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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File Number 001-36305

SEMLER SCIENTIFIC, INC.

(Exact name of registrant as specified in its charter)

Delaware

26-1367393

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

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: None.

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 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 1, 2021, there were 6,757,708 shares of the issuer’s common stock, $0.001 par value per share, outstanding.

Table of Contents

Table of Contents

TABLE OF CONTENTS

 

Page

Part I.

Financial Information

1

 

 

Item 1.

Financial Statements

1

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

20

Item 4.

Controls and Procedures

21

 

 

Part II.

Other Information

21

 

 

Item 1.

Legal Proceedings

21

Item 1A.

Risk Factors

21

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

21

Item 3.

Defaults upon Senior Securities

21

Item 4.

Mine Safety Disclosures

21

Item 5.

Other Information

21

Item 6.

Exhibits

22

 

 

Signatures

23

i

Table of Contents

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. 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 FDA-cleared products and may not benefit from our recent investments in other companies developing complementary products;
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;
the fact that 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
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 9, 2021.

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.

ii

Table of Contents

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, 

    

2021

    

2020

    

2021

    

2020

Revenues

$

13,991

$

10,727

$

41,485

$

26,530

Operating expenses:

 

Cost of revenues

 

1,382

820

3,957

2,370

Engineering and product development

 

1,036

672

2,676

2,277

Sales and marketing

 

3,968

2,116

10,407

7,283

General and administrative

 

2,352

1,564

6,710

4,634

Total operating expenses

 

8,738

5,172

23,750

16,564

Income from operations

 

5,253

5,555

17,735

9,966

Interest income

 

3

2

8

5

Other income

 

1

 

38

 

6

 

64

Other income

 

4

40

14

69

Pre-tax net income

5,257

5,595

17,749

10,035

Income tax provision

1,107

729

2,034

1,421

Net income

$

4,150

$

4,866

$

15,715

$

8,614

Net income per share, basic

$

0.61

$

0.74

$

2.34

$

1.31

Weighted average number of shares used in computing basic income per share

 

6,754,526

6,578,808

6,722,858

6,553,522

Net income per share, diluted

$

0.51

$

0.61

$

1.93

$

1.07

Weighted average number of shares used in computing diluted income per share

8,143,377

8,038,513

8,135,337

8,046,759

See accompanying notes to unaudited condensed financial statements.

1

Table of Contents

Semler Scientific, Inc.

Condensed Balance Sheets

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

September 30, 

December 31, 

2021

    

2020

Unaudited

Assets

Current Assets:

 

  

 

  

Cash and cash equivalents

$

35,930

$

22,079

Trade accounts receivable, net of allowance for doubtful accounts of $61 and $61, respectively

 

3,972

 

2,808

Inventory

1,788

340

Prepaid expenses and other current assets

 

4,405

 

1,376

Total current assets

 

46,095

 

26,603

Assets for lease, net

 

1,727

 

1,941

Property and equipment, net

 

386

 

261

Other non-current assets

353

418

Long-term investments

 

821

 

3,051

Long-term deferred tax assets

1,591

2,365

Total assets

$

50,973

$

34,639

Liabilities and Stockholders’ Equity

 

 

Current liabilities:

Accounts payable

$

401

$

677

Accrued expenses

 

5,304

 

2,798

Deferred revenue

 

909

 

963

Other short-term liabilities

79

76

Total current liabilities

 

6,693

 

4,514

Long-term liabilities:

 

 

  

Other long-term liabilities

266

332

Total long-term liabilities

 

266

 

332

Commitments and contingencies (Note 10)

Stockholders’ equity:

 

 

Common stock, $0.001 par value; 50,000,000 shares authorized; 6,823,130, and 6,725,422 shares issued, and 6,757,208 and 6,700,422 shares outstanding (treasury shares of 65,922 and 25,000, respectively)

 

7

 

7

Additional paid-in capital

 

20,619

 

22,113

Retained earnings

 

23,388

 

7,673

Total stockholders’ equity

 

44,014

 

29,793

Total liabilities and stockholders’ equity

$

50,973

$

34,639

See accompanying notes to unaudited condensed financial statements.

2

Table of Contents

Semler Scientific, Inc.

Statements of Stockholders’ Equity

Unaudited

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

For the Three Months Ended September 30, 2020

Common Stock

Treasury Stock

Additional

Common Stock

Paid-In

(Accumulated Deficit)

Total Stockholders'

    

Shares Issued

    

Amount

    

Shares

    

Amount

    

Capital

    

    

Equity

Balance at June 30, 2020

    

6,588,176

    

$

7

    

(25,000)

    

$

    

$

19,598

    

$

(2,586)

    

$

17,019

Employee stock grants

641

Stock option exercises

 

52,016

104

104

Stock-based compensation

 

62

62

Net income

 

4,866

4,866

Balance at September 30, 2020

 

6,640,833

$

7

(25,000)

$

$

19,764

$

2,280

$

22,051

For the Three Months Ended September 30, 2021

Common Stock

Treasury Stock

Additional

Common Stock

Paid-In

Retained Earnings

Total Stockholders'

    

Shares Issued

    

Amount

    

Shares

    

Amount

    

Capital

    

    

Equity

Balance at June 30, 2021

 

6,819,304

$

7

(65,922)

$

$

20,563

$

19,238

$

39,808

Employee stock grant

116

Stock option exercises

 

3,710

9

9

Stock-based compensation

 

47

47

Net income

 

4,150

4,150

Balance at September 30, 2021

6,823,130

$

7

(65,922)

$

$

20,619

$

23,388

$

44,014

For the Nine Months Ended September 30, 2020

Common Stock

Treasury Stock

Additional

Common Stock

Paid-In

(Accumulated Deficit)

Total Stockholders'

    

Shares Issued

    

Amount

    

Shares

    

Amount

    

Capital

    

    

Equity

Balance at December 31, 2019

 

6,556,221

$

7

 

(25,000)

$

$

19,400

$

(6,334)

$

13,073

Employee stock grants

641

Stock option exercises

 

83,971

 

 

 

 

174

 

 

174

Stock-based compensation

 

 

 

 

 

190

 

 

190

Net income

 

 

 

 

 

 

8,614

 

8,614

Balance at September 30, 2020

6,640,833

$

7

 

(25,000)

$

$

19,764

$

2,280

$

22,051

For the Nine Months Ended September 30, 2021

Common Stock

Treasury Stock

Additional

Common Stock

Paid-In

Retained Earnings

Total Stockholders'

    

Shares Issued

    

Amount

    

Shares

    

Amount

    

Capital

    

    

Equity

Balance at December 31, 2020

 

6,725,422

$

7

(25,000)

$

$

22,113

$

7,673

$

29,793

Exercise of put option in private Company #2 (Note 6)

(40,922)

(2,230)

(2,230)

Employee stock grant

5,516

537

537

Stock option exercises

 

92,192

54

54

Stock-based compensation

 

145

145

Net income

 

15,715

15,715

Balance at September 30, 2021

 

6,823,130

$

7

(65,922)

$

$

20,619

$

23,388

$

44,014

See accompanying notes to unaudited condensed financial statements

3

Table of Contents

accompanying notes to unaudited condensed financial statements

Semler Scientific, Inc.

Condensed Statements of Cash Flows

Unaudited

(In thousands of U.S. Dollars)

For the nine months ended September 30

    

2021

    

2020

    

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

15,715

$

8,614

Reconciliation of Net Income to Net Cash Provided by Operating Activities:

 

 

  

Depreciation

 

470

412

Deferred tax expense

774

1,224

Loss on disposal of assets for lease

 

221

178

Allowance for doubtful accounts

 

13

43

Stock-based compensation expense

 

682

190

Changes in Operating Assets and Liabilities:

 

Trade accounts receivable

 

(1,177)

(13)

Inventory

(1,448)

(32)

Prepaid expenses and other current assets

 

(3,029)

(1,315)

Other non-current assets

65

(416)

Accounts payable

 

(276)

(2)

Accrued expenses

 

2,506

264

Other current and non-current liabilities

(63)

416

Deferred revenue

 

(54)

5

Net Cash Provided by Operating Activities

 

14,399

9,568

CASH FLOWS FROM INVESTING ACTIVITIES:

Additions to property and equipment

 

(261)

(103)

Notes receivable

(400)

Purchase of assets for lease

 

(341)

(187)

Net Cash Used in Investing Activities

 

(602)

(690)

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Exercise of stock options

 

54

174

Net Cash Provided by Financing Activities

 

54

174

INCREASE IN CASH

 

13,851

9,052

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

22,079

7,741

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

35,930

$

16,793

Supplemental Disclosure of Cash Flow Information:

Exercised put option of 211,928 common stock in private Company #2 for 40,922 common stock of the Company

$

2,230

See accompanying notes to unaudited condensed financial statements

4

Table of Contents

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, 2020 filed with the SEC on March 9, 2021 (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.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

COVID-19

In the first quarter of 2020, the World Health Organization (“WHO”) declared the novel coronavirus (“COVID-19”) outbreak a pandemic. The outbreak of COVID-19 resulted in travel restrictions, quarantines, “stay-at-home” and “shelter-in-place” orders and extended shutdown of certain businesses around the world. While restrictions began to ease in the second quarter of 2020 and activities began to resume, continued outbreaks both in the United States and globally could lead to restrictions being reimplemented. In the first half of 2020, the Company’s revenues, primarily from variable-fee licenses, were negatively impacted by the COVID-19 pandemic. In the second half of 2020 and the nine months of 2021, the Company’s revenues, primarily from variable-fee licenses, rebounded to and even exceeded pre-COVID-19 levels. However, the Company believes that it possibly experienced some negative effects from the COVID-19 pandemic with the outbreak of the Delta variant during the third quarter of 2021, which may have impacted the sequential growth of the Company’s revenues, in particular, revenue from variable-fee licenses. The extent and duration of the pandemic is unknown, and the future effects on the Company’s business are uncertain and difficult to predict. The Company is continuing to monitor the events and circumstances surrounding the COVID-19 pandemic, which may require adjustments to the Company’s estimates and assumptions in the future.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles for income taxes. This update is effective for the Company’s annual periods beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted the new standard on January 1, 2021 and determined that the adoption of this new accounting guidance did not have a material impact on its financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The amendments in this ASU clarify the interaction between the accounting for investments in equity securities, investment in equity method and certain derivatives instruments. The ASU is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. This ASU is effective for fiscal years beginning after December 15, 2020. The Company adopted the new standard on January 1, 2021 and determined that the adoption of this new accounting guidance 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 October 2020, the FASB issued ASU No. 2020-10, Codification Improvements. This ASU is the final update of the 2019 proposed ASU, Codification Improvements, of which various topics in the Codification are amended, clarified, simplified, or otherwise modified to improve the Codification. The amendments in Section B of this ASU improve the Codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the disclosure section of the Codification. The amendments in Section C of this ASU are varied in nature and may affect the application of the guidance in cases which the original guidance may have been unclear. The amendments in Sections B and C of this ASU are effective for the Company’s annual periods beginning after December 15, 2020, and the amendments should be applied retrospectively, and should be applied at the beginning of the period that includes the adoption date. The Company adopted the new standard on January 1, 2021 and determined that the adoption of this new accounting guidance did not have a material impact on its financial statements.

Accounting Pronouncements Not Yet Adopted

In June 2016, the 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 will adopt the new standard in the first quarter of fiscal year 2023. The Company is evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on the Company's financial statements.

In March 2020, the 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 Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company's financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of the London Interbank Offered Rate, regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. The ASU can be adopted no later than December 1, 2022, with early adoption permitted. The Company has not yet adopted this ASU and is evaluating the effect of adopting this new accounting guidance. The Company does not expect adoption will have a material impact on the Company's financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt--Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity's Own Equity (Subtopic 815-40). The amendments in this ASU affect entities that issue

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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)

convertible instruments and/or contracts in an entity's own equity. For contracts in an entity's own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. The FASB simplified the settlement assessment by removing the requirements (1) to consider whether the contract would be settled in registered shares, (2) to consider whether collateral is required to be posted, and (3) to assess shareholder rights. Those amendments also affect the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this ASU affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The ASU reduces the number of accounting models for convertible debt instruments and convertible preferred stock by eliminating the beneficial conversion feature model and cash conversion model. As compared with current GAAP, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument. The interest rate of more convertible debt instruments will be closer to the coupon interest rate. This ASU is effective for the Company’s fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company has not yet adopted this ASU and is evaluating the effect of adopting this new accounting guidance. The Company does not expect adoption will have a material impact on the Company's financial statements.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). This ASU clarifies the scope of Topic 848 so that derivatives affected by the discounting transition due to reference rate reform initiatives are explicitly eligible for certain optional expedients and exceptions in Topic 84. In addition, to efficiently address another emerging issue related reference rate reform and respond to stakeholder feedback on the proposed feedback on the proposed update on this project, the Board decided to clarify that a receive-variable-rate, pay-variable-rate cross-currency interest rate swap may be considered an eligible hedging instrument in a net investment hedge if both legs of the swap do not have the same repricing intervals and dates as of the result of reference rate reform. The amendments in this update are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments also optionally apply to all entities that designate receive-variable-rate, pay-variable-rate cross-currency interest rate swaps as hedging instruments in net investment hedges that are modified as a result of reference rate reform. An entity may elect to apply the amendments in this update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). The Company has not yet adopted this ASU and is evaluating the effect of adopting this new accounting guidance. The Company does not expect adoption will have a material impact on the Company's financial statements.

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.  This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for the Company’s fiscal years beginning after December 15, 2021. The Company is evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on the Company's financial statements.

In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. This update address stakeholders’ concerns by amending the lease classification requirements for lessors to align them with practice under Topic 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: i) The lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in paragraphs 842-10-25-2 through 25-3, ii) the lessor would have otherwise recognized a day-one loss. This update is effective for the Company’s fiscal years beginning after

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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)

December 15, 2021. The Company is evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on the Company's 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 Topic 606. Total fees from variable-fee licenses represent approximately $5,847 and $4,088 for the three months ended September 30, 2021 and 2020, respectively. Total fee from variable-fee licenses represents approximately $18,009 and $7,080 for the nine months ended September 30, 2021 and 2020, respectively. Total sales of hardware and equipment accessories represent approximately $300 and $332 of revenues for the three months ended September 30, 2021 and 2020, respectively. Total sales of hardware and equipment accessories represent approximately $820 and $732 of revenues for the nine months ended September 30, 2021 and 2020, 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.

3. 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.

In September 2020, the Company entered into an agreement with Private company #1 to exclusively market and distribute a new product line.

Under this agreement, the Company committed to purchase $1,200 of product inventory, all of which was received as of September 30, 2021.   

The Company also agreed to make royalty payments ranging from 0% to 10% of net sales depending on the average net sales price of the distributed products. Unless early terminated in accordance with its terms, this exclusive distribution agreement will remain in full force and effect until December 31, 2024, and thereafter there is an option for this agreement to be automatically renewed for additional 4-year terms. There were no sales of this product through September 30, 2021.

The Company had other hardware inventory of $586 purchased from other vendors as of September 30, 2021. Total inventory, which includes inventory from Private company #1, was $1,788 and $340 as of September 30, 2021 and December 31, 2020, 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)

4.           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. Upon shipment under variable-fee license contracts, these assets for lease are sold to the customers, and the asset is recognized as cost of revenue under Accounting Standards Codification or ASC 606, Revenue from Contracts with Customers. During the three months ended September 30, 2021 and 2020, the Company recognized approximately $7,844 and $6,307, respectively, in lease revenues related to these arrangements. During the nine months ended September 30, 2021 and 2020, the Company recognized approximately $22,656 and $18,718, respectively, in lease revenues related to these arrangements, which is included in Revenues on the Condensed Statements of Income.

Assets for lease consist of the following:

September 30, 

December 31, 

2021

    

2020

    

Assets for lease

$

3,287

$

3,407

Less: accumulated depreciation

 

(1,560)

 

(1,466)

Assets for lease, net

$

1,727

$

1,941

Depreciation expense amounted to $111 and $146 for the three months ended September 30, 2021 and 2020, respectively. Depreciation expense amounted to $334 and $318 for the nine months ended September 30, 2021 and 2020, respectively. Reduction to accumulated depreciation for returned items was $48 and $56 for the three months ended September 30, 2021 and 2020, respectively. Reduction to accumulated depreciation for returned items was $239 and $143 for the nine months ended September 30, 2021 and 2020, respectively. The Company recognized a loss on disposal of assets for lease in the amount of $97 and $54 for the three months ended September 30, 2021 and 2020, respectively. The Company recognized a loss on disposal of assets for lease in the amount of $221 and $178 for the nine months ended September 30, 2021 and 2020, respectively.

5.            Property and Equipment, net

Capital assets consist of the following:

September 30, 

December 31, 

2021

    

2020

    

Capital assets

$

1,047

$

786

Less: accumulated depreciation

 

(661)

 

(525)

Capital assets, net

$

386

$

261

Depreciation expense amounted to $49 and $32 for the three months ended September 30, 2021 and 2020, respectively. Depreciation expense amounted to $136 and $94 for the nine months ended September 30, 2021 and 2020, respectively.

6.Long-Term Investments

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

September 30, 

December 31, 

2021

2020

Investments in Private company #2

    

$

512

    

$

2,742

Investments in Private company #3

 

309

 

309

Total

$

821

$

3,051

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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)

Private Company #2:

In October 2020, the Company purchased 211,928 shares of common stock of Private company #2 from certain sellers in exchange for 40,922 shares of the Company’s common stock. The total fair value of the purchase consideration as of December 31, 2020 was approximately $2,230. The Company had the right to, in various circumstances, sell any or all of these shares of common stock back to the sellers in exchange for the shares of the Company’s common stock originally issued to the sellers. These rights were tied to (a) Private company #2 completing a bona fide equity financing, (b) the share price in such financing, (c) the timing of delivery of certain documents to the Company, or (d) at the Company’s sole option, at any time between March 31, 2021 and October 8, 2021. On April 1, 2021, the Company exercised its option to “put” these shares of common stock back to the sellers in exchange for the shares of the Company’s common stock originally issued to the sellers.

In September 2020, the Company acquired a promissory note from Private company #2 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 Private company #2 as repayment in full of the promissory note. The value of the note exchanged for the shares of preferred stock of Private company #2 held by the Company as of September 30, 2021 and December 31, 2020 was approximately $512.

Private Company #3:

In October 2020, the Company acquired from a seller a convertible promissory note previously issued by Private company #3 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 Private company #3, 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 Private company #3 as repayment in full of such convertible promissory note. The value of consideration exchanged for the shares of preferred stock of Private company #3 held by the Company as of September 30, 2021 and December 31, 2020 was approximately $309.

In April 2021, the Company entered into a distribution agreement with Private company #3 to exclusively market and distribute its product line in the United States, including Puerto Rico, except for selected accounts. Under this agreement, the Company agreed to prepay $2,000 of product licenses, which is included in prepaid expenses and other current assets. As of September 30, 2021, the Company has signed one product license with a customer for this product that may commence in the near future. Unless terminated early in accordance with its terms, the exclusive distribution agreement will remain in full force and effect until April 1, 2026, and thereafter there is an option for this agreement to be automatically renewed for additional one-year terms. Revenue from these product licenses will be recognized in accordance with ASC 606, Revenue from Contracts with Customers. The Company did not generate any revenue from these product licenses during the three and nine months ended September 30, 2021.

The investments in Private company #2 and #3 securities that were retained by the Company as of December 31, 2020 and September 30, 2021 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. No impairment was recorded during the three and nine months ended September 30, 2021.

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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.           Accrued Expenses

Accrued expenses consist of the following:

September 30, 

December 31, 

2021

    

2020

    

Compensation

$

3,640

$

1,524

Accrued Taxes

1,135

861

Miscellaneous Accruals

 

529

 

413

Total Accrued Expenses

$

5,304

$

2,798

8.           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 and cash equivalents consist of bank deposits and money market funds held with banks that, at times, exceed federally insured limits. 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 any exposure to potential credit loss. For the three months ended September 30, 2021, two customers accounted for 39.7% and 27.9% of the Company’s revenues, respectively. For the nine months ended September 30, 2021, two customers accounted for 38.6% and 30.5% of the Company’s revenues, respectively. For the three months ended September 30, 2020, two customers accounted for 39.2% and 29.8% of the Company’s revenues. For the nine months ended September 30, 2020, two customers accounted for 47.2% and 20.4%, of the Company’s revenues, respectively. As of December 31, 2020, four customers accounted for 31.2%, 19.4%, 15.7% and 10.4% of the Company’s accounts receivable, respectively. As of September 30, 2021, four customers accounted for 30.8%, 16.2%, 13.0% and 12.6% of the Company’s accounts receivable, respectively. The Company’s largest customer in terms of both revenues and accounts receivable in the nine months ended September 30, 2021 is a U.S. diversified healthcare company and its affiliated plans.

As of December 31, 2020, two vendors accounted for 15.9% and 24.3% of the Company’s accounts payable, respectively.  As of September 30, 2021, three vendors accounted for 14.8%, 14.0% and 10.3% of the Company’s accounts payable, respectively.

9.          Leases

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, 2021, the remaining lease term is four years with no options to renew. The Company recognized facilities lease expenses of $22 and $32 for the three months ended September 30, 2021 and September 30, 2020, respectively. The Company recognized facilities lease expenses of $90 and $67 for the nine months ended September 30, 2021 and September 30, 2020, respectively.

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Notes to Condensed Financial Statements

Unaudited

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

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, 2021:

    

Total

2021 Remaining period

$

22

2022

 

87

2023

 

90

2024

 

93

2025

 

71

Thereafter

 

Total undiscounted future minimum lease payments

 

363

Less: present value discount

 

(18)

Total lease liabilities

 

345

Lease expense in excess cash payment

 

(11)

Total ROU asset

$

334

As of September 30, 2021, the Company’s right-of-use (“ROU”) asset was $334, which was recorded on the Company’s balance sheet as other noncurrent assets, and the Company’s current and noncurrent lease liabilities were $79 and $266, respectively, which were recorded on the Company’s balance sheet as other short-term liabilities and other long-term liabilities, respectively. As of December 31, 2020, the Company’s ROU asset was $399, which was recorded on the Company’s balance sheet as other noncurrent assets, and the Company’s current and noncurrent lease liabilities were $75 and $332, respectively, which were recorded on the Company’s balance sheet as other short-term liabilities and other long-term liabilities, respectively.

Lease 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 4 to the Unaudited Condensed Financial Statements.

10.          Commitments and Contingencies

Facilities Leases

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

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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)

leased office space in September 2020, and the lease is effective through September 30, 2025. See Note 9 to the Unaudited Condensed Financial Statements for the details.

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.

11.           Stock Incentive Plan

The Company’s stock-based compensation program is designed to attract and retain employees while also aligning employees’ interests with the interests of its stockholders. Stock options have been granted to employees under the stockholder-approved 2007 Key Person Stock Option Plan (“2007 Plan”) and stock options and restricted stock have been granted to employees under the stockholder-approved 2014 Stock Incentive Plan (“2014 Plan”). Stockholder approval of the 2014 Plan became effective in September 2014. The 2014 Plan originally provided that the aggregate number of shares of common stock that may be issued pursuant to awards granted under the 2014 Plan may not exceed 450,000 shares (the “Share Reserve”), however in October 2015, the stockholders approved a 1,500,000 increase to the Share Reserve. In addition, the Share Reserve automatically increases on January 1st of each year, for a period of not more than 10 years, beginning on January 1st of the year following the year in which the 2014 Plan became effective and ending on (and including) January 1, 2024, in an amount equal to 4% of the total number of shares of common stock outstanding on December 31st of the preceding calendar year. The Company’s Board of Directors may act prior to January 1st of a given year to provide that there will be no January 1st increase in the Share Reserve for such year or that the increase in the Share Reserve for such year will be a lesser number of shares of common stock than would otherwise occur. In the fourth quarter of 2020, the Board of Directors agreed not to increase the Share Reserve, and accordingly, the Share Reserve did not increase on January 1, 2021. The Share Reserve is currently 3,044,865 shares as of September 30, 2021.

In light of stockholder approval of the 2014 Plan, the Company no longer grants equity awards under the 2007 Plan. As of September 30, 2021, there were no shares available for future stock-based compensation grants under the 2007 Plan and 1,216,333 shares of an aggregate total of 3,044,865 shares were available for future stock-based compensation grants under the 2014 Plan.

Stock Awards

The Company granted fully vested stock awards for an aggregate 5,516 shares of common stock to the non-employee members of the board of directors, employees and one non-employee as compensation during the nine months ended September 30, 2021. Fair value of these stock awards on grant date was $537.

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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)

Stock Options

Aggregate intrinsic value represents the difference between the closing market value as of September 30, 2021 of the underlying common stock and the exercise price of outstanding, in-the-money options. A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2021 is as follows:

Options Outstanding

Weighted

Average

Number of

Weighted

Remaining

Aggregate

Stock Options

Average

Contractual

Intrinsic Value

    

Outstanding

    

Exercise Price

    

Term (In Years)

    

(In Thousands)

Balance, January 1, 2021

 

1,451,420

$

3.25

 

4.91

$

131,714

Options exercised

 

(93,925)

2.54

Balance, September 30, 2021

 

1,357,495

$

3.30

4.22

$

165,253

Exercisable as of September 30, 2021

 

1,351,245

$

3.27

4.21

$

164,522

The total compensation cost related to unvested stock option awards not yet recognized was $37 as of September 30, 2021.  The weighted average period over which the total unrecognized compensation cost related to these unvested stock awards will be recognized is 0.20 years. There were no options granted during the nine months ended September 30, 2021 or 2020.

The Company has recorded an expense of $47 and $62 as it relates to stock-based compensation for the three months ended September 30, 2021 and 2020, respectively. The Company has recorded an expense of $682 and $190 as it relates to stock-based compensation for the nine months ended September 30, 2021 and 2020, respectively:

Three months ended September 30, 

Nine months ended September 30, 

    

2021

    

2020

    

2021

    

2020

Cost of Revenues

$

$

$

$

Engineering and Product Development

 

32

Sales and Marketing

 

105

General and Administrative

 

47

62

545

190

Total

$

47

$

62

$

682

$

190

12.           Income Taxes

The Company’s income tax provision for the three and nine months ended September 30, 2021 and September 30, 2020 reflect its estimate of the effective tax rates expected to be applicable for the full year, adjusted for any discrete events that are recorded in the period in which they occurred. The estimates are re-evaluated each quarter based on the estimated tax expense for the full year.

For uncertain tax positions that meet a “more likely than not” threshold, the Company recognizes the benefit of uncertain tax positions in the financial statements. The Company’s practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the statements of operations.

The effective tax rate for the three and nine months ended September 30, 2021 was 21.06% and 11.46%, respectively, compared to 13.19% and 14.17%, respectively, in the same periods of the prior year. The decrease in the effective tax rate for the nine months ended September 30, 2021 is primarily related to increase of tax benefits associated with share-based compensation plans. The increase in the effective tax rate for the three months ended September 30, 2021 is primarily related to a decrease in percentage of tax benefit from discrete events associated with share-based compensation plans that occurred during the quarter as compared to the same period in prior year.

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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)

The effective tax rate for the three months and nine months ended September 30, 2021 differed from the U.S. federal statutory rate of 21% primarily due to state income taxes (net of federal benefit), tax benefits associated with share-based compensation plans, and federal and state research and development (“R&D”) credit benefit. The difference between the U.S. federal statutory rate of 21% and the Company’s effective tax rate for the three and nine months ended September 30, 2020 was primarily due to state income taxes (net of federal benefit) partially offset by tax benefits associated with share-based compensation plans, federal and state R&D credit benefit and the effect of changes in enacted tax laws.

As of September 30, 2021, and December 31, 2020, the Company had $325 and $341, respectively of unrecognized tax benefits, excluding interest and penalties. The Company’s practice is to recognize interest and penalty expenses related to uncertain tax positions in income tax expense, which was zero for the year ended December 31, 2020 and nine months ended September 30, 2021.

13.           Net Income Per Share, Basic and Diluted

Basic earnings per share (“EPS”) represent net income attributable to common stockholders divided by the weighted average number of common shares outstanding during the measurement period. Diluted EPS represents net income attributable to common stockholders divided by the weighted average number of common shares outstanding during the measurement period while also giving effect to all potentially dilutive common shares that were outstanding during the period using the treasury stock method.

Basic and diluted EPS is calculated as follows:

Three months ended September 30, 

2021

2020

Shares

    

Net Income

    

EPS

    

Shares

    

Net Income

    

EPS

Basic

6,754,526

$

4,150

$

0.61

6,578,808

$

4,866

$

0.74

Common stock warrants

73,922

70,291

Common stock options

1,314,929

1,389,414

Diluted

8,143,377

$

4,150

$

0.51

8,038,513

$

4,866

$

0.61

Nine months ended September 30, 

2021

2020

Shares

    

Net Income

    

EPS

    

Shares

    

Net Income

    

EPS

Basic

6,722,858

$

15,715

$

2.34

6,553,522

$

8,614

$

1.31

Common stock warrants

73,736

69,682

Common stock options

1,338,743

1,423,555

Diluted

8,135,337

$

15,715

$

1.93

8,046,759

$

8,614

$

1.07

The were no weighted average shares outstanding of common stock equivalents excluded from the computation of diluted net income per share for the nine months ended September 30, 2021 and 2020.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read together with our condensed unaudited financial statements and the related notes appearing elsewhere in this quarterly report on Form 10-Q and with the audited financial statements and notes for the fiscal year ended December 31, 2020, and the information under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on March 9, 2021, or the Annual Report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” in the Annual Report.

Overview

We are a company providing technology solutions to improve the clinical effectiveness and efficiency of healthcare providers. Our mission is to develop, manufacture and market innovative products and services that assist our customers in evaluating and treating chronic diseases. In 2011, we began commercializing our first patented and U.S. Food and Drug Administration, or FDA, cleared product, which measured arterial blood flow in the extremities to aid in the diagnosis of peripheral arterial disease, or PAD. In March 2015, we received FDA 510(k) clearance for the next generation version of our product, QuantaFlo®, which we began commercializing in August 2015. In September 2020 and in April 2021 respectively, we entered into two agreements with private companies to exclusively market and distribute new product lines in the United States, including Puerto Rico, except for selected accounts, and in September 2021, we signed our first customer to a license for one of these new product lines. Our recent investments in, and/or distribution agreements with, these private companies may allow us to expand our current product offering beyond QuantaFlo® for PAD, in addition to our internal research and development efforts. We believe our current products and services, and any future products or services that we may offer, position us to provide valuable information to our customer base, which in turn permits them to better guide patient care.

In the three months ended September 30, 2021, we had total revenues of $14.0 million and net income of $4.2 million, compared to total revenues of $10.7 million and net income of $4.9 million in the same period in 2020. In the nine months ended September 30, 2021, we had total revenues of $41.5 million and net income of $15.7 million, compared to total revenues of $26.5 million and net income of $8.6 million in the same period in 2020.

Recent Developments

Late in the first quarter and into the second quarter of 2020, we experienced decreased test volumes due to COVID-19 related “social distancing” and other executive orders mandating “shelter-in-place” or similar restrictions, which limited patient visits by our customers. As such restrictions have been lifted around the country and non-emergency medical services resumed in late 2020, our business has returned to and even exceeded pre-COVID-19 levels. However, as we look forward into the remainder of 2021 and 2022, there is uncertainty as recent outbreaks of variants had occurred and vaccination rates lag in certain jurisdictions. New, additional or different restrictions could be imposed, which could impact the usage of our product by our customers.

We continue to operate as close to normal as possible, notwithstanding the COVID-19 pandemic.  We may have experienced some effects due to the Delta variant of COVID-19 during the third quarter of 2021 as the sequential growth of our revenues dipped, in particular, revenue from variable-fee licenses, where tests are conducted in the home.

Results of Operations

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Revenues

We had revenues of $14.0 million for the three months ended September 30, 2021, an increase of $3.3 million, or 30%, compared to $10.7 million in the same period in 2020. Our revenues are primarily from fees charged to customers for use of our vascular testing products and from sale of accessories used with these products. We recognized revenues of $13.7 million from fees for our vascular testing products for the three months ended September 30, 2021, consisting of $7.8 million from fixed-fee licenses and $5.9 million from variable-fee licenses compared to $10.4 million in the same period of the prior year, consisting of $6.3 million from fixed-

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fee licenses and $4.1 million from variable-fee licenses. The remainder was from sales of other products, which were $0.3 million in both periods.

We experienced the effects of COVID-19 beginning late in the first quarter and primarily during the second quarter of 2020, which decreased our revenues, in particular, revenue from variable-fee licenses. However, in the third quarter of 2020, our business returned to and even exceeded pre-COVID-19 levels, and we experienced even higher test volumes as our customers accelerated usage due to a backlog of untested patients. This increased testing volume continued in the first half of 2021, until slowing of sequential growth in revenues from variable-fee licenses in the third quarter of 2021, which we believe this may be either due to effects of the Delta variant of COVID-19 during the third quarter of 2021, or due to a new seasonality in the home-testing market, which it hasn’t seen in prior periods, or due to both.

Revenues from fees for vascular testing products are recognized monthly for each unit installed with a customer, usually billed as a fixed monthly fee, or as a variable monthly fee dependent on usage. The primary reason for the increase in revenues was growth in the number of installed units from both new customers and established customers, which we believe is the result of our sales and marketing efforts, partially offset by some effects from the COVID-19 pandemic in the third quarter of 2021.

Operating expenses

We had total operating expenses of $8.7 million for the three months ended September 30, 2021, an increase of $3.5 million or 69%, compared to $5.2 million in the same period in the prior year. The primary reasons for this change were increased expenses associated with our expanding business, such as increased personnel expense. As a percentage of revenues, operating expenses increased to 63% in the third quarter of 2021 as compared to 48% in the prior year period. The changes in the various components of our operating expenses are described below.

Cost of revenues

We had cost of revenues of $1.4 million for the three months ended September 30, 2021, an increase of $0.6 million, or 69%, compared to $0.8 million in the same period of the prior year. The primary reason for this change was an inventory adjustment for supplies and increased headcount. As a percentage of revenues, cost of revenues increased to 10% in the third quarter of 2021, as compared to 8% in the prior year period.

Engineering and product development expense

We had engineering and product development expense of $1.0 million for the three months ended September 30, 2021, an increase of $0.3 million, or 54%, compared to $0.7 million in the same period of the prior year. The increase was primarily due to increased clinical studies costs as well as increased headcount and consulting costs associated with projects. As a percentage of revenues, engineering and product development expense was 7% in the third quarter of 2021, as compared to 6% in the prior year period.

Sales and marketing expense

We had sales and marketing expense of $4.0 million for the three months ended September 30, 2021, an increase of $1.9 million, or 88%, compared to $2.1 million in the same period of the prior year. The increase was primarily due to increased headcount and associated expense to serve a continued expansion of customer activities. As a percentage of revenues, sales and marketing expense increased to 28% in the third quarter of 2021, as compared to 20% in the prior year period. 

General and administrative expense

We had general and administrative expense of $2.4 million for the three months ended September 30, 2021, an increase of $0.8 million, or 50%, compared to $1.6 million in the same period of the prior year. The increase was primarily due to the growth in our business, which led to increased expenses including the expansion of board of directors, insurance, joining Nasdaq market, and other professional fees. As a percentage of revenues, general and administrative expense increased to 17% in the third quarter of 2021, as compared to 15% in the prior year period. 

Other income/expense

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We had other income of $4,000 for the three months ended September 30, 2021, compared to other income of $40,000 in the same period of the prior year. The decrease was primarily due to lower miscellaneous income.

Pre-tax net income

For the foregoing reasons, we had pre-tax net income of $5.3 million, or $0.78 per basic share and $0.65 per diluted share, for the three months ended September 30, 2021, a decrease of $0.3 million, or 6%, compared to a pre-tax net income of $5.6 million, or $0.85 per basic share and $0.70 per diluted share for the same period of the prior year.

Income tax expense

We had income tax expense of $1.1 million for the three months ended September 30, 2021, compared to income tax expense of $0.7 million for the three months ended September 30, 2020. Increase of tax expense in the current quarter was due to lower tax benefits relating to employee stock plans, federal and state research and development credit.

Net income

For the foregoing reasons, we had net income of $4.2 million, or $0.61 per basic share and $0.51 per diluted share, for the three months ended September 30, 2021, a decrease of $0.7 million, or 15%, compared to a net income of $4.9 million, or $0.74 per basic share and $0.61 per diluted share, for the same period of the prior year.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Revenues

We had revenues of $41.5 million for the nine months ended September 30, 2021, an increase of $15.0 million, or 56%, compared to $26.5 million in the same period in 2020. Our revenues are primarily from fees charged to customers for use of our vascular testing products and from sales of accessories used with these products. We recognized revenues of $40.7 million from fees for our vascular testing products for the nine months ended September 30, 2021, consisting of $22.7 million from fixed-fee licenses and $18.0 million from variable-fee licenses, compared to $25.8 million in the same period of the prior year, consisting of $18.7 million from fixed-fee licenses and $7.1 million from variable-fee licenses. The remainder was from sales of other products, which were $0.8 million compared to $0.7 million in the same period of the prior year.

We experienced the effects of COVID-19 beginning late in the first quarter and primarily during the second quarter of 2020, which decreased our revenues, in particular, revenue from variable-fee licenses. However, in the third quarter of 2020, our business returned to and even exceeded pre-COVID-19 levels, and we experienced even higher test volumes as our customers accelerated usage due to a backlog of untested patients. This increased testing volume continued in the first half of 2021, until a slowing of sequential growth in the third quarter of 2021, which we believe may be either due to effects of the Delta variant of COVID-19 during the third quarter of 2021, or due to a new seasonality in the home-testing market, which it hasn’t seen in prior periods, or due to both.

Revenues from fees for vascular testing products are recognized monthly for each unit installed with a customer, usually billed as a fixed monthly fee, or as a variable monthly fee dependent on usage. The primary reason for the increase in revenues was growth in the number of installed units from both new customers and established customers, which we believe is the result of our sales and marketing efforts, partially offset by some effects from the COVID-19 pandemic in the third quarter of 2021.

Operating expenses

We had total operating expenses of $23.8 million for the nine months ended September 30, 2021, an increase of $7.2 million or 43%, compared to $16.6 million in the same period in the prior year. The primary reasons for this change were due to increased expenses associated with our expanding business, such as increased personnel expenses, including stock-based compensation, partially offset by payroll tax reductions available in the first half as compared to the prior year period. As a percentage of revenues, operating expenses decreased to 57% in the first nine months of 2021 as compared to 62% in the prior year period. The changes in the various components of our operating expenses are described below.

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Cost of revenues

We had cost of revenues of $4.0 million for the nine months ended September 30, 2021, an increase of $1.6 million, or 67%, compared to $2.4 million in the same period of the prior year. The primary reasons for this change were increased personnel expenses and an inventory adjustment. As a percentage of revenues, cost of revenues increased to 10% in the nine months ended September 30, 2021, as compared to 9% in the prior year period.

Engineering and product development expense

We had engineering and product development expense of $2.7 million for the nine months ended September 30, 2021, an increase of $0.4 million or 18%, compared to $2.3 million in the same period of the prior year. The primary reason for the increase was higher clinical studies expenses. As a percentage of revenues, engineering and product development expenses decreased to 7% in the first nine months of 2021, compared to 9% in the prior year period.

Sales and marketing expense

We had sales and marketing expense of $10.4 million for the nine months ended September 30, 2021, an increase of $3.1 million, or 43%, compared to $7.3 million in the same period of the prior year. The increase was primarily due to increased headcount and associated expense to serve a continued expansion of customer activities. As a percentage of revenues, sales and marketing expense decreased to 25% in the first nine months of 2021, as compared to 27% in the prior year period. 

General and administrative expense

We had general and administrative expense of $6.7 million for the nine months ended September 30, 2021, an increase of $2.1 million, or 45%, compared to $4.6 million in the same period of the prior year. The increase was primarily due to the growth in our business, which led to increased expenses including the expansion of board of directors, insurance and subscriptions, partially offset by payroll tax credits and consulting fee expenses. As a percentage of revenues, general and administrative expense decreased to 16% in the first nine months of 2021, as compared to 17% in the prior year period. 

Other income/expense

We had other income of $14,000 for the nine months ended September 30, 2021, compared to other income of $69,000 in the same period of the prior year. The decrease was primarily due to lower miscellaneous income and interest income.

Pre-tax net income