Oct 31, 2015
Executives
Doug Murphy-Chutorian - CEO
Analysts
Brian Marckx - Zacks Investments Research Yi Chen - HCW Jan Wald - Benchmark Company Marc Robins - Catalyst Research
Operator
Good day, ladies and gentlemen and welcome to the Semler Scientific Third Quarter 2016 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 be given at that time. [Operator Instructions] As a reminder this call is being is 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 its results. Now I would like to introduce Doug Murphy-Chutorian, CEO of Semler Scientific.
Please go ahead.
Doug Murphy-Chutorian
Thank you, operator, and thank you all for joining our quarterly earnings call. In the third quarter 2015 Semler had accelerating double-digit sequential growth, year-over-year revenue growth was 74%, sequential quarterly revenue growth was 20% which is grown at a rate that is 2.5 times faster than what we reported to you in our last earnings call in July.
We continue to achieve our sales goals which are to number one, initiate business relationships with a large health insurance plans; number two, to expand the size of orders from our established client base and number three, to launch additional products and service offerings to sell to our established customer base. Please refer to the financial results which are described in our earnings press release distributed this morning.
Some highlights and additional details are as follows; for the three months ended September 30, 2015 compared to the three months ended June 30, 2015 revenue was 1.562 million, a sequential increase of 259,000 or 20%. The significant ramp in revenue is due to both service revenue from our second contract to WellChec and recurring revenue from our licensing model for QuantaFlo.
Please note that QuantaFlo is the new name of our next generation vascular testing system and WellChec is our service for doing wellness testing and diagnostics. Of importance during the third quarter, our sales team obtained several new contracts for our WellChec service.
We anticipate WellChec-ing for these new customers in the fourth quarter of 2015 and continuing into 2016. In general, we do not plan to report details of individual contracts or numbers of patients tested from our wellness testing services.
Potential customers for WellChec range from small health insurance plans to major health insurance plans to other organizations. And our recent contract wins include customers from both types along this spectrum.
Back to the financial numbers, cost of revenue was 385,000, a sequential increase of 141,000 or 58%. For the period cost of revenue as a percentage of revenue was 24.6%.
We expect a cost of revenue as a percentage of revenue should increase [indiscernible] for larger proportion of our revenue comings from our WellChec service. Operating expenses other than cost of revenue were 2.729 million a sequential increase of 357,000 or 58%.
The primary reason for the change is an increase in stock compensation expense of 454,000 which is partially offset by a decrease in the remaining operating expenses of 98,000 or 4% from last quarter. Engineering and product development expense decreased by 34%, general and administrative expense increased by 73% due predominantly higher stock compensation expense from legal expenses, uncollectable accounts and audit tax expense.
Sales and marketing expense increased 1% due to higher stock compensation expense and travel expense which is partially offset by lower commissions, trade show expenses and building lease. The net loss was 1.580 million or $0.32 per share, a sequential increase of 239,000 compared to a net loss of 1.341 million or 27% shares in the previous quarter.
Stock compensation expense represented $0.10 per share of the net loss of this $0.32 in the third quarter compared to only $0.01 in the previous quarter. Weighted average number of shares was 4,983,198, unrestricted cash was 1.945 million which is a sequential decrease of 415,000 compared to 2.340 million as unrestricted cash, restricted cash was $0 compared to restricted cash of 2.1 million due to the retirement of our bank line of credit.
So in summary, net of the stock compensation expense, the cost of revenue increase, the other operating expenses decreased, revenue grew, net loss [in group] and the use of cash from operating activities was lower. We believe that the business prospects and opportunity for Semler improved significantly during the third quarter of 2015 as we received several larger orders for our WellChec service which we began to fulfil in the fourth quarter that we’re currently in, in 2015.
As a reminder about our business, Semler is gathering and organizing information about the wellness of patients. The parties interested in this information are insurance plans and physicians who care for the patient.
Indeed this patient is probation to guide, management and care. Now patients with chronic disease cost more to care for and prevention might be the best way to control cost.
Often primary care physicians are logistically challenged and too busy to gather the data in an efficient manner. We provide objective well organized documentation and information to our clients.
And with this information in hand, care management programs might be designed for patients to lower their risk to keep them at a hospital. In addition, payments can be received by our clients to compensate them for these risks and costs.
So Semler’s entry into this market is to create proprietary patented solutions that are intended to substantially improve information gathering because Semler’s products are designed to be faster, more proactive to use, more accurate, less expensive or require less expensive personnel and are a combination of these various attributes. So using proprietary solutions as the way into the wellness information market, Semler has now added product and service offerings to maneuver solution for its growing base of established customers.
Now our primary sales focus is to expand our base of established clients, especially among large health insurance clients. To reiterate, these contracts have long lead times 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. So what we have learned from our larger customers is that there is a need for a turnkey solution, where we provide testing services and vertical integration of their information slot.
So to address this market need we launched WellChec earlier this year. WellChec is a service where we provide scheduling, equipment and sub-contracted personnel to perform the diagnostic test.
Our goal is to help physicians evaluate patients now in order to save medical costs later, ad early diagnosis may lead to more prevention and lower health cost as I mentioned. In addition, there are the significant economic benefits derived by our clients from using the WellChec service.
WellChec is designed to be like an executive type annual physical that could be available to all of the members of an insurance plan. It’s an added benefit to build customer loyalty.
And this Uber or ultra-exam provides our proprietary vascular test QuantaFlo as well as some basic tests and examinations that look for chronic diseases and other [organs]. We plan on expanding the WellChec offering in terms of the number of tests offered as well as the number of customers who are contracting for our service.
In the third quarter, we obtained orders from customers to WellChec more of their patients and our success in fulfilling these contracts will be a major determinant of the magnitude of the revenue growth that we expect in the fourth quarter of 2015. We are not yet providing guidance regarding this major potential growth engine for our company until we have a better understanding of the success of the service rollout and our ability to deliver on the contracts we have signed.
At the same time we still offer licensees on our vascular testing equipment for those who want to provide their own operators and do the test themselves. QuantaFlo, our next generation vascular system.
It was launched in the third quarter with outstanding feedback on its performance. It has enhanced data tracking capabilities and expanded marketing label.
These features may attract some of our original FloChec users to migrate to this higher priced platform. At this point all new shipments under licensing contracts are QuantaFlo systems.
As estimated that there are 80 million people in the United States over the age of 50 years who might be tested annually for peripheral artery disease. Our goal is to ensure that all patients receive the test that they need by giving interested practitioners and their vendors access to our products and services.
The market is very, very large and we plan to participate as a service provider but also as an equipment provider just as long as the optimal healthcare for all is achieved at affordable prices. To list our goals that we have accomplished in the third quarter, number one, we launched our next generation vascular testing product called QuantaFlo; number two, we added to our growing list of large insurance planned customers; number three, we signed additional contracts for the WellChec testing services; four, we accelerated our quarter-over-quarter revenue growth rate; five, we’ve expanded the WellChec menu of tests and exams; and six, we decreased our near term cash burn excluding the payoff of our debt.
We believe Semler is well positioned to benefit from this new era of healthcare reform which we are delivering cost effective wellness solutions for the care of patients with chronic diseases and providing economics that work for the provider and facilities, the insurance plan, the government and the patient. Future Semler products intent to expand upon this strategy.
So to conclude, we have a recurring revenue model which has produced period-to-period revenue growth and we’ve added a service business model which has the potential to accelerate our revenue growth rate even faster. Well thank you for the interest in the company and now operator if you could please open the lines for questions.
Operator
[Operator Instructions] Our first question comes from the line of Brian Marckx with Zacks Investments Research. Your line is now open.
Brian Marckx
Good morning, Doug and congratulations on the quarter. Doug, I think you mentioned that you did not plan the breaking out what the WellChec revenue is going forward and I think you did it for Q1 and Q2.
Can you give us what that was for Q3 or is that -- Q3 includes the not giving that number out?
Doug Murphy-Chutorian
No, we did the one that gives the detail at the [interval] names of our customers in the contract side. So in the fourth quarter approximately what we call protest service revenue was approximately $150,000.
So both in the recurring revenue business during the quarter and then about as that may come out to about 9% of the quarter was WellChec revenue that predominantly claim from as I said our second contract which was a contract similar in size in terms of the number of patients that we took care of in the August timeframe to our first contract which as you recall was about 200 patients that were done in the March and April timeframe. So that’s about the same size, that contract has substantially more patients for us to try to schedule for the fourth quarter.
So it's an ongoing contract at this point in time.
Brian Marckx
And in terms of WellChec, so you’ve had at least a few months to kind of I guess pilot it for a lack of a better word to see if it's feasible and to see what kind of reception it's getting from the plan providers and from patients. So at this point can you pretty definitively say that the WellChec service is feasible I guess at the very least?
Doug Murphy-Chutorian
Well there is a lot of details in work through it logistically challenged we’re bringing in as you know contract people to do some of the pieces so that we don’t have to hire up everybody in size and therefore can have the ability working with natural contractors to have the man power and staff we need when it's needed but not necessarily have them onboard for the long haul. So we did not time for a variable expense instead of fixed expense.
But the key thing is really what are the two things we’re trying to achieve, one is for the insurance plan they want their membership to be very happy. They want to retain them, they want them to keep coming back year after year.
So we do a survey at the end of our interaction with these patients and I can tell you that those survey results i.e. would you come back next year?
Absolutely, running very, very high numbers at the low end 80% and at the high-end 95%. So seems that the membership the patients like what we are doing and that really is a strong selling point in the insurance plan.
The second point is that of course we are quantifying chronic diseases number of which have not been identified before and there is an uplift for the insurance company the economic benefit. And I think we had previously disclosed that that was running approximately $300,000 per patient and although that number may vary a little bit from patient to patient population higher or lower and we think that there is substantial economic value still that is coming from this on a per patient basis.
So from a standpoint of the question and sort of changing a little bit around the answer but I think those are the two key things. Therefore if you're in insurance plan your membership is happy and you are making money from using the WellChec service, we hope that that means that you’ll continue to order, increase your order size and many of these are just giving us the larger plans, just a few of their patients.
They have hundreds of thousands or millions of patients, so we’re hoping that those kind of drivers are what we do to a continued appetite for the service. However, that is early in the -- two contracts as I said were started before the end of the third quarter and multiple other ones ongoing in the fourth, I would like to kind of reserve their judgment to make a call of how successful or where it's going to go or what’s the appetite so we actually see at least a little more experience in track behind us.
Brian Marckx
In terms of the margin on the WellChec business in your prepared remarks I think you said that the cost of services would be higher in the WellChec business than it is on the instrument side is that -- did I get that right?
Doug Murphy-Chutorian
That’s true, I mean WellChec has about 10 different things in it now exams and tests as some of those tests for example a vascular test when its performed is super high margins. I mean we would probably be calling it 95%, maybe 99% margins on some of those tests given that that test was -- is very quick, it can be done by medical agents, is very inexpensive and the cost of the equipment is relatively low and we’re getting higher volume use out of that equipment.
So those are sky high some of those tests. And the other thing is some things like annual wellness visits which are [vast] intensive, really aren't that high margins.
We need to see instead of with a few number -- a greater number, what’s the next, how many of the very high margin items are we getting and what volume versus the low margin? So net-net, generally I call it cost of revenue which is the way we have to describe it from an accounting basis versus our revenue, has been running about I think 20% or so as we have been reporting to you quarter-over-quarter and getting better.
But the WellChec service will obviously drag that number up a bit. So from a marginal standpoint we are just not giving guidance is to what it will be, clearly we hope -- try to run the business with a very high margin given that some of those items are extremely high.
But as I said there were some lower margin items too in the mix. Our goal -- and just the last comment on this is why even keep low margin items in it?
What we are trying to do for the insurance plan is make their business easy. Their cane is trying to deal with all these new regulations and needing to give access and complete care to their patients.
If we can give them that complete solution and also keep only information guided for them, we not only schedule the patients in for them, see the patients, examine them, do them, send out reports, we even go as far as preparing the information they need to do their billing. So we are trying to make it extremely easy to say if you want to take care of your patients just bring in WellChec and you don’t have to go to other vendors or anything, it’s all in one place.
And then contrary to that is to the extent that they are working with someone on wellness or have providers that are actually have enough time to do it, we like them to use the equipment we have that makes that whole job easier at either a per test rate or licensing rate. So we have a few business models operating -- but as you can see the whole thing is if our targeted market is insurance plans at which there about 500 or so that do medical -- a Medicare advantage in the elderly population and which about 25 of them control 80% of the market, we want those large health insurance plans and even the smaller ones working with us because these are very lucrative.
Even as we saw a few hundred patients generate hundreds of thousands of revenue for us, [or more than 100,000]. So that’s kind of the goal.
Brian Marckx
Okay. So the margin, so the aggregate gross margin came down quite a bit in Q3 relative to where it was.
Is it fair to assume that, that was because of some of the WellChec revenue in there, higher WellChec revenue I guess?
Doug Murphy-Chutorian
Yes exactly. QuantaFlo and FloChec, it’s fair to say all are running at very nice margins and continue to grow some and the WellChec revenues will even out as we get an idea but they will obviously get a little bit numbers.
So the fact that our number was a few percent lower this quarter is directly attributable to WellChec cost of revenue rather than to QuantaFlo customer group.
Brian Marckx
Okay, okay. Just a couple of more if I could.
On the prior calls you provided what the increase in the installed base was for FloChec, QuantaFlo. Can you give us what that was for Q3 if you have?
Doug Murphy-Chutorian
I don’t have that at my fingertips it was a number, I think we had said it was an 18% increase in the second quarter, I don’t think it was as large as that. And so I don’t have the exact number but I will try to get back to you on that.
In general we are not really as you recall talking about how many unit placements we have et cetera. We really want to talk about revenue growth that where it’s coming from and that’s for various reasons including competitive one.
Brian Marckx
Just one last one. I think you had a Medicare advantage plan that was in a pilot program I think last quarter and expected that to convert to customer status.
Did that happen?
Doug Murphy-Chutorian
Yes.
Operator
Our next question comes from the line of Yi Chen with HCW. Your line is now open.
Yi Chen
Hi, thank you for taking my questions. Just to clarify, for any new orders it will be the -- the new orders will only be filled with QuantaFlo instead of FloChec.
Is that correct?
Doug Murphy-Chutorian
That is correct. We may have a few [lag for] some reason orders that are in place to have to [Technical Difficulty] before but you can think totally that we have switched over to QuantaFlo.
Yi Chen
Okay. So going forward, because of the gross margin for total revenues, do you expect to remain similar to what we see for the third quarter?
Doug Murphy-Chutorian
I think that the problem here is that yes absolutely QuantaFlos would continue to grow I believe from the numbers though even higher based on the way the volume works. WellChec, it’s a little too early to make an exact call given what the mix of exams and tests are.
But we will try to keep you as informed about that as it happens. So I would expect therefore that the -- we call it gross margin which is not the way we term it [Technical Difficulty] will increase if what we've discussed comes to that.
Yi Chen
Okay. For the third quarter the G&A expenses seem to be [hurt] in the first and second quarter, can you give us some color on what it's likely to be for the following quarters?
Doug Murphy-Chutorian
Yes I think that the -- with a stock compensation expense hit that we took predominantly in G&A which will largely disappear in future quarters that particular, so there was a change in some warrant status in that, that hit -- and there was some stock options that were granted. So I think that number will disappear and the G&A will go back to the number.
So I will endeavour to make sure that you have the G&A expense net of stock compensation expense so your purpose is to do that. That’s all listed I'm sure it will be in the 10-Q, I'll make sure that you have that information.
Yi Chen
Finally regarding the cash position how many quarters of burn that will that provide?
Doug Murphy-Chutorian
That decrease or use of cash in the third quarter are bringing it down quite a bit. We also had in the previous conference call indicated that by changing some contracts and delaying of payments we had reduced about $600,000 per quarter where we're at.
So going forward in terms of where we are we obviously have to look at this revenue generation and how much margin dollars it has versus the cash. We are not making the statement at this moment in time that we will reach profitability on the amount of cash we have.
So we have indicated that we will be looking for to raise additional funds and that I think is all I can say at this point in time. Clearly if the WellChec revenue substantially increases with the substantial margin, we could work with the existing amount of cash and do fine.
However, I think we’re going to be more opportunistic and looking to raise additional funds even if that were the case because the WellChec increased so much, because I think that is just more prudent and also we want to make sure that those businesses grow as fast as possible since we seem to be having an offering -- a service offering that is really has an appetite in this insurance paying world. I think they need what we're doing, I think that makes sense.
So you should anticipate that we’ll probably raise some additional money within the next 12 months prior to becoming profitable. And I think that’s all I can say about it because from the standpoint of the number of lines, the way this works is we get a contract.
The customer gives us a chase list, so we call it, which means the number of patients who they would like to have tested who need testing. And then we go and schedule some percentage of those people either that come into a setting which you could call a health fair or for us to go to their home and do testing or even to a providers office.
What we’re learning now is what are the percentage of that chase list that would come in, clearly if we do 50% of chase list of let's say 10,000 patients that will be 5,000 patients that come in, if our average which we have already disclosed in previous is somewhere between $750, $800 or so per patient and hopefully as an increasing number you can kind of do the math that’s a very lucrative contract for us. On the other hand if in a quarter we can only schedule 10%, 15% of those patients it will be a smaller number but hopefully these are recurring kind of contracts where we do our job well they will be keep coming.
So the revenue numbers here are substantially bigger than what we’ve reported before, we just need to reschedule another quarter under our belt, we’ve shown you some of those increased revenue so that we can then try to plan or even give guidance going forward. But at this time we’re not giving guidance other than to say these contracts are large we’re going to work it out, figure out the margins and the growth rate and be able to give better indications.
So we’ll be investing public and see. We’re kind of excited by this, but I can’t really put a number on it for you now.
Operator
Our next question comes from the line of Jan Wald with Benchmark Company. Your line is now open.
Jan Wald
Thank you. Good morning Doug, congratulations on quarter.
I guess I have one question which is you're moving from a product kind of model to a service model, what is it that you're bringing -- what’s proprietary that you're bringing to this service model and what’s the value proposition that you're proposing to your customers?
Doug Murphy-Chutorian
The service model WellChec really gives the customers one place to go, almost the one place shopping, within it on a proprietary product QuantaFlo and we hope then to others and also proprietary will call it where we’re gathering information and putting it all in one place and making it accessible and analyzable for them. There is -- no one who is really quite doing that or adding those other things and so in essence we’re able to more efficiently gather the data than they could by going to or let's say if physician group that is really not set up in a 15 minute appointment schedule to actually do any of the stuff which takes longer.
So in essence it's a matter of mixing some very proprietary stuff with some basic stuff and then doing the basic stuff efficiently and in a pleasurable manner for their members. So they actually get the information that they have been not able to get before.
And doing that and the second piece of this is very hard that to even get the attention of insurance plans, they are not used to buying even services, [indiscernible] it's not unheard of but it's not usual. So our goal there is to say hey this is the most complete solution you can get because it's kind of painful for you to use multiple vendors that get a wellness exam here, to get some test there and by pulling that all information into -- information if you will backbone it can provide -- is a major gain for them right through from the scheduling locations they want seen to giving them the day-to-day need to put up prevention programs and orders, send the bills to the government to get paid for this stuff.
So I think that’s why we are getting a response, a very nice response from the people we’ve approached so far insurance plans and getting them to minimally try this what we are doing and hopefully expand those orders with us in the following year.
Jan Wald
And I guess I have another question based on your answer. It seems to me that what you are doing has something to do with the analytics and big data is getting to be more important in the clinical world and I guess you are able to capture data for each of the individual plans but you are also able to capture data across plans.
Do you have in your contracts anything that would allow you to use that data to do more larger data analytics [and you might reach the plans]?
Doug Murphy-Chutorian
We anticipate that, that is an option for us. We are not actively pursuing that as another revenue generating item but obviously very high margin type one.
So we are going to put that on future other things that we can do. I mean clearly it’s as this as follows.
If we really establish ourselves -- and how did we get in there in first place? We got in because the QuantaFlo and its predecessor FloChec was a very economically profitable and also a good way of finding out that many of the patients that these guys had, had a disease that they could do something about, that they could hopefully prevent it or in a case if you have a blockage in your leg atherosclerosis you have a high likelihood of having a heart attack or stroke and may be they can do something preventively.
So establishing a relationship with them of a high quality product that is financially excellent ROI for them and hopefully that they are interacting with us that we do it in a highly professional way with our kind of entry point. Now we are sort of saying if you like what we did before, we think we understand now what your needs are, what gives you pain and how we can essentially make your business easier.
And that’s kind of the crossover. So from a competitive standpoint, it’s so hard to get in there in the first place, I guess you could say we used a lever or an introductory tool to get us in and I think that our hope now is to make sure we understand what they need better than anyone and to deliver on it.
But not to say that we are not continued on the equipment side business, that’s also a nice revenue generator with high margin. So I think you now have a company with both products and services.
And so it’s not really fair to say we are one or other at this point but there is a reason for doing that and that’s because the customer, the insurance plan and [the stays] were the large physician group really benefits from both aspects of what we are doing. And that’s our goal.
Operator
Our next question comes from the line of Marc Robins with Catalyst Research. Your line is open.
Marc Robins
Thank you for taking my question. Doctor, good quarter.
But my question is better answered. But what’s -- this is an extension of the previous fellow’s query.
Have you not really looked towards any kind of big data outcome that might come from several hundred thousands collections of data?
Doug Murphy-Chutorian
Obviously it’s an option for us to go into that direction and wanted to be addressed. Other options are as we said there are other devices, proprietary devices and types of things I think we’ve mentioned previously congested heart failure making early diagnosis.
So we want to add proprietary test into what we do. There’s also now one of the reasons for being a tiny company going public early, but to be in a position ultimately to have a currency to be able to either partner with other companies and make acquisitions that would lead to once again a product offering that is proprietary strong and kind of you have to have kind of product.
So that’s the second thing. We are going into as we’re discussing here some of the other aspects of what we do and then the next going after that is now that we’ve diagnosed your problems, identified your population, laid it out for you, can we help you manage these patients better.
So a lot of opportunities for where we are at. At the same time, small company revenues seem to be growing beautifully and you will have to crawl before you can walk and run.
So let’s not ahead of the story either, I would like this to be a show me story i.e. every quarter we get to show you we did better and better and that’s kind of what we want to do.
And then we will see them sorted out. But right now to specifically answer your question we have not made any major attempt, even big minor attempt to correlate the data and sell it as a big data file.
Operator
Thank you. I am showing no further questions.
I would like to turn the call back to Douglas Murphy-Chutorian for any further remarks.
Doug Murphy-Chutorian
Well thank you operator. Thank you everybody for joining us today.
I look forward to updating you soon on our continued progress. Obviously we are excited about what we are doing and we the next few quarter but we have a lot of work to do.
So I appreciate your attention and continue to be available if you need any information that we can provide in between. Thanks so much everybody and have a great day and weekend.
Operator
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.