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TearLab Corporation (NASDAQ:TEAR)

Q3 2013 Earnings Conference Call

November 12, 2013, 16:30 PM ET

Executives

William G. Dumencu - CFO

Elias Vamvakas - Chairman and CEO

Seph Jensen - President and COO

Analysts

Steven Crowley - Craig-Hallum Capital Group LLC

Chris Lewis - ROTH Capital Partners LLC

Jeffrey Frelick - Canaccord Genuity, Inc.

Drew Jones - Stephens Inc.

Ben Haynor - Feltl and Company

Shawn Boyd - Next Mark Capital

Operator

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

I would now like to turn the conference over to Bill Dumencu, Chief Financial Officer. You may begin.

William G. Dumencu

Thank you, Natalia. 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 relating 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 with previous calls, I want to update you on our progress with respect to the commercialization of the TearLab system.

Total 2013 third quarter revenues were 4.2 million. That's an increase of 247% from Q3 2012 and up 19% sequentially from the previous quarter. Excluding non-cash charges associated with the continued reevaluation of outstanding warrants, our adjusted net loss was $0.12 per share. That's a couple pennies better than consensus analyst estimates. Cash used in operating activities was approximately 1.7 million and we ended the quarter in a very strong financial position with cash and cash equivalents totaling 42 million.

In terms of expanding our installed base, a total of 467 system orders were booked in the third quarter, of those 385 systems were under our Masters Multi Unit Program, 78 were through our minimum use access program, six were purchased outside the U.S. Also built into that total was a decrease of two direct purchases as they were converted to use contracts.

One area of continued focus for us is trying to balance our continuing success in building our installed base with maximizing per system utilization as much and as quickly as possible. We know that once a doctor sees the potential opportunity that is inherent in managing dry disease and experiences our tests, they understand TearLab's value proposition and want to integrate the test in their normal practice patterns.

Once integrated, TearLab becomes critical to their success and the utilization of the device increases significantly. But that doesn't happen overnight or in its own. 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 is very important for us to provide them with the tools and support they need to fully incorporate TearLab into their practices. That support ranges from basic delivery, tech training and doctor education through the help in establishing protocols and managing Medicare and private insurance reimbursement.

As we know, private reimbursement levels can have a big influence on doctor acceptance and adoption of our tests. As private reimbursement varies widely state by state, insurer by insurer, we have recently expanded our reimbursement support group to include regional field representatives who will work closely with our local customers. So far we have hired three people in that area with one more to go.

Another big part of the answer has been the addition of more sales people, territory managers and implementation specialists. As we have mentioned before, this has been the focus of ours over the past few months. We are making great strides in this area and while being very strategic in hiring, we have added five new implementation specialists and two territory managers since our last call. So as of total, our sales organization stand at 61 people consisting of one executive, four general managers, five professional relations coordinators, 32 of our own direct territory managers plus nine independent reps and sub reps and 10 implementation specialists.

As I said, adding people to our sales team is an important part of the answer together with our new President and COO, Seph Jensen, who has a tremendous amount of experience building strong sales teams, we're also making some key changes to our sales organization including adding a layer of middle management to help us grow. We have five offers going out to five new area sales managers this week. We're also increasing our compensation structure to support our corporate objectives, the most significant being driving the utilization rate of our devices in the field.

We have lots of work ahead of us but I'm very excited about Seph's involvement and the progress that we're already making in building and infrastructure that can accommodate the demand that we are seeking for our tests. To put that demand in perspective, going into 2013 most analysts were expecting us to place approximately 900 systems during the entire year. At the end of Q3, our system order total is already 50% above that and more than 1,400 units and we still have another quarter to go.

Let me close up my opening remarks by giving you some color of this year's American Academy of Ophthalmology annual meeting in New Orleans which will be getting started in just a couple of days. Like last year we expect to close a good number of contracts and go to multiple sales leads with TearLab systems at the show. More importantly though, AAO really represents the single best opportunity all year to promote doctor awareness in the widespread adoption of our tests.

There will be a number of posters of presentations there that highlight the significant role of TearLab Osmolarity testing and the role it can play in the objective diagnosis and management of dry disease. Many of those talks will use data from our ongoing dry disease prevalence study which is now enrolled close to 9,000 patients. Data from that study continues to show that a much larger percentage of hyperosmolarity is in the general population than originally thought, helping to confirm that dry disease is the most common condition eye doctors see day-in and day-out.

I am most excited about our Ask The Experts session that will be taking place at our booth. It is a marketing crew that our team has put together with an impressive list of thought leaders who each will be spending an hour talking to our customers right at our booth. What a great way to promote our technology and give our customers the opportunity to talk directly to world renowned leaders and enthusiastic supporters of our technology. If any of you are planning to attend the meeting this year I encourage you to drop by to get a first-hand feel of the buzz that's building for the TearLab test.

As with previous calls, let me share with you where we stand with our device tallies. All the numbers that I'm about to give are as of the close of Q3 and exclude devices used strictly for research and/or educational purposes. At the end of the second quarter, we had 2,093 commercial units ordered in the United States. Of those, 1,860 are active while 233 have not yet been activated. Of the 1,860 active devices, 235 were purchased, 825 were under minimum use contracts and 800 were under our Masters program.

Those 800 active Masters devices represent 150 accounts, so within that the average Masters account includes 5.3 devices. I believe we'll see that number increase somewhat as existing Masters accounts receive devices that have been ordered but not yet shipped. Of the 233 units that have been ordered but not yet activated, 136 of those are part of a minimum use program and 97 are part of a Masters program. In the rest of the world, at the end of the quarter, we had 467 devices.

Thank you again for taking the time to join us today. But before jumping into the Q&A session, I want to take this opportunity to formally welcome Seph to his first TearLab quarterly call. Seph came to TearLab from Alcon where he spent 17 years gradually advancing through the ranks. His most recent role was the Head of Surgical Marketing and had responsibility for more than 1.4 billion in revenue across Alcon's cataract, retina and refractive business.

As I mentioned earlier, he's a seasoned leader with strong track record of delivering operational excellence in the eye care space and we're all looking forward to him helping us continue to build our sales infrastructure and sharpen our execution. Given the fact that Seph has only officially joined us for a few weeks, I didn't think it was fair to ask him to make any introductory remarks, but he's here on the call with us and I'm sure he'd be happy to answer any questions you might have of him.

Also, just an aside, he'll be joining me at the Stephens' Conference in New York City tomorrow and will be on the floor with the rest of our team at the AAO conference through the weekend. We hope to meet some of you there.

So operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question is from Steven Crowley of Craig-Hallum. Your line is open.

Steven Crowley - Craig-Hallum Capital Group LLC

Good afternoon, gentlemen. Congratulations on a really good performance this quarter.

Elias Vamvakas

Thanks, Steve.

Steven Crowley - Craig-Hallum Capital Group LLC

Before we get into the details on that performance, given your introduction of Seph, Seph welcome from the folks of Craig-Hallum, I'm sure the overall investment community. It's an intriguing hire for the company, I'm sure for you it's an intriguing move. I'm wondering if we could benefit from some of the process you went through in analyzing the opportunity at Tear, some of the observations that were most notable as you got to know the opportunity and made the decision and maybe one other aspect as you look at your significant tenure at Alcon and some of the things you did there, are there a few projects or stints you have there, responsibilities you had there that are particularly analogous to what you see as fitting for Tear?

Seph Jensen

Sure. First, I want to thank Elias for the welcome and Steve, thanks for your question. I'm clearly very excited but before I get into too much, I want to start by saying that Alcon is a fantastic company. They were extremely good to me. I had a great 17 years there and I'm very appreciative of that experience. But moving on to more of your questions, the decision to join TearLab really wasn't an easy one after doing some basic research. I would say that first, there's tremendous market potential with a uniquely positioned product that I think meets an important unmet need in the market. We've got a business model that's a disposal-based model and that's something that I have significant experience with as well. When you look at coverage, we have both good Medicare as well as private coverage that's growing. It doesn't take long to look at the TearLab website and do a quick review and see that we have very strong KOL support both with ophthalmologists as well as optometrists. And then I think when you add in the endorsement by the AAO for their preferred practice patterns, I think it's pretty clear that TearLab has a great platform from which to grow. I would say that one of the most important parts of my research though was clearly speaking to a lot of my key doctor friends and industry people that I have been working with for a very long time. And they all had really good things to say about TearLab, they were very supportive of the technology and supportive of the future potential of the company. So for me when I added all of that up, the opportunity to join TearLab at this stage with all of this opportunity in front of us, it was something that I just couldn't pass up. The last part of your question, Steve, there was obviously a lot of experiences with Alcon over 17 years. The one that comes to mind I would say would be if you followed Alcon at all, you know that in ophthalmology, specifically in surgical and cataract, the femtosecond technology is something that has really come on the scene in the past couple of years and that was a disruptive technology because it was an additional step in the procedure and not only that, it required a little bit of a different patient flow as you worked up the patient. And that presented unique challenges that we had to handle not just clinically but patient flow-wise and I think when you look at the TearLab's system and how most practices route patients through their flow, we have been going through a similar challenge and I think I can apply some of those learnings to help facilitate and make sure that can incorporate the TearLab systems and maintain healthy flow.

Steven Crowley - Craig-Hallum Capital Group LLC

That's really helpful. I appreciate the color. Look forward to getting to know you and to see your contribution to the organization. Thanks again. Now switching gears, Elias, as I said, the quarter looked really solid. I mean remarkably as I look down, our expectations and what you delivered from revenue to gross margin to operating expense is to non-GAAP pre-tax income and net income, there were all better. So I was a little surprised after a bit of a celebration in your stock initially in the aftermarket to see it trade down hard. And the only thing I couldn't think of dovetails with the concern that I've been getting from some investors that I want to ask you to hit head on. In that big system order number which was way above expectations, there was a large component of Masters Multi Unit program contracts. And the concern that I'm getting from some investors is that the company, its sale people are just placing these units, kind of throwing them out there in the field and there isn't a significant commitment on the part of the customer or the sales person for consumable utilization to be there, and maybe you could really tell us how you've structured this and whether that's a legit concern or an illegitimate concern?

Elias Vamvakas

Actually, it's a great call and for sure I understand that feeling. We have to remember that the Masters program was not created by us but it is really a response to what our customers wanted. And when the program was first proposed by our sales group, I had the exact same issues. I had a concern that our sales guys would just see this as an opportunity to displace units and get paid for placements that aren't going to necessarily perform to our expectations. I wasn't really concerned about the capital costs because our units are fairly inexpensive. My concern really was twofold. It was first about worrying about paying commissions on what might not have been real sales. But secondly and most importantly, I knew that the key metric for our business was revenue per device, utilization and I was really concerned that this program would potentially impact our numbers significantly. At the same time I recognize that it was a huge opportunity and as it was becoming very evident to us that our customers were liking the technology and wanted to adopt it broadly. So we sat down and spent a lot of time on this. Knowing that sales people focus on what they get paid on, we decided that we would align compensation with corporate objectives here. We agreed to allow the Masters program but put in what I call appropriate guardrails to meet our objectives. We had three important points that we looked at. First of all, we wanted to make sure that the implementation process, the approval process had a detailed plan and a business case that justified putting out devices that we're going to get $15,000 of annual revenue and that had to be developed and submitted before approval. One of the things by the way we recently added to that process was that we now have a requirement that the medical side of that practice also agrees to a treating protocol as part of that whole business plan. The second part that we had done was we wanted the approval to be different. We wanted the regional manager to sign off on every single one of those Masters programs to make sure that it was properly placed and justified. And frankly, the most critical part was the compensation. We decided that we weren't going to pay a commission upfront. What we decided to do was retrospectively pay a commission only for the number of units that produced $15,000 of revenue in the first year. So to be more specific, we look at the revenue that comes from a Masters account and pay commission only after $15,000 of threshold had been reached. So in fact it is financially better for our rep to place a unit under a use agreement because they get upfront commissions than to actually start a Masters account where they only get paid until the account is actually performed for the appropriate rate. Seph, I know we spent a lot of time in this area, I don't know if there's anything you'd like to add to that comment.

Seph Jensen

Probably the only thing I'd add is just to reinforce that we are very cognizant of our utilization per device in the market. It is an important metric, as Elias said and it's something that we're gearing really all of our compensation around. At the same time, I just want to reinforce that we're acutely aware of how critical patient flow is to the sense of any practice and we believe that the Masters program and the mechanics of how it works, the efficiency that it offers is really going to bring something for our larger and busier customers that's an ideal solution.

Elias Vamvakas

Steve, I hope that answers the question.

Steven Crowley - Craig-Hallum Capital Group LLC

No, I think that really puts the meat on the bones of how you've structured this. I'll hop back in the queue with a follow-up question. Thanks for taking mine on the frontend here.

Elias Vamvakas

Thanks.

Operator

Thank you. The next question is from Chris Lewis of ROTH Capital Partners. Your line is open.

Chris Lewis - ROTH Capital Partners LLC

Hi, guys. Thanks for taking the questions.

Elias Vamvakas

Hi, Chris.

Chris Lewis - ROTH Capital Partners LLC

First, I just wanted to walkthrough kind of the placement expectations going forward, it's been quite a strong year here for new orders as you talked about in your prepared remarks. Elias, I was just hoping you could maybe provide some more visibility into just kind of the future orders going forward. You have AAO coming up in the fourth quarter, it seem like the acceleration this year really started at last year's AAO. So how do we think about orders going forward into 2014? Is it reasonable to say at this point that orders should be greater in 2014 than 2013? Thanks.

Elias Vamvakas

Yes. So I can tell you that probably since June we have been focused on helping doctors implement rather than going out and getting these sales. Frankly competition is what's driving a lot of our sales today and – the bigger practices see another big practice implementing the system and one that implements themselves, so right now most of our interest is inbound as opposed to outbound per se. So I guess I'm going to say that I would be surprised and disappointed if we didn't have more device sales next year than we have this year for sure. I don't expect to continue growing by 400% a year, but I do certainly expect that they continue to grow. But more importantly for us is that we need to manage the whole implementation process and make sure that the devices are not only placed but the doctors are trained properly and utilization meets our expectations.

Chris Lewis - ROTH Capital Partners LLC

Okay, great. And then I guess going off of that, what's been the feedback in the field since you've implemented some of those strategies to really drive the utilization and integrate the TearLab systems within the practice protocol, I guess feedback from the implementation specialists who are in the field working with the accounts? And then typically how long does it really take for the system that are placed to really become fully integrated into a practice?

Elias Vamvakas

It's a great question. And I think I'm going to answer the second part of that because it really depends on how well that practice is managed. The better the practice is managed, the better the leadership in the practice the more quickly it is integrated. We have found that a key element of success to how quickly our test is integrated and how well implementation goes comes with an upfront understanding of how a practice is going to use the device, the clinical protocol, meaning that the doctor stands up and says, okay staff, we are going to test people on the following protocol. We're going to test people that have at least two symptoms that are coming in for cataract surgery, that are coming for refractive surgery and over age 60. When that's developed upfront then we see implementation becoming quicker and more efficient. And that's why as I mentioned in my earlier remarks, we're taking that step and including it as part of the scales process for a Masters account. We won't sell an account until the doctors have agreed on what the implementation process is.

Chris Lewis - ROTH Capital Partners LLC

Okay. And then finally if I can sneak one more in here. Can you talk a little bit about the pipeline for the Masters program, I think you said 150 accounts at this point. So what's the pipeline look like in terms of number of accounts and size of those accounts going forward? Thanks for the time.

Elias Vamvakas

Thanks for your call. We – it's still very early stages. So if you look at our Masters programs, the average is five devices. I think that average will get closer to 10 as time goes by. But if you can imagine there's hundreds if not thousands of practices that have more than five doctors in the U.S. and more significantly there's thousands of practices that have more than five lanes. That's usually two or three doctors. So I think we're very early stage of that program and still have an awful lot of room to grow in that area. And as I mentioned, I think what's exciting for me is that we are now seeing sort of the competitive spirit driving a lot of our sales.

Operator, next question.

Operator

Yes. The next question is from Jeff Frelick of Canaccord. Your line is open.

Jeffrey Frelick - Canaccord Genuity, Inc.

Yes. Good evening, folks. Elias, maybe a clarification on the implementation time, how does that compare to about a year ago, maybe third quarter last year when you already had the reimbursement, you started to kind of make your way into the eye specialist practices and how does that implementation time to get the account up and running and ordering tests, how does that compare year-over-year?

Elias Vamvakas

So I think there might be kind of two things that we're talking about there. So one is and maybe I missed something in that question but I'll clarify it for those of us that have that separation. The time from the time we sell a contracted unit to the time it becomes activated and that's the timeframe that requires for them to receive the unit, receive cards and to get the clear waiver. That as we talked about before has taken anyway from three days if you're in Oklahoma to six months and still counting if you're in California. So that honestly hasn't changed much. We do have some preliminary understanding that California is actually going to speed up the process a little bit. In markets, as I said in Oklahoma, we have a close relationship with the regulators, with the phone call [ph]. So I think we've done as much as we can in that area, although I'm going to say some changes to North East insurance carriers are actually going to delay it a little longer for us because there's some insurance company that require an 855 form to be filled out which might take three or four months before they process that. So that's one stage and I'm going to call that the contract through activation stage. What I call the implementation stage is the next stage for us which is when an implementation specialist or a rep goes in and spends time in that practice training the staff as to how to use the device, how to fill out the forms, all those other things. And that as we've gotten busier and with a limited number of people that we have out there is actually taking a pretty long time for us and that where we're adding staff. So for example, if you have a Masters account, it probably is 30 to 60 days before we can book up an implementation specialist or free up an implementation specialist to go in and train the staff at this point.

Jeffrey Frelick - Canaccord Genuity, Inc.

Okay. And then are you only using the implementation specialists for the Masters accounts currently?

Elias Vamvakas

That was the plan. I mean our plan was that if you're selling one or two devices then the rep can go and do that. If you're selling – if you got to deal with 10 or 15 devices, 20 devices, then it probably makes sense when implementation specialists actually spend two or three days in a particular practice to be able to get all that done. So we didn't want our sales people tied up for a week in a particular practice which is what the reason behind the implementation specialists were, but we are really and this is where we're spending a lot of time with staff on this issue is we're really reviewing our whole structure from a sales perspective to understand where it's most valuable for our territory managers to be, where it's going to spark the best use of the implementation specialists to be. So we are just looking at a whole infrastructure because clearly we have much more demand from a unit placement than the organizations build to handle today and we're going as far as we possibly can.

Jeffrey Frelick - Canaccord Genuity, Inc.

Great, thank you. And then are you – any feedback from the field, do they see anything in any form of one-off type of competition, anything in that sense, Elias, from the field?

Elias Vamvakas

No. That landscape hasn't changed at all and I think what's happening with the eminent hopefully approval of InflammaDry by RPS, I think people are now understanding that it's complementary and not competitive. We're working very closely with TearScience, with their devices. So I think the market is really getting a better understanding of Dry Eye disease and how these technologies can integrate with each other and the nice part about it and we've had it told by everybody, TearLab is at the top of the funnel. It determines the size of the market and then everything else comes down the funnel with that.

Jeffrey Frelick - Canaccord Genuity, Inc.

Great. Thanks for that update.

Elias Vamvakas

Thanks, Jeff.

Operator

Thank you. The next question is from Drew Jones of Stephens Inc. Your line is open.

Drew Jones - Stephens Inc.

Hi. Thanks, Elias. First question, what percentage of those 150 accounts in the Masters program have an ISS implementation specialist assigned to them?

Elias Vamvakas

Yes, it a great question and to be honest I don't know the answer to that. They all would have an implementation specialist that's in the region. As to whether they actually met them yet or not is a different question. But we do have 10 implementation specialists. They do look after all of the Masters accounts but as I mentioned, we're kind of couple of months booked out with those specialists.

Drew Jones - Stephens Inc.

Okay. Digging into the Masters order number for the quarter a little bit more, how many customers were ordering and how many of those were new customers?

Elias Vamvakas

For the revenue for the quarter?

Drew Jones - Stephens Inc.

The 385 Masters units that were ordered in the quarter?

Elias Vamvakas

I would say and this is a total guess from the top of my head, I would say that probably about 60% of our Masters accounts are currently actively engaged. The other 40% are waiting for us to get to them.

Drew Jones - Stephens Inc.

Okay. And then just one last question. Can you give us an update on manufacturing for systems?

Elias Vamvakas

Yes. So we no longer have a backlog in terms of device backlog, meaning that we do have enough devices. We like the process that we've put in place where we actually don't ship a device until someone has a clear waiver. So as I mentioned, there is several accounts – there's more than 200 accounts that have not had their clear waivers approved yet but we do have enough inventory to look after them as soon as they are approved. So we are just barely starting to build our inventory on the device front. We also have a second source manufacturing that are building units as we speak, but we actually haven't put out any of the market we expect that to happen sort of at the end of this month, probably even middle of December as their first off-the-line batch.

Drew Jones - Stephens Inc.

Thanks, guys.

Elias Vamvakas

Thank you.

Operator

Thank you. (Operator Instructions). The next question is from Ben Haynor of Feltl and Company. Your line is open.

Ben Haynor - Feltl and Company

Good afternoon, gentlemen.

Elias Vamvakas

Hi, Ben.

Ben Haynor - Feltl and Company

Going along the same lines in terms of production, have you increased production any from that 250 or so systems a month that you had been producing going into the AAO conference?

Elias Vamvakas

No. We have not increased the production but we are bringing on a second source manufacturer that's going to be producing at almost those levels, starting let's say into next year.

Ben Haynor - Feltl and Company

Okay. So you would have two guys producing that at 250…?

Elias Vamvakas

Correct. That's the current objective.

Ben Haynor - Feltl and Company

Okay, great. And then with the rise of the Masters program, have you seen some of those 324 accounts or accounts that would have been 324 access accounts move more towards the Masters program so that the access programs would be more SKU-ed towards the 315 programs?

Elias Vamvakas

We have certainly seen a lot of the 324 accounts ultimately become Masters accounts. So yes, I would say that a lot of the remaining would be 315 programs although a couple of those would have changed with the 324s as well. But I would say primarily most of our used contracts would be in the 1,500 315s at this time.

Ben Haynor - Feltl and Company

Okay. But the trend overall is to more utilization per practice.

Elias Vamvakas

Correct. Like I said, I think when I first thought about the business my view was that we were going to have the 315 and the 324 programs but doctors were going to really do multiples of that on the device. My view today is that doctors are going to have multiple device and probably do kind of the 15,000 of revenue per device but on multiple devices.

Ben Haynor - Feltl and Company

Okay, great. And then I don't know if you can address this at all. You mentioned that preliminary agreement with California to maybe speed up the clear waiver approval process. Is there any expectation as to when that can turn into a full agreement and maybe anything that you can talk about as far as the attributes that might be present in the preliminary agreement?

Elias Vamvakas

It's not really an agreement, it's really California looking at sort of the demand levels and realizing that they have to have higher and better service levels than they currently have. And so I think it's the California clear division making a commitment to say that we're going to do way better than what we've done in the past and if you get us this information we will have an answer for you in 60 to 90 days, not six months.

Ben Haynor - Feltl and Company

Okay, great.

Elias Vamvakas

We'll never know until it starts to happen. I can tell you and Bob's on the call. Bob's been dealing with California a fair bit. I know that we've had a few accounts come in with a clear. Bob, I don't know if you have any specific comments you want to add to that.

William G. Dumencu

No, what you're saying is exactly right. The city of California is changing their process to just improve their service levels and we expect to see some significant changes with the whole clear folks probably right after the first of the year.

Ben Haynor - Feltl and Company

Great, and sounds encouraging. I'll jump off. Thanks for taking the questions.

Elias Vamvakas

Thank you.

Operator

Thank you. The next question is from Shawn Boyd of Next Mark Capital. Your line is open.

Shawn Boyd - Next Mark Capital

Hi. Thanks for taking the question. I just want to clarify on the change in commission structure, the $15,000, was that under the Masters program per account or per device?

Elias Vamvakas

It's per device and it's not really a change of commission structure, it's how we've always – when we first implemented the Masters program, we looked at it and said we don't want to be paying upfront and we don't want to be motivating our sales reps to just go out and place units. So what we'll do is if you put out 10 devices, for every $15,000 of annual revenue you get a commission if you've sold one unit. So hopefully by the end of the year, they would have ordered $150,000 worth of product for you to get your commission. If they hadn't ordered the product, then you're not getting a commission on those devices.

Shawn Boyd - Next Mark Capital

Got it, okay. And on the use program and the purchase program, I'd assume that we're looking for just a little bit higher revenue rate for device on those?

Elias Vamvakas

[Indiscernible]

Shawn Boyd - Next Mark Capital

For a box placed under either those two programs.

Elias Vamvakas

A little higher device than our Masters program?

Shawn Boyd - Next Mark Capital

Yes.

Elias Vamvakas

Personally I think there are all going to ultimately be the same. However, I can tell you that our sales group figures that the Masters program will be in and around the 15,000 range whereas use, this might be on the 20,000 range. I personally feel that they're all going to ultimately get to the same utilization level but it's still early for us to tell for sure.

Shawn Boyd - Next Mark Capital

Got it, okay. Thank you.

Elias Vamvakas

Thank you.

Operator

The next question is from Steven Crowley of Craig-Hallum. Your line is open.

Steven Crowley - Craig-Hallum Capital Group LLC

Hi, guys. Just a follow-up. Given your commentary earlier about having success expanding the sales organization and that's showing up in the roster numbers you gave us, I'm wondering – and adding a layer in responsibilities of some of those sales people, I'm wondering how your plans are evolving in terms of increasing the sales force from here?

Elias Vamvakas

My commitment has been for us to double our sales force in the next year. Obviously in order for us to do that we have to put in – we don't want to just hire people and put them out there. We need to have the proper infrastructure to do that. If you think about our general managers, today they might have 10 guys reporting to them. So in six to 12 months they'll have 20 guys reporting to them. That's not realistic. So our view was in order to properly train and manage those people, we need to first put in the infrastructure and then hire the people. So that's the purpose of putting in a middle management layer that can day-to-day manage the expansion of our sales team.

Steven Crowley - Craig-Hallum Capital Group LLC

Okay. And in terms of this kind of growing focus on utilization which makes a lot of sense, while – that focus started to increase it sounds like during the summer months here, it probably hasn't had much time to really show up in the numbers or the performance, is that fair? We're really in the frontend of seeing some of the benefits of that focus, that's the way we should think about that?

Elias Vamvakas

Yes. We're at the very frontend and in fact, our focus – our belief is you manage and compensate what you ultimately want to get in terms of results. So the focus of our whole organization is the systems that we're building are focused on implementation, the next stage for us is commissions and compensations and we're having a meeting with the entire sales group and Seph and I are meeting this week actually and we're altogether at AAO. We're spending a couple of days early to review our whole structure, our whole compensation because we want to make sure that we align everything in the same way that the rest of the company is based and managed and that is revenue per device, utilization of our devices.

Steven Crowley - Craig-Hallum Capital Group LLC

Great. And then just one more from me. You mentioned a couple of times the competitive dynamics not for you as a company but for your customers as they practice ophthalmology and it almost sounds like the story that you talked about on the frontend that demand could get contagious for the TearLab is starting to play out. Do you think that's really more at the top tier of the market with a larger account and that should play out across the broader market or is it happening kind of on both ends and converging to the middle?

Elias Vamvakas

Well, I'm going to say that it is definitely happening in larger accounts and the reason why I know that is because I hear about the larger accounts and I hear what's going on and I know a lot of the doctors in those accounts and so on. So I can definitely say that it's happening in larger accounts. I think I have a better feel for that answer at the Academy meeting this week. There's going to be 15,000 doctors at that show and I love going to those things just to gauge our progress in the doctor's mind space. The first year we went there, it was all about what the heck is osmolarity and what does it do? And then it was TearLab, what do you guys do? And then last year it was more like, tell me about how I make money, how I bring this into my practice? So the discussions have moved from understanding Dry Eye disease and osmolarity and how that fits in to how do I bring this device into my practice and count on [ph] looking forward to this meeting saying whether we're sort of more of a standard test, more of standard expectations in the doctors' minds and I'm kind of hoping that we'll see doctors coming in and saying, the guy across the street has one. I better find out what's it all about.

Steven Crowley - Craig-Hallum Capital Group LLC

Great. Well, we'll look forward to that update. Thanks for taking the questions.

Elias Vamvakas

Thanks, Steve.

Operator

Thank you. There are no further questions at this time. I'll turn the call back over for closing remarks.

Elias Vamvakas

Thanks very much. Again, thank you all. Appreciate you taking the time this afternoon. If you happen to be visiting at the AAO, please come and see our new booth and catch some of the doctors talking about the TearLab. If you have any questions, please feel free to call us. Thank you again. Good night.

Operator

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.

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Source: TearLab Corporation's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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