SEC Filing | Semler Scientific, Inc.

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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, 2023



	☐	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)

Delaware	26-1367393
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2340-2348 Walsh Avenue, Suite 2344

Santa Clara, CA 95051

(Address of principal executive offices) (Zip Code)

(877) 774-4211

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.001 per share		SMLR		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-Accelerated Filer	☒	Smaller Reporting Company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 7, 2023, there were 6,855,956 shares of the issuer’s common stock, $0.001 par value per share, outstanding.

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TABLE OF CONTENTS

		Page
Part I.	Financial Information	1

Item 1.	Condensed Financial Statements (Unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24

Part II.	Other Information	24

Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	25

Signatures		27

In this report, unless otherwise stated or as the context otherwise requires, references to “Semler Scientific,” “the Company,” “we,” “us,” “our” and similar references refer to Semler Scientific, Inc. The Semler Scientific logo, QuantaFlo and other trademarks or service marks of Semler Scientific, Inc. appearing in this report are the property of Semler Scientific, Inc. This report also contains registered marks, trademarks and trade names of other companies. All other trademarks, registered marks and trade names appearing in this report are the property of their respective holders.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. In some cases, you can identify forward-looking statements by terminology, such as “expects,” “anticipates,” “intends,” “estimates,” “plans,” “believes,” “seeks,” “may,” “should,” “continue,” “could” or the negative of such terms or other similar expressions. The forward-looking statements in this report include, but are not limited to, statements regarding:

●

our QuantaFlo business, including efforts to develop QuantaFlo HD for heart dysfunction;

●

the effects of the 2024 Medicare Advantage and Part D Final Rate Announcement issued by the Centers for Medicare and Medicaid Services, or CMS, on our revenues; and

●

anticipated costs and savings from our recently announced strategic streamlining;

Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this report. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements, including risks associated with:

●

implementation of our business strategy and the fact that we actively market only two U.S. Food and Drug Administration, or FDA, cleared products and may not benefit from our recent investments in other companies developing complementary products or the extension of QuantaFlo to test for other cardiovascular diseases;

●

changes in the regulatory reimbursement landscape, such as the recent 2024 Medicare Advantage and Part D Final Rate Announcement issued by CMS could impact the perceived value of using our products to aid diagnosis of cardiovascular diseases;

●

our recently announced strategic streamlining, as well as the recent changes in our executive team and board of directors;

●

the failure of physicians and other customers to widely adopt our products, or to determine that our product provides a safe and effective alternative to existing ankle brachial index, or ABI, devices;

●

our testing product is generally but not specifically approved for reimbursement under any third-party payor codes;

●

our reliance on the talents of a small number of key personnel, and a small direct sales force;

●

not requiring customers to enter into long-term licenses;

●

concentration of our revenues and accounts receivable with a limited number of customers;

●

our reliance on a small number of independent suppliers and facilities for the manufacturing of our product;

●

our business being subject to many laws and government regulations, including governing the manufacture and sale of medical devices, patient data, and others;

●

our ability to protect our intellectual property;

●

impacts of the ongoing Covid-19 pandemic and macroeconomic factors that could impact our business, such as the effects of the Russian invasion of Ukraine on the global economy and supply chain and inflation, as well as the recent bank failures; and

●

the other factors set forth under the caption “Risk Factors” in our annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 23, 2023.

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Because the risks and uncertainties referred to above and in our SEC reports could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements.

You should read this quarterly report and the documents that we reference herein and therein and have filed as exhibits to this report and our other filings with the SEC. You should assume that the information appearing in this quarterly report is accurate as of the date of this quarterly report only. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this quarterly report, and particularly our forward-looking statements, by these cautionary statements.

iii

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Semler Scientific, Inc.

Condensed Statements of Income

Unaudited

(In thousands of U.S. Dollars, except share and per share data)


	For the three months ended June 30,				For the six months ended June 30,
	2023		2022		2023			2022

Revenues	$	18,605	$	14,828	$	36,811	$	28,845
Operating expenses:
Cost of revenues		1,219		963		2,488		1,932
Engineering and product development		1,762		1,074		3,392		2,200
Sales and marketing		4,985		4,201		10,177		8,878
General and administrative		3,459		3,412		7,318		6,715
Total operating expenses		11,425		9,650		23,375		19,725
Income from operations		7,180		5,178		13,436		9,120
Interest income		597		13		1,080		14
Change in fair value of notes held for investment		(111)		—		(217)		—
Other income, net		486		13		863		14
Pre-tax net income		7,666		5,191		14,299		9,134
Income tax provision		1,787		1,117		3,451		1,700
Net income	$	5,879	$	4,074	$	10,848	$	7,434
Net income per share, basic	$	0.88	$	0.60	$	1.62	$	1.10
Weighted average number of shares used in computing basic net income per share		6,707,341		6,761,050		6,704,306		6,769,552
Net income per share, diluted	$	0.75	$	0.51	$	1.38	$	0.92
Weighted average number of shares used in computing diluted net income per share		7,867,001		8,029,302		7,887,584		8,071,509

See accompanying notes to unaudited condensed financial statements.

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Semler Scientific, Inc.

Condensed Balance Sheets

Unaudited

(In thousands of U.S. Dollars, except share and per share data)


	June 30,		December 31,
	2023		2022

Assets
Current Assets:
Cash and cash equivalents	$	39,495	$	23,014
Short-term investments		12,330		20,073
Trade accounts receivable, net of reserves of $154 and $109, respectively		6,032		3,884
Inventory, net		476		469
Prepaid expenses and other current assets		2,418		1,468
Total current assets		60,751		48,908
Assets for lease, net		2,891		2,478
Property and equipment, net		796		667
Long-term investments		821		821
Notes held for investment (includes measured at fair value of $3,962 and $3,679, respectively)		4,962		4,679
Other non-current assets		2,736		2,842
Long-term deferred tax assets		2,505		2,298
Total assets	$	75,462	$	62,693

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	509	$	835
Accrued expenses		8,243		4,748
Deferred revenue		1,188		1,160
Other short-term liabilities		143		114
Total current liabilities		10,083		6,857

Long-term liabilities:
Other long-term liabilities		116		160
Total long-term liabilities		116		160
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 6,923,446, and 6,906,544 shares issued, and 6,709,024 and 6,692,122 shares outstanding (treasury shares of 214,422 and 214,422), respectively		7		7
Additional paid-in capital		15,188		16,449
Retained earnings		50,068		39,220

Total stockholders’ equity		65,263		55,676

Total liabilities and stockholders’ equity	$	75,462	$	62,693

See accompanying notes to unaudited condensed financial statements.

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Semler Scientific, Inc.

Condensed Statements of Stockholders’ Equity

Unaudited

(In thousands of U.S. Dollars, except share and per share data)


	For the Three Months Ended June 30, 2022
	Common Stock			Treasury Stock			Additional
		Common Stock					Paid-In		Retained Earnings		Total Stockholders'
	Shares Issued	Amount		Shares	Amount		Capital				Equity
Balance at March 31, 2022	6,855,168	$	7	(67,952)	$	—	$	21,130	$	28,255	$	49,392
Treasury stock acquired	—		—	(99,012)		—		(2,846)		—		(2,846)
Employee stock grants	1,204		—	—		—		45		—		45
Taxes paid related to net share settlement of equity awards	(292)		—	—		—		(8)		—		(8)
Stock option exercises	8,545		—	—		—		10		—		10
Stock-based compensation	—		—	—		—		3		—		3
Net income	—		—	—		—		—		4,074		4,074
Balance at June 30, 2022	6,864,625	$	7	(166,964)	$	—	$	18,334	$	32,329	$	50,670


	For the Six Months Ended June 30, 2022
	Common Stock			Treasury Stock			Additional
		Common Stock					Paid-In		Retained Earnings		Total Stockholders'
	Shares Issued	Amount		Shares	Amount		Capital				Equity
Balance at December 31, 2021	6,824,380	$	7	(65,922)	$	—	$	20,645	$	24,895	$	45,547
Treasury stock acquired	—		—	(101,042)		—		(2,945)		—		(2,945)
Employee stock grants	9,610		—	—		—		673		—		673
Taxes paid related to net share settlement of equity awards	(1,710)		—	—		—		(114)		—		(114)
Stock option exercises	32,345		—	—		—		72		—		72
Stock-based compensation	—		—	—		—		3		—		3
Net income	—		—	—		—		—		7,434		7,434
Balance at June 30, 2022	6,864,625	$	7	(166,964)	$	—	$	18,334	$	32,329	$	50,670


	For the Three Months Ended June 30, 2023
	Common Stock			Treasury Stock			Additional
		Common Stock					Paid-In		Retained Earnings		Total Stockholders'
	Shares Issued	Amount		Shares	Amount		Capital				Equity
Balance at March 31, 2023	6,920,643	$	7	(214,422)	$	—	$	17,005	$	44,189	$	61,201
Common stock warrants acquired	—		—	—		—		(1,949)		—		(1,949)
Employee stock grants	3,875		—	—		—		152		—		152
Taxes paid related to net share settlement of equity awards	(1,072)		—	—		—		(27)		—		(27)
Stock-based compensation	—		—	—		—		7		—		7
Net income	—		—	—		—		—		5,879		5,879
Balance at June 30, 2023	6,923,446	$	7	(214,422)	$	—	$	15,188	$	50,068	$	65,263


	For the Six Months Ended June 30, 2023
	Common Stock			Treasury Stock			Additional
		Common Stock					Paid-In		Retained Earnings		Total Stockholders'
	Shares Issued	Amount		Shares	Amount		Capital				Equity
Balance at December 31, 2022	6,906,544	$	7	(214,422)	$	—	$	16,449	$	39,220	$	55,676
Common stock warrants acquired	—		—	—		—		(1,949)		—		(1,949)
Employee stock grant	21,923		—	—		—		846		—		846
Taxes paid related to net share settlement of equity awards	(5,021)		—	—		—		(172)		—		(172)
Stock-based compensation	—		—	—		—		14		—		14
Net income	—		—	—		—		—		10,848		10,848
Balance at June 30, 2023	6,923,446	$	7	(214,422)	$	—	$	15,188	$	50,068	$	65,263

See accompanying notes to unaudited condensed financial statements

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Semler Scientific, Inc.

Condensed Statements of Cash Flows

Unaudited

(In thousands of U.S. Dollars)


	Six months ended June 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	10,848	$	7,434

Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Depreciation		279		309
Deferred tax income		(207)		(160)
Loss on disposal of assets for lease		114		215
Allowance for credit losses		92		38
Change in fair value of notes held for investment		217		—
Gain on short-term investments		(237)		—
Stock-based compensation		860		676
Changes in Operating Assets and Liabilities:
Trade accounts receivable		(2,240)		(1,962)
Inventory		(7)		26
Prepaid expenses and other current assets		(950)		1,276
Other non-current assets		106		(1,960)
Accounts payable		(326)		20
Accrued expenses		3,495		1,800
Other current and non-current liabilities		13		20
Net Cash Provided by Operating Activities		12,057		7,732

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(260)		(258)
Purchase of notes held for investment		(500)		(1,179)
Proceeds from maturities of short-term investments		57,707		—
Purchase of short-term investments		(49,728)		—
Purchase of assets for lease		(674)		(600)
Net Cash Provided by (Used in) Investing Activities		6,545		(2,037)

CASH FLOWS FROM FINANCING ACTIVITIES:
Taxes paid related to net settlement of equity awards		(172)		(114)
Common stock warrants acquired		(1,949)		—
Treasury stock acquired		—		(2,945)
Proceeds from exercise of stock options		—		72
Net Cash Used in Financing Activities		(2,121)		(2,987)
INCREASE IN CASH		16,481		2,708
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		23,014		37,323
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	39,495	$	40,031

See accompanying notes to unaudited condensed financial statements

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Semler Scientific, Inc.

Notes to Condensed Financial Statements

Unaudited

(In thousands of U.S. Dollars, except share and per share data)

1.Basis of Presentation

Semler Scientific, Inc., a Delaware corporation (“Semler” or “the Company”), prepared the unaudited interim financial statements included in this report in accordance with United States generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 23, 2023 (the “Annual Report”). In the opinion of management, these financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for any future period, including the full year.

Credit Losses on Financial Instruments

In accordance with Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“Toic 326”), the Company periodically reviews the financial assets for credit losses. Financial instruments include cash, cash equivalents, marketable and non-marketable securities, and accounts receivable.

In determing the amount of the allowance for credit losses, the Company considers historical collectability based on past due status and make judgments about the creditworthiness of customers based on ongoing credit evaluations. The Company also considers customer-specific information, current market conditions, and reasonable and supportable forecasts of future economic conditions. Any credit loss is recorded as a charge to other income, net, not to exceed the amount of the unrealized loss. Unrealized losses other than the credit loss are recognized in accumulated other comprehensive income (“AOCI”). If the Company has an intent to sell, or if it is more likely than not that the Company will be required to sell a debt security in an unrealized loss position before recovery of its amortized cost basis, the Company will write down the security to its fair value and record the corresponding charge as a component of other income, net.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“Topic 326”). This ASU requires timelier recording of credit losses on loans and other financial instruments held. Instead of reserves based on a current probability analysis, Topic 326 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. All organizations will now use forward-looking information to better inform their credit loss estimates. Topic 326 requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide information about the amounts recorded in the financial statements. In addition, Topic 326 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326 Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, to introduce amendments which will affect the recognition and measurement of financial instruments, including derivatives and hedging. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments – Credit Losses (Topic 326); Targeted Transition Relief. The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments upon adoption of Topic 326. This standard and related amendments are effective for the Company’s fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted this ASU prospectively effective January 1, 2023 and determined that the adoption of this new accounting standard did not have a material impact on its financial statements.

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Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

(In thousands of U.S. Dollars, except share and per share data)

In March 2020, FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments. This ASU improves and clarifies various financial instruments topics, including the current expected credit losses standard issued in 2016 (ASU No. 2016-13). The ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments have different effective dates. The issues 1-5 are conforming amendments, which are effective upon issuance of this final update. The Company determined that issues 1-5 have no impact on its financials. The amendments related to issue 6 and 7 effect ASU No. 2016-13, Financial instruments – credit losses (Topic 326): measurement of credit losses on financial statements. Effective dates of issue 6 and 7 are the same as the effective date of ASU No. 2016-13. The Company adopted this ASU prospectively effective January 1, 2023 and determined that the adoption of this new accounting standard did not have a material impact on its financial statements.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. For public business entities, this guidance will be effective for fiscal years beginning after December 15, 2022 and for interim periods within those fiscal years. This ASU should be applied prospectively to all business combinations in the year of adoption. The Company adopted this ASU prospectively effective January 1, 2023 and determined that the adoption of this new accounting standard did not have a material impact on its financial statements.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the troubled debt restructuring accounting model in Accounting Standards Codification (“ASC”) 310-40 for creditors that have adopted the guidance on measurement of credit losses in ASU 2016-13. Additionally, the ASU requires the public business entities to disclose current period gross write-offs by year of origination for financing receivables and net investments in leases as part of their vintage disclosures under ASC 326. For entities that have adopted the amendments in ASU 2026-13, the amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted the amendments in ASU 2016-13, the effective dates are the same as effective dates in ASU 2016-13. The Company adopted this ASU prospectively effective January 1, 2023 and determined that the adoption of this new accounting standard did not have a material impact on its financial statements.

2.Variably-Priced Revenue

The Company recognizes variable-fee licenses (i.e., fee per test) and sales of hardware equipment and accessories in accordance with ASC 606, Revenue from Contracts with Customers. Total fees from variable-fee licenses represent approximately $8,376 and $6,012 for the three months ended June 30, 2023 and 2022, respectively. Total fees from variable-fee licenses represent approximately $16,938 and $11,855 for the six months ended June 30, 2023 and 2022, respectively. Total sales of hardware and equipment accessories represent approximately $611 and $268 of revenues for the three months ended June 30, 2023 and 2022. Total sales of hardware and equipment accessories represent approximately $951 and $553 of revenues for the six months ended June 30, 2023 and 2022, respectively. The remainder of the revenue is earned from leasing the Company's testing product for a fixed fee, which is not subject to Topic 606.

Upon shipment under variable-fee license contracts, assets for lease are sold to the customers, and the asset is recognized as cost of revenue.

3. Accounts Receivable and Allowance for Credit Losses

Accounts receivable are recorded at the invoiced amount, net of allowance for credit losses. The allowance for credit losses is based on management’s assessment of the collectability of accounts. The Company regularly reviews the adequacy of this allowance for credit losses by considering historical experience, the age of the accounts receivable balances, the credit quality of the customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect customers’ ability to pay to determine whether a specific reserve is appropriate. Accounts receivable deemed uncollectable are charged against the allowance for credit losses when identified.

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Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

(In thousands of U.S. Dollars, except share and per share data)

4. Inventory

Inventory, which is made up of finished goods, is recorded at the lower of cost or net realizable value. Cost is determined on the first-in, first-out method. The Company periodically analyzes its inventory levels to identify inventory that has a cost basis in excess of its estimated realizable value and writes down such inventory as appropriate. Inventory balance was $476 and $469 as of June 30, 2023 and December 31, 2022, respectively.

5. Assets for Lease, net

The Company enters into contracts with customers for the Company’s QuantaFlo product. The Company has determined these contracts meet the definition of a lease under Topic 842. Operating leases are short-term in nature (monthly, quarterly or one year), and all of which have renewal options. The assets that may be associated with these leasing arrangements are identified below as assets for lease. Upon shipment under operating leases, assets for lease are depreciated. During the three months ended June 30, 2023 and 2022, the Company recognized approximately $9,618 and $8,548, respectively, in lease revenues related to these arrangements, which is included in Revenues on the Condensed Statements of Income. During the six months ended June 30, 2023 and 2022, the Company recognized approximately $18,922 and $16,437, respectively, in lease revenues related to these arrangements, which is included in Revenues on the Unaudited Condensed Statements of Income.

Assets for lease consist of the following:


	June 30,		December 31,
	2023		2022
Assets for lease	$	3,998	$	3,702
Less: accumulated depreciation		(1,107)		(1,224)
Assets for lease, net	$	2,891	$	2,478

Depreciation expense amounted to $77 and $103 for the three months ended June 30, 2023 and 2022, respectively. Depreciation expense amounted to $147 and $212 for the six months ended June 30, 2023 and 2022, respectively. Reduction to accumulated depreciation for returned and retired items was $67 and $57 for the three months ended June 30, 2023 and 2022, respectively. Reduction to accumulated depreciation for returned items was $264 and $147 for the six months ended June 30, 2023 and 2022. The Company recognized a loss on disposal of assets for lease in the amount of $36 and $141 for the three months ended June 30, 2023 and 2022, respectively. The Company recognized a loss on disposal of assets for lease in the amount of $114 and $215 for the six months ended June 30, 2023 and 2022, respectively.

6. Property and Equipment, net

Capital assets consist of the following:


	June 30,		December 31,
	2023		2022
Capital assets	$	1,467	$	1,206
Less: accumulated depreciation		(671)		(539)
Capital assets, net	$	796	$	667

Depreciation expense amounted to $73 and $51 for the three months ended June 30, 2023 and 2022, respectively. Depreciation expense amounted to $132 and $97 for the six months ended June 30, 2023 and 2022, respectively.

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Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

(In thousands of U.S. Dollars, except share and per share data)

7.Long-Term Investments

Long term investments consist of the following for the periods presented:


	June 30,		December 31,
	2023		2022
Investments in SYNAPS Dx	$	512	$	512
Investments in Mellitus Health Inc.		309		309
Total initial cost	$	821	$	821

In September 2020, the Company acquired a promissory note from NeuroDiagnostics Inc., which is doing business as SYNAPS Dx, in the principal amount of $500, $100 of which was retained for expense reimbursement. Subsequently, in December 2020, the Company agreed to convert the promissory note, together with all accrued interest thereon, into shares of preferred stock of SYNAPS Dx as repayment in full of the promissory note. The value of the note exchanged for the shares of preferred stock of SYNAPS Dx held by the Company as of June 30, 2023 and December 31, 2022 was approximately $512.

In October 2020, the Company acquired from a seller a convertible promissory note previously issued by Mellitus Health Inc. (“Mellitus”) to such seller for a purchase price of $59, which represented the $50 principal amount of the note and all accrued and unpaid interest thereon.

Subsequently, in October 2020, the Company purchased $250 of shares of preferred stock of Mellitus, and in connection with such transaction, the convertible promissory note, together with all accrued interest thereon, also converted pursuant to its terms into shares of preferred stock of Mellitus as repayment in full of such convertible promissory note. The value of consideration exchanged for the shares of preferred stock of Mellitus held by the Company as of June 30, 2023 and December 31, 2022 was approximately $309.

The investments in SYNAPS Dx and Mellitus securities that were retained by the Company as of June 30, 2023 were recorded in accordance with ASC 321, Investments – equity securities, which provides that investments in equity securities in privately-held companies without readily determinable fair values are generally recorded at cost, plus or minus subsequent observable price changes in orderly transactions for identical or similar investments, less impairments. The Company elected the practical expedient permitted by ASC 321 and recorded the above investments on a cost basis. As a part of the assessment for impairment indicators, the Company considers significant deterioration in the earnings performance and overall business prospects of the investee as well as significant adverse changes in the external environment these investments operate. If qualitative assessment indicates the investments are impaired, the fair value of these equity securities would be estimated, which would involve a significant degree of judgement and subjectivity.

The Company qualitatively assessed both investments for impairment in accordance with ASC 321. As of June 30, 2023 and December 31, 2022, the Company determined that there was no impairment for the investment in SYNAPS Dx and the investment in Mellitus.

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Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

(In thousands of U.S. Dollars, except share and per share data)

8.Fair Value Measurements

The following table presents fair value hierarchy of the Company’s financial assets measured at fair value on a recurring basis:


	Fair Value Hierarchy
	Level 1		Level 2		Level 3		Total
As of June 30, 2023
U.S. Treasury bills	$	12,330	$	—	$	—	$	12,330
(Included in short-term investments)
Investment in debt securities		—		—		3,962		3,962
(Included in notes held for investment)
Total Assets	$	12,330	$	—	$	3,962	$	16,292


	Level 1		Level 2		Level 3		Total
As of December 31, 2022
U.S. Treasury bill	$	20,073	$	—	$	—	$	20,073
(Included in short-term investments)
Investment in debt securities		—		—		3,679		3,679
(Included in notes held for investment)
Total Assets	$	20,073	$	—	$	3,679	$	23,752

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy under FASB ASC 820, Fair Value Measurement, are described as follows:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 — Inputs other than quoted prices included in Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and

Level 3 — Unobservable inputs that are supported by little or no market activity, which requires the Company to develop its own models.

The financial instruments of the Company consist primarily of cash, money market accounts, receivable, and accounts payable. These items are considered Level 1 due to their short-term nature and their market interest rates and are therefore considered a reasonable estimate of fair value at June 30, 2023 and December 31, 2022. The Company classifies short-term investments within Level 1 in the fair value hierarchy, because quoted prices for identical assets in active markets are used to determine fair value. The Company estimates the fair value of the investment in debt securities using Level 3 inputs. See Note 9 for description of methodologies and significant assumptions used in those valuations. The Company also invested in non-convertible promissory note, prepayment for inventory and equity securities of two privately held companies, which were recorded on cost basis. See Note 7, 9 and 10 to the financial statements for more information.

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Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

(In thousands of U.S. Dollars, except share and per share data)

Treasury bills were purchased on May 12, 2023 and June 23, 2023, at a cost of $10,154 and $2,077, respectively, and fair values accrete to maturity dates at an interest rate of 5.02% and 5.14%, resepectively. As of June 30, 2023, the interest income recorded on these bills was $99.

The Company's privately held debt securities are recorded at fair value on a recurring basis. The estimation of fair value for these investments requires the use of significant unobservable inputs, and as a result, the Company deems these assets as Level 3 within the fair value measurement framework. For investments without a readily determinable fair value, the Company applies valuation methods based on information available, including the market approach and bond plus call pricing approach. Observable transactions, such as the issuance of new equity by an investee and changes in market yield, are indicators of investee enterprise value and are used to estimate the fair value of the Company’s investments.

The Company valued the debt security issued by Monarch Medical Technology LLC (“Monarch”) using a bond plus call option model reflecting the cash flow from the Monarch debt security and assuming a 20% probability of an equity financing, a 20% probability of a change of control, and a 60% probability of payment at maturity or an insolvency event. The Company valued the Mellitus debt security using a bond plus call option model reflecting the cash flow from the Mellitus debt securities and assuming a 70% probability of an equity financing, 8% probability of a change of control, and a 22% probability of payment at maturity or an insolvency event. The fair value of the Company’s privately held debt securities were estimated at $3,962 and $3,679 as of June 30, 2023 and December 31, 2022, respectively.

The key inputs for the valuation model are:


		June 30,
		2023
Risk-free rate		4.32% - 5.33%
Cash flow discount rate		25.8% - 26.9%
Expert term in years		0.50- 3.43
Expected volatility		110.0%- 315.0%

The following table reprents changes in the notes held for the investments with significant unobservable inputs (Level 3):


	Convertible Notes
Balance as of December 31, 2022	$	3,679
Purchased		500
Change in fair value of the notes held for investment		(217)
Balance as of June 30, 2023	$	3,962

9.Notes Held for Investment

Notes receivable consist of the following for the periods presented:


	June 30			December 31
	2023			2022
Senior secured promissory notes	$	1,000	$	1,000
Secured convertible promissory notes		3,962		3,679
Total notes held for investment	$	4,962	$	4,679

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Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

(In thousands of U.S. Dollars, except share and per share data)

In June 2022, the Company loaned Mellitus an aggregate of $1,000 through the purchase of two senior secured promissory notes that bear interest at a rate of 5% per annum, and mature in three years unless accelerated due to an event of default as provided in the notes. Repayment of notes is secured by a first priority interest in all of Mellitus’ assets.

In May 2022, to facilitate the subordination of such notes in connection with the purchase of the senior secured notes, the Company acquired $179 aggregate principal amount of outstanding convertible notes of Mellitus, which, as amended, mature July 5, 2025, if not automatically converted into preferred stock prior thereto. This note bears an interest rate of 10% per annum.

In December 2022, the Company entered in a senior convertible promissory note arrangement with Monarch, providing Monarch with up to $5,000 in available funding, of which $4,000, in principal was drawn as of June 30, 2023. The remaining $1,000 is available to be drawn at any time unless there is an event of default (as defined in the note) that is continuing. The Monarch debt security accrues interest at 10% per annum, payable monthly, and the principal balance is due December 6, 2024. The note along with up to $100 of transaction expenses is due and payable on the occurrence of an event of default or change of control unless accelerated due to the conversion into preferred stock prior thereto at the option of the Company. The Company has the option to extend the maturity date for two consecutive one-year terms. The Monarch debt security can be converted into Monarch’s shares at the Company’s option upon (a) an equity financing at Monarch, (b) upon a change of control at Monarch, or (c) at the Company’s option at any time prior to the maturity date. If converted upon a change of control, the Company has the right to receive a cash payment equal to the balance of the Monarch debt security or the amount payable upon conversion into Monarch’s shares. The Monarch debt security is redeemable at any time at Monarch’s option or automatically upon an event of default (as defined in the note).

The Company made an irrevocable election to account for the Mellitus and Monarch debt securities using the fair value option under ASC 825 – Financial Instruments (“ASC 825”) and will measure the fair value of the such debt securities in accordance with ASC 820. The Company made the fair value option election to present the debt securities in their entirety at fair value, which it believes to be preferable to recognizing the host instrument at fair value under ASC 320 and potentially separately recognizing certain embedded features as bifurcated derivatives under ASC 815. As of June 30, 2023, the Company estimated the fair value of the Monarch debt security to be $3,741 and the Mellitus debt security to be $221. As of December 31, 2022, the Company estimated the fair value of the Monarch debt security to be $3,500 and the Mellitus debt security to be $179, which were equivalent of the outstanding principal balances at December 31, 2022.

The Company recognizes interest income as it accrues on the Monarch debt securities, which is included in interest income in the statements of income. For the three months ended June 31, 2023 and 2022, the Company recognized $118 and $3, respectively, of interest income from Monarch and Mellitus notes, which is included in prepaid and other current assets. For the six months ended June 30, 2023 and 2022, the Company recognized $227 and $3, respectively, of interest income from Monarch and Mellitus notes. Unpaid balance is included in prepaid and other current assets. The Company recognizes changes in fair value of the notes in the statements of income separately from the interest income. For the three months ended June 30, 2023, the Company recorded change in fair value of $111. For the six months ended June 30, 2023, the Company recorded change in fair value of $217.

10. Other Non-current assets

Other non-current assets consist of the following for the periods presented:


	June 30,		December 31,
	2023		2022
Prepaid licenses	$	2,424	$	2,490
Other		312		352
Total other non-current assets	$	2,736	$	2,842

In April 2021, the Company entered into a five-year agreement, as amended in December 2022, with Mellitus to exclusively market and distribute its product line in the United States, including Puerto Rico, except for selected accounts. Under this distribution agreement and its amendments, the Company agreed to purchase $2,500 of product licenses and prepaid $2,500 for the license purchases. This prepayment, which was reclassed to a long-term asset in 2022 due to the change in the estimation of the recoverability

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Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

(In thousands of U.S. Dollars, except share and per share data)

period is expected to be more than one year. The long-term portion of the prepaid licenses are included in the Other non-current assets. Unless early terminated in accordance with its terms, the exclusive distribution agreement will remain in full force and effect until April 1, 2026, and for renewal periods of one year each upon its anniversary date, unless terminated by at least 60 days written notice prior to such an anniversary date. Either party may terminate the agreement by written notice to the other party upon or after the breach of any material provision of this agreement by the other party, if the other party has not cured such breach within 60 days after written notice thereof from the non-breaching party.

Revenue from these product licenses will be recognized in accordance with ASC 606, Revenue from Contracts with Customers. The Company did not generate significant revenue from these product licenses during the three and six months ended June 30, 2023 and 2022.

Other includes right-of-use asset (“ROU”) of $192, miscellaneous receivables of $100, and long-term deposits of $20 as of June 30, 2023. As of December 31, 2022, ROU was $233, miscellaneous receivable was $100, and long-term deposit was $19.

11.Accrued Expenses

Accrued expenses consist of the following:


	June 30,		December 31,
	2023		2022
Compensation	$	3,865	$	2,467
Accrued Taxes		3,824		1,923
Miscellaneous Accruals		554		358
Total Accrued Expenses	$	8,243	$	4,748

12.Concentration of Credit Risk

Credit risk is the risk of loss from amounts owed by the financial counterparties. Credit risk can occur at multiple levels; as a result of broad economic conditions, challenges within specific sectors of the economy, or from issues affecting individual companies. Financial instruments that potentially subject the Company to credit risk consist of cash and accounts receivable.

The Company maintains cash with major financial institutions. The Company’s cash consists of bank deposits held with banks that, at times, exceed federally insured limits. The cash and cash equivalents also include short-term treasury bills with original maturities of three months or less. As of June 30, 2023, the Company held deposits of $10,620, approximately $5,561 of which held by First Republic Bank (“FRB”). The Company’s deposits at FRB are largely uninsured. On May 1, 2023, JP Morgan Chase Bank (“JPM”) agreed to acquire all the assets and liabilities of FRB. Consequently, all depositors of FRB will become the depositors of JPM. Deposits at JPM are largely uninsured. The Company also invested in U.S. treasury bills in the amount of $41,205 as of June 30, 2023. The Company limits its credit risk by dealing with counterparties that are considered to be of high credit quality and by performing periodic evaluations of the relative credit standing of these financial institutions.

Management periodically monitors the creditworthiness of its customers and believes that it has adequately provided for exposure to potential credit loss. For the three months ended June 30, 2023, two customers (including affiliates) accounted for 37.2% and 33.5% of the Company’s revenues. For the three months ended June 30, 2022, two customers (including affiliates) accounted for 38.1% and 32.3% of the Company’s revenues. For the six months ended June 30, 2023, two customers accounted for 39.0% and 33.5%, of the Company’s revenues, respectively. For the six months ended June 30, 2022, two customers accounted for 38.6% and 32.0%, of the Company’s revenues, respectively. As of June 30, 2023, three customers accounted for 37.5%, 33.3%, and 10.3% of the Company’s accounts receivable. As of December 31, 2022, three customers accounted for 26.8%, 25.9%, and 16.8% of the Company’s accounts receivable. The Company’s largest customer in terms of both revenues and accounts receivable in the three and six months ended June 30, 2023 is a U.S. diversified healthcare company and its affiliated plans.

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Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

(In thousands of U.S. Dollars, except share and per share data)

As of June 30, 2023, five vendors accounted for 14.5%, 11.8%, 11.6%, 10.9% and 10.2% of the Company’s accounts payable. As of December 31, 2022, two vendors accounted for 25.8% and 10.8% of the Company’s accounts payable.

13.Lessee Arrangements

On July 31, 2020, the Company entered into a 61-month lease agreement for office space to use, as necessary, for office administration, lab space and assembly and storage purposes, located in Santa Clara, California. The Company took possession of the leased office space in September 2020, and the lease is effective through September 30, 2025.

As of June 30, 2023, the remaining lease term is two years and three months with no options to renew. The Company recognized facilities lease expenses of $22 and $22 for the three months ended June 30, 2023 and 2022, respectively. The Company recognized facilities lease expenses of $44 and $44 for the six months ended June 30, 2023 and 2022, respectively. The following table summarizes the future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms greater than one year as of June 30, 2023:


	Total
2023 Remaining period		45
2024		93
2025		71
Total undiscounted future minimum lease payments		209
Less: present value discount		(6)
Total lease liabilities		203
Lease expense in excess cash payment		(11)
Total ROU asset	$	192

As of June 30, 2023, the Company’s ROU asset was $192, which was recorded on the Company’s balance sheet as other noncurrent assets, and the Company’s current and noncurrent lease liabilities were $87 and $116, respectively, which were recorded on the Company’s balance sheet as other short-term liabilities and other long-term liabilities, respectively.

Lessor Arrangements

The Company enters into contracts with customers for the Company’s QuantaFlo product. The Company has determined these contracts meet the definition of a lease under Topic 842. The lease portfolio primarily consists of operating leases that are short-term in nature (monthly, quarterly or one year, all of which have renewal options). The Company allocates the consideration in a bundled contract with its customers based on relative standalone selling prices of the lease and non-lease components. The Company made an accounting policy election to apply the practical expedient to not separate lease and eligible non-lease components. The lease component is the predominant component and consists of fees charged for use of the equipment over the period of the arrangement. The nature of the eligible non-lease component is primarily software support. The assets associated with these leasing arrangements are separately identified in the Balance Sheet as Assets for Lease and separately disclosed in Note 5 to the Unaudited Condensed Financial Statements.

14.Commitments and Contingencies

Senior Secured Convertible Note

In December 2022, the Company committed a loan of $5,000 to Monarch through the purchase of a senior secured convertible promissory note that bears interest at a rate of 10% per annum and matures on the second anniversary from the issue date, which can be extended for up to two additional consecutive one-year terms in the Company’s sole discretion. The note along with up to $100 of transaction expenses is due and payable on the occurrence of an event of default or change of control unless accelerated due to the conversion into preferred stock prior thereto at the option of the Company. Monarch borrowed $3,500 on the issuance date and $500 in the first quarter of 2023 out of the committed amount of $5,000 and has agreed to reimburse the Company for up to $100 of

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Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

(In thousands of U.S. Dollars, except share and per share data)

transaction expense. Repayment of the note is secured by a first priority interest in all of Monarch’s assets. See Note 8 and 9 to the Unaudited Condensed Financial Statements.

Indemnification Obligations

The Company enters into agreements with customers, partners, lenders, consultants, lessors, contractors, sales representatives and parties to certain transactions in the ordinary course of the Company’s business. These agreements may require the Company to indemnify the other party against third party claims alleging that its product infringes a patent or copyright. Certain of these agreements require the Company to indemnify the other party against losses arising from: a breach of representations or covenants, claims relating to property damage, personal injury or acts or omissions of the Company, its employees, agents or representatives. The Company has also agreed to indemnify the directors and certain of the officers and employees in accordance with the by-laws of the Company. These indemnification provisions will vary based upon the nature and terms of the agreements. In many cases, these indemnification provisions do not contain limits on the Company’s liability, and the occurrence of contingent events that will trigger payment under these indemnities is difficult to predict. As a result, the Company cannot estimate its potential liability under these indemnities. The Company believes that the likelihood of conditions arising that would trigger these indemnities is remote and, historically, the Company has not made any significant payment under such indemnification provisions. Accordingly, the Company has not recorded any liabilities relating to these agreements. In certain cases, the Company has recourse against third parties with respect to the aforesaid indemnities, and the Company believes it maintains adequate levels of insurance coverage to protect the Company with respect to potential claims arising from such agreements.

401(K) Plan

Effective January 1, 2022, the Company started to match 50% of employee’s 401(k) deferral up to a maximum of 6% of the employee’s eligible earnings.

Other

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides for an employee retention payroll tax credit for certain employers, which is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020 and before December 31, 2021. For each employee, wages (including health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. The Company started claiming this credit on its July 2020 payroll until mid-April 2021 when it determined that it no longer qualified given the change in government restrictions on travel that had impacted its sales activities. The Company’s determination that it qualified to claim the employee retention payroll tax credit is subjective and subject to audit by the Internal Revenue Service (“IRS”). If the IRS were to disagree with the Company’s tax position, it could be required to pay the retention credit claimed, along with penalties. As of June 30 2023, the Company has claimed $1.24 million in this retention credit.