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, 2022



	☐	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 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 October 28, 2022, there were 6,839,973 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.	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	21
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	22
Item 3.	Defaults upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	23

Signatures		24

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. 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 or the extension of QuantaFlo to test for other cardiovascular diseases;

●

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 macroeconomic factors that could impact our business, such as the effects of the Russian invasion of Ukraine on the global economy and supply chain and inflation; 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 4, 2022.

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.

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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,
		2022		2021	2022			2021

Revenues	$	14,047	$	13,991	$	42,891	$	41,485
Operating expenses:
Cost of revenues		1,138		1,382		3,070		3,957
Engineering and product development		1,244		1,036		3,444		2,676
Sales and marketing		4,153		3,968		13,031		10,407
General and administrative		3,045		2,352		9,760		6,710
Total operating expenses		9,580		8,738		29,305		23,750
Income from operations		4,467		5,253		13,586		17,735
Interest income		137		3		151		8
Other (expenses) income		(3)		1		(2)		6
Other income		134		4		149		14
Pre-tax net income		4,601		5,257		13,735		17,749
Income tax provision		926		1,107		2,626		2,034
Net income	$	3,675	$	4,150	$	11,109	$	15,715
Net income per share, basic	$	0.55	$	0.61	$	1.65	$	2.34
Weighted average number of shares used in computing basic income per share		6,678,175		6,754,526		6,738,717		6,722,858
Net income per share, diluted	$	0.46	$	0.51	$	1.38	$	1.93
Weighted average number of shares used in computing diluted income per share		7,939,926		8,143,377		8,027,271		8,135,337

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,
	2022		2021
		Unaudited
Assets
Current Assets:
Cash and cash equivalents	$	45,536	$	37,323
Trade accounts receivable, net of allowance for doubtful accounts of $71 and $61, respectively		3,673		3,619
Inventory, net		511		550
Prepaid expenses and other current assets		1,960		4,044
Total current assets		51,680		45,536
Assets for lease, net		1,986		1,643
Property and equipment, net		635		394
Long-term investments		821		821
Long-term notes receivable		1,179		—
Other non-current assets		2,267		332
Long-term deferred tax assets		2,351		1,946
Total assets	$	60,919	$	50,672

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	483	$	443
Accrued expenses		6,653		3,436
Deferred revenue		1,158		921
Other short-term liabilities		91		80
Total current liabilities		8,385		4,880

Long-term liabilities:
Other long-term liabilities		182		245
Total long-term liabilities		182		245
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 6,879,497, and 6,824,380 shares issued, and 6,665,075, and 6,758,458 shares outstanding (treasury shares of 214,422 and 65,922), respectively		7		7
Additional paid-in capital		16,341		20,645
Retained earnings		36,004		24,895

Total stockholders’ equity		52,352		45,547

Total liabilities and stockholders’ equity	$	60,919	$	50,672

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, 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 grants	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, 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 Synaps Dx	—		—	(40,922)		—		(2,230)		—		(2,230)
Employee stock grants	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


	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 grant	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 grant	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

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)


	For the nine months ended September 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,109	$	15,715

Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Depreciation		462		470
Deferred tax expense		(405)		774
Loss on disposal of assets for lease		303		221
Allowance for doubtful accounts		53		13
Stock-based compensation		708		682
Changes in Operating Assets and Liabilities:
Trade accounts receivable		(107)		(1,177)
Inventory		39		(1,448)
Prepaid expenses and other current assets		2,083		(3,029)
Other non-current assets		(1,934)		65
Accounts payable		40		(276)
Accrued expenses		3,217		2,506
Other current and non-current liabilities		(52)		(63)
Deferred revenue		237		(54)
Net Cash Provided by Operating Activities		15,753		14,399

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(388)		(261)
Notes receivable		(1,179)		—
Purchase of assets for lease		(961)		(341)
Net Cash Used in Investing Activities		(2,528)		(602)

CASH FLOWS FROM FINANCING ACTIVITIES:
Taxes paid related to net settlement of equity awards		(114)		-
Treasury stock acquired		(4,991)		-
Proceeds from exercise of stock options		93		54
Net Cash (Used in) Provided by Financing Activities		(5,012)		54
INCREASE IN CASH		8,213		13,851
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		37,323		22,079
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	45,536	$	35,930
Supplemental Disclosure of Cash Flow Information:
Cash paid for taxes		1,617		2,647
Exercised put option of 211,928 common stock in Synaps Dx for 40,922 common stock of the company	$	—	$	2,230

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, 2021 filed with the SEC on March 4, 2022 (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.

COVID-19

In 2021, variable fee license revenues (fee-per-test), which grew strongly in the first half of 2021, decreased subsequently in the second half of 2021. The Company believes this new pattern in the home-testing market is due to a change in the behavior of insurance plans when ordering QuantaFlo testing from its health risk assessment customers.

The extent and duration of the pandemic is still unknown due to new variants spreading, and the future effects of the new variants 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.

As the Company looks forward into the remaining three months of 2022 and first half of 2023, there is continued uncertainty as recent outbreaks of new variants have occurred and vaccination rates lag in certain jurisdictions. New, additional or different restrictions could be imposed, which could impact the usage of its product by its customers, or further impact the timing of demand for its products. Other customers who have fixed-fee licenses could decide to cancel their licenses if they are not able to use the Company’s device as frequently as they had anticipated in light of such restrictions.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In May 2021, the financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adopted this ASU prospectively effective January 1, 2022 and determined that the adoption of this new accounting standard did not have a material impact on its financial statements.

In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. This update addresses 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 adopted this ASU prospectively to the leases that commence or modified on or after January 1, 2022 and determined that the adoption of this new accounting standard did not have a material impact on its financial statements.

In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This ASU increases the transparency of government assistance to include the disclosure of (1) the types of assistance, (2) an entity's accounting for the assistance, and (3) the effect of the assistance on an entity's financial statements. The guidance in ASU 2021-10 is effective for financial statements of all entities, including private companies, for annual periods beginning after December 15, 2021, with early application permitted. Entities are required to provide the new disclosures prospectively for all transactions with a government entity that are accounted for under either a grant or a contribution accounting model and are reflected in the financial statements at the date of initially applying the new amendments, and to new transactions entered into after that date. The Company adopted ASU No. 2021-10 prospectively to the government assistance received after January 1, 2022 and determined that the adoption of this new accounting standard 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. While the Company is evaluating the effect of adopting this new accounting guidance its effect will largely depend on the composition and credit quality of the Company's portfolio of financial assets and the economic conditions at the time of adoption.

In March 2020, FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments. This ASU improves and clarifies various financial instruments topics, including the current expected credit losses standard issued in 2016 (ASU No. 2016-13). The ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments have different effective dates. The issues 1-5 are conforming amendments, which are effective upon issuance of this final update. The Company determined that issues 1-5 have no impact on its financials. The amendments related to issue 6 and 7 effect ASU No. 2016-13, Financial instruments – credit losses (Topic 326): measurement of credit losses on financial statements. Effective dates of issue 6 and 7 are the same as the effective date of ASU No. 2016-13. The Company 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 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

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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)

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. For all other entities, this guidance is effective for fiscal years beginning after December 15, 2023 and for interim periods within those fiscal years. This ASU should be applied prospectively to all business combinations in the year of adoption. The Company will adopt the new standard in the first quarter of fiscal year 2023. The Company does not expect the adoption of this standard will 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 writeoffs 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 will adopt this ASU along with ASU 2016-13 in the first quarter of 2023. The Company does not expect the adoption of this standard will 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. Total fees from variable-fee licenses represent approximately $4,887 and $5,847 for the three months ended September 30, 2022 and 2021, respectively. Total fees from variable-fee licenses represent approximately $16,742 and $18,009 for the nine months ended September 30, 2022 and 2021, respectively. Total sales of hardware and equipment accessories represent approximately $539 and $300 of revenues for the three months ended September 30, 2022 and 2021, respectively. Total sales of hardware and equipment accessories represent approximately $1,091 and $820 of revenues for the nine months ended September 30, 2022 and 2021, 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. Inventory balance was $511 and $550 as of September 30, 2022 and December 31, 2021, 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. During the three months ended September 30, 2022 and 2021, the Company recognized approximately $8,621 and $7,844, respectively, in lease revenues related to these arrangements. During the nine months ended September 30, 2022 and 2021, the Company recognized approximately $25,058 and $22,656, respectively, in lease revenues related to these arrangements, which is included in Revenues on the Condensed Statements of Income.

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 ASC 606, Revenue from Contracts with Customers.

Assets for lease consist of the following:


	September 30,		December 31,
	2022		2021
Assets for lease	$	3,305	$	3,241
Less: accumulated depreciation		(1,319)		(1,598)
Assets for lease, net	$	1,986	$	1,643

Depreciation expense amounted to $103 and $111 for the three months ended September 30, 2022 and 2021, respectively. Depreciation expense amounted to $315 and $334 for the nine months ended September 30, 2022 and 2021, respectively. Reduction to accumulated depreciation for returned and retired items was $448 and $48 for the three months ended September 30, 2022 and 2021, respectively. Reduction to accumulated depreciation for returned and retired items was $594 and $239 for the nine months ended September 30, 2022 and 2021, respectively. The Company recognized a loss on disposal of assets for lease in the amount of $82 and $97 for the three months ended September 30, 2022 and 2021, respectively. The Company recognized a loss on disposal of assets for lease in the amount of $303 and $221 for the nine months ended September 30, 2022 and 2021, respectively.

5. Property and Equipment, net

Capital assets consist of the following:


	September 30,		December 31,
	2022		2021
Capital assets	$	1,271	$	882
Less: accumulated depreciation		(636)		(488)
Capital assets, net	$	635	$	394

Depreciation expense amounted to $50 and $49 for the three months ended September 30, 2022 and 2021, respectively. Depreciation expense amounted to $147 and $136 for the nine months ended September 30, 2022 and 2021, 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)

6.Long-Term Investments

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


	September 30,		December 31,
	2022		2021
Investments in Synaps Dx	$	512	$	512
Investments in Mellitus Health Inc.		309		309
Total	$	821	$	821

In September 2020, the Company acquired a promissory note from NeuroDiagnostics Inc., which is doing business as Synaps Dx (“Synaps”), in the principal amount of $500. 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 as repayment in full of the promissory note. The value of the note exchanged for the shares of preferred stock of Synaps held by the Company as of September 30, 2022 and December 31, 2021 was approximately $512.

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

Subsequently, in October 2020, the Company purchased $250 of shares of preferred stock of Mellitus, and in connection with such transaction, the convertible promissory note, together with all accrued interest thereon, also converted pursuant to its terms into shares of preferred stock of Mellitus as repayment in full of such convertible promissory note. The value of consideration exchanged for the shares of preferred stock of Mellitus held by the Company as of September 30, 2022 and December 31, 2021 was approximately $309.

The investments in Synaps and Mellitus securities that were retained by the Company as of September 30, 2022 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. In accordance with ASC 321, the Company assessed qualitatively for impairment and determined that there was no impairment for these investments as of September 30, 2022 and December 31, 2021.

7. Notes Receivable

Notes receivable consist of the following for the periods presented:


	September 30,		December 31,
	2022		2021
Senior secured promissory notes	$	1,000	$	—
Secured convertible promissory note		179		—
Total notes receivable	$	1,179	$	—

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.

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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 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.

The Company accrued interest income of $17 and $20 for the three and nine months ended September 30, 2022. This interest is included in prepaid and other current assets.

8. Other Non-current assets

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


	September 30,		December 31,
	2022		2021
Prepaid licenses	$	1,995	$	—
Other		272		332
Total other non-current assets	$	2,267	$	332

In April 2021, the Company entered into an agreement with Mellitus to exclusively market and distribute its product line in the United States, including Puerto Rico, except for selected accounts. The Company is currently developing a marketing plan. Under this distribution agreement, the Company agreed to purchase $2,000 of product licenses and prepaid $2,000 for the license purchases. 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. This prepayment was reclassed to a long-term asset in the second quarter as the recoverability of the prepayment is now expected to be more than twelve months.

Other includes right-of-use asset (“ROU”) of $253 and miscellaneous deposits balance of $19 as of September 30, 2022. As of December 31, 2021, ROU asset and miscellaneous deposits balances were $314 and $18 respectively.

9. Accrued Expenses

Accrued expenses consist of the following:


	September 30,		December 31,
	2022		2021
Compensation	$	4,386	$	1,754
Accrued Taxes		1,955		1,159
Miscellaneous Accruals		312		523
Total Accrued Expenses	$	6,653	$	3,436

10. 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 cash and cash equivalents also include short term treasury bills with original maturities of three months or less. The Company invested in treasury bills in the amount of $19.9 million and money market funds of $7.5 million which are measured at fair value on a recurring basis based on quoted market prices in active markets and are classified as level 1 within the fair value hierarchy. The Company limits its credit risk by

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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)

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, 2022, two customers accounted for 41.2% and 26.2% of the Company’s revenues, respectively. For the three months ended September 30, 2021, two customers accounted for 39.7% and 27.9% of the Company’s revenues. For the nine months ended September 30, 2022, two customers accounted for 39.9% and 30.1%, 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. As of September 30, 2022, three customers accounted for 30.3%, 26.3%, and 13.0% of the Company’s accounts receivable, respectively. As of December 31, 2021, three customers accounted for 21.9%, 20.1%, and 16.6% 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, 2022 is a U.S. diversified healthcare company and its affiliated plans.

As of September 30, 2022, two vendors accounted for 11.9% and 11.4% of the Company’s accounts payable, respectively. As of December 31, 2021, one vendor accounted for 14.0% of the Company’s accounts payable, respectively.

11. 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, 2022, the remaining lease term is three years and three months with no options to renew. The Company recognized facilities lease expenses of $22 and $22 for the three months ended September 30, 2022 and 2021, respectively. The Company recognized facilities lease expenses of $66 and $90 for the nine months ended September 30, 2022 and 2021, 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, 2022:


	Total
2022 Remaining period	$	22
2023		90
2024		93
2025		71
Total undiscounted future minimum lease payments		276
Less: present value discount		(10)
Total lease liabilities		266
Lease expense in excess cash payment		(13)
Total ROU asset	$	253

As of September 30, 2022, the Company’s right-of-use (“ROU”) asset was $253, which was recorded on the Company’s balance sheet as other noncurrent assets, and the Company’s current and noncurrent lease liabilities were $84 and $182, 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, 2021, the Company’s ROU asset was $314, which was recorded on the Company’s balance sheet as other noncurrent assets, and the Company’s current and noncurrent lease liabilities were $80 and $245, 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

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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)

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.

12. Commitments and Contingencies

Facilities Leases

Indemnification Obligations

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

401(K) Plan

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

Other

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

Litigation

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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)

From time to time in the normal course of business, the Company is subject to various legal matters such as threatened or pending claims or litigation. Although the results of claims and litigation cannot be predicted with certainty, the Company does not believe it is a party to any claim or litigation the outcome of which, if determined adversely to it, would individually or in the aggregate be reasonably expected to have a material adverse effect on its results of operations or financial condition.

13. 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. On January 1, 2022, the Share Reserve increased by 270,338. The Share Reserve is currently 3,315,203 shares as of September 30, 2022.

In light of stockholder approval of the 2014 Plan, the Company no longer grants equity awards under the 2007 Plan. As of September 30, 2022, there were no shares available for future stock-based compensation grants under the 2007 Plan and 1,472,319 shares of an aggregate total of 3,315,203 shares were available for future stock-based compensation grants under the 2014 Plan.

Treasury Stock Acquired

On March 14, 2022, the Company’s Board of Directors authorized a share repurchase program under which it may repurchase up to $20.0 million of its outstanding common stock. Under this program the Company may purchase shares on a discretionary basis from time to time through open market purchases, privately negotiated transactions or other means, including through Rule 10b5-1 trading plans or through the use of other techniques such as accelerated share repurchases. The timing and amount of any transactions will be subject to the discretion of the Company based upon market conditions and other opportunities that it may have for the use or investment of its cash balances. The repurchase program has no expiration date, does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. The Company purchased 47,458 shares at a cost of approximately $2,045 during the three months ended September 30, 2022 and 148,500 shares at a cost of approximately $4,991 during the nine months ended September 30, 2022.

Stock Awards

The Company granted fully vested stock awards of 10,482 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, 2022. Net shares issued after deducting taxes paid on these grants were 8,772. Fair value of these stock awards on grant date was $698. The Company granted fully vested stock awards of 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, 2022 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, 2022 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, December 31, 2021	1,356,245	$	3.30	3.97	$	119,830
Options exercised	(47,000)		2.41	—		—
Options granted	5,000		30.48	4.00		—
Balance, September 30, 2022	1,314,245	$	3.43	3.28	$	44,806
Exercisable as of September 30, 2022	1,309,245	$	3.33	3.25	$	44,806

On May 17, 2022 the Company awarded 5,000 options to an employee as compensation pursuant to the 2014 Plan with an exercise price of $30.48 and Black-Scholes options pricing model value of $22.27. In applying the Black-Scholes options pricing model, following assumptions were used: 1) expected price volatility of 78.6%; risk-free interest rate of 2.884%; weighted average expected life of 7 years; zero forefeiture rate and no dividend yield. 1/4th of these options are vested one year after the grant date and 1/48th for each month thereafter contingent upon the participant’s continued service beginning on the initial vesting date and ending when the Vested Ratio equals 1/1. As of September 30, 2022, the fair value of unvested stock options was approximately $101. This unrecognized stock-based compensation expense is expected to be recorded over a weighted average period of 3.4 years.

No options were granted during the nine months ended September 30, 2021.

The Company has recorded an expense of $32 and $47 as it relates to stock-based compensation for the three months ended September 30, 2022 and 2021, respectively. The Company has recorded an expense of $708 and $682 as it relates to stock-based compensation for the nine months ended September 30, 2022 and 2021, respectively:


	Three months ended September 30				Nine months ended September 30,
	2022		2021		2022		2021
Engineering and Product Development	$	—		—		45	$	32
Sales and Marketing		—		—		172		105
General and Administrative		32		47		491		545
Total	$	32	$	47	$	708	$	682

14. Income Taxes

The Company’s income tax provision for the three months ended September 30, 2022 was $926 and for the three months ended September 30, 2021 was $1,107. The Company’s income tax provision for the nine months ended September 30, 2022 and 2021 was $2,626 and $2,034, respectively. The income tax provision reflects 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.

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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 and nine months ended September 30, 2022 was 20.13% and 19.12%, respectively compared to 21.06% and 11.46%, respectively, in the same periods of the prior year. The decrease in effective tax rate for the three months ended September 30, 2022 is primarily related to an increase of tax benefits associated with share-based compensations. The increase in the effective tax rate for the nine months ended September 30, 2022 is primarily due to lower tax benefits associated with employee stock-based compensation plans.

The effective tax rate for the three and nine months ended September 30, 2022 differed from the U.S. federal statutory rate of 21% primarily due to tax benefits associated with stock-based compensation plans, state income taxes (net of federal benefit), and federal and state research and development credit benefit.

As of September 30, 2022, and December 31, 2021, the Company had $419 and $476, 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, 2021 and $8 for the nine months ended September 30, 2022.

On August 16, 2022, the "Inflation Reduction Act" (H.R. 5376) was signed into law in the United States. Among other things, the IRA imposes a 15% corporate alternative minimum tax for tax years beginning after December 31, 2022, levies a 1% excise tax on net stock repurchases after December 31, 2022, and provides tax incentives to promote clean energy. The Company is still in the process of analyzing the provisions of the IRA. The Company does not currently expect the Inflation Reduction Act to have a material impact on the Company's Financial Statements.

15. 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,
	2022					2021
	Shares	Net Income		EPS		Shares	Net Income		EPS
Basic	6,678,175	$	3,675	$	0.55	6,754,526	$	4,150	$	0.61
Common stock warrants	67,932		—			73,922		—
Common stock options	1,193,819		—			1,314,929		—
Diluted	7,939,926	$	3,675	$	0.46	8,143,377	$	4,150	$	0.51

Nine months ended September 30,

2022

2021

Shares