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 September 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 November 7, 2023, there were 6,873,196 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	23
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, Use of Proceeds and, Issuer Purchases of Equity Securities	24
Item 3.	Defaults upon Senior Securities	24
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	25

Signatures		25

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 recent 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 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 macroeconomic factors that could impact our business, such as the effects of the Russian invasion of Ukraine and Israel conflict with Hamas on the global economy and supply chain and inflation, as well as the recent bank failures and other events, such as the recent Covid-19 pandemic or any other pandemics; 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 September 30,				For the nine months ended September 30,
	2023		2022		2023			2022

Revenues	$	16,316	$	14,047	$	53,127	$	42,891
Operating expenses:
Cost of revenues		1,111		1,138		3,599		3,070
Engineering and product development		1,174		1,244		4,566		3,444
Sales and marketing		3,423		4,153		13,601		13,031
General and administrative		3,710		3,045		11,028		9,760
Strategic streamlining		599		—		599		—
Total operating expenses		10,017		9,580		33,393		29,305
Income from operations		6,299		4,467		19,734		13,586
Interest income		692		137		1,772		151
Change in fair value of notes held for investment		—		—		(217)		—
Other expense		(3)		(3)		(3)		(2)
Other income, net		689		134		1,552		149
Pre-tax net income		6,988		4,601		21,286		13,735
Income tax provision		1,474		926		4,924		2,626
Net income	$	5,514	$	3,675	$	16,362	$	11,109
Net income per share, basic	$	0.82	$	0.55	$	2.44	$	1.65
Weighted average number of shares used in computing basic net income per share		6,717,301		6,678,175		6,708,675		6,738,717
Net income per share, diluted	$	0.71	$	0.46	$	2.09	$	1.38
Weighted average number of shares used in computing diluted net income per share		7,818,236		7,939,926		7,847,390		8,027,271

See accompanying notes to unaudited condensed financial statements.

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Semler Scientific, Inc.

Condensed Balance Sheets

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


	September 30,		December 31,
	2023		2022
		Unaudited
Assets
Current Assets:
Cash and cash equivalents	$	37,497	$	23,014
Short-term investments		18,530		20,073
Trade accounts receivable, net of reserves of $254 and $109, respectively		5,966		3,884
Inventory, net		439		469
Prepaid expenses and other current assets		1,946		1,468
Total current assets		64,378		48,908
Assets for lease, net		2,498		2,478
Property and equipment, net		765		667
Long-term investments		821		821
Notes held for investment (includes measured at fair value of $4,462 and $3,679, respectively)		5,462		4,679
Other non-current assets		2,744		2,842
Deferred tax assets		2,775		2,298
Total assets	$	79,443	$	62,693

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	300	$	835
Accrued expenses		6,998		4,748
Deferred revenue		1,120		1,160
Other short-term liabilities		159		114
Total current liabilities		8,577		6,857

Long-term liabilities:
Other long-term liabilities		93		160
Total long-term liabilities		93		160
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 6,941,554, and 6,906,544 shares issued, and 6,727,132 and 6,692,122 shares outstanding (treasury shares of 214,422 and 214,422), respectively		7		7
Additional paid-in capital		15,184		16,449
Retained earnings		55,582		39,220

Total stockholders’ equity		70,773		55,676

Total liabilities and stockholders’ equity	$	79,443	$	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 September 30, 2022
	Common Stock			Treasury Stock			Additional
		Common Stock					Paid-In		Retained Earnings		Total Stockholders'
	Shares Issued	Amount		Shares	Amount		Capital				Equity
Balance at June 30, 2022	6,864,625	$	7	(166,964)	$	—	$	18,334	$	32,329	$	50,670
Treasury stock acquired	—		—	(47,458)		—		(2,045)		—		(2,045)
Employee stock grants	872		—	—		—		25		—		25
Stock option exercises	14,000		—	—		—		20		—		20
Stock-based compensation	—		—	—		—		7		—		7
Net income	—		—	—		—		—		3,675		3,675
Balance at September 30, 2022	6,879,497	$	7	(214,422)	$	—	$	16,341	$	36,004	$	52,352


	For the Nine Months Ended September 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	—		—	(148,500)		—		(4,991)		—		(4,991)
Employee stock grants	10,482		—	—		—		698		—		698
Taxes paid related to net share settlement of equity awards	(1,710)		—	—		—		(114)		—		(114)
Stock option exercises	46,345		—	—		—		93		—		93
Stock-based compensation	—		—	—		—		10		—		10
Net income	—		—	—		—		—		11,109		11,109
Balance at September 30, 2022	6,879,497	$	7	(214,422)	$	—	$	16,341	$	36,004	$	52,352


	For the Three Months Ended September 30, 2023
	Common Stock			Treasury Stock			Additional
		Common Stock					Paid-In		Retained Earnings		Total Stockholders'
	Shares Issued	Amount		Shares	Amount		Capital				Equity
Balance at June 30, 2023	6,923,446	$	7	(214,422)	$	—	$	15,188	$	50,068	$	65,263
Employee stock grants	1,945		—	—		—		—		—		—
Taxes paid related to net share settlement of equity awards	(3,618)		—	—		—		(75)		—		(75)
Stock option exercises	19,781		—	—		—		24		—		24
Stock-based compensation	—		—	—		—		47		—		47
Net income	—		—	—		—		—		5,514		5,514
Balance at September 30, 2023	6,941,554	$	7	(214,422)	$	—	$	15,184	$	55,582	$	70,773


	For the Nine Months Ended September 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	23,868		—	—		—		846		—		846
Taxes paid related to net share settlement of equity awards	(8,639)		—	—		—		(247)		—		(247)
Stock option exercises	19,781		—	—		—		24		—		24
Stock-based compensation	—		—	—		—		61		—		61
Net income	—		—	—		—		—		16,362		16,362
Balance at September 30, 2023	6,941,554	$	7	(214,422)	$	—	$	15,184	$	55,582	$	70,773

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)


	Nine months ended September 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,362	$	11,109

Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Depreciation		439		462
Deferred tax expense		(478)		(405)
Loss on disposal of assets for lease		355		303
Loss on disposal of inventory		171		—
Allowance for credit losses		203		53
Change in fair value of notes held for investment		217		—
Gain on short-term investments		(307)		—
Stock-based compensation		907		708
Changes in Operating Assets and Liabilities:
Trade accounts receivable		(2,284)		(107)
Inventory		30		39
Prepaid expenses and other current assets		(478)		2,083
Other non-current assets		98		(1,934)
Accounts payable		(535)		40
Accrued expenses		2,250		3,217
Other current and non-current liabilities		(22)		(52)
Deferred revenue		(40)		237
Net Cash Provided by Operating Activities		16,888		15,753

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(310)		(388)
Purchase of notes held for investment		(1,000)		(1,179)
Proceeds from maturities of short-term investments		59,719		—
Purchase of short-term investments		(57,869)		—
Purchase of assets for lease		(773)		(961)
Net Cash Used in Investing Activities		(233)		(2,528)

CASH FLOWS FROM FINANCING ACTIVITIES:
Taxes paid related to net settlement of equity awards		(247)		(114)
Common stock warrants acquired		(1,949)		—
Treasury stock acquired		—		(4,991)
Proceeds from exercise of stock options		24		93
Net Cash Used in Financing Activities		(2,172)		(5,012)
INCREASE IN CASH		14,483		8,213
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		23,014		37,323
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	37,497	$	45,536

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.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

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 Topic 326. Effective dates of issue 6 and 7 are the same as the effective date of Topic 326. 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.

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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)

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 $6,254 and $4,887 for the three months ended September 30, 2023 and 2022, respectively. Total fees from variable-fee licenses represent approximately $23,191 and $16,742 for the nine months ended September 30, 2023 and 2022, respectively. Total sales of hardware and equipment accessories represent approximately $523 and $539 of revenues for the three months ended September 30, 2023 and 2022. Total sales of hardware and equipment accessories represent approximately $1,474 and $1,091 of revenues for the nine months ended September 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 ASC 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.

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 $439 and $469 as of September 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 September 30, 2023 and 2022, the Company recognized approximately $9,539 and $8,621, respectively, in lease revenues related to these

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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)

arrangements, which is included in Revenues on the Unaudited Condensed Statements of Income. During the nine months ended September 30, 2023 and 2022, the Company recognized approximately $28,462 and $25,058, 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:


	September 30,		December 31,
	2023		2022
Assets for lease	$	3,560	$	3,702
Less: accumulated depreciation		(1,062)		(1,224)
Assets for lease, net	$	2,498	$	2,478

Depreciation expense amounted to $81 and $103 for the three months ended September 30, 2023 and 2022, respectively. Depreciation expense amounted to $228 and $315 for the nine months ended September 30, 2023 and 2022, respectively. Reduction to accumulated depreciation for returned and retired items was $125 and $448 for the three months ended September 30, 2023 and 2022, respectively. Reduction to accumulated depreciation for returned items was $390 and $594 for the nine months ended September 30, 2023 and 2022. The Company recognized a loss on disposal of assets for lease in the amount of $241 and $82 for the three months ended September 30, 2023 and 2022, respectively. The Company recognized a loss on disposal of assets for lease in the amount of $355 and $303 for the nine months ended September 30, 2023 and 2022, respectively.

6. Property and Equipment, net

Property and equipment, net consists of the following:


	September 30,		December 31,
	2023		2022
Property and equipment, gross	$	1,516	$	1,206
Less: accumulated depreciation		(751)		(539)
Property and equipment, net	$	765	$	667

Depreciation expense amounted to $80 and $50 for the three months ended September 30, 2023 and 2022, respectively. Depreciation expense amounted to $211 and $147 for the nine months ended September 30, 2023 and 2022, respectively.

7.Long-Term Investments

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


	September 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 September 30, 2023 and December 31, 2022 was approximately $512.

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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 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 September 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 September 30, 2023 were recorded in accordance with ASC 321, Investments – Equity Securities (“ASC 321”), 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 September 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 September 30, 2023
U.S. Government money market fund accounts	$	35,241	$	—	$	—	$	35,241
(Included in cash and cash equivalents)
U.S. Treasury bills		18,530		—		—		18,530
(Included in short-term investments)
Investment in debt securities		—		—		4,462		4,462
(Included in notes held for investment)
Total Assets	$	53,771	$	—	$	4,462	$	58,233


	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, U.S. government money market fund accounts, trade receivables, trade payables, short-term investments and debt securities. Because carrying values of cash, trade receivables and payables are equal to or approximate their fair value, the Company excluded from the leveling requirements. U.S. government money market fund accounts are classified as Level 1 due to their short-term nature, their market interest rates and also based on the fact that they are publicly traded. 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. The Company also invested in non-convertible promissory note, prepayment for inventory and

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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)

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.

Treasury bills were purchased on July 27, 2023 and August 11, 2023, at a cost of $8,095 and $10,279, respectively, and fair values accrete to maturity dates at an interest rate of 5.28%. As of September 30, 2023, the interest income recorded on these bills was $156.

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.

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 10% probability of an equity financing, a 50% probability of a change of control, and a 40% 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 80% probability of an equity financing, 15% probability of a change of control, and a 5% probability of payment at maturity or an insolvency event. The fair value of the Company’s privately held debt securities were estimated at $4,462 and $3,679 as of September 30, 2023 and December 31, 2022, respectively.

The key inputs for the valuation model are:


		September 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		1,000
Change in fair value of the notes held for investment		(217)
Balance as of September 30, 2023	$	4,462

9.Notes Held for Investment

Notes receivable consist of the following for the periods presented:


	September 30,			December 31,
	2023			2022
Senior secured promissory notes	$	1,000	$	1,000
Secured convertible promissory notes		4,462		3,679
Total notes held for investment	$	5,462	$	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 $4,500, in principal was drawn as of September 30, 2023. The remaining $500 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 September 30, 2023, the Company estimated the fair value of the Monarch debt security to be $4,241 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 on the Monarch debt securities, which is included in interest income in the condensed statements of income. For the three months ended September 30, 2023 and 2022, the Company recognized $120 and $17, respectively, of interest income from Monarch and Mellitus notes. Accrued interest is included in prepaid and other current assets. For the nine months ended September 30, 2023 and 2022, the Company recognized $347 and $20, 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 September 30, 2023, the Company recorded no change in fair value. For the nine months ended September 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:


	September 30,		December 31,
	2023		2022
Prepaid licenses	$	2,453	$	2,490
Other		291		352
Total other non-current assets	$	2,744	$	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

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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)

purchases. This prepayment, which was reclassed to a long-term asset in 2022 due to the change in the estimation of the recoverability 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 is 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 nine months ended September 30, 2023 and 2022.

11.Accrued Expenses

Accrued expenses consist of the following:


	September 30,		December 31,
	2023		2022
Compensation	$	3,669	$	2,467
Accrued Taxes		2,342		1,923
Miscellaneous Accruals		987		358
Total Accrued Expenses	$	6,998	$	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 September 30, 2023 and December 31, 2022, the Company held deposits of $2,256 and $12,960, respectively. These deposits are largely uninsured. The Company also invested in U.S. government money market funds and U.S. treasury bills in the amount of $35,241 and $18,530, respectively, as of September 30, 2023. As of December 31, 2022, the Company invested in U.S. treasury bills of $30,127. 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 September 30, 2023, three customers (including affiliates) accounted for 36.4%, 28.3% and 11.4% of the Company’s revenues. For the three months ended September 30, 2022, two customers (including affiliates) accounted for 41.2% and 26.2% of the Company’s revenues. For the nine months ended September 30, 2023, two customers accounted for 34.4% and 35.7% of the Company’s revenues, respectively. For the nine months ended September 30, 2022, two customers accounted for 39.9% and 30.1%, of the Company’s revenues, respectively. As of September 30, 2023, three customers accounted for 34.1%, 21.9%, and 21.7% 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 nine months ended September 30, 2023 is a U.S. diversified healthcare company and its affiliated plans.

As of September 30, 2023, four vendors accounted for 20.9%, 12.8%, 12.0%, and 10.5% 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.

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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)

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 September 30, 2023, the remaining lease term is two years with no options to renew. The Company recognized facilities lease expenses of $22 and $22 for the three months ended September 30, 2023 and 2022, respectively. The Company recognized facilities lease expenses of $66 and $66 for the nine months ended September 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 September 30, 2023:


	Total
2023 Remaining period		23
2024		93
2025		71
Total undiscounted future minimum lease payments		187
Less: present value discount		(5)
Total lease liabilities		182
Lease expense in excess cash payment		(11)
Total ROU asset	$	171

As of September 30, 2023, the Company’s right of use (“ROU”) asset was $171, which was recorded on the Company’s balance sheet as other noncurrent assets, and the Company’s current and noncurrent lease liabilities were $88 and