Oct 31, 2014
Executives
Doug Murphy-Chutorian - Chief Executive Officer
Analysts
Operator
Good day ladies and gentlemen and welcome to the Semler Scientific Q3 2014 Financial Results 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. And 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 may, will, expect, anticipate, estimate or words with similar meanings. 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 the 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 event. Please refer to our SEC filings for a more detailed description of the risk factors that may affect Semler Scientific’s results.
Now may I introduce Doug Murphy-Chutorian CEO of Semler Scientific.
Doug Murphy-Chutorian
Thank you operator. Thank you all for joining Semler’s third earnings call as a public company.
The third quarter of 2014 has brought accelerating growth and maturation of key client relationships for Semler. During this time, we’ve continued to attract seasoned talent to our team; we’ve grown revenue; and had made progress in product development.
Highlights of the third quarter financial results are described in our press release this morning and are as follows. For the third quarter ended September 30, 2014 compared to the corresponding period of 2013, revenue was $897,000, an increase of 52% compared to $589,000.
We believe that revenue growth is predominantly due to our sales and marketing efforts which added new customers to an established customer base. As you know, we have a recurring revenue model and we’re seeing month to month growth now, and that growth is accelerating.
So directionally, we’re seeing a significant upswing. Cost of revenue was $178,000 that’s an increase of 34% from a $133,000 last year.
Now, $77,000 of the additional cost in the cost of revenue was associated with employees who oversee manufacturing operations. These persons were not employed in the previous period, so in addition to 53% more monthly depreciations during the quarter because of the increased base of revenue generating units in the field that’s partially offset by a lower average depreciation rate.
But putting those facts together, our comments to producing a unique product has obviously substantially improved. So higher revenues, lower cost.
Total operating expense and this includes cost of revenue was $2.264 million, an increase of 108% compared to $1.86 million. Engineering and product development expense was $262,000 compared to $60,000 due to development efforts of new product offerings.
When compared to the second quarter of 2014, the engineering and product development expenses actually decreased by a $154,000 or 37%. Now we expect this number to decrease further in the fourth quarter as we get to a more normal level of R&D spending as our efforts has borne fruit.
Sales and marketing expense was $1.40 million compared to $569,000 that’s primarily due to a higher salary expense associated with the larger sales and marketing team that we have now posted profit. G&A expense was $784,000 compared to $324,000 and that’s primarily due to higher stock compensation expense and higher salaries in this quarter heading our Board members and stock compensation that we previously discussed or announced, as well as increased expenses associated with being a publicly traded company.
So, some of those expenses would not appear to be recurring in the fourth quarter. Net loss was $1.466 million or $0.31 per share compared to a net loss of $523,000 or $0.66 per share.
Weighted average number of shares using computing basic and diluted loss per share was $4,708,162 for the third quarter of 2014 and $786,750 for the corresponding quarter of 2013. Net cash was $5.973 million on September 30, 2014 compared to net cash of $6.554 million as of June 30, 2014.
So that reflects a use of cash or decreasing cash in the third quarter of $581,000. Directionally, you probably know from the last call, we’ve had substantial improvement in cash usage from the second quarter, which was a cash usage of $1.058 million.
So, we’ve not quite decrease that didn’t have which obviously is a direct you want to see us go. For the nine months comparisons please refer to our press release or when filed our Form 10-Q with a bit more data about this.
As we’ve discussed, the company’s primary focused on 2014 has been to expand our base of established clients who are insurance plans with Medicare advantage basis, insurance plan is very unusual for to grow after that particular market and that’s something very important for every investor to realize and think about as I will explain. Three of these contracts have long lead times, but they are high return.
We have concentrated our efforts on these contracts rather than single office for physician contract, which are smaller, but have a quicker sales cycle and was what we did in our early days upon beginning to sell the product, the FloChec product. This strategy that we now have results in a steady year-over-year revenue growth curve to-date.
And should these insurance companies start placing larger orders more of the fitting their size, we expect a much more exciting long-term growth rate perhaps we’re beginning to see that now. We believe insurance payers are the lynchpin to the current U.S.
healthcare market. To understand the importance of progress amongst largest payors, you need to be aware of the pattern of concentration of Medicare Advantage lives.
The top 15 payors account for more than 70% of the entire 16 million patient Medicare Advantage market, 15 payors. So, establishing a footprint in that market means gaining contract with these large insurance providers.
Now in this regard, I am happy to report that two such payors in the top 15 converted from a pilot trial status with us and ordered FloChec systems during the quarter. In addition, one of the top 15 that has been a customer for us for over one year has recently increased their order size with us and renewed their other order.
So very exciting, after they’ve had a year’s experience with FloChec to make a decision to go for it and increase it, a great referral account for us with the others amongst the top 15. Finally during the past quarter, we have moved the sales process along with several others among the top 15.
And that process is as follows: Number one, initial meetings; these lead to number two, pilot trials. Those when converted, as we’ve converted from this quarter to initial orders and then the exciting part is extending order size once they see the benefit, both for good medicine and the economics of working to get targeted conditions and risk assessments with the FloChec system.
I’ve heard from one analyst last quarter that some investors asking the question, will the government decide to move away from Medicare Advantage? Well, actually Medicare Advantage enrollment has continued to grow rapidly for many years since it was introduced in 2007.
And to understand why, I think it may be helpful for investors to realize that Medicare Advantage is a bit of a misnomer; it’s not advantage, it’s not a premium program. Relative to Medicare, Medicare Advantage is a less costly program for the government.
That’s one of the reason the program is being promoted. It’s not premium like the name sounds; it really is low cost for those over 65 years.
Patients like it because they have lower out of pocket payments with the trade off because they’re restricted to which physicians they can see. So accordingly, Medicare Advantage and capitated programs continue to expand rapidly.
So, we’re not particularly worried nor are we particularly worried if the price for risk adjustments decreases because our prices are so low and the profits so great for using the test that in actually we think we have an increased market share if indeed they decrease their number. We can go more into that and I’ve done that previous times.
But just to focus on Semler, we’ve been really concentrating on vascular disease, specifically narrowing of arteries in the legs from atherosclerotic plaque that’s known as PAD, Peripheral Artery Disease. PAD: It’s an important disease in the Medicare Advantage market.
More than 18 million Americas older than 50 at a risk for disease; 18 million are estimated to have the disease of the legs but most are undiagnosed. This disease in legs increases the likelihood of affected arteries of the heart and the neck, so heart attack and strokes.
And patients with this disease in the legs have a 21% event rate of cardiovascular death, heart attack, stroke or hospitalization for atherothrombotic within one year, 21% within one year. So our goal is to help physicians evaluate these patients now in order to save medical cost later.
Heart attacks and strokes, very expensive things; can they be prevented? Early diagnosis may lead to more prevention and lower healthcare cost.
The gatekeepers who see these patients are more than 250,000 primary care physicians, internists, family practitioners et cetera, primary care physicians in the United States. The reason that more than 75% of patients with PAD are undiagnosed is that the way to do that is an old standard, blood pressure cuffs and Doppler systems and they are just not practical in the primary care office.
Our FloChec product has many advantages to the current traditional test for vascular disease. FloChec is as or more accurate, takes only four minutes to perform a test and it could be performed by a medical aid instead of a vascular technology.
Since then the doctor doesn’t have to do it. And then there is key thing, it’s taking non-physician personnel and have been doing something that’s specialists were able to do -- only able to do before, hence making the whole system of healthcare delivery more practical, more economic and more reasonable.
So, the big value driver though for the physician is payment from insurance companies, insurance plans. So of the 18 million patients over 50 years of age approximately 16 million are these Medicare Advantage patients that I spoke of.
Others are now signing up for healthcare exchanges; and both of these programs, insurance plans and many physicians do risk sharing for a fixed yearly rate of payment for taking care of the patient. So, they can substantially -- I think we see substantially higher annual payments, when they identify patients with vascular disease who were previously undiagnosed.
FloChec helps evaluate this patient and generate substantial revenue for both, the primary care physician and the insurance plan, an alignment of interest that’s driving sales for us. Now, the Semler sales force is organized to have a small number of extremely talented sales directors target these larger parities insurance accounts.
Other members of the sales force are clinical specialists, they ensure quality uptake of the FloChec test, which leads to further business with established clients. We have an advisory group of 10 professionals or many most of them are working on plans, they reach their contact with health plans, describe FloChec in the FloChec marketing program called the advantage program and they qualified introduction to the sales team who then follow-up to the process of those four steps that I mentioned earlier.
Semler does not sell FloChec, rather we relicense the product to customers on an annual or monthly basis. Revenue from licenses is recognized on a monthly basis.
Cost of revenue is amortized over 36 months and consist predominantly of the cost of acquiring our assets release, as a hardware part of the product, but it create values in the software. Semler uses contract manufacturing to produce its products so we have ample production capacity without the need to make capital expenditures, which is why our care physicians were very confident in.
Similarly, we used contract R&D so that we can have larger teams complete product development sooner as we did over the last two quarters and then lower our expenditures quickly as there is no fixed overhead or headcount, which is why we’re confident to say that we’ll get those down to a more normal level after this verse of activity that we had over the last two quarters, which improves cash flow. As an example, you should expect to see further reductions in that in the fourth quarter compared to the third quarter.
Now as we’ve established FloChec in the marketplace, our goal is to make it standard of care. We intend to offer other products that have similar features; quick, easy, cost effective to the primary care provider and work for the insurance plan as well.
And our goal for our products it to be significant revenue generators. Once again, for the insurance plan and for the primary care physician.
Now the list of goals we've accomplished in the first nine months of the year. We've reorganized our Board bringing on independent thought leaders, healthcare business professionals.
As you know in the past quarter, we announced Aidan Collins, a key healthcare professional who has joined the Board. We improved number two marketing and sales infrastructure including the addition of an Executive Vice President of Global Sales.
Now we've upgraded number three our current product offering with encryption features, cloud storage capability, enhanced electronic record compatibility and others which are coming. And most importantly, we've added other major insurance plans to our growing list of customers.
We believe we're positioned to benefit in this new area of healthcare reform because we deliver cost effective wellness solutions for the care of patients with chronic disease. We provide economics that work for the providers, the facilities, the insurance plans for government and the patient.
And we assist providers to identify patients with chronic disease. This allows them to initiate preventative measures and receive higher reimbursements for each patient.
And we have future to Semler products, which intend to expand upon this strategy. For 2015, we're very excited.
We're looking forward to do it reporting on these new product offerings driving towards cash flow positive. We think that's going to happen because of accelerating revenue growth.
We have well controlled expenses and if you've seen us talked about improvement in already gross margins even at these relatively lower values. So to conclude, we have a recurring revenue model.
We're seeing month-to-month revenue growth that growth accelerating. And directionally, we're seeing a significant upswing.
Operator, we may now open the lines for questions. Thank you everyone.
Operator
Thank you. (Operator Instructions) And I’m showing we have no questions at this time.
I would like to turn the phone back over to Doug Murphy.
Doug Murphy-Chutorian
Thank you, operator. Well everyone, the plan for us is to make a trip to New York City for me in the second week of November for a non-dealer road show.
If you have interest in meeting or talking more; Susan Noonan, who runs Investor Relations is conducting putting that schedule together. And we’d love to be able to talk to you at that time.
And also feel free to contact me if you’d like to speak privately and have questions you like to speak about. Once again, we thank you for listening to the call today.
And look forward to looking for you in the future. Thanks everybody.
You can end the call, operator.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program.
And you may all disconnect.