Semler Scientific(SMLR) - 2022 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents the company's unaudited condensed financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed financial statements of Semler Scientific, Inc., including the Statements of Income, Balance Sheets, Statements of Stockholders' Equity, and Statements of Cash Flows, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial line items for the periods ended September 30, 2022 and 2021 Condensed Statements of Income This table presents the unaudited condensed statements of income, detailing revenues, expenses, and net income for the specified periods Condensed Statements of Income (Unaudited, In millions of U.S. Dollars, except share and per share data) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $14.0 | $14.0 | $42.9 | $41.5 | | Total operating expenses | $9.6 | $8.7 | $29.3 | $23.8 | | Income from operations | $4.5 | $5.3 | $13.6 | $17.7 | | Pre-tax net income | $4.6 | $5.3 | $13.7 | $17.7 | | Income tax provision | $0.9 | $1.1 | $2.6 | $2.0 | | Net income | $3.7 | $4.2 | $11.1 | $15.7 | | Net income per share, basic | $0.55 | $0.61 | $1.65 | $2.34 | | Net income per share, diluted | $0.46 | $0.51 | $1.38 | $1.93 | Condensed Balance Sheets This table presents the unaudited condensed balance sheets, outlining assets, liabilities, and stockholders' equity at specific dates Condensed Balance Sheets (In millions of U.S. Dollars) | Metric | September 30, 2022 (Unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $45.5 | $37.3 | | Total current assets | $51.7 | $45.5 | | Total assets | $60.9 | $50.7 | | Total current liabilities | $8.4 | $4.9 | | Total long-term liabilities | $0.2 | $0.2 | | Total stockholders' equity | $52.4 | $45.5 | | Total liabilities and stockholders' equity | $60.9 | $50.7 | Condensed Statements of Stockholders' Equity This table presents the unaudited condensed statements of stockholders' equity, showing changes in equity components over time Condensed Statements of Stockholders' Equity (In millions of U.S. Dollars, except share and per share data) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Common Stock (Shares Issued) | 6,879,497 | 6,824,380 | | Common Stock (Amount) | $0.0 | $0.0 | | Treasury Stock (Shares) | (214,422) | (65,922) | | Additional Paid-In Capital | $16.3 | $20.6 | | Retained Earnings | $36.0 | $24.9 | | Total Stockholders' Equity | $52.4 | $45.5 | - During the nine months ended September 30, 2022, the company acquired treasury stock totaling $5.0 million and recognized net income of $11.1 million[19] Condensed Statements of Cash Flows This table presents the unaudited condensed statements of cash flows, categorizing cash movements from operating, investing, and financing activities Condensed Statements of Cash Flows (Unaudited, In millions of U.S. Dollars) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $15.8 | $14.4 | | Net Cash Used in Investing Activities | ($2.5) | ($0.6) | | Net Cash (Used in) Provided by Financing Activities | ($5.0) | $0.1 | | INCREASE IN CASH | $8.2 | $13.9 | | CASH AND CASH EQUIVALENTS, END OF PERIOD | $45.5 | $35.9 | Notes to Condensed Financial Statements This section provides detailed explanations and disclosures supporting the condensed financial statements Note 1. Basis of Presentation This note outlines the accounting principles, impact of COVID-19, and recently adopted and unadopted accounting pronouncements - The company's unaudited interim financial statements are prepared in accordance with GAAP and SEC rules for interim financial reporting[23] - COVID-19 led to a decrease in variable fee license revenues in the second half of 2021 due to changes in insurance plans' behavior, with future effects remaining uncertain[24][25][26] - Recently adopted accounting pronouncements (ASU 2021-04, 2021-05, 2021-10) did not have a material impact on the financial statements[27][31][32] - Accounting pronouncements not yet adopted (ASU 2016-13, 2019-04, 2019-05, 2020-03, 2021-08, 2022-02) will be adopted in Q1 2023, but are not expected to have a material impact[33][34][38][39] Note 2. Variably-Priced Revenue This note details the components of variably-priced revenue, including variable-fee licenses and hardware sales Variably-Priced Revenue (In millions of U.S. Dollars) | Revenue Type | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Variable-fee licenses | $4.9 | $5.8 | $16.7 | $18.0 | | Sales of hardware and equipment accessories | $0.5 | $0.3 | $1.1 | $0.8 | - The remainder of revenue is earned from fixed-fee leases of the company's testing product[40] Note 3. Inventory This note provides the inventory balance and the accounting policy for inventory valuation Inventory Balance (In millions of U.S. Dollars) | Date | Inventory, net | | :--- | :--- | | September 30, 2022 | $0.5 | | December 31, 2021 | $0.6 | - Inventory is recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out method[41] Note 4. Assets for Lease, net This note presents lease revenues and the net balance of assets held for lease, primarily QuantaFlo products Lease Revenues (In millions of U.S. Dollars) | Period | Lease Revenues | | :--- | :--- | | Three months ended Sep 30, 2022 | $8.6 | | Three months ended Sep 30, 2021 | $7.8 | | Nine months ended Sep 30, 2022 | $25.1 | | Nine months ended Sep 30, 2021 | $22.7 | Assets for Lease, net (In millions of U.S. Dollars) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets for lease | $3.3 | $3.2 | | Less: accumulated depreciation | ($1.3) | ($1.6) | | Assets for lease, net | $2.0 | $1.6 | - Operating leases for QuantaFlo products are short-term (monthly, quarterly, or one year) with renewal options[44] Note 5. Property and Equipment, net This note details the net balance of property and equipment and associated depreciation expense Capital Assets, net (In millions of U.S. Dollars) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Capital assets | $1.3 | $0.9 | | Less: accumulated depreciation | ($0.6) | ($0.5) | | Capital assets, net | $0.6 | $0.4 | Depreciation Expense (In millions of U.S. Dollars) | Period | Depreciation Expense | | :--- | :--- | | Three months ended Sep 30, 2022 | $0.1 | | Three months ended Sep 30, 2021 | $0.0 | | Nine months ended Sep 30, 2022 | $0.1 | | Nine months ended Sep 30, 2021 | $0.1 | Note 6. Long-Term Investments This note outlines the company's long-term investments in privately-held companies, recorded at cost Long-Term Investments (In millions of U.S. Dollars) | Investment | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Investments in Synaps Dx | $0.5 | $0.5 | | Investments in Mellitus Health Inc. | $0.3 | $0.3 | | Total | $0.8 | $0.8 | - Investments in privately-held Synaps Dx and Mellitus Health Inc. are recorded at cost basis, with no impairment identified as of September 30, 2022[52] Note 7. Notes Receivable This note details the company's notes receivable, including loans to Mellitus Health Inc Notes Receivable (In millions of U.S. Dollars) | Note Type | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Senior secured promissory notes | $1.0 | $— | | Secured convertible promissory note | $0.2 | $— | | Total notes receivable | $1.2 | $— | - In June 2022, the company loaned Mellitus $1.0 million through senior secured promissory notes at 5% interest, maturing in three years[53] - In May 2022, the company acquired $0.2 million of Mellitus' convertible notes at 10% interest, maturing July 5, 2025[55] Note 8. Other Non-current assets This note presents other non-current assets, primarily prepaid licenses for an exclusive distribution agreement Other Non-Current Assets (In millions of U.S. Dollars) | Asset Type | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Prepaid licenses | $2.0 | $— | | Other (ROU asset, deposits) | $0.3 | $0.3 | | Total other non-current assets | $2.3 | $0.3 | - Prepaid licenses of $2.0 million relate to an exclusive distribution agreement with Mellitus for its Insulin Insights product line in the U.S., effective until April 1, 2026[57] Note 9. Accrued Expenses This note provides a breakdown of accrued expenses, including compensation and taxes Accrued Expenses (In millions of U.S. Dollars) | Expense Type | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Compensation | $4.4 | $1.8 | | Accrued Taxes | $2.0 | $1.2 | | Miscellaneous Accruals | $0.3 | $0.5 | | Total Accrued Expenses | $6.7 | $3.4 | Note 10. Concentration of Credit Risk This note discloses significant customer concentrations in revenues and accounts receivable - For the three months ended September 30, 2022, two customers accounted for 41.2% and 26.2% of the company's revenues[65] - For the nine months ended September 30, 2022, two customers accounted for 39.9% and 30.1% of the company's revenues[65] - As of September 30, 2022, three customers accounted for 30.3%, 26.3%, and 13.0% of the company's accounts receivable[65] Note 11. Leases This note details the company's lease commitments, including office space and QuantaFlo product leases - The company has a 61-month office space lease effective through September 30, 2025, with a remaining term of three years and three months as of September 30, 2022[67][68] Lease Liabilities and ROU Asset (In millions of U.S. Dollars) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Right-of-use (ROU) asset | $0.3 | $0.3 | | Current lease liabilities | $0.1 | $0.1 | | Noncurrent lease liabilities | $0.2 | $0.2 | - The company's lease portfolio for QuantaFlo products primarily consists of short-term operating leases (monthly, quarterly, or one year) with renewal options[70][71] Note 12. Commitments and Contingencies This note discusses commitments such as 401(k) matching, potential IRS audit for tax credits, and legal matters - Effective January 1, 2022, the company began matching 50% of employee 401(k) deferrals up to a maximum of 6% of eligible earnings[76] - The company claimed $1.24 million in employee retention payroll tax credit under the CARES Act until mid-April 2021, which is subject to IRS audit[77] - The company does not believe any current legal matters would have a material adverse effect on its results of operations or financial condition[81] Note 13. Stock Incentive Plan This note provides details on the stock incentive plan, share reserve, treasury stock acquisitions, and stock-based compensation - The 2014 Stock Incentive Plan's Share Reserve increased by 270,338 on January 1, 2022, totaling 3,315,203 shares as of September 30, 2022[82] - As of September 30, 2022, 1,472,319 shares were available for future stock-based compensation grants under the 2014 Plan[83] Treasury Stock Acquired (In millions of U.S. Dollars, except share data) | Period | Shares Purchased | Cost | | :--- | :--- | :--- | | Three months ended Sep 30, 2022 | 47,458 | $2.0 | | Nine months ended Sep 30, 2022 | 148,500 | $5.0 | Stock-Based Compensation Expense (In millions of U.S. Dollars) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three months ended Sep 30 | $0.0 | $0.0 | | Nine months ended Sep 30 | $0.7 | $0.7 | Note 14. Income Taxes This note presents the income tax provision and effective tax rates, discussing factors influencing tax expense Income Tax Provision (In millions of U.S. Dollars) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three months ended Sep 30 | $0.9 | $1.1 | | Nine months ended Sep 30 | $2.6 | $2.0 | Effective Tax Rate | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three months ended Sep 30 | 20.13% | 21.06% | | Nine months ended Sep 30 | 19.12% | 11.46% | - The decrease in the effective tax rate for the three months ended September 30, 2022, is primarily due to increased tax benefits from share-based compensation[92] - The Inflation Reduction Act, signed in August 2022, is not currently expected to have a material impact on the company's financial statements[95] Note 15. Net Income Per Share, Basic and Diluted This table presents the basic and diluted net income per share for the specified periods Net Income Per Share (Basic and Diluted) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $0.55 | $0.61 | $1.65 | $2.34 | | Diluted EPS | $0.46 | $0.51 | $1.38 | $1.93 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting key performance drivers, recent developments, and a detailed comparison of financial results for the three and nine months ended September 30, 2022, against the prior year Overview This section covers overview - Semler Scientific provides technology solutions to improve healthcare, focusing on developing, manufacturing, and marketing innovative products for chronic diseases[100] - The company commercializes QuantaFlo, an FDA-cleared product for diagnosing peripheral arterial disease (PAD), and is developing an extension for other cardiovascular diseases[100][101] - Semler Scientific has an exclusive agreement to market and distribute Insulin Insights (FDA-cleared software for diabetic patients) from Mellitus Health, Inc., and has investments in Mellitus and Synaps Dx (early Alzheimer's test)[101] Recent Developments This section covers recent developments - Overall testing volume increased at the company's largest customers, with growth in fixed-fee license units from both new and established customers[103] - Variable-fee revenues declined due to a large customer reaching a volume pricing milestone and market share shifts from higher-priced to lower-priced customers[103] Common Stock Repurchase Program This section covers common stock repurchase program - The Board of Directors authorized a $20.0 million share repurchase program on March 14, 2022, with no expiration date[104][106] Share Repurchases (In millions of U.S. Dollars, except share data) | Period | Shares Purchased | Cost | | :--- | :--- | :--- | | Three months ended Sep 30, 2022 | 47,458 | $2.0 | | Nine months ended Sep 30, 2022 | 148,500 | $5.0 | Results of Operations This section analyzes the company's financial performance, comparing revenues and expenses across periods Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 This section compares the financial results for the three months ended September 30, 2022, against the prior year Revenue Breakdown (Three Months Ended Sep 30, In millions of U.S. Dollars) | Revenue Type | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $14.0 | $14.0 | $0.0 | 0% | | Fixed-fee licenses | $8.6 | $7.8 | $0.8 | 10.3% | | Variable-fee licenses | $4.9 | $5.9 | ($1.0) | -16.9% | | Hardware & accessories sales | $0.5 | $0.3 | $0.2 | 66.7% | - Total operating expenses increased by $0.9 million (10%) to $9.6 million, primarily due to increased personnel expense[110] - Net income decreased by $0.5 million (11%) to $3.7 million[119] Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 This section compares the financial results for the nine months ended September 30, 2022, against the prior year Revenue Breakdown (Nine Months Ended Sep 30, In millions of U.S. Dollars) | Revenue Type | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $42.9 | $41.5 | $1.4 | 3.4% | | Fixed-fee licenses | $25.1 | $22.7 | $2.4 | 10.6% | | Variable-fee licenses | $16.7 | $18.0 | ($1.3) | -7.2% | | Hardware & accessories sales | $1.1 | $0.8 | $0.3 | 37.5% | - Total operating expenses increased by $5.5 million (23%) to $29.3 million, driven by personnel expenses, employee benefits, increased insurance costs, and the expiry of COVID-19 related payroll tax credits[123] - Net income decreased by $4.6 million (29%) to $11.1 million[132] Liquidity and Capital Resources This section covers liquidity and capital resources Liquidity Overview (In millions of U.S. Dollars) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $45.5 | $37.3 | | Total current liabilities | $8.4 | $4.9 | | Working capital | $43.3 | N/A | - Operating activities generated $15.8 million in net cash for the nine months ended September 30, 2022, an increase from $14.4 million in the prior year, primarily due to lower inventory, higher accrued expenses, and lower prepaid expenses[135] - Investing activities used $2.5 million in net cash, mainly for long-term notes receivable ($1.2 million), assets for lease ($0.9 million), and fixed asset purchases ($0.4 million)[136] - Financing activities used $5.0 million in net cash, primarily due to $5.0 million for treasury stock acquisition under the share repurchase program[138] Critical Accounting Policies and Estimates This section covers critical accounting policies and estimates - There have been no material changes to the company's critical accounting policies and estimates through September 30, 2022, from those discussed in the Annual Report on Form 10-K for the year ended December 31, 2021[140] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that quantitative and qualitative disclosures about market risk are not applicable to the company for the reported period - The company states that quantitative and qualitative disclosures about market risk are not applicable[141] Item 4. Controls and Procedures Management evaluated the effectiveness of the company's disclosure controls and procedures as of September 30, 2022, concluding they were effective. No material changes in internal control over financial reporting occurred during the third fiscal quarter - Management concluded that disclosure controls and procedures were effective as of September 30, 2022[143] - No material changes in internal control over financial reporting occurred during the third fiscal quarter ended September 30, 2022[144] PART II—OTHER INFORMATION This section provides additional disclosures not covered in the financial information, including legal, risk, and equity matters Item 1. Legal Proceedings The company is not currently a party to any legal claims or litigation that would reasonably be expected to have a material adverse effect on its operations or financial condition - The company is not a party to any claim or litigation the outcome of which would individually or in the aggregate be reasonably expected to have a material adverse effect on its results of operations or financial condition[81] Item 1A. Risk Factors This section indicates that there are no new material risk factors to report for the current period, referring readers to the Annual Report on Form 10-K for a comprehensive discussion of risks - No new material risk factors are applicable for this reporting period[147] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities and no specific use of proceeds from such sales. However, it detailed share repurchases made under its authorized program during the quarter Recent Sales of Unregistered Securities This section confirms no unregistered sales of equity securities were reported during the period - No unregistered sales of equity securities were reported[149] Use of Proceeds This section confirms no proceeds from unregistered sales of equity securities were applicable for the period - This section is not applicable as there were no unregistered sales of equity securities[150] Issuer Purchases of Equity Securities This section details the company's share repurchase activities under its authorized program Issuer Purchases of Equity Securities (Three Months Ended September 30, 2022) | Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs | | :--- | :--- | :--- | :--- | :--- | | July 1, 2022 to July 31, 2022 | - | - | - | $17.1 | | August 1, 2022 to August 31, 2022 | 47,458 | $43.08 | 47,458 | $15.0 | | September 1, 2022 to September 30, 2022 | - | - | - | $15.0 | | Total | 47,458 | | | $15.0 | - The company's Board of Directors authorized a $20.0 million share repurchase program on March 14, 2022, with no expiration date[152] Item 3. Defaults upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[153] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[154] Item 5. Other Information The company reported no other information requiring disclosure under this item - No other information was reported under this item[155] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including organizational documents, certifications, and XBRL-related documents Key Exhibits Filed | Exh. No. | Exhibit Name | | :--- | :--- | | 3.1 | Amended and Restated Certificate of Incorporation | | 3.2 | Second Amended and Restated Bylaws | | 31.1 | Rule 13a-14(a) Certification of Principal Executive Officer of Registrant | | 31.2 | Rule 13a-14(a) Certification of Principal Financial Officer of Registrant | | 32.1* | Section 1350 Certification | | 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | 104 | The cover page from Semler Scientific's Quarterly Report on Form 10-Q for the three months ended September 30, 2022 is formatted in Inline XBRL and it is contained in Exhibit 101 | Signatures The report is duly signed on behalf of Semler Scientific, Inc. by its Chief Executive Officer and Senior Vice President, Finance and Accounting, dated November 4, 2022 - The report was signed by Douglas Murphy-Chutorian, M.D., Chief Executive Officer, and Andrew B. Weinstein, Senior Vice President, Finance and Accounting, on November 4, 2022[160]