Semler Scientific's (SMLR) CEO Doug Murphy-Chutorian on Q4 2015 Results - Earnings Call Transcript

| About: Semler Scientific (SMLR)

Semler Scientific Inc (NASDAQ:SMLR)

Q4 2015 Results Earnings Conference Call

February 19, 2016, 11:00 AM ET

Executives

Doug Murphy-Chutorian - CEO

Analysts

Yi Chen - HC Wainwright

Brian Marckx - Zacks Investment Research

Operator

Good day, ladies and gentlemen and welcome to the Semler Scientific's Fourth Quarter 2015 Financial Results Conference Call. [Operator Instructions] As a reminder today's conference call is being recorded.

Before we begin Semler Scientific, I would like to remind you that this conference call may contain forward-looking statements. Such statements can be identified by words such as may, will, expect, anticipate, estimate or words with similar meaning. And such statements involve a number of risks and uncertainties that could cause Semler Scientific's actual results to differ materially from those discussed here.

Please note that these forward-looking statements reflect Semler Scientific's opinions only as of date of this presentation and it undertakes no obligation to revise or publicly release the result of any revision to these forward-looking statements in light of new information or future events. Please refer to Semler Scientific's SEC filings for a more detailed description of the risk factors that may affect Semler Scientific's results and these forward-looking statements.

Now I would like to introduce Doug Murphy-Chutorian, CEO of Semler Scientific. You have the floor sir.

Doug Murphy-Chutorian

Thank you, Operator, and thank you all for joining December fourth quarter and year-end earnings call. In the fourth quarter 2015, Semler had revenue growth of 88% compared to the third quarter of 2015 and compared to the fourth quarter in 2014, revenue grew 178%.

And in the year-over-year comparison of 2015 versus 2014, revenue growth was 93%. And we achieved these growth rates, number one by initiating business relations with large health insurance plans, number two expanding the size of orders from our established client base, and number three launching additional products and services through our targeted markets.

Major accomplishments in 2015 were the development of QuantaFlo and WellChec, which I’ll describe a little bit more later. QuantaFlo is priced higher and is intended to generate more cash and gross margins than its predecessor. And WellChec was delivered to four clients in the quarter with a significant expenditure of cash for the first two clients but happily the last two contracts were profitable.

This suggests that we have an engine for revenue growth in WellChec, which can contribute to the goal of the common cash flow positive. It's still our intention to take this major news and stride and move forward to deliberate pace, but the investment made in WellChec seems to have been quite worthwhile.

Higher expenses in the fourth quarter, have already in 2016, returned to their usual 2015 levels which sets the stage for the drive to profitability, which is our goal for 2016. Now, to discuss the numbers, please refer to the financial results which are described in our earnings press release distributed this morning. Some highlights in additional details for the year ended December 31 2015, compared to the same period in 2014, are as follows:

Revenue was 7 million, an increase of 3.4 million. The significant ramp in revenue is due to increased recurring revenue from our licensing model for QuantaFlo, and the introduction of our service model known as WellChec.

Cost of revenue, which is included in our operating expenses was 2.8 million, an increase of 2.1 million. The increase is primarily due to additional cost associated with starting up the WellChec service, as well as increased QuantaFlo units in the field with customers.

Operating expenses other than cost of revenue were 12.5 million, a sequential increase of 5.3 million. The largest factor for the change was an increase in stock based compensation expense.

Engineering and product development expense increased by 29%, which funded the development in commercial release of both QuantaFlo and WellChec.

Sales and marketing expense increased 68% due to higher stock based compensation expense, increased personnel cost, and travel expense. General and administration expense increased by 99%, with the largest factor being higher stock based compensation expense.

Net loss was 8.4 million or $1.72 per share, a sequential increase of 3.9 million, compared to a net loss of 4.9 million or $1.10 per share. Stock based compensation expense is responsible for $0.53 per share or 86% of the year-over-year increase in net loss per share.

Weighted average number of shares was 4,928,881, compared to 4,105,754. Unrestricted cash of 405,000, which is a decrease of 3.75 million, compared to 4.15 million.

So in summary, both revenue and expenses grew considerably in 2015. A large proportion of growth in expenses was due to stock based compensation, which was expensed in December 2015 when we accelerated vesting of certain stock options.

Absence of significant future grants, stock compensation expense should be markedly reduced in earnings reports during 2016. There are also start-up costs associated with fulfilling WellChec contracts in the beginning of the fourth quarter. Later in the fourth quarter, WellChec contract achieved respectable margins.

Now regarding the cash position at the end of the year, the company was hesitant to enter the public market to raise additional capital as recent equity financing of other companies have been achieved, only at the expense of discounted share prices and large warrant coverage.

Additional capital might fuel outstanding growth in the company's products and services but would come with significant investor dilution. So to solve this dilemma of any adequate cash resource and unattractive public financings, the company obtained debt financing of 1.5 million at reasonable interest rates in January of 2016.

In addition, during 2015 we implemented measures to reduce expenses and renegotiated longer payment terms to our existing contracts. In that connection, we granted a number of stock options.

Now that WellChec initial launch expenses are behind us, and in light of these expense reduction measures, we anticipate in seeing a return to more usual correlating operating expenses in the first quarter of 2016.

We believe that this combination of reasonably priced capital obtained in January 2016, expense reduction and continued revenue growth should bring profitability and cash flow positive operations as soon as possible.

Depending on the price and availability of additional capital, the company might do further public or private financing. However, the operating plan is currently to achieve profitability and positive cash flow with the current capital at hand.

We believe that the business prospects and opportunities for Semler improved significantly during the fourth quarter of 2015. As we fulfilled several orders for our WellChec service, which represents a huge potential engine of growth for us. WellChec represented approximately 49% of total revenue in the fourth quarter.

Now as a reminder about our business, Semler wants to improve healthcare in terms of cost and access to care. There is a physician shortage, so with our better technology we enable non-physicians to assist physicians to care for patients. We believe that patients with chronic disease need earlier diagnosis and preventive care to improve their healthcare and to control cost.

Our products and services provide objective, well-organized documentation and information to our clients. With this information in hand, care management programs might be designed for patients to lower their risks and keep them out of hospital. In addition, payments can be received by our clients to compensate them for the risks and costs.

Our entry point into this market is to create proprietary patented solutions that are intended to substantially improve information gathering. Our products are designed to be faster, more practical to use, more accurate, less expensive, require less expensive personnel or combination of these attributes.

Our primary sales focus is to expand our base of established clients, especially among health insurance plans. These contracts have long lead times, but we expect them to have a high return. We've concentrated our efforts on approaching health insurance companies rather than physicians, because we prefer the larger scale despite the longer sales cycle. We continue to expand our presence among the top 25 health insurance plan to control 80% of the Medicare advantage market.

QuantaFlo, our next-generation vascular system was launched in the third quarter 2015 with outstanding feedback on its performance. It has enhanced data tracking capabilities, better clinical performance, more comprehensive results and expanded marketing labeling. These features have attracted some of our original product users to migrate to this higher priced platform and is attracting new customers as well.

As a reminder, our typical business model is a recurring revenue license or fees per test. We are building on that ways of business and increasing revenue month-by-month.

In 2016, revenue from QuantaFlo is expected to continue to grow on a quarterly basis due to number of installations, average pricing and the business model recurring revenue in addition to the fact that the average pricing is substantially higher.

In 2015, we made significant improvements to create and conduct WellChec business. Now the value proposition of WellChec is attractive and we know how to deliver the service with substantial client and patient satisfaction. We plan to limit WellChec business until later in the year, which should further lessen current operating expenses and improve cash flow in the first half of the year.

When we do take on contracts of WellChec during 2016, we will see significant spikes in revenue and cost to revenue, but do anticipate seeing contributions to profit. We expect renewals from existing WellChec customers and contract some new customers in 2016.

Because Semler does not give formal financial guidance, the magnitude of these changes and the progress towards such an operating plan will be reported during the quarterly earnings releases.

One other further cautionary note until we have increased stockholders equity to $2.5 million or until the market capitalization of the company is greater than $35 million, Semler might be bumped to the OTC market over the counter market instead of NASDAQ. The general procedure is for NASDAQ to meet with management at a hearing and make its decision to delist or not, we have requested such a hearing and it is scheduled for March 31.

To list the goals that we accomplished during the fourth quarter; we increased customer acceptance for our next-generation vascular testing product called QuantaFlo. Number two, we added to a growing list of large insurance plan customers. Number three, we have completed additional contracts for WellChec testing services demonstrating excellent results for our clients in terms of clinical success, patient satisfaction and return on their investment.

And number four, we accelerated our quarter-over-quarter revenue growth rate. And five, we have arranged for debt financing in early 2016 at reasonable cost.

We believe Semler is well positioned in the healthcare market, because we deliver cost effective wellness solutions for the care of patients with chronic diseases. And we provide economics that work for the providers, the facilities, the insurance plans, the government and the patients.

So to conclude, we have a recurring revenue model which has produced period-to-period revenue growth and we have added an additional service business model that can accelerate our revenue growth even faster. We have dedicated ourselves to achieving profitability as soon as possible and we are very excited about those possibilities and your support.

So we thank you for the interest in the company, your continuing support. And operator, you may now open the lines if there are any questions. Thank you everyone.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Yi Chen with HC Wainwright. Your line is open.

Yi Chen

Hi, thank you for taking my questions. First of all, congratulations for achieving such a large increase in topline revenue. So I just wanted to have a general idea from you if possible whether future quarterly revenues could be at or above the revenue level seen in the first quarter of 2015, is that expected?

Doug Murphy-Chutorian

Thank you for your question. We anticipate that normally the growth in QuantaFlo, very nice more or less than we expect to see that type of change. Being said, we will be limiting due in the first quarter. However, in later quarters then you should see a swing back in, which from an annual basis should increase those substantially.

As you know we don't give exact guidance, but it's fair to be return to a base of - base was running about $6.5 million per year on the base business and growing quarter-over-quarter. And then we expect some additional business coming obviously from QuantaFlo, but also from WellChec in quarter subsequent to the first.

Operator

Thank you. Our next question comes from the line of Brian Marckx from Zacks Investment Research. Your line is open.

Brian Marckx

Good morning, Doug, and congratulations on the revenue number. In terms of the gross margin, if I just turn back of the envelop, the gross margin it looks like WellChec is well in the negative. Can you give me a little kind of help with if this gross margin say 33% blended going forward is something that you expect to continue when you bring the WellChec business back online later in 2016?

Doug Murphy-Chutorian

Well, the base business as you know, Brian, runs cost of revenue - over 80% and that seems to continue to improve. The WellChec business had a number of, we'll call it, launching, learning curve, issues in the first two large contracts that we started on in the fourth quarter and we modified the service did some things that improved it substantially, for example, and scheduling patience and efficiencies and working with our third-party vendors that we have in the service.

So I am happy to say, in the last two contracts we were with significant companies and customers. We were able to achieve very reasonable margins approaching 30% to 40%. We don't know because we customize each one of these contracts, well, that's a firm number that I can give you. It may vary a little worse, little better, but at least we felt it was a contribution to profit now and that we - essentially we have established and developed a business model, which was worse that investment in the earlier time period to get there.

And as you know, having happy customers and having substantial way to make a reasonable profit ourselves was really the goal. The revenue goals of potential WellChec is obviously substantial as you saw just an inkling of it in the fourth quarter.

Brian Marckx

Okay. Your comment relates to that WellChec, I guess, essentially take a pause for maybe the first half of 2016 and then come back online sometime in the second half, is that accurate?

Doug Murphy-Chutorian

That would be fair to say and I think we obviously may do some in the second quarter. Here is the thinking, last year when we had these contracts we rushed to get them done because the customers want them done and they need them done by the end of the year.

Of course that sets up for inefficiencies where we are having a couple days to start scheduling patients rather than inappropriate 8 weeks or that we’re rushing around to get vendors and trained in into places so that we can do the appropriate testing.

That being said, that’s the learning curve and that’s also our goal is to be adaptable and flexible to the needs of the customer and their needs being getting all these things done before the end of the year.

So now we have the opportunity to organize this in a more efficient process with appropriate lead times to do the organization. We will probably get the same number of patients by taking a little bit longer and doing it right the first time. But you know the goal was keep our customers happy and get reorders, we believe we will get reorders from the groups that we work with, they have many more patients than they gave the first go round, so we’re kind of excited by it but we want to do it in a measured way, providing a high quality service and achieving the kind of margins we want.

So that's some of the quote start up costs and that occurred then that we will seek not to have and hence instead of predicting we’re going to have those revenues in the first quarter, we will push them back into the second or third and we feel that there is a significant amount of revenue that can come from that source.

Brian Marckx

Okay. Clearly the operating expenses were significantly higher than Q3 and you talked about some of that increase, can you help us with understanding how much of that increase is somewhat non-recurring in terms of these were startup costs that hit Q4 that may not recur even when WellChec comes back on.

Doug Murphy-Chutorian

Yes, I think that the typical operating expenses that we had for the business prior to the fourth quarter running just roughly about 750,000 a quarter, so we’re kind of back to those levels and I think that WellChec comes on obviously there will be a component of it, presuming for the sake of argument if we do a $1.5 million business in a quarter for WellChec you might see expenses associated that of about $1 million.

Now they may not all appear in the cost of revenue line but that’s approximately that what we would see is the kind of working idea of how we would run that business model, okay.

And I'd say that with the sign that’s a working idea and we do customize it, so there may be variance and we can’t give you a good number, obviously we just don’t have enough experience to predict with precision exactly what that would be.

Brian Marckx

Doug you said 750,000 a quarter, did you mean a month with Q3?

Doug Murphy-Chutorian

I'm sorry, I said a quarter but I meant a month, exactly.

Brian Marckx

Okay. And so we should expect to see kind of that without the WellChec business and then if I got it right about 10% operating expense increase related to, well 10% on revenue of WellChec?

Doug Murphy-Chutorian

Yes, we will have to maybe discuss that in more detail offline to make sure your numbers are right, I apologize I don’t want to be - you’re throwing numbers at me and I’m throwing at you, I want to make sure -

Brian Marckx

Yes, okay.

Doug Murphy-Chutorian

What we did do, and a big reason for saying expense in the fourth quarter, as I mentioned we are stock compensation and stock based compensation was a matter of our vesting additional shares earlier and accelerating the vesting. And because of that we took all that expense in 2015 and then eliminated most of it for 2016, so that the street can now have a clear glimpse of what we’re doing without all this non-cash stock base compensation expense confusing the issue.

Brian Marckx

Yes Okay.

Doug Murphy-Chutorian

Happy to get that off and out the way which is the reason we wanted to but this is a year for driving the profitability and we don’t want you to be seeing stock compensation numbers that gets everybody confused.

So we are happy that there will be some stock based compensation but we don’t expect to add anything to that relatively small based back to what I say is usual levels of 2015.

Brian Marckx

Okay. What was the stock based comp in Q4?

Doug Murphy-Chutorian

In the fourth quarter - I don’t have that number in front of me, it was certainly north of $2 million.

Brian Marckx

Okay, it was 2 million plus. Okay, good. That helps. All right. Let’s see, what else did I have - I think that was it. I appreciate, thanks Doug.

Doug Murphy-Chutorian

Thanks very much for your questions.

Operator

Thank you. Our next question is a follow up from Yi Chen from HC Wainwright. Your line is open.

Yi Chen

Hi Doug, can you clarify for us how much debt does the company currently have?

Doug Murphy-Chutorian

Yes, we have 1.5 million in promissory notes that were issued in January to one of the largest shareholders in the company.

Q – Yi Chen

Okay. All right, thank you.

Operator

Thank you. Our next question comes from the line of [Wells Parker][ph], a Private Investor. Your line is open.

Q – Unidentified Analyst

Good morning. Thank you for taking my question. In previous quarters the WellChec capitation increase per patient was running in the $3000 range versus the ballpark, maybe, $600 or $800 charge for WellChec, how did that customer ROI hold up in Q4 with much larger patient numbers?

Doug Murphy-Chutorian

I think that the numbers were probably higher, possibly because a large number of the patients were diabetic and they have even more diseases. So very good uplift for the customer. And our charges to the patient because some of them were higher than we had originally seen, when we reported that in the 2015.

While it is really not going to - ongoing basis either for competitive reasons or other to be specific about what our pricing is on the WellChec service and exactly what we were getting. So on that side, you can get an assumption that it’s higher than a number that we had. But we are not going to be too specific about what that was.

And as you pointed out there is a very nice economic incentive, as well as a good health, a good medical practice incentives of that service. So we think those are the two driving forces behind it.

Q – Unidentified Analyst

Good, thank you.

Operator

Thank you. That's all of the questions that we have in the queue at this time for today. So I’d like to turn the call back over to management for closing remarks.

Doug Murphy-Chutorian

Thank you, Operator. And thank you everybody for joining us today in the call. I look forward to updating you on our continued progress and our drive this year to - we hope the most exciting year yet for the company.

We will hope to see you then next call being at the end of April for the first quarter. Thanks so much and have a good day.

Operator

Ladies and gentlemen, thank you again for you participation in today's conference. This now concludes the program and you may now disconnect your telephone lines at this time. Everyone have a great day.

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