TearLab's CEO Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: TearLab Corporation (TEAR)
by: SA Transcripts

TearLab Corporation (NASDAQ:TEAR)

Q1 2013 Earnings Call

May 13, 2013 04:30 pm ET

Executives

William G. Dumencu – Chief Financial Officer

Elias Vamvakas – Chairman and Chief Executive Officer

Analysts

Steve F. Crowley – Craig-Hallum Capital Group LLC

Matt V. Dolan – ROTH Capital Partners LLC

Jeffrey Frelick – Canaccord Genuity, Inc.

Jack D. Wallace – Sidoti & Co. LLC

Ben C. Haynor – Feltl & Co.

Operator

Good day ladies and gentlemen and welcome to TearLab First Quarter 2013 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

At this time, I would like to hand the conference over to Mr. Dumencu, Chief Financial Officer and Treasurer. Sir, you may begin.

William G. Dumencu

Thank you, Syed. Just to remind everyone, certain matters discussed in today’s conference call or answers that maybe given to questions asked are forward-looking statements that are subject to risks and uncertainties related to future events and to other future financial performance of the company.

Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in the company’s most recent public filings with the U.S. Securities and Exchange Commission and the Canadian Provincial Securities Administrators and can be accessed through the EDGAR and SEDAR data basis found at www.sec.gov and www.sedar.com respectively.

Please note that the company is under no obligation to update any forward-looking statements discussed today and investors are cautioned not to place undue reliance on these statements.

I’d like to now turn the call over to Elias Vamvakas, TearLab’s Chairman and CEO.

Elias Vamvakas

Thanks Bill and good afternoon everyone. As in the previous calls, I want to update you on our progress with respect to the commercialization of the TearLab system.

Total revenues in Q1 in Q1 2013 were $2.5 million, up more than six fold from Q4 2012 and up 54% sequentially from the previous quarter. Excluding non-cash charges associated with the continual revaluation of outstanding loans, our adjusted net loss was $0.11 per share and that’s about $0.01 better than analysts’ estimates.

Given the relatively short time between the reporting year-end 2012 and the first quarter 2013 results, there isn’t a huge amount to update you since our last call. But we do have at least one or two exciting things to talk about.

I closed on for the call by giving everyone a brief preview of our new Masters multiunit program rollout. As a reminder, the rationale behind Masters is that depending on the size of the practice in terms of the number of doctors, admissions and patients, some of our customers need to significantly increase the number of devices they have in order to maximize efficiency. With these growths, the trend seems to be having a TearLab in each lane or each examination room.

The main difference between Masters and our 3/15 and 3/24 program is the number of units placed under the Masters program is based on practice protocols, means that utilization parameters rather than a minimum cog requirement. Importantly, this takes TearLab to the next level. If it incorporates our cash into routine patient evaluation protocols and accordingly makes a standard of care for their practice.

The rollout of our Masters program is still in its initial stages. That being said, our initial success obviously contributed towards achieving stronger than expected system orders in Q1. Of the 388 systems that were booked in the first quarter, 162 or 42% were under the Masters program, 195 were through our access programs, 11 were direct purchases and 20 were purchased outside the U.S. Keeping in mind that in order for us to count the Masters unit in total, the practice has already taken delivery of the reader, cash to utilization levels against protocols and committed to incorporating it into the practice going forward as per our agreement.

As we discussed a few weeks ago in our year-end call, the unexpected increase in demand that we‘re seeing across the board has left us in the back order position with our device manufacturer. To address this, we now have more than tripled our manufacturing capacity and are currently producing more than 240 units per month.

So we will probably produce somewhere between 7,300 units in Q2. While I think this will likely clear the manufacturing back order situation by the end of the quarter, given those manufacturing grades, if we’re still backward at the end of June, I think we’ll all be very happy.

A point to note, that the manufacturing back order situation is not significantly impacting our relationships with our customers. The traditional lag associated with Clear license [redact] and the timing and flexibility that’s built-in our Master sales process allows us to manage the situation, allowing us to live up to reasonable delivery dates for our systems.

Having said that, as I mentioned in the last call, we have been looking at securing effective system manufacturer to provide us with greater production level flexibility and of course with back up and I'm happy to report that we have chosen Minnetronix of St. Paul and Minnesota as a second manufacturer.

To give a little bit of back on Minnetronix, the 17-year-old company, 200 employees in their site in St. Paul they are of course FDA approved and ISO 13485 certified and they are approved to build, Class II and Class III medical devices. In addition to being a high quality manufacturer though, we are also able to design and manufacture highly complex medical products. We have a good range of medical products produced and currently in production. And this was very important to us as we look at design capabilities and enhancements to our current platform. We welcome the Minnesota new TearLab team and look forward to building a strong relationship with them.

One other area, we’ve increased focus for us in the past few months, it has been balancing our success and building our installed system base, we are trying to maximize utilization as much and as quickly as possible. As we have discussed in the past our primary goal is not to just build doctor awareness, because we know that once a doctor seize the potential opportunity that is inherent in managing dry disease. And experiences of our task to really understand our value and our value proposition and integrate the task into their normal practice patterns.

While this may take a little while once integrated, TearLab becomes critical to their success and the utilization of device increases significantly. So our sales organization is expected to do a lot more than just sell devices. We see ourselves in partnership with doctors and believe that it’s very important for us to provide them with the two other supporting need to fully incorporate TearLab into their practice. Part of that has been a recent addition of implementations specialist to our sales team. We call them eye lash and their techs would become experts in using and integrating TearLab into large practices.

We originally designed the role to help large practices properly implement TearLab into the testing protocol but based on earlier sponsor from our customers we see it’s a very important role and are working to expand the number of our access. We have to help drive integration and adoption at more customer sites. That’s the extent of my update and as with previous calls let me close off my introductory remarks by sharing with you what you spend with respect to both our sales infrastructure and our installed base. So as of today there are 53 people in our sales organization, that would consist of one Vice President, 4 Regional Sales Directors, 27 of our own direct sales people that we call Territory Managers, plus 13 independent reps, 4 professional relations coordinators and as I mentioned earlier four ISS implementation specialist.

Turning to device tallies, all the numbers that I am about to give you as of the close of Q1 2013 and exclude devices and cards been used strictly for research and or educational purposes. At the end of the first quarter, we had 1,101 commercial units ordered in the US, of those 867 were part of a used master’s program, 212 US units had been ordered but had are not yet activated. 173 of those are part of a used or access program, 37 were part of a Masters program and 2 were purchased units, and the rest of the world calendar quarter we had 443 devices.

Thank you again for taking the time to join us and I will turn the call over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) we have questioned from Steve Crowley from Craig-Hallum.

Steve F. Crowley – Craig-Hallum Capital Group LLC

Good afternoon folks and congratulations to a great start to the year.

Elias Vamvakas

Thanks Steve.

Steve F. Crowley – Craig-Hallum Capital Group LLC

In terms of, our obviously masters multiunit programs are emerging as the significant layer of the business and activity of the company and I'm wondering even at this sort of a stage if you are getting a sense for how this changes customers’ consumption of consumables, I just think back to ASCRS and I know there is a (inaudible) day where some prominent physicians and the CEO were up at the podium and there were some pretty big numbers talked around, for example by Dr. Don himself and I would like to think (inaudible), but what kind of evidence do you have that folks are playing along to the script that you are writing?

Elias Vamvakas

It’s a great question. It is really early for us the talent and to be specific, but the Masters program was something that we trailed for quite a while before deciding the direction we wanted to go and it’s the kind of numbers that you are talking about and it’s kind of a response and the reactions that we have had from other doctors as well as Dr. Don have told that, are loving the idea of integrating the TearLab into practice and as I have said before, once the device gets integrated, then it becomes standard of care and then it becomes part of the protocol and utilization does go through the root. We are very excited about the initial response that we’ve seen, but we don’t have a lot of data in fact, a lot of our devices are going out to the big practices as we speak.

Steve F. Crowley – Craig-Hallum Capital Group LLC

And then in terms of your implementation of multiple units on existing customers, is that a relatively cost effective thing for you to do in that? You are not starting from square one with familiarity of the system, but how expensive is it for you to add ten more units to an account that might have three? You talked to us about on the call side whether or not you are protecting the methodology and how expensive that is?

Elias Vamvakas

Well, actually it’s a lot easier to add another 10 units to someone who is free. The most expensive and most time-consuming device that we have is the first one, because that’s when a doctor has to look at him and change what they have always been doing.

As I have always said in the past, our biggest challenge is the fact that doctors are doing something different than they have always done in the past. It makes all the good sense to do, it's cost-effective for them to get great data, they get paid when they ar using it. So the only negative – it’s not really a negative, it's just changing what they have done in the past.

So once a doctor gets comfortable with using the TearLab then that’s when they want to use it more and more and more. So really it cost us virtually the same to put in the new device as it does to put in n devices.

Steve F. Crowley – Craig-Hallum Capital Group LLC

Now in terms of, like you said it hasn't been that long since we talked and you brought up a fair number of reimbursement highlights at the last call. There hasn't been a whole lot of time that’s passed, is there anything notable on the reimbursement side, that is worthy of mention or should it be the fact that you didn't mention anything kind of answering my question already?

Elias Vamvakas

The whole reimbursement side and especially if you look at our web, you will see that there are regular wins on a regular basis, so it is, as I said before, it is something that is going to take us a couple of years to get everybody on board. We’re happy with the progress we’re making, but it is slow work there. There is thousands of plans out there, but we are getting good reception from – when we get an audience, we get good reception and good results.

Steve F. Crowley – Craig-Hallum Capital Group LLC

One more from me and I will hop back in the queue, as it relates to the sales organization, can you tell us a little – I know you have some ambitions plans around ASCRS in terms of training and getting the group together. Can you give us a little feel for what you are able to accomplish and then in terms of building the group, it seems like you are having success ahead over the last public discussion, adding experienced ophthalmology industry folks, is that still the model that you’re working and what can you tell us about the kind of talents you’ve been able to bring to the organization?

Elias Vamvakas

For the vast majority of our team, it’s experienced sales guys. We’ve been, I am going to say fortunate, you know there’s been an awful lot of consolidation in the eye care space for big pharma, which has opened up the opportunity for sales guys who are looking, they do not work for pharma company, but maybe a small or more aggressive plus more potential company.

So we are continuing to hunt in that space and we still think that there is lots of opportunity there for us. We are trying to manage the level of growth that we’re seeing with managing the people and training the people and so on. So it’s a balance for us. I mean if you look that as a year ago, we had 17 employees, today we have over 60, so it’s just the question of growing at the fastest level possible but being able to manage it at the same time.

Steve F. Crowley – Craig-Hallum Capital Group LLC

That’s helpful. Thanks for taking the question.

Elias Vamvakas

Thank you.

Operator

Thank you. Our next question comes from Matt Dolan from ROTH Capital Partners.

Matt V. Dolan – ROTH Capital Partners LLC

Hey, guys congratulations on the progress here. I wanted to talk on placements. Can you give us any visibility into what you’re seeing for the rest of the year, do you annualize your order rate in Q1? You’re running close to 1,500 units at bank. So tell us kind of what happened at ASCRS and what kind of levels of system orders we can expect throughout the rest of the course of the year as compared to this big number here in Q1?

Elias Vamvakas

It’s a great question and I really don’t know the answer of that. I can tell you that, we’ve seen as I said at the end of the year, that we saw great momentum from the AAO and lot’s of interest and it’s carried it into the beginning of the year, we are having a lots of discussions with Masters program.

We had a very good ASCRS. Although I am going to say, because of our sales force and the number of people that we have out there, even though ASCRS was 200%, 300% as big as it was last year, it isn’t playing as big factor overall, just because we now have feet on the street. So I am going to say that we certainly are seeing continued growth at the levels that we are experiencing I think maybe, this was a very strong quarter, just because the Masters program is at its earlier stages.

I think our sales people – it’s hard to say, we haven’t gone through the summer. I don’t know how slow summer gets. We have only had one year of summer and that’s been very slow, but telling from what I am seeing today, we haven’t seen anything really slow up in anyway.

Matt V. Dolan – ROTH Capital Partners LLC

Okay, great. And then moving to the Masters concept; can you tell us how many accounts were involved in the order number you gave, I think it was 162 systems?

Elias Vamvakas

I don’t have that number also top of my head. I can guess – maybe we will get back to you on it, you can look at and give us a feel of that answer, so that I am not guessing.

Matt V. Dolan – ROTH Capital Partners LLC

Just trying to understand proportionately, are there a lot more coming on the Masters side or how many accounts are evaluating this option?

Elias Vamvakas

Yeah, so there are more coming, I mean I think what I said at the beginning of the year or at the end of last year is that, if I look into the future, I am going to see that probably 50% of our sales as we go forward is going to be the Masters program at least for the next couple of years.

So I do think you will continue to see that and I think you will continue to see it is as being a significant part of the business that we were doing. It’s a work set it about it because number one it’s easier to implement, it sets as a standard of care and it actually becomes a perfect example to the rest of the medical community, how to properly utilize TearLab.

So it’s for many reasons, it’s an attractive program for us. To say the least that it’s usually the largest practices across the U.S. that are implementing it and those are the opinion leaders for other doctors to look for in term of how to practice.

Matt V. Dolan – ROTH Capital Partners LLC

Okay and then last one is on utilization rates. For those accounts that are up and activated, can you give us any metrics or figures around those types of where those card numbers are coming per account. I know you had a big – looks like, you had a big activation number in the quarter. So we are just trying to get a sense of how much the reps are out there hunting for new accounts versus making sure that the prior calls are actually on board and ordering? Thanks.

Elias Vamvakas

That’s a great question because that is actually of a perpetual challenge for us. You make a lot of sales and then you have the sales guys back with all those accounts and work of all those accounts, it’s easier for Masters programs and it is the reason why we brought in the implementation specialist, so that they can help the sales reps, so that we can have the sales rep continuing to get new business while the implementation people are working as the cards. So it’s a fine balance that we have to run.

To answer your the first part of your question about what are we thinking in terms of implementation numbers. It’s really early for us to tell that, but I am going to tell you, my guts feel from having experienced a few of them is that, you probably – that the ultimately both the Masters programs and other programs will come to a similar number on an annual basis. I am still pretty comfortable with the $20,000 revenue per device per year.

I do think that the implementation of the large account some many of them will make that little slow, so we are not going to come off the gate, doing $20,000, but I think ultimately once they were utilized in that practice, I think we will see similar numbers. My whole attitude of what the future of the business looks like has changed. My view is – my original though was that we’re going to have sort of a device per doctor and then the device will be used at three or four times the number that the minimus are. My view today is that the number that we have put out of $20,000 per device is probably a fairly accurate number, but it will be several devices per doctor as we go forward.

Matt V. Dolan – ROTH Capital Partners LLC

Okay, that’s great. Thank you very much. Congrats again.

Elias Vamvakas

Thanks.

Operator

Thank you. Our next question comes from Jeff Frelick from Canaccord.

Jeffrey Frelick – Canaccord Genuity, Inc.

Thanks, Elias best job. Let me just focus on the implementation specialist for a minute here. So are you seeing a noticeable uptick on the utilization earlier or you are deploying the implementation specialist versus as a comp that you are not?

William G. Dumencu

Yeah, for sure. I mean the idea behind the implementation specialist is, if you got an account that is implementing 15 devices, 20 devices, they actually stay within that practice for a week and they work together with our practice, making sure that everybody understands how to use it, but more importantly making sure that everybody remembers to do it every time and once it’s built into the system, once it's built in the protocol, once it becomes habit-forming, then of course they leave, so that's the idea behind the implementation specialist. So we are, we definitely make a difference in every account that they gulp you. Again the reason being, if you think about what’s stopping a doctor from doing this is they don't know now to implement it into the practice because it's different and the Texas slow to do it, because they overworked anyway so if we because we over worked anyway. So if we can bring someone that speaks the same language as the tax that helps them do it faster, do it easier then we get the results that we are looking for.

Jeffrey Frelick – Canaccord Genuity, Inc.

And we are striving the expansion, the increased hires there for implementation specialist, are they spending longer in each account or you are just doing more Master’s program where you need to deploy more of this specialist free.

Elias Vamvakas

No, I think it is demand. We as our salespeople, understand the value that they bring to our clients, they all want them to go into their accounts, right? So if you think about an specialist spending in a couple of days and each one of the accounts we now have 800 plus accounts. So they are right now are implementation specialist right now, are booked too much out.

Jeffrey Frelick – Canaccord Genuity, Inc.

Okay great. And then just I know you didn’t touch on the chip manufacturing, you did talk about the instrument size just so everyone is clear, the chip manufacturing, that's far and we’re able to keep up the forecast and everything.

Elias Vamvakas

Yes absolutely and we have good inventory and we have a good production plan in place.

Jeffrey Frelick – Canaccord Genuity, Inc.

Okay and the cash issues in the quarter, nearly about a 1 million less than in the prior quarter, is that what we should expect reminder of the year?

William G. Dumencu

Yeah, hopefully as our revenue goes up our cash plan would go down. I know it’s kind of obvious so the – yeah that is ultimately where we are going to get and we want to see that on a steady basis declining.

William G. Dumencu

Okay, great thank you very much.

Jeffrey Frelick – Canaccord Genuity, Inc.

Thanks.

Operator

Thank you our next question comes from Jack Wallace from Sidoti.

Jack D. Wallace – Sidoti & Co. LLC

Thank you for taking my questions guys. Just got two questions here, one regarding the gross margin looks like it was held barely steady from on the fourth quarter. But with our capacity what is the good place for us to have and we think through the end of the year here something in the 45% range I think those parts had on previous calls is that about accurate?

William G. Dumencu

Yeah. I think 45% to 50% is kind of where we want to be.

Jack D. Wallace – Sidoti & Co. LLC

Got you. Thank you. And then R&D was down, I should guess fairly significantly in the quarter. Any reason for that or maybe that can be large expense going forward or is maybe just kind of a one time thing.

William G. Dumencu

Yeah I would say R&D at similar level until we get to the next stage. So while we were still on the research side we are not spending a tremendous amount of money from a research perspective. Once we get past the research site meaning that we get our next custom placed and then we have to go into engineering and we start up with and design, that’s when we see – that when we start to spend a bit more money on the Research and Development side. So I wouldn’t see it being that much different over the next little while.

Jack D. Wallace – Sidoti & Co. LLC

And the second test timing and one that might start to ramp up will be end of this year or maybe first half of next?

Elias Vamvakas

While you are still on the research side there is like definitive plan. I think you get a definitive plan once you get exactly into the development side but Ben I know that Ben’s got two or three pathways actually that he is examining and he's pretty excited about kind of his initial results but he hasn't come to me, he hadn't said this is the new test that I want to commercialize over the next six to 12 months gap.

Jack D. Wallace – Sidoti & Co. LLC

Got, thank you and I got a couple of other questions about some of the numbers relating to the Master’s program but I’ll take those offline.

Elias Vamvakas

Okay, perfect thank you.

Jack D. Wallace – Sidoti & Co. LLC

Thank you for the answer guys.

Operator

(Operator Instructions) our next question comes from Ben Haynor from Feltl and Company.

Ben C. Haynor – Feltl & Co.

Yeah, good evening gentlemen.

Elias Vamvakas

Hi.

Ben C. Haynor – Feltl & Co.

Just on that next test, anything you might be able to share as to what analyze that might be looking at.

Elias Vamvakas

Well, we have talked about IGE doing our next test and really it’s an ideal test with what we’re doing, cash flow during a lot of the symptoms are caused by dries, so analogy test would make a lot of sense but that’s – it’s the next test. So that's the primary focus, that's the bench looking at, he is looking at couple of other things but that's the primary focus right now.

Ben C. Haynor – Feltl & Co.

Okay, great and then on the 3/24 and 3/15 programs with the masters program getting out there in big way are you seeing fewer practices choosing the 3/24 and opting to go more of the masters rounds that you have seen in the past?

Elias Vamvakas

I think that, when I, we’re seeing that happens is that practice is cut off by a 3/15 or 3/24 program, realize the value of the TearLab, look at implementing to their practice and if there are a couple of two or three doctors if they’re minimum if we look at it so, we need to have seven, 10, 15 devices and then we get into Masters discussion. So a lot of times in the early stages or the early Masters programs came from our 3/15 customers. A lot of our new Masters programs come out as Masters program out of the shoot and that is that we focus and concentrate on practices that might have 10, 15, 20 doctors and we know instantly that those are Masters programs.

What normally happens with those is, we sit down and we do a trial with them where we will put in two or three devices in a doctor’s area and have them as the sort of the test case for the whole practice and once they excited, then they implement it across the board.

Ben C. Haynor – Feltl & Co.

Okay, great. That’s helpful. And then the last one I had is real quick thought, deprecation and amortization in the quarter?

William G. Dumencu

Sorry, what’s the question?

Ben C. Haynor – Feltl & Co.

What was deprecation and amortization?

Elias Vamvakas

Bill, can you answer that?

William G. Dumencu

It’s worth $380,000.

Ben C. Haynor – Feltl & Co.

Really. Okay, thank you very much guys, great quarter.

Elias Vamvakas

Thank you.

Operator

Thank you. And I am showing no further questions in queue at this time, sir.

Elias Vamvakas

Okay, thanks very much. Thank you again everybody for being on the call. We are happy to answer any individual questions you have. And we look forward to updating you on our growth plans.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day.

William G. Dumencu

Thank you.

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