has really got us going at a very nice clip with them in Europe and we've already received orders from them for more shipments into Japan for this fourth quarter.

So that business, while it's not a big percentage, we think, has a lot of potential and we're kind of excited now to be shipping into two major international geographies with GE.

GE also being the market leader for FFDM equipment in Japan as well.

And how might -- I know there was a little bit of news flow in the trade access, you know, so what's coming on the market if the full-field digital mammography system (inaudible) in the Europe first and then U.S.

maybe in the out years at play with your strategy in Europe?

I think, you know, for us the more partners the merrier and we've already begun discussing with Phillips a CAD strategy.

We understand they will be demonstrating kind of works in process mammography equipment possibly for DR and possibly CR at the RSNA show.

I think as we've discussed this with them, they don't feel that they're too late into the game.

I think they feel that given that the majority of the market is still film-based on a global basis, this represents a real opportunity for them and they do recognize the importance of CAD because they're going to be competing obviously with companies that have that, that they're in a fierce competitive fight with every day, people like GE and Siemens.

So they're interested in qualifying our CAD.

We're very interested in developing a partnership and a contract with them, and we have begun that dialogue in the last 30 days.

Okay, terrific.

Ken and Darlene, thank you very much.

Thank you.

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

Please proceed.

Thank you.

My questions have been already addressed.

Okay.

And your next question comes from line of Adrian Dawes with Hartwell.

Please proceed.

Congratulations on the quarter.

Thanks, Adrian.

As we think about the upcoming 2008 guidance, what are some of the low-hanging fruit in terms of the visibility that you have into the 2008?

Obviously, we have building backlog, we have the Fuji element, can you just walk us through what elements of '08 growth pretty much visible to you as we look today?

Sure.

The first thing I would comment on is our biggest partner GE.

We are in France two weeks ago today.

We were with them all day, literally until 6:30 in the evening on a Friday, and they shared with us their shipment plan for '08.

What I would say is it's a healthy double-digit increase in units over '07 and pleasing to us that it is skewed more toward the United States in the international market.

So, that's good for us because of the obvious attachment rate of CAD in the U.S.

So we think that GE has a very strong shipment plan and they also are sitting on nine months' worth of backlog.

With all of that said, we could see a significant increase in business with GE in '08.

Secondly, we have seen a nice increase in business in the second half with Siemens, both on a U.S.

and on an international basis, so we would expect to see some nice growth in Siemens in '08 as well.

Hologic business is obviously a limited opportunity for us but it's fairly consistent quarter on quarter, so we would probably not expect to see anymore than flat business from the customers that still require our CAD.

Beyond that, Adrian, I think the Total Look business is a nice growth opportunity as customers have to digitize their priors.

Clearly prior exams is an opportunity for growth.

And of course last but not least is we're really hoping that we can get through this Fuji process probably no later than the end of the first quarter and we're really hoping that, you know, again it's hard to put a time line and say we're certain of anything, but we would hope with five months of constructive effort ahead of us, worse case I hope, that we could get a Fuji approval.

We think Fuji now has probably installed well over 150 systems, is getting more traction on a quarrel quarterly basis in the market and that approval could be a significant amount of pent-up demand in ongoing new revenue.

So those are kind of some of the areas that we're looking at, but that only addresses minimal.

We don't expect any plans for colon CAD next year, but part of our filing the shelf registration really was to give us the ability to move quickly if we see an opportunity to do something from an acquisition standpoint in the market.

Obviously, it has to make sense but we're targeting the opportunity to find synergies with our strategy with some sort of an acquisition that could be accretive and would provide for substantial revenue out of the box.

One of the reasons we're moving in this direction that we don't see that immediate opportunity in the CAD space over the next say six to nine months.

What we felt is that we need to scale the company larger and the CAD business will become a very viable growth business beyond mammography but the pace that it is developing didn't fit with our strategy, so we felt that we needed to continue investing there for our longer-term future but continue looking for opportunities that could push our topline higher very quickly and then the minimum synergy should be that our sales channels and our service channels would be calling on that same targeted customer.

So that's where we're looking at a minimum for the synergy and looking for the a better offering and a broader offering for the radiology market.

Those are the kind of things we're working on as we assemble our '08 plans.

That sounds tremendously encouraging.

As you look at the size of the shelf, walk us through your thought as to the amount, 75 relative to your current market cap is significant.

What was the thought process behind the magnitude of that?

A couple of things.

The first one is that, you know, we've done a fairly exhaustive search of companies, not to say that we've got something in our sites, but we wanted to better understand.

Let's just use an example.

If you were looking to make an acquisition and you were looking for companies that, you know, had high growth market, strong margins, synergies with our current plan and revenue in $10 to $25 million range, just use that example, what we found were that the multiples were probably in the 2.5 to 4.5 times trailing revenue and so having looked at that large database again without any particular target, we used that as a baseline for putting a shelf out there that would enable us if we found something in that sweet spot that made sense that we would certainly be able to go forward with a transaction.

So that was kind of the initial thinking.

The other thing we looked at was the affect of the filing a shelf on companies and the size of the shelf, and again, this was a fairly substantial database and what we found was that people filing small shelves that signaled the need for working capital, stocks didn't seem to fair as well.

The ones that put shelves out at approximately 50% of their market cap or greater seemed to do better because the indication was they were trying to do something strategic as opposed to need funds for working capital.

So that was really the thought process behind it, but again, I would stress most of the work in that area is ahead of us.

Good.

In terms of debt capacity, lines of credit and so forth that the company has, I noted it was only a common rather than a mixed shelf filing.

Yes, correct.

It's only a common stock filing and you know, if we were -- we've talked about too, Adrian, if we did some sort of an acquisition or acquisitions, we would try to do some sort of debt component with that as well, so that it wouldn't all be equity.

I can also -- I think maybe where you're going with this, we do have some debt on your books, but I fully expect that all of that will convert to common stock.

I don't expect it will pay off any of that at this point in time with cash.

Okay and the current lines you have with the banks totaled how much in millions?

We have a $5 million line of credit actually right now that is with the former Chairman of the Board, Bob Howard, of which $2.2 million is tapped on the line, so $2.8 million is available and I fully expect at this time, Bob will convert that as he does have a conversion feature into equity as opposed to taking a repayment.

Good.

Well, congratulations.

I saw a lot of progress and some significant opportunities ahead.

Great.

Thank you, Adrian.

Thank you.

At this time there are no more questions in queue.

Now, I would like to turn the call back over to Mr.

Ferry for the closing remarks.

In closing, we thank you for your questions and for your continued interest in iCAD.

I would also like to thank our employees for their hard work and the results that they are generating every day.

We're proud of the significant progress we've made and we're very excited about our future.

We look forward to speaking with you again when we report our full fourth quarter results and, again, thanks for joining us and have a great day.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Good day.