Semler Scientific Inc (OTC:SMLR) Q1 2016 Earnings Conference Call April 29, 2016 11:00 AM ET
Doug Murphy-Chutorian - CEO
Brian Marckx - Zacks Investment
Yi Chen - H.C. Wainwright
Before we begin Semler Scientific 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 may I introduce Doug Murphy-Chutorian, CEO of Semler Scientific.
Thank you, operator. Good morning, and thank you all for joining Semler's first quarter 2016 earnings call. Semler’s goal is to reach profitability and to grow revenue. The first step in that process was to reduce operating expense that we achieved this quarter. Specifically, in the first quarter of 2016 compared to the fourth quarter of 2015, operating expenses were reduced $4.7 million from $7.1 million to $2.4 million. This includes cost of revenue.
The second step for the company to achieve its profitability goal is to enhance revenue growth of its high margin vascular testing products. In the first quarter of 2016 compared to the fourth quarter of 2015, recurring revenue from our vascular test products grew from $1.49 million to $1.66 million. It is expected that we will close the gap between revenue and expenses based on new orders and upgrades to QuantaFlo which is our latest vascular testing product.
As we discussed on our last earnings call, we did not plan for any significant WellChec revenue in the first or second quarters of 2016, but are seeking WellChec revenue in the third and fourth quarters of 2016 basically from our newer orders from last year's major customers. In the fourth quarter of 2015 revenue for WellChec had totaled approximately $1.44 million.
So during 2016 to-date, the major accomplishments are as follows. Number one, we raised $2.36 million of debt financing under reasonable terms which we believe provides Semler with sufficient capital until we become profitable. Number two, we reduced quarterly operating expenses with $7.1 million - the fourth quarter of last year to $2.4 million in the first quarter of this year and we grew QuantaFlo and vascular testing revenue by 12% on a sequential quarterly basis and 50% compared to the corresponding period of 2015.
Because QuantaFlo sells at a higher price than its predecessor product the gap between expansions and revenue is closed by transitioning current customers to QuantaFlo while adding new customers and orders. So we are in the process of migrating established customers to the QuantaFlo platform at higher prices and in addition our book of orders for new customers makes us believe that we are closing the profitability gap rapidly. We also anticipate bookings for the WellChec testing service in the second half of 2016. Logistical planning to satisfy these anticipated renewal orders is underway. WellChec service is intended to contribute to revenue growth and to profitability.
Questions, do we need to raise more capital to operate the business. We obtained debt financing of $2.36 million in 2016 to-date. Based on current operations and assuming we can maintain our operating expenses at the current level, we do not anticipate needing to raise additional funds prior to becoming cash flow positive from operations. If possible, we prefer not to raise additional capital from sale of equity unless we wanted to either make new investments or to satisfy Nasdaq’s continued listing requirements or should unexpected needs arise.
Second question, do we need Nasdaq criteria to stay listed, do we meet them, excuse me or will they go to the OTC market. On March 31 we attended a Nasdaq hearing. Following that hearing we received notice that we are now – we now have until August 8, 2016 to demonstrate compliance with the continued listing standards. Also we're required to update Nasdaq by May 16 regarding the status of our plans to regain full compliance. If Nasdaq is not satisfied with our progress it could result in being delisted prior to August 8. The key criteria of compliance is to have a shareholders’ equity of $2.5 million which is about $4 million more than the current value. If delisted, we will likely trade on the OTCQB markets until we are able to relist with Nasdaq.
Now please refer to the financial results that are described in our earnings press release which was distributed this morning. Some highlights and additional details for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 are as follows. Revenue was $1.5 million, an increase of 299,000. This growth is due to the increased revenue - recurring revenue from our licensing model for vascular testing products which increased about 50% to $1.66 million and is partially offset by a reversal of 162,000 in WellChec revenue from the fourth quarter of 2015.
Cost of revenue which is included in our operating expenses was $417,000 an increase of 176,000 which was primarily due to the late arrival of bills for WellChec expenses from 2015 and to an increase in depreciation due to more QuantaFlo units in the field with customers.
Operating expenses, other than cost of revenue were $2 million, a decrease of $300,000. Engineering and product development expense decreased by 13%. Sales and marketing expense decreased by 19%. General and administrative expense decreased by 3%. The net loss was $1.06 or $0.20 per share, a decrease of $366,000 compared to a net loss of $1.37 million or $0.29 per share in the corresponding period of 2015. Weighted average number of shares was 5,123,568 compared to 4,763,573. And as of March 31st, 2016 compared to the balance sheet of December 31st, 2015, Semler had cash of 1,441,000, which is an increase of 1,036,000 compared to 405,000 at the end of 2015.
In summary, QuantaFlo revenue was growing and expenses are better controlled as we progress towards profitability. As a reminder about our business, Semler wants to improve healthcare in terms of cost and access. There is a primary care physician shortage, so with our 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 costs. 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 these risks and cost. Our entry point into this market is to create proprietary patented solutions that are intended to substantially improve information gathered. Our products are designed to be faster, more practical to use, more accurate, less expensive, require less expensive personnel or a combination of these attributes.
Our primary sales focus is to expand our base of established clients, especially amongst health insurance players. These contracts have long lead time items but we expect them to have a high return. We have 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 plans that control 80% of the Medicare Advantage market.
QuantaFlo, our next generation vascular system was launched in the third quarter of 2015 with outstanding feedback on its performance. It has an enhanced data tracking capability, better clinical performance, more comprehensive results and expanded marketing label. And these features have attracted some of our original product users to migrate to this higher priced platform. As a reminder, our typical business model is a recurring revenue license or fees per test. We're building on that base 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 increasing numbers of installations, higher average pricing and our business model of recurring revenue. In 2015, we made significant investments to create and conduct WellChec business. We believe the value proposition of WellChec is attractive and we know how to deliver the service with substantial client and patient satisfaction. We planned to limit WellChec business until later in the year at which time we expect to see increased revenue and contributions to profit, although at a lower margin than our QuantaFlo business. This should start up in the third quarter of this year.
Now, because Semler does not give financial guidance, the magnitude of these changes and progress towards such an operating plan will be reported during the quarterly earnings releases. The list of goals we accomplished during the first quarter, we increased, number one, increased customer acceptance of our next generations vascular testing product called QuantaFlo. Number two, we added to our growing list of large insurance plan customers and number three, we completed a debt financing in early 2016. 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 provide economics that work for the providers, the facilities, the insurance plans, the government and the patient.
So to conclude, we are on track to achieve profitability and substantial revenue growth. And I thank you for your interest in the company and your continuing support. And now operator, please open the lines for questions.
[Operator Instructions] And our first question comes from the line of Brian Marckx with Zacks Investment. Your line is now open.
Hey. Good morning, Doug and congratulations on the quarter. Can you review for me again the $162,000 offset in Q1 related to WellChec that came over from Q4, 2015 and kind of more exactly what does that relate to?
Sure. The 162,000 is really broken up in two parts. One is an incorrect invoice that both customers and auditors and us had in place and then realized that there was a double invoicing of some money. That was also, because of that, there was an associated decrease in expense. So that almost netted out.
The second piece was some work that we have performed with valid invoice on analyzing a number of patients but because the customer was late in delivering stuff, we were not able to complete all those tests on those patients. So since that is a very large insurance plan and we believe intend to renew, kind of as a good faith measure, we took that off the bill which obviously improves their ROI and also sets us up for a substantially larger order. These are plans that as you know, some of the plans that we have customers who have millions of patients and getting a 100,000 patient or something like that order to do WellChec testing on, we thought it’s kind of where sweetening the path.
Of course, it dampens the – or makes it a little less transparent of the nice revenue growth we had from QuantaFlo, but have taken those, but we thought that was the right thing to do. And correspondingly, the WellChec program I might mention had some expenses that were carryovers that were kind of late bills, because as you know we work with third-party vendors for a lot of our stuff, so there was probably a negative 200,000 in expenses in the quarter as well that are non-recurring and came over. So we do have some impact like I would say cloud [ph] at the quarter from seeing how extraordinary it was in terms of the expense reduction we were able to achieve and we’re very happy with the QuantaFlo growth, but we have set up some very exciting increased QuantaFlo growth in the upcoming quarters we believe.
Okay, great. So you said 200,000 in expenses and those did hit Q1, so Q1 expenses would have been $200,000 lower than they actually were if it weren’t for the situation, did I get that right?
Yes, approximately, I don’t think we have – that’s approximately the number.
Remarkably, we do see expense levels down to below the first quarter of 2015, while we continue to have strong revenue growth in the QuantaFlo, which could actually be accelerating, because as you know, QuantaFlo pricing compared to the predecessor product is 50% to 60% more in some cases. So if we just have our existing groups migrate over to that platform, we get a nice increase in revenue. As we are adding new clients in, but they are added in at a substantially higher price. So we think that that product has produced great value for our customers, performs very well, but as you can see, the gap that we had, that we reported not even including that $200,000, it’s about $700,000 per quarter and – or in a monthly basis about $230,000.
If we perform probably about 70% as well in terms of unit growth in our QuantaFlo as we did last year, we should become profitable as long as we keep those expenses flat. So we’re kind of excited that our goals are in reach should we have given guidance of the specific time that we can do it, but we are very excited just on the base business, the QuantaFlo business. Then you add into the mix, this extraordinary potential revenue growth, which was $1.5 million in the fourth quarter from WellChec and we believe now we can do WellChec – we understand how to do it profitably as we disclosed before in the last contracts of the year, we believe those were profitable. So we think we have the mixture of both obtaining profitability with our base business and enhancing profitability in revenue growth with our service business.
Okay. So in terms of operating expenses, can you give us a little help with what you think? It sounds like just based on your prepared comments and just what you talked about there that operating expenses could be somewhat flattish going forward from Q1, is that roughly a fair estimate?
Yes, we think that those will be right around the $2.4 million range and cost of revenue, of course is included in that. So as revenues increase that cost of revenue could migrate up a little bit. As you know, we have excellent margins with that, so that’s not a big number when it increases. And then when we launch into WellChec, there will be some corresponding increase in operating expense due to that with a very large increase in revenue. Margins on that will be a lower margin. So it’s just a matter of – in terms of modeling it out, you take our base business, keeping expenses very flat and then as you model in WellChec, you have to model that at a lower margin and increase operating expenses, basically cost of revenue associated with that. If you breakout operating expenses into if you will, those not including cost of revenue, we anticipate those to be very flat for the rest of the year.
Okay, great. And in terms of WellChec, when it comes back online – so say, it comes back online in Q3, what does that look like? So are these existing contracts that essentially take a pause for say, Q1 and Q2 and then they restart essentially in Q3 or are these new contracts that are coming on that are just starting in Q3?
Yes, the answer is, we limited ourselves because of the size of the customers that we worked with in the fourth quarter for just doing renewals. We didn’t even go after anyone else yet, because there are so much opportunity. We wanted to just make sure that we could do logistics in a quality way. The contracts that we have in place from last year are really the basis of what we would expect to do this year. But the expectation is that we will be given “a chase list” of the number of patients or members of the insurance plan that they would like us to test. So once again, this is just trying numbers, so if you can get a sense of that, but not intended to lead us into it. But assume that a group gave us 100,000 lives, then the question is in six months, can we get to a 100,000 lives.
Well, last year we know that towards the end of the year, our ability to schedule to do those was about 30%. I don’t know if we can prove on or not, but that would mean 30,000 lives. And you saw that last year, we did approximately 1,500 patients, did about $1.5 million in revenue and of course some of those patients were done with more – not the full service. If we do full service, you can get a sense of the very, very high from that numbers that I just gave you revenue potential of WellChec. Now, I just used that number to be -- as an example, we did about 1,500 patients in the fourth quarter of 2015. So all we know now is that’s probably a level we can operate at and we’re going to operate more and huge potential here, an opportunity but we have decided by pausing for two quarters. To take the time to have these groups analyze all their data to see that they're getting the following value.
Number one, the WellChec service has been -- there are members like in fact in the last groups that we did we do a survey at the end, 100% of them said they would come back next year for testing. So that’s very good because insurance plans need members to stay in their program, so member satisfaction is important. Number two, there is quality system in place called the star system and the test that we do and the information we provide enhances the quality scores of the insurance plant, we did very well at enhancing their quality scores. And number three is that there is also a need for them to understand the chronic diseases of their patients both because they get extra reimbursement for it but also so that they can direct the primary care physicians to do things that would enhance the outcomes for their patients. And we scored very high on that. So the return on our services are probably 3 or 4 to 1 at insurance plans received and the amount that they pay to us.
So we think we provided excellent economic value, great medical value and we would anticipate strong renewals. We didn't want to take on more and we just have taken the time to set this up, so we can handle the increased volumes and we can do it in the way we did it before in a high-quality way. And of course we wanted to make sure that we maintain these at the profitability side which we had figured out by December of last year and that’s a very important part of why we need this lead time to get it done right. And in subsequent years, I'm not sure we’ll have this much seasonality we might but that was our intent is to, a, just do it right because it’s too big an opportunity to make a mistake on.
And then when do you think about potentially soliciting new contracts?
We’ve already been approached by some of our current customers asking us, so what about that and we get involved and I got to tell you the truth is that there is an opportunity may be some of them we will accept this year but our real intend was just to push that back to 2017. We actually used the current accounts almost as reference accounts as to how good this was and that's kind of helpful as you can imagine as we market in the future. But I don't think we need more customers, we just need to make sure the challenge for the company is that we handle logistics that we have and the contracts intend to be negotiated so that the cash flow doesn’t - that we don't have any cash flow needs from me because the way the payment are structured. Okay so that’s why we think that the money we raise should be sufficient for us to drive this to cash flow and profitability and of course you have to anticipate that should be the case but it may not necessarily be the case, so we will be flexible particularly trying to do this. But we are not trying to maximize orders this year, we’re just trying to optimize the business for a long term opportunity.
Thank you. And our next question comes from the line of Yi Chen with H.C. Wainwright. Your line is now open.
First question is, is the migration from - for existing customers from FloChec to QuantaFlo voluntary or mandatory?
It is voluntary and it obviously comes with a substantial increase in the price to most of those customers. And so we’re finding that there is excellent interest to be doing that. So we will try to keep up with the flow of that activity during the year and report back to you.
Do you have an estimate as to the timeframe that you expect the migration to complete?
The migrations have been starting as people make individual orders, some of the larger groups and larger orders were staging to get those done now and so that’s exciting. So I think we'll be reporting almost on a monthly basis significant migrations is what appears to us. I don't think everybody will come on over because the other product works pretty well. And maybe a better price point for some of the smaller clients but we think that ultimately probably everyone, not everyone but most everyone will come over but we are saying that you know certainly I would anticipate that 50% or so should come on over without question and may be more this year.
Thank you. And I'm not showing any further questions at this time. I would now like to hand the call back to Doug Murphy-Chutorian for closing remarks.
Thank you operator and thank you everybody for joining us today. We look forward to updating you soon on our continued progress. We are expecting a very excited year and happy to have expenses where we want them and revenue growing and bookings and all that good stuff happening but once again thank you for your continued support and following the story this is – we hopefully a break out year for us. Have a good day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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