Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ___ Commission File Number 001-36305 SEMLER SCIENTIFIC, INC. (Exact name of registrant as specified in its charter) (State or other jurisdiction ...

Semler Scientific, Inc. (NASDAQ:SMLR) Q2 2021 Earnings Conference Call August 2, 2021 4:30 PM ET Company Participants Doug Murphy-Chutorian - CEO Dennis Rosenberg - Chief Marketing Officer Andy Weinstein - Senior Vice President of Finance and Accounting Conference Call Participants Brooks O'Neil - Lake Street Capital Markets Kyle Bauser - Colliers Marc Wiesenberger - B. Riley Securities Operator Good day, and welcome to the Semler Scientific Second Quarter 2021 Financial Results Conference Call. [Operator ...

[Part I. Financial Information](index=5&type=section&id=Part%20I.%20Financial%20Information) This section presents the company's financial statements, management's analysis, market risk disclosures, and internal controls [Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) The company reported strong Q1 2021 financial performance with significant revenue and net income growth, driven by rebounding variable-fee licenses and strategic investments Condensed Statements of Income (Q1 2021 vs Q1 2020) | Metric | For the three months ended March 31, 2021 (in thousands of dollars) | For the three months ended March 31, 2020 (in thousands of dollars) | | :--- | :--- | :--- | | **Revenues** | $13,183 | $9,430 | | **Income from operations** | $6,019 | $3,452 | | **Net income** | $4,877 | $2,673 | | **Net income per share, basic** | $0.73 | $0.41 | | **Net income per share, diluted** | $0.60 | $0.33 | Condensed Balance Sheet Highlights | Metric | March 31, 2021 (in thousands of dollars) | December 31, 2020 (in thousands of dollars) | | :--- | :--- | :--- | | **Cash** | $26,478 | $22,079 | | **Total current assets** | $33,285 | $26,603 | | **Total assets** | $40,646 | $34,639 | | **Total current liabilities** | $5,073 | $4,514 | | **Total stockholders' equity** | $35,268 | $29,793 | Condensed Statements of Cash Flows (Q1 2021 vs Q1 2020) | Metric | For the three months ended March 31, 2021 (in thousands of dollars) | For the three months ended March 31, 2020 (in thousands of dollars) | | :--- | :--- | :--- | | **Net Cash Provided by Operating Activities** | $4,606 | $3,703 | | **Net Cash Used in Investing Activities** | ($216) | ($233) | | **Net Cash Provided by Financing Activities** | $9 | $3 | | **Increase in Cash** | $4,399 | $3,473 | - The company's revenues, particularly from variable-fee licenses, were negatively impacted by the COVID-19 pandemic in the first half of 2020 but rebounded to exceed pre-pandemic levels in the second half of 2020 and the first quarter of 2021[25](index=25&type=chunk) - The company has significant customer concentration, with two customers accounting for **38.3%** and **30.4%** of total revenues for the three months ended March 31, 2021[61](index=61&type=chunk) - Subsequent to the quarter end, in April 2021, the company entered into an exclusive distribution agreement with a private company, committing to purchase **$2.0 million** of product inventory[87](index=87&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2021 revenue growth driven by QuantaFlo® adoption, strategic product expansion, and strong liquidity [Overview and Recent Developments](index=25&type=section&id=Overview%20and%20Recent%20Developments) The company focuses on providing technology solutions like QuantaFlo® and is expanding offerings through strategic partnerships - The company's mission is to provide technology solutions, like its FDA-cleared QuantaFlo® product for diagnosing peripheral arterial disease (PAD), to improve clinical effectiveness for healthcare providers[89](index=89&type=chunk) - Business activity, which had decreased due to COVID-19 restrictions in early 2020, has since returned to and exceeded pre-pandemic levels as customers address a backlog of untested patients[90](index=90&type=chunk) - The company is expanding its product offerings beyond QuantaFlo® through strategic investments and exclusive distribution agreements with three private companies focused on chronic disease management[91](index=91&type=chunk)[94](index=94&type=chunk)[95](index=95&type=chunk) [Results of Operations](index=27&type=section&id=Results%20of%20Operations) Q1 2021 saw significant revenue growth and improved operating leverage, despite increased cost of revenues Q1 2021 vs Q1 2020 Performance | Metric | Q1 2021 (in millions of dollars) | Q1 2020 (in millions of dollars) | Change (in millions of dollars) | % Change | | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $13.2M | $9.4M | +$3.8M | +40% | | **Operating Expenses** | $7.2M | $6.0M | +$1.2M | +20% | | **Pre-tax Net Income** | $6.0M | $3.5M | +$2.5M | +74% | | **Net Income** | $4.9M | $2.7M | +$2.2M | +82% | - Revenue growth was driven by an increase in fees from vascular testing products, which rose to **$12.9 million** in Q1 2021 from **$9.2 million** in Q1 2020, due to growth in both fixed-fee and variable-fee licenses from new and existing customers[96](index=96&type=chunk)[97](index=97&type=chunk) - Operating expenses as a percentage of revenues decreased to **54%** in Q1 2021 from **63%** in Q1 2020, demonstrating improved operating leverage despite a **20%** absolute increase in expenses[98](index=98&type=chunk) - Cost of revenues increased **86%** to **$1.6 million**, primarily due to a non-recurring inventory adjustment and increased headcount[99](index=99&type=chunk) [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) The company's cash position significantly improved in Q1 2021, driven by strong operating cash flow - The company's cash position improved, with cash increasing to **$26.5 million** at March 31, 2021, from **$22.1 million** at December 31, 2020, and working capital stood at approximately **$28.2 million**[108](index=108&type=chunk) - For Q1 2021, net cash provided by operating activities was **$4.6 million**, primarily driven by net income of **$4.9 million**, offset by an increase in trade accounts receivable[111](index=111&type=chunk) - Investing activities used **$0.2 million** for purchases of assets for lease and fixed assets to support business growth[112](index=112&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=31&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company reports that there are no applicable quantitative or qualitative disclosures regarding market risk - Not applicable[116](index=116&type=chunk) [Controls and Procedures](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal controls - Management, including the CEO and senior finance officers, concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[120](index=120&type=chunk) - There were no changes in internal control over financial reporting during the first fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls[121](index=121&type=chunk) [Part II. Other Information](index=33&type=section&id=Part%20II.%20Other%20Information) This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits [Legal Proceedings](index=33&type=section&id=Item%201.%20Legal%20Proceedings) The company reports no material legal proceedings - None[123](index=123&type=chunk) [Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) The company reports that there are no applicable risk factors to disclose - Not applicable[124](index=124&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=33&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports no unregistered sales of equity securities or use of proceeds - None[125](index=125&type=chunk) [Defaults upon Senior Securities](index=33&type=section&id=Item%203.%20Defaults%20upon%20Senior%20Securities) The company reports no defaults upon senior securities - None[126](index=126&type=chunk) [Mine Safety Disclosures](index=33&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The company reports that this item is not applicable - Not applicable[127](index=127&type=chunk) [Other Information](index=33&type=section&id=Item%205.%20Other%20Information) The company reports that this item is not applicable - Not applicable[128](index=128&type=chunk) [Exhibits](index=34&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including required certifications and Inline XBRL documents - The exhibits filed with the report include Rule 13a-14(a) certifications for the Principal Executive Officer and Principal Financial Officer, a Section 1350 certification, and Inline XBRL data files[129](index=129&type=chunk)

Part I [Business](index=7&type=section&id=Item%201.%20Business) Semler Scientific is a medical technology company focused on developing and marketing products for evaluating and treating chronic diseases - The company's main product is **QuantaFlo®**, an **FDA 510(k) cleared device** used to aid in the diagnosis of peripheral arterial disease (PAD)[22](index=22&type=chunk)[25](index=25&type=chunk) - The business primarily uses a license model for QuantaFlo®, with approximately **two-thirds of customers on a fixed-fee model** and just under **one-third on a variable, per-test fee model**[27](index=27&type=chunk) - A significant portion of revenue comes from a single U.S. diversified healthcare company, which accounted for **47.2% of revenues in 2020**[28](index=28&type=chunk) - In September and October 2020, the company entered into an exclusive distribution agreement for a new product line and made investments in two private companies to expand its product offerings beyond PAD[22](index=22&type=chunk)[38](index=38&type=chunk)[41](index=41&type=chunk) - As of December 31, 2020, the company had **86 full-time employees**, a **28% increase** from 67 employees in the prior year[99](index=99&type=chunk) Financial Performance | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenues | $38.6 million | $32.8 million | | Net Income | $14.0 million | $15.1 million | | Pre-tax Net Income | $16.5 million | $10.7 million | [Products and Services](index=7&type=section&id=Item%201.%20Business%23Products%20and%20Services) The company's sole marketed product is QuantaFlo®, a non-invasive, four-minute test for PAD, primarily offered through a monthly license model - **QuantaFlo®** is a **four-minute**, in-office blood flow test that uses a sensor clamp on a toe or finger to generate a blood flow waveform and assess for flow obstruction[26](index=26&type=chunk) - The company primarily licenses **QuantaFlo®** to customers, including insurance plans, physician groups, and risk assessment groups, rather than selling the equipment outright[27](index=27&type=chunk)[28](index=28&type=chunk) - In September 2020, the company entered an exclusive distribution agreement for a new product line, agreeing to purchase **$1.2 million of inventory** and pay royalties of **0% to 10% of net sales**[38](index=38&type=chunk) [Market Opportunity](index=9&type=section&id=Item%201.%20Business%23Market%20Opportunity) The market for QuantaFlo® is driven by financial incentives in Medicare Advantage for identifying PAD, a common and under-diagnosed condition - The **Medicare Advantage program's risk adjustment model** provides a financial incentive for health plans to identify and code for conditions like PAD, as it leads to higher per-patient payments[30](index=30&type=chunk)[31](index=31&type=chunk) - Peripheral Arterial Disease (PAD) is estimated to be undiagnosed in **75% of cases**, representing about **12 million Americans**, with the total affected population in the U.S. estimated at **20 million**[32](index=32&type=chunk) - The primary target market for **QuantaFlo®** includes insurance plans with Medicare Advantage patients and providers caring for over **80 million Americans older than 50**[35](index=35&type=chunk) [Strategy](index=13&type=section&id=Item%201.%20Business%23Strategy) The company's strategy focuses on marketing QuantaFlo® via a recurring revenue model, expanding vascular testing, and exploring new product offerings - Target customers with patients at risk for PAD, including over **400,000 physicians** and other potential customers in the U.S[43](index=43&type=chunk) - Expand tools available to internists and non-peripheral vascular experts, for whom traditional ABI testing was previously impractical[43](index=43&type=chunk) - Develop and explore additional product offerings through internal R&D and external arrangements, such as marketing, distribution, and potential acquisitions, to address chronic disease management[43](index=43&type=chunk) [Competition](index=14&type=section&id=Item%201.%20Business%23Competition) QuantaFlo® primarily competes with traditional ankle-brachial index (ABI) devices, differentiating itself as a simpler, cuff-less tool for non-specialists - The main competitor is the standard blood pressure cuff ABI device, manufactured by several larger companies with more financial resources[50](index=50&type=chunk) - **QuantaFlo®** is positioned as a tool for internists and non-specialists, and for patients where traditional cuff-based ABI is difficult (e.g., obese patients, non-compressible arteries)[52](index=52&type=chunk) - The company anticipates that competitors will continue to enter the PAD market with competing digital devices[53](index=53&type=chunk) [Government Regulation](index=18&type=section&id=Item%201.%20Business%23Government%20Regulation) The company's products are subject to extensive FDA regulation, including 510(k) clearance, and are impacted by healthcare reimbursement policies and fraud and abuse laws - **QuantaFlo®** is a medical device subject to extensive FDA regulation, including design, manufacturing, labeling, and pre-market **510(k) clearance**[64](index=64&type=chunk)[67](index=67&type=chunk) - The success of **QuantaFlo®** is dependent on the availability of coverage and reimbursement from third-party payors, including Medicare and private insurance, although the product is not specifically approved under any single reimbursement code[75](index=75&type=chunk)[76](index=76&type=chunk) - The company is subject to federal and state healthcare fraud and abuse laws, such as the **Anti-Kickback Law** and the **False Claims Act**, which carry severe penalties for violations[82](index=82&type=chunk)[83](index=83&type=chunk)[84](index=84&type=chunk) - The **Health Care Reform Law (ACA)** has influenced the business by shifting focus to capitated payments and rewarding the identification of chronic conditions, but the company faces uncertainty regarding the law's potential repeal or modification[94](index=94&type=chunk)[95](index=95&type=chunk) [Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including reliance on QuantaFlo®, customer concentration, extensive healthcare regulations, stock delisting, and intellectual property protection - **Business Risks:** The company actively markets only one product, **QuantaFlo®**, and its success is not guaranteed. A significant portion of revenue is concentrated with a few customers; in 2020, two customers accounted for **47.2%** and **22.8% of revenues**[110](index=110&type=chunk)[125](index=125&type=chunk) - **Regulatory & Reimbursement Risks:** The business is subject to extensive FDA regulation and unannounced inspections. Widespread acceptance of **QuantaFlo®** depends on healthcare providers obtaining adequate reimbursement, which is not guaranteed as the product is not specifically approved under any single reimbursement code[116](index=116&type=chunk)[117](index=117&type=chunk)[145](index=145&type=chunk) - **Market & Stock Risks:** The company's common stock was delisted from the Nasdaq Capital Market and now trades on the **OTCQB**, which may negatively impact liquidity and stock price. A small number of executive officers, directors, and significant stockholders hold approximately **48.6% of the common stock**, giving them substantial control[173](index=173&type=chunk)[167](index=167&type=chunk) - **Operational Risks:** The company relies on a small number of key personnel and independent suppliers for manufacturing. Any disruption could negatively impact operations. The business has also been affected by the **COVID-19 pandemic**, which caused decreased test volumes in early 2020[121](index=121&type=chunk)[126](index=126&type=chunk)[108](index=108&type=chunk) - **Intellectual Property Risks:** Success depends on the ability to protect proprietary information. The company holds one U.S. patent for its apparatus, which expires in **2027**, and faces risks of challenges or infringement claims[63](index=63&type=chunk)[158](index=158&type=chunk)[160](index=160&type=chunk) [Properties](index=58&type=section&id=Item%202.%20Properties) The company's corporate headquarters and operations fulfillment space are located in a leased facility in Santa Clara, California - The company leases an operations fulfillment space in Santa Clara, CA, which also serves as its corporate headquarters[194](index=194&type=chunk) [Legal Proceedings](index=58&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently a party to any material legal proceedings expected to have a material adverse effect on its business or financial condition - As of the report date, the company is not involved in any litigation expected to have a material adverse effect on the business[195](index=195&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=60&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the OTCQB market under "SMLR" since its 2016 Nasdaq delisting, with no anticipated cash dividends - The company's common stock has traded on the **OTCQB** under the symbol "**SMLR**" since **August 11, 2016**[198](index=198&type=chunk) - As of **February 26, 2021**, there were **6,708,672 shares of common stock outstanding** and approximately **37 stockholders of record**[6](index=6&type=chunk)[200](index=200&type=chunk) - The company has never declared or paid cash dividends and does not anticipate paying them in the foreseeable future[201](index=201&type=chunk) Fiscal Year 2020 Stock Price | Fiscal Year 2020 | High | Low | | :--- | :--- | :--- | | First Quarter | $57.84 | $30.00 | | Second Quarter | $51.50 | $32.52 | | Third Quarter | $60.00 | $43.20 | | Fourth Quarter | $95.00 | $50.11 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=61&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In FY2020, revenues grew to **$38.6 million**, pre-tax net income increased, and liquidity improved to **$22.1 million** cash, despite a net income decrease due to a 2019 tax benefit [Results of Operations (2020 vs. 2019)](index=68&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations%23Results%20of%20Operations) In 2020, revenues increased by **17.8%** to **$38.6 million**, and income from operations grew to **$16.0 million**, though net income decreased to **$14.0 million** due to a prior year tax benefit Financial Metric Comparison | Financial Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | **Revenues** | **$38.6M** | **$32.8M** | **+17.8%** | | - Fixed-fee licenses | $25.7M | $22.9M | +12.2% | | - Variable-fee licenses | $11.6M | $8.9M | +30.3% | | **Total Operating Expenses** | **$22.6M** | **$22.1M** | **+2.3%** | | Cost of Revenues | $3.4M | $3.7M | -8.1% | | Sales & Marketing Expense | $9.9M | $9.0M | +10.0% | | General & Admin Expense | $6.4M | $7.0M | -8.6% | | **Income from Operations** | **$16.0M** | **$10.7M** | **+49.5%** | | **Net Income** | **$14.0M** | **$15.1M** | **-7.3%** | - The decrease in net income was primarily due to a **$4.4 million income tax benefit in 2019** from the release of a valuation allowance, compared to a **$2.5 million income tax expense in 2020**[240](index=240&type=chunk) [Liquidity and Capital Resources](index=70&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations%23Liquidity%20and%20Capital%20Resources) The company's liquidity significantly improved in 2020, with cash increasing to **$22.1 million** at year-end, driven by **$15.4 million** in net cash from operating activities and no material indebtedness Cash and Working Capital | Metric (as of Dec 31) | 2020 | 2019 | | :--- | :--- | :--- | | Cash | $22.1 million | $7.7 million | | Working Capital | $21.7 million | N/A | | Total Current Liabilities | $4.5 million | $5.2 million | Cash Flow Activities | Cash Flow Activity (Year Ended Dec 31) | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $15.4 million | $12.7 million | | Net Cash used in Investing Activities | ($1.3 million) | ($1.7 million) | | Net Cash from (used in) Financing Activities | $0.23 million | ($6.6 million) | - The company has no material outstanding indebtedness as of **December 31, 2020**[248](index=248&type=chunk) [Critical Accounting Policies and Estimates](index=65&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations%23Critical%20Accounting%20Policies%20and%20Estimates) Management identifies critical accounting policies requiring significant judgment, including allowance for doubtful accounts, inventory, share-based compensation, income taxes, and valuation of private investments - Key critical accounting estimates include: allowance for doubtful accounts, inventory valuation, share-based compensation, income tax recognition and measurement, and valuation of investments[219](index=219&type=chunk) - Investments in privately held companies without readily determinable fair values are recorded at cost, adjusted for subsequent observable price changes or impairments[227](index=227&type=chunk) - The company uses the **Black-Scholes model** to value stock options, which requires subjective assumptions about volatility, expected life, and interest rates[224](index=224&type=chunk) [Controls and Procedures](index=73&type=section&id=Item%209A.%20Controls%20and%20Procedures) As of December 31, 2020, management concluded disclosure controls were effective, having successfully remediated prior year material weaknesses in internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of **December 31, 2020**[255](index=255&type=chunk) - The company remediated material weaknesses identified in 2019, which related to insufficient segregation of duties, ineffective IT controls, inadequate data validation, and insufficient documentation for management review controls[257](index=257&type=chunk) - Remediation actions included hiring additional accounting staff, reassessing and formalizing policies, engaging an outside firm for assistance, and implementing enhanced controls and documentation procedures[258](index=258&type=chunk)[266](index=266&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=76&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) This section details the company's board of directors and executive officers, including their independence, audit committee composition, and the adopted Code of Business Conduct and Ethics - The board of directors consists of five members: **Douglas Murphy-Chutorian, M.D. (CEO)**, Arthur Leibowitz, M.D., Daniel S. Messina, Cindy H. Moon, and Wayne T. Pan, M.D., Ph.D[268](index=268&type=chunk) - The board has affirmatively determined that **four of its five directors are independent**: Dr. Leibowitz, Mr. Messina, Ms. Moon, and Dr. Pan[281](index=281&type=chunk) - The audit committee is comprised of **Dr. Pan (Chairman)**, Mr. Messina, and Ms. Moon. Mr. Messina is qualified as an "**audit committee financial expert**"[284](index=284&type=chunk) - The company has adopted a **Code of Business Conduct and Ethics** that applies to its principal executive and financial officers[288](index=288&type=chunk) [Executive Compensation](index=82&type=section&id=Item%2011.%20Executive%20Compensation) This section details the compensation for named executive officers, including CEO Dr. Douglas Murphy-Chutorian's **$721,982** total compensation in 2020, and outlines non-employee director compensation Executive Compensation Summary | Name and Principal Position | Year | Salary ($) | Non-Equity Incentive Plan ($) | All Other Comp. ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Douglas Murphy-Chutorian, M.D., CEO | 2020 | 400,000 | 300,000 | 21,982 | 721,982 | | | 2019 | 400,000 | 744,708 | 25,545 | 1,170,253 | | Andrew B Weinstein, SVP, Finance | 2020 | 294,792 | 0 | 31,545 | 352,170 | | | 2019 | 265,625 | 0 | 1,686 | 322,311 | | Daniel E. Conger, VP, Finance | 2020 | 210,000 | 0 | 31,545 | 283,545 | | | 2019 | 200,000 | 0 | 23,058 | 263,058 | - As of **December 31, 2020**, CEO Dr. Murphy-Chutorian held outstanding options to purchase **765,000 shares**, all of which were exercisable[299](index=299&type=chunk) - Non-employee directors receive an annual cash retainer of **$45,000**, plus additional retainers for committee service. In 2020, total cash fees paid to non-employee directors ranged from **$6,000 to $70,500**[302](index=302&type=chunk)[303](index=303&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=87&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) This section details beneficial ownership of common stock as of February 26, 2021, with William H.C. Chang owning **16.7%** and all directors/officers owning **13.5%** as a group Beneficial Ownership | Name of Beneficial Owner | Percentage of Shares Beneficially Owned | | :--- | :--- | | William H.C. Chang | 16.7% | | Park West Asset Management, LLC | 9.7% | | Eric Semler | 8.5% | | Nantahala Capital Management, LLC | 5.4% | | Dr. Douglas Murphy-Chutorian (CEO) | 11.9% | | All directors and officers as a group | 13.5% | Equity Compensation Plan Information | Plan Category | Securities to be Issued Upon Exercise | Weighted Avg. Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity Compensation Plans Approved by Securityholders | 1,451,420 | $3.25 | 997,163 | [Certain Relationships and Related Transactions, and Director Independence](index=88&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) This section discloses related party transactions since January 1, 2019, including warrant repurchases from the CEO's family trust and a sale of private company securities to a significant stockholder - In May and November 2019, the company repurchased warrants to acquire a total of **159,339 shares** from the family trust of CEO Dr. Murphy-Chutorian for an aggregate price of approximately **$6.6 million**[312](index=312&type=chunk)[313](index=313&type=chunk) - In December 2020, the company sold shares of preferred stock and warrants of a private company to a significant stockholder for a cash purchase price of **$1.9 million**[314](index=314&type=chunk) - The company employs two immediate family members of Daniel E. Conger, its Vice President of Finance, and paid them an aggregate of **$211,618** in salary and bonuses since **January 1, 2019**[315](index=315&type=chunk) [Principal Accounting Fees and Services](index=91&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) This section details fees paid to BDO USA, LLP for 2020 and 2019, totaling **$356,850** and **$429,000** respectively, primarily for audit services and all pre-approved by the audit committee Accounting Fees | Fee Type | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fees | $328,700 | $402,000 | | Tax Fees | $28,150 | $27,000 | | **Total** | **$356,850** | **$429,000** | - All audit and non-audit services provided by **BDO USA, LLP** were pre-approved by the company's audit committee[320](index=320&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=92&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists financial statements, schedules, and exhibits filed as part of the Form 10-K, including corporate governance documents, material contracts, and officer certifications - This item provides an index of all financial statements and exhibits included with the annual report filing[323](index=323&type=chunk)[324](index=324&type=chunk) [Financial Statements](index=96&type=section&id=Financial%20Statements) Audited financial statements for 2020 and 2019 show significant asset growth to **$34.6 million**, with BDO USA, LLP providing an unqualified opinion and highlighting a private investment as a critical audit matter Balance Sheet (in thousands) | Balance Sheet (in thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash | $22,079 | $7,741 | | Total Current Assets | $26,263 | $11,443 | | Total Assets | $34,639 | $18,287 | | Total Current Liabilities | $4,514 | $5,207 | | Total Stockholders' Equity | $29,793 | $13,073 | Statements of Income (in thousands) | Statements of Income (in thousands) | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Revenues | $38,603 | $32,767 | | Income from Operations | $15,961 | $10,708 | | Net Income | $14,007 | $15,084 | | Diluted EPS | $1.74 | $1.88 | - The independent auditor, **BDO USA, LLP**, identified the accounting for a non-routine investment in a private company via a stock purchase agreement as a **Critical Audit Matter** due to the significant judgment required[335](index=335&type=chunk)[337](index=337&type=chunk) [Notes to Financial Statements: Concentration of Credit Risk](index=119&type=section&id=Notes%20to%20Financial%20Statements%3A%20Concentration%20of%20Credit%20Risk) The company has significant customer concentration, with two customers accounting for **47.2%** and **22.8%** of 2020 revenue, and four customers representing a large portion of accounts receivable - In 2020, two customers accounted for **47.2%** and **22.8% of the company's revenue**[388](index=388&type=chunk) - As of **December 31, 2020**, four customers accounted for **31.2%**, **19.4%**, **15.7%** and **10.4% of accounts receivable**[388](index=388&type=chunk) [Notes to Financial Statements: Income Taxes](index=126&type=section&id=Notes%20to%20Financial%20Statements%3A%20Income%20Taxes) The company's effective tax rate was **15.04%** in 2020, significantly different from 2019 due to a valuation allowance release, and holds federal and California NOL carryforwards Income Tax Metrics | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total income tax provision (benefit) | $2,479,000 | $(4,383,000) | | Effective income tax rate | 15.04% | (40.96)% | - As of **Dec 31, 2020**, the company has federal NOL carryforwards of **$310,000** and California NOL carryforwards of **$5,746,000**[411](index=411&type=chunk) - The company claimed **$466,000** in employee retention payroll tax credits under the **CARES Act** during **2020**[412](index=412&type=chunk)

Financial Data and Key Metrics Changes - The company reported a record financial performance in Q3 2020, with revenues increasing by 68% to $10.7 million compared to Q2 2020 [4] - Pre-tax net income rose by 465% to $5.6 million, while net income increased by 353% to $4.9 million [4] - Cash at the end of the quarter increased to $16.8 million, up from $8.5 million a year earlier [10] Business Line Data and Key Metrics Changes - Fixed fee software license revenues were approximately $6.3 million, up 6% from Q2 2020 [11] - Variable fee software license revenues surged to approximately $4.1 million, an increase of 1,310% [11] - Equipment and other sales reached $332,000, a 257% increase [11] Market Data and Key Metrics Changes - The two largest customers accounted for 39% and 30% of quarterly revenues, indicating a strong reliance on major clients [11] - The company experienced a significant recovery in business as non-emergency medical services resumed, exceeding pre-COVID-19 levels [12] Company Strategy and Development Direction - The company aims to expand its product offerings beyond Quantaflo for PAD, focusing on technology solutions for chronic disease management [3][16] - Investments were made in three new product areas, all of which are FDA-cleared and focus on chronic disease management [16] - The company plans to continue upgrading existing products and developing new services to enhance customer value [15] Management's Comments on Operating Environment and Future Outlook - Management noted that while the business has returned to pre-COVID-19 levels, the ongoing pandemic creates uncertainty for future quarters [12] - The company intends to manage expenses in line with revenue changes and may increase operating expenses as hiring resumes [12] - Management expressed optimism about the ongoing development of organic new products alongside external opportunities [29] Other Important Information - The company has no current plans to raise additional capital but reserves the right to change financing plans as needed [13] - A new member was added to the Board of Directors to meet NASDAQ governance requirements [14] Q&A Session Summary Question: Future outlook based on Q3 performance - Management indicated that the current business environment is positive, but caution is warranted due to COVID-19 uncertainties [19][20] Question: Impact of COVID-19 on revenue - Management acknowledged a significant catch-up in variable fee business in Q3, which had been impacted in Q2 [21][24] Question: New product initiatives and distribution strategy - Management confirmed that new products will be marketed to existing customers and potentially through new strategies [25][26] Question: Success in attracting new customers - Management reported growth among both existing and new customers during Q3 [27][28] Question: Plans for cash reserves - Management stated intentions to maintain cash reserves while exploring opportunities for proprietary acquisitions [33][34] Question: Hiring expectations - Management plans to hire in R&D, sales, and marketing to support anticipated growth [55] Question: Margin expectations - Management expressed confidence in maintaining strong margins across all products [56][57]

Financial Data and Key Metrics Changes - Annual revenue grew 73% to $21.5 million from $12.5 million, and net income increased to $5 million from a net loss of $1.5 million [6][8] - Earnings per share were $0.82 basic and $0.66 diluted, compared to a net loss of $0.28 both basic and diluted [6][8] - Total liabilities decreased by $3.3 million, and cash at year-end was $3.3 million, up from $1.5 million a year ago [6][10] Business Line Data and Key Metrics Changes - Operating expenses increased to $16.1 million, up from $13.3 million, representing a 21% increase [8][10] - In Q4 2018, revenue was $6 million, a 42% increase from $4.2 million, while operating expenses were $4.5 million, an 18% increase from $3.8 million [11][12] Market Data and Key Metrics Changes - The company noted that customer and market interest in its products is growing, with expectations for continued sequential growth in license revenue [7][13] - The market for vascular disease testing is large relative to current market penetration, indicating room for continued growth [17] Company Strategy and Development Direction - The company aims to further establish its QuantaFlo product as the standard of care in the industry and expects to grow revenue at a faster rate than expenses while remaining profitable [16][17] - Management plans to increase operating expenses to support anticipated growth, with no current plans to raise additional capital [16] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about continued revenue growth due to increased installations and usage of products, as well as recurring revenue from licensing [13][15] - The company believes that the QuantaFlo product provides substantial clinical and economic value, contributing to increased customer demand [35] Other Important Information - The company intends to re-list its stock on NASDAQ, which requires a minimum stockholders' equity of $5 million [10] - The historical pattern of quarterly revenue shows that the first quarter is typically the lowest, with increases in subsequent quarters [15] Q&A Session Summary Question: How does the fourth quarter compare to the third quarter? - Management characterized the fourth quarter as a terrific quarter, with significant customer interest and new orders coming in [21] Question: What are the main drivers of increased customer demand? - The QuantaFlo product is recognized for its clinical and economic value, leading to increased demand [35] Question: What is the expected capital expenditure for 2019 compared to 2018? - Capital expenditures are expected to be similar or slightly less than in 2018 due to decreased costs associated with hardware [39] Question: Can you provide updates on the adoption of QuantaFlo within UnitedHealth? - The penetration within UnitedHealth remains low, with estimates suggesting less than 10% [46] Question: What is the status of the iOS version and the congestive heart failure device? - The focus remains on upgrading current products rather than developing new ones, with all platforms now operational [51]