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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 March 31, 2023

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 incorporation or organization)

(I.R.S. Employer Identification No.)

2340-2348 Walsh Avenue, Suite 2344

Santa Clara, CA 95051

(Address of principal executive offices) (Zip Code)

(877) 774-4211

(Registrant’s telephone number, including area code)

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

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

SMLR

 

The Nasdaq Stock Market LLC

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

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

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

Large Accelerated Filer

 

Accelerated Filer

Non-Accelerated Filer

 

Smaller Reporting Company

 

 

Emerging growth company

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

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

As of May 5, 2023, there were 6,851,498 shares of the issuer’s common stock, $0.001 par value per share, outstanding.

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

17

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

20

Item 4.

Controls and Procedures

20

 

 

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

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.

i

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 U.S. Food and Drug Administration, or FDA, cleared products and may not benefit from our recent investments in other companies developing complementary products or the extension of QuantaFlo to test for other cardiovascular diseases;

changes in the regulatory reimbursement landscape, such as the recent 2024 Medicare Advantage and Part D Final Rate Announcement issued by the Centers for Medicare and Medicaid Services, or CMS, could impact the perceived value of using our products to aid diagnosis of 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;
our testing product is generally but not specifically approved for reimbursement under any third-party payor codes;
our reliance on the talents of a small number of key personnel, and a small direct sales force;
not requiring customers to enter into long-term licenses;
concentration of our revenues and accounts receivable with a limited number of customers;
our reliance on a small number of independent suppliers and facilities for the manufacturing of our product;
our business being subject to many laws and government regulations, including governing the manufacture and sale of medical devices, patient data, and others;
our ability to protect our intellectual property;
impacts of the ongoing Covid-19 pandemic and macroeconomic factors that could impact our business, such as the effects of the Russian invasion of Ukraine on the global economy and supply chain and inflation, as well as the recent bank failures; and
the other factors set forth under the caption “Risk Factors” in our annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 23, 2023.

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

ii

statements. We qualify all of the information presented in this quarterly report, and particularly our forward-looking statements, by these cautionary statements.

iii

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 March 31, 

2023

2022

Revenues

$

18,206

$

14,016

Operating expenses:

Cost of revenues

1,269

970

Engineering and product development

1,630

1,126

Sales and marketing

5,192

4,676

General and administrative

3,859

3,302

Total operating expenses

11,950

10,074

Income from operations

6,256

3,942

Interest income

484

1

Change in fair value of notes held for investment

 

(107)

 

Other income, net

377

1

Pre-tax net income

6,633

3,943

Income tax provision

1,664

583

Net income

$

4,969

$

3,360

Net income per share, basic

$

0.74

$

0.50

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

6,701,199

6,777,950

Net income per share, diluted

$

0.63

$

0.41

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

7,896,043

8,116,456

See accompanying notes to unaudited condensed financial statements.

1

Semler Scientific, Inc.

Condensed Balance Sheets

Unaudited

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

March 31, 

December 31, 

2023

    

2022

Assets

Current Assets:

  

 

  

Cash and cash equivalents

$

5,305

$

23,014

Short-term investments

37,663

20,073

Trade accounts receivable, net of reserves of $154 and $109, respectively

 

9,343

 

3,884

Inventory, net

512

469

Prepaid expenses and other current assets

 

2,769

 

1,468

Total current assets

 

55,592

 

48,908

Assets for lease, net

 

2,873

 

2,478

Property and equipment, net

 

703

 

667

Long-term investments

 

821

 

821

Notes held for investment (includes measured at fair value of $4,072 and $3,679, respectively)

5,072

4,679

Other non-current assets

2,818

2,842

Long-term deferred tax assets

2,378

2,298

Total assets

$

70,257

$

62,693

Liabilities and Stockholders’ Equity

 

 

Current liabilities:

Accounts payable

$

298

$

835

Accrued expenses

 

7,206

 

4,748

Deferred revenue

 

1,286

 

1,160

Other short-term liabilities

128

114

Total current liabilities

 

8,918

 

6,857

Long-term liabilities:

 

  

 

  

Other long-term liabilities

138

160

Total long-term liabilities

 

138

 

160

Commitments and contingencies (Note 14)

Stockholders’ equity:

 

 

Common stock, $0.001 par value; 50,000,000 shares authorized; 6,920,643, and 6,906,544 shares issued, and 6,706,221 and 6,692,122 shares outstanding (treasury shares of 214,422 and 214,422), respectively

 

7

 

7

Additional paid-in capital

 

17,005

 

16,449

Retained earnings

 

44,189

 

39,220

Total stockholders’ equity

 

61,201

 

55,676

Total liabilities and stockholders’ equity

$

70,257

$

62,693

See accompanying notes to unaudited condensed financial statements.

2

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 March 31, 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

 

(2,030)

(99)

(99)

Employee stock grants

8,406

628

628

Taxes paid related to net share settlement of equity awards

(1,418)

(106)

(106)

Stock option exercises

 

23,800

62

62

Net income

 

3,360

3,360

Balance at March 31, 2022

 

6,855,168

$

7

(67,952)

$

$

21,130

$

28,255

$

49,392

For the Three Months Ended March 31, 2023

Common Stock

Treasury Stock

Additional

Common Stock

Paid-In

Retained Earnings

Total Stockholders'

    

Shares Issued

    

Amount

    

Shares

    

Amount

    

Capital

    

    

Equity

Balance at December 31, 2022

 

6,906,544

$

7

(214,422)

$

$

16,449

$

39,220

$

55,676

Employee stock grant

18,048

695

695

Taxes paid related to net share settlement of equity awards

(3,949)

,

(146)

(146)

Stock-based compensation

7

7

Net income

 

4,969

4,969

Balance at March 31, 2023

6,920,643

$

7

(214,422)

$

$

17,005

$

44,189

$

61,201

See accompanying notes to unaudited condensed financial statements

3

Semler Scientific, Inc.

Condensed Statements of Cash Flows

Unaudited

(In thousands of U.S. Dollars)

Three months ended March 31,

    

2023

    

2022

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

4,969

$

3,360

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

 

 

  

Depreciation

 

129

 

155

Deferred tax (income) expense

(80)

179

Loss on disposal of assets for lease

 

78

 

74

Allowance for credit losses

 

48

 

21

Change in fair value of notes held for investment

107

Gain on short-term investments

(305)

Stock-based compensation

 

702

 

628

Changes in Operating Assets and Liabilities:

 

 

Trade accounts receivable

 

(5,507)

 

(1,818)

Inventory

(43)

(45)

Prepaid expenses and other current assets

 

(1,301)

 

(1,988)

Other non-current assets

25

19

Accounts payable

 

(537)

 

(68)

Accrued expenses

 

2,458

 

946

Other current and non-current liabilities

118

39

Net Cash Provided by Operating Activities

 

861

 

1,502

CASH FLOWS FROM INVESTING ACTIVITIES:

Additions to property and equipment

 

(95)

 

(122)

Proceeds from maturities of short-term investments

20,211

Purchase of short-term investments

(37,496)

Purchase of notes held for investment

(500)

Purchase of assets for lease

 

(544)

 

(134)

Net Cash Used in Investing Activities

 

(18,424)

 

(256)

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Taxes paid related to net settlement of equity awards

(146)

(106)

Treasury stock acquired

(99)

Proceeds from exercise of stock options

 

 

62

Net Cash Used in Financing Activities

 

(146)

 

(143)

(DECREASE) INCREASE IN CASH

 

(17,709)

 

1,103

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

23,014

 

37,323

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

5,305

$

38,426

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, 2022 filed with the SEC on March 23, 2023 (the “Annual Report”). In the opinion of management, these financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for any future period, including the full year.

Credit Losses on Financial Instruments

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

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

Recently Issued Accounting Pronouncements

Accounting Pronouncements Recently Adopted

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

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Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

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

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

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

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

2.Variably-Priced Revenue

The Company recognizes variable-fee licenses (i.e., fee per test) and sales of hardware equipment and accessories in accordance with ASC 606, Revenue from Contracts with Customers. Total fees from variable-fee licenses represent approximately $8,561 and $5,842 for the three months ended March 31, 2023 and 2022, respectively. Total sales of hardware and equipment accessories represent approximately $340 and $285 of revenues for the three months ended March 31, 2023 and 2022, respectively. The remainder of the revenue is earned from leasing the Company's testing product for a fixed fee, which is not subject to Topic 606.

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

3. Accounts Receivable and Allowance for Credit Losses

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

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Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

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

4. Inventory

Inventory, which is made up of finished goods, is recorded at the lower of cost or net realizable value. Cost is determined on the first-in, first-out method. The Company periodically analyzes its inventory levels to identify inventory that has a cost basis in excess of its estimated realizable value and writes down such inventory as appropriate. Inventory balance was $512 and $469 as of March 31, 2023 and December 31, 2022, respectively.

5.           Assets for Lease, net

The Company enters into contracts with customers for the Company’s QuantaFlo product. The Company has determined these contracts meet the definition of a lease under Topic 842. Operating leases are short-term in nature (monthly, quarterly or one year), and all of which have renewal options. The assets that may be associated with these leasing arrangements are identified below as assets for lease. Upon shipment under operating leases, assets for lease are depreciated. During the three months ended March 31, 2023 and 2022, the Company recognized approximately $9,304 and $7,889, 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:

March 31, 

December 31, 

2023

    

2022

    

Assets for lease

$

3,970

$

3,702

Less: accumulated depreciation

 

(1,097)

 

(1,224)

Assets for lease, net

$

2,873

$

2,478

Depreciation expense amounted to $70 and $108 for the three months ended March 31, 2023 and 2022, respectively. Reduction to accumulated depreciation for returned and retired items was $197 and $90 for the three months ended March 31, 2023 and 2022, respectively. The Company recognized a loss on disposal of assets for lease in the amount of $78 and $74 for the three months ended March 31, 2023 and 2022, respectively.

6.            Property and Equipment, net

Capital assets consist of the following:

March 31, 

December 31, 

2023

    

2022

    

Capital assets

$

1,301

$

1,206

Less: accumulated depreciation

 

(598)

 

(539)

Capital assets, net

$

703

$

667

Depreciation expense amounted to $59 and $46 for the three months ended March 31, 2023 and 2022, respectively.

7.Long-Term Investments

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

March 31, 

December 31, 

2023

    

2022

Investments in SYNAPS Dx

    

$

512

$

512

Investments in Mellitus Health Inc.

309

309

Total initial cost

$

821

$

821

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

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

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

The investments in SYNAPS Dx and Mellitus securities that were retained by the Company as of March 31, 2023 were recorded in accordance with ASC 321, Investments – equity securities, which provides that investments in equity securities in privately-held companies without readily determinable fair values are generally recorded at cost, plus or minus subsequent observable price changes in orderly transactions for identical or similar investments, less impairments. The Company elected the practical expedient permitted by ASC 321 and recorded the above investments on a cost basis. As a part of the assessment for impairment indicators, the Company considers significant deterioration in the earnings performance and overall business prospects of the investee as well as significant adverse changes in the external environment these investments operate. If qualitative assessment indicates the investments are impaired, the fair value of these equity securities would be estimated, which would involve a significant degree of judgement and subjectivity.

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

8.Fair Value Measurements

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

Fair Value Hierarchy

Level 1

Level 2

Level 3

Total

As of March 31, 2023

U.S. Treasury bills

$

37,663

$

$

$

37,663

(Included in short-term investments)

Investment in debt securities

4,072

4,072

(Included in notes held for investment)

Total Assets

$

37,663

$

$

4,072

$

41,735

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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)

Level 1

Level 2

Level 3

Total

As of December 31, 2022

U.S. Treasury bill

$

20,073

$

$

$

20,073

(Included in short-term investments)

Investment in debt securities

3,679

3,679

(Included in notes held for investment)

Total Assets

$

20,073

$

$

3,679

$

23,752

Treasury bills were purchased on February 10, 2023, March 3, 2023 and March 24, 2023, at a cost of $9,999, $20,498 and $6,999, respectively, and fair values accrete to maturity dates at an interest rate of 4.61% , 4.84% and 4.51%, resepectively. As of March 31, 2023, the interest income recorded on these bills was $167.

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

The Company valued the Monarch Debt Security using a bond plus call option model reflecting the cash flow from the Monarch Debt Security and assuming a 20% probability of an equity financing, a 20% probability of a change of control, and a 60% probability of payment at maturity or an insolvency event. The Company valued the Mellitus debt security using a bond plus call option model reflecting the cash flow from the Mellitus debt securities and assuming a 70% probability of an equity financing, 8% probability of a change of control, and a 22% probability of payment at maturity or an insolvency event. The fair value of the Company’s privately held debt securities were estimated at $4,072 and $3,679 as of March 31, 2023 and December 31, 2022, respectively.

The key inputs for the valuation model are:

March 31, 

2023

Risk-free rate

3.67% - 4.67%

Cash flow discount rate

26.4% - 28.7%

Expert term in years

0.25 - 3.68

Expected volatility

105.0%- 205.0%

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

Convertible Notes

Balance as of December 31, 2022

$

3,679

Purchased

500

Change in fair value of the notes held for investment

(107)

Balance as of March 31, 2023

$

4,072

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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)

9.Notes Held for Investment

Notes receivable consist of the following for the periods presented:

March 31 

December 31

2023

2022

Senior secured promissory notes

$

1,000

$

1,000

Secured convertible promissory notes

4,072

3,679

Total notes held for investment

$

5,072

$

4,679

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

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

In December 2022, the Company entered in a senior convertible promissory note arrangement with Monarch Medical Technology, LLC (“Monarch”), providing Monarch with up to $5,000 in available funding, of which $4,000, in principle was drawn as of March 31, 2023 (the “Debt Security”). The remaining $1,000 is available to be drawn at any time unless there is an Event of Default that is continuing. The Debt Security accrues interest at 10% per annum, payable monthly, and the principal balance is due December 6, 2024. The note along with up to $100 of transaction expenses is due and payable on the occurrence of an event of default or change of control unless accelerated due to the conversion into preferred stock prior thereto at the option of the Company. The Company has the option to extend the maturity date for two consecutive one-year terms. The Debt Security can be converted into Monarch’s shares at the Company’s option upon (a) an equity financing at Monarch, (b) upon a change of control at Monarch, or (c) at the Company’s option at any time prior to the maturity date. If converted upon a change of control, the Company has the right to receive a cash payment equal to the balance of the Debt Security or the amount payable upon conversion into Monarch’s shares. The Debt Security is redeemable at any time at Monarch’s option or automatically upon an Event of Default.

The Company made an irrevocable election to account for the Debt Securities using the fair value option under ASC 825 – Financial Instruments (“ASC 825”) and will measure the fair value of the Debt Securities in accordance with ASC 820. The Company made the fair value option election to present the Debt Securities in its entirety at fair value, which it believes to be preferable to recognizing the host instrument at fair value under ASC 320 and potentially separately recognizing certain embedded features as bifurcated derivatives under ASC 815. As of March 31, 2023, the Company estimated the fair value of the Debt Securities of Monarch to be $3,858 and Mellitus $214. As of December 31, 2022, the Company estimated the fair value of the Debt Securities of Monarch to be $3,500 and Mellitus $179, which were equivalent of the outstanding principal balances at December 31, 2022.

The Company recognizes interest income as it accrues on the Debt Securities, which is included in interest income in the statements of income. For the quarters ended March 31, 2023 and 2022, the Company recognized $82 and $0, respectively, of interest income from Monarch and Mellitus notes, which is included in prepaid and other current assets. The Company recognizes changes in fair value of the Debt Securities in the statements of income separately from the interest income. For the quarter ended March 31, 2023, the Company recorded change in fair value of $107.

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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)

10. Other Non-current assets

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

March 31, 

December 31, 

2023

    

2022

Prepaid licenses

$

2,487

$

2,490

Other

331

352

Total other non-current assets

$

2,818

$

2,842

In April 2021, the Company entered into a five-year agreement, as amended in December 2022, with Mellitus to exclusively market and distribute its product line in the United States, including Puerto Rico, except for selected accounts. Under this distribution agreement and its amendments, the Company agreed to purchase $2,500 of product licenses and prepaid $2,500 for the license purchases. This prepayment, which was reclassed to a long-term asset in 2022 due to the change in the estimation of the recoverability period is expected to be more than one year. The long-term portion of the prepaid licenses are included in the Other non-current assets. Unless early terminated in accordance with its terms, the exclusive distribution agreement will remain in full force and effect until April 1, 2026, and for renewal periods of one year each upon its anniversary date, unless terminated by at least 60 days written notice prior to such an anniversary date. Either party may terminate the agreement by written notice to the other party upon or after the breach of any material provision of this agreement by the other party, if the other party has not cured such breach within 60 days after written notice thereof from the non-breaching party.

Revenue from these product licenses will be recognized in accordance with ASC 606, Revenue from Contracts with CustomersThe Company did not generate significant revenue from these product licenses during the three months ended March 31, 2023 and 2022.

Other includes right-of-use asset (“ROU”) of $212, miscellaneous receivables of $100, and long-term deposits of $19 as of March 31, 2023. As of December 31, 2022, ROU was $233, miscellaneous receivable was $100, and long-term deposit was $19.

11.Accrued Expenses

Accrued expenses consist of the following:

March 31, 

December 31, 

2023

    

2022

    

Compensation

$

2,682

$

2,467

Accrued Taxes

3,781

1,923

Miscellaneous Accruals

 

743

 

358

Total Accrued Expenses

$

7,206

$

4,748

12.Concentration of Credit Risk

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

The Company maintains cash with major financial institutions. The Company’s cash consists of bank deposits held with banks that, at times, exceed federally insured limits. The cash and cash equivalents also include short-term treasury bills with original maturities of three months or less. As of March 31,2023, the Company held deposits of $5,305, approximately $5,198 of which held by First Republic Bank (“FRB”). The Company’s deposits at FRB are largely uninsured. On May 1, 2023, JP Morgan Chase Bank (“JPM”) agreed to acquire all the assets and liabilities of FRB. Consequently, all depositors of FRB will become the depositors of JPM. Deposits at JPM are largely uninsured. The Company also invested in U.S. treasury bills in the amount of $37,663. 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)

Company limits its credit risk by dealing with counterparties that are considered to be of high credit quality and by performing periodic evaluations of the relative credit standing of these financial institutions.

Management periodically monitors the creditworthiness of its customers and believes that it has adequately provided for exposure to potential credit loss. For the three months ended March 31, 2023, two customers (including affiliates) accounted for 40.9% and 33.5% of the Company’s revenues,. For the three months ended March 31, 2022, two customers (including affiliates) accounted for 39.2% and 31.7% of the Company’s revenues. As of March 31, 2023, three customers accounted for 60.0%, 15.4%, and 13.6% of the Company’s accounts receivable. As of December 31, 2022, three customers accounted for 26.8%, 25.9%, and 16.8% of the Company’s accounts receivable. The Company’s largest customer in terms of both revenues and accounts receivable in the three months ended March 31, 2023 is a U.S. diversified healthcare company and its affiliated plans.

As of March 31, 2023, two vendors accounted for 20.6% and 13.9% of the Company’s accounts payable. As of December 31, 2022, two vendors accounted for 25.8% and 10.8% of the Company’s accounts payable.

13.Lessee Arrangements

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

As of March 31, 2023, the remaining lease term is two years and six months with no options to renew. The Company recognized facilities lease expenses of $22 and $22 for the three months ended March 31, 2023 and 2022, respectively.

The following table summarizes the future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms greater than one year as of March 31, 2023:

    

Total

2023 Remaining period

 

67

2024

 

93

2025

 

71

Total undiscounted future minimum lease payments

 

231

Less: present value discount

 

(7)

Total lease liabilities

 

224

Lease expense in excess cash payment

 

(12)

Total ROU asset

$

212

As of March 31, 2023, the Company’s ROU asset was $212, which was recorded on the Company’s balance sheet as other noncurrent assets, and the Company’s current and noncurrent lease liabilities were $86 and $138, respectively, which were recorded on the Company’s balance sheet as other short-term liabilities and other long-term liabilities, respectively.

Lessor Arrangements

The Company enters into contracts with customers for the Company’s QuantaFlo product. The Company has determined these contracts meet the definition of a lease under Topic 842. The lease portfolio primarily consists of operating leases that are short-term in nature (monthly, quarterly or one year, all of which have renewal options). The Company allocates the consideration in a bundled contract with its customers based on relative standalone selling prices of the lease and non-lease components. The Company made an accounting policy election to apply the practical expedient to not separate lease and eligible non-lease components. The lease component is the predominant component and consists of fees charged for use of the equipment over the period of the arrangement. The nature of the eligible non-lease component is primarily software support. The assets associated with these leasing arrangements are separately identified in the Balance Sheet as Assets for Lease and separately disclosed in Note 4 to the 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)

14.Commitments and Contingencies

Senior Secured Convertible Note

In December 2022, the Company committed a loan of $5,000 to Monarch through the purchase of a senior secured convertible promissory note that bears interest at a rate of 10% per annum and matures on the second anniversary from the issue date, which can be extended for up to two additional consecutive one-year terms in the Company’s sole discretion. The note along with up to $100 of transaction expenses is due and payable on the occurrence of an event of default or change of control unless accelerated due to the conversion into preferred stock prior thereto at the option of the Company. Monarch borrowed $3,500 on the issuance date and $500 in the first quarter of 2023 out of the committed amount of $5,000 and has agreed to reimburse the Company for up to $100 of transaction expense. Repayment of the note is secured by a first priority interest in all of Monarchs’ assets. See Note 8 to the Unaudited Condensed Financial Statements.

Indemnification Obligations

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

401(K) Plan

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

Other

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

Company has claimed $1.24 million in this retention credit. No credit was claimed for the three months ended March 31, 2023 and for the year ended December 31, 2022.

Litigation

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.

15.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. On January 1, 2023, the Share Reserve increased by 267,685. The Share Reserve is currently 3,582,888 shares as of March 31, 2023.

In light of stockholder approval of the 2014 Plan, the Company no longer grants equity awards under the 2007 Plan. As of March 31, 2023, there were no shares available for future stock-based compensation grants under the 2007 Plan and 1,725,256 shares of an aggregate total of 3,582,888 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 did not purchase any shares during the three months ended March 31, 2023. The Company purchased 148,500 shares at a cost of approximately $4,991 as of March 31, 2023.

Stock Awards

The Company granted fully vested stock awards of 18,048 shares of common stock to the non-employee members of the board of directors and employees as compensation during the three months ended March 31, 2023. Net shares issued after deducting taxes paid on these grants were 14,099. Fair value of these stock awards on grant date was $695. The Company granted fully vested stock awards of 8,406 shares of common stock to the non-employee members of the board of directors, employees and one non-employee as compensation during the three months ended March 31, 2022. Net shares issued after deducting taxes paid on these grants were 6,988. Fair value of these stock awards on grant date was $628.

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Table of Contents

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 March 31, 2023 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 three months ended March 31, 2023 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, 2022

 

1,287,847

$

3.44

 

3.03

$

38,053

Options exercised

 

Options granted

Balance, March 31, 2023

 

1,287,847

$

3.44

2.78

$

30,100

Exercisable as of March 31, 2023

 

1,282,847

$

3.34

2.76

$

30,100

  As of March 31, 2023, the fair value of unvested stock options was approximately $87. 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 three months ended March 31, 2023 and 2022.

The Company has recorded an expense of $702 and $628 as it relates to stock-based compensation for the three months ended March 31, 2023 and 2022, respectively:

Three months ended March 31, 

    

2023

    

2022

    

Engineering and Product Development

$

45

$

45

Sales and Marketing

 

170

172

General and Administrative

 

487

411

Total

$

702

$

628

16.Income Taxes

The Company’s income tax provision for the three months ended March 31, 2023 was $1,664 and for the three months ended March 31, 2022 was $583. 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.

The effective tax rate for the three months ended March 31, 2023 was 24.68%, compared to 14.79%, in the same period of the prior year. The increase in effective tax rate for the three months ended March 31, 2023 was primarily due to lower tax benefits associated with employee stock-based compensation.

The effective tax rate for the three months ended March 31, 2023 differed from the U.S. federal statutory rate of 21% primarily due to state income taxes (net of federal benefit) and federal and state research and development (“R&D”) credit benefit. The effective tax rate for the three months ended March 31, 2022 differed from the U.S. federal statury rate of 21% primarily due to

15

Table of Contents

Semler Scientific, Inc.
Notes to Condensed Financial Statements

Unaudited

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

state income taxes (net of federal benefit) partially offset by tax benefits associated with employee share-based compensation plans and federal and state R&D credit benefit.

As of March 31, 2023, and December 31, 2022, the Company had $447 and $401, 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 $42 and $30 for the three months ended March 31, 2023, and the year ended December 31, 2022, respectively.

On August 16, 2022, the Creating Helpful Incentives to Produce Semiconductors for America Act of 2022 (“CHIPS and Science Act”), and Inflation Reduction Act (“IRA”) was signed into law in the United States. Among other things, CHIPS and Science Act provides incentives and tax credits for the global chip manufacturers who choose to set-up or expand existing operations in the United States. 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. This act is primarily applicable to large corporations with an annual revenue of $1 billion or over. Implementation of this act has no impact on the Company’s financial statements as of March 31, 2023.

17.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 March 31, 

2023

2022

Shares

    

Net Income

    

EPS

    

Shares

    

Net Income

    

EPS

Basic

6,701,199

$

4,969

$

0.74

6,777,950

$

3,360

$

0.50

Common stock warrants

64,825

71,839

Common stock options

1,130,019

1,266,667

Diluted

7,896,043

$

4,969

$

0.63

8,116,456

$

3,360

$

0.41

As of March 31, 2023, 5,000 options related to stock awards were granted and unvested. These options were considered anti-dilutive for the computation of diluted net income per share. Hence, these options were excluded from the computation of diluted net income per share. As of March 31, 2022, there were no weighted average shares outstanding of common stock equivalents excluded from the computation of diluted net income per share.

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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, 2022, 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 23, 2023, 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 that develops, manufactures ands markets innovative products and services that assist our customers in evaluating and treating chronic diseases. Our flagship product, QuantaFlo, which is patented and cleared by the FDA, is a rapid point-of-care test that measures arterial blood flow in the extremities. The QuantaFlo test aids in the diagnosis of cardiovascular diseases, such as peripheral arterial disease, or PAD, and heart dysfunction. QuantaFlo is used by healthcare providers to evaluate their patient’s risk of mortality and major adverse cardiovascular events.

We have an agreement with Mellitus Health Inc., or Mellitus, a private company to exclusively market and distribute Insulin Insights, an FDA-cleared software product that recommends optimal insulin dosing for diabetic outpatients in the United States, including Puerto Rico, except for selected accounts.

We have minority investments in Mellitus, in Monarch Medical Technology LLC, or Monarch,, a private digital health company whose proprietary product, EndoTool Glucose Management System, offers a technological solution for inpatient glycemic management, and in Neurodiagnostics, Inc., which is doing business as SYNAPS Dx and whose product, Discern, is a test for early Alzheimer’s disease. We continue to develop additional complementary proprietary products in-house (such as our recently released QuantaFlo extension as an aid to measure hemodynamics related to heart dysfunction), and seek out other arrangements for additional products and services that we believe will bring value to our customers and to our company. 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 March 31, 2023, we had total revenues of $18.2 million and net income of $5.0 million, compared to total revenues of $14.0 million and net income of $3.4 million in the same period in 2022. 

Recent Developments

In late March 2023, CMS issued the final 2024 rate announcement with payment changes for the Medicare Advantage and Part D prescription drug programs. Essentially, CMS is phasing in a new Medicare Advantage risk adjustment model (2024 model) from the previous model (2020 model) over a three year period. The 2024 model does not include risk adjusted for PAD without complications, which payments many health insurers relied upon for their Medicare Advantage patients in the 2020 model. The changes will be phased in as follows: in calendar year 2023, full payment under the 2020 model; in calendar year 2024, 67% of the 2020 model; in calendar year 2025, 33% of the 2020 model.

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Results of Operations

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Revenues

We had revenues of $18.2 million for the three months ended March 31, 2023, compared to $14.0 million in the same period of 2022. Our revenues are primarily from fees charged to customers for use of our products and from sale of accessories used with these products. We recognized revenues of $17.9 million from fees for our products for the three months ended March 31, 2023, consisting of $9.3 million from fixed-fee licenses and $8.6 million from variable-fee licenses, compared to $13.7 million in the same period of the prior year, consisting of $7.9 million from fixed-fee licenses and $5.8 million from variable-fee licenses. The remainder was from sales of hardware and equipment accessories, which were $0.3 million for each of the three months ended March 31, 2023 and 2022.

Revenues from fees for products are recognized monthly, usually billed as a fixed monthly fee or as a variable monthly fee dependent on usage.

The primary reason for the increase in fixed-fee 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. The primary reason for the increase in variable-fee revenues was an increase in testing at our largest customer, partially offset by lower pricing at this customer.

Operating expenses

We had total operating expenses of $12.0 million for the three months ended March 31, 2023, an increase of $1.9 million or 18%, compared to $10.1 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 and consulting fees. As a percentage of revenues, operating expenses decreased to 66% in the first quarter of 2023 as compared to 72% 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 $1.3 million for the three months ended March 31, 2023, an increase of $0.3 million or 34%, compared to $1.0 million for the same period in 2022. The increase was primarily due to an increase in headcount, annual pay increases and increased consulting costs associated with QuantaFlo. As a percentage of revenues, cost of revenues was 7% in the first quarter of 2023, the same as first quarter of 2022.

Engineering and product development expense

We had engineering and product development expense of $1.6 million for the three months ended March 31, 2023, an increase of $0.5 million, or 45%, compared to $1.1 million in the same period of the prior year. The increase was primarily due to increased headcount and annual pay increases, as well as consulting and engineering material costs associated with QuantaFlo extensions and upgrades. As a percentage of revenues, engineering and product development expense was at 9% in the first quarter of 2023, compared to 8% for the prior year period.

Sales and marketing expense

We had sales and marketing expense of $5.2 million for the three months ended March 31, 2023, an increase of $0.5 million, or 11%, compared to $4.7 million in the same period of the prior year. The increase was primarily due to increased headcount, annual salary increases, and associated expense to serve a continued expansion of customer activities, as well as an increase in trade shows and travel costs, as our business resumed more typical pre-COVID activities. As a percentage of revenues, sales and marketing expense decreased to 29% in the first quarter of 2023, as compared to 33% in the prior year period. 

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General and administrative expense

We had general and administrative expense of $3.8 million for the three months ended March 31, 2023, an increase of $0.5 million, or 17%, compared to $3.3 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, compensation due to increased headcount and annual salary and stock compensation increases, as well as higher professional fees, offset by lower insurance costs. As a percentage of revenues, general and administrative expense decreased to 21% in the first quarter of 2023, as compared to 24% in the prior year period. 

Other income, net

We had total other income of $377 thousand for the three months ended March 31, 2023 compared to $1 thousand in 2022. The increase from the prior year period was due to interest income of $484 from increased investments in U.S. Treasury bills, debt securities and higher rates on short term government debt and money market funds, partially offset by changes in the fair value of investments of $107 thousand.

Income tax provision

We had income tax provision of $1.7 million for the three months ended March 31, 2023, an increase of $1.1 million or 185%, compared to $0.6 million in the same period of the prior year. The effective tax rate for the three months ended March 31, 2023 was 25%, compared to 15%, in the same period of the prior year. The increase in effective tax rate was primarily due to lower tax benefits associated with employee stock-based compensation.

Net income

We had net income of $5.0 million, or $0.74 per basic share and $0.63 per diluted share, for the three months ended March 31, 2023, an increase of $1.6 million, or 48%, compared to a net income of $3.4 million, or $0.50 per basic share and $0.41 per diluted share, for the same period of the prior year.

Liquidity and Capital Resources

We had cash and cash equivalents and short-term investments of $43.0 million at March 31, 2023 compared to $43.1 million at December 31, 2022, and total current liabilities of $8.9 million at March 31, 2023 compared to $6.9 million at December 31, 2022. As of March 31, 2023, we had working capital of approximately $46.7 million. We believe that our current sources of funds will provide us with adequate liquidity during the period following March 31, 2023, as well as in the long-term.

Our cash is held in a variety of non-interest bearing bank accounts and treasury bills. At March 31, 2023, we held approximately $37.7 million of U.S. Treasury bills, and the remaining cash of $5.3 million was held in non-interest bearing bank accounts. We have banking relationships with First Republic Bank, or FRB, and Edward Jones and are taking steps to diversify further. As of March 31,2023, we held approximately $5.2 million of deposits at FRB. Our deposits at FRB are largely uninsured. On May 1, 2023, JP Morgan Chase Bank, or JPM agreed to acquire all the assets and liabilities of FRB. Consequently, all depositors of FRB will become the depositors of JPM. Deposits at JPM are largely uninsured. Our investment guidelines allow for holdings in U.S. government and agency securities, corporate securities, taxable municipal bonds, commercial paper, money market accounts and treasury bills. In addition, we have, and may in the future, choose to invest some of our cash resources in other entities that may have complementary technologies or product offerings.

Operating activities

We generated $0.9 million of net cash from operating activities for the three months ended March 31, 2023, compared to $1.5 million of net cash from operating activities for the same period of the prior year. The change was primarily due to increases in our working capital requirements. Non-cash adjustments to reconcile net income to net cash from operating activities provided net cash of $0.7 million and were primarily due to stock-based compensation expense of $0.7 million, depreciation of $0.1 million, loss on disposal of assets for lease of $0.1 million, change in fair values of investments of $0.1 million and allowance for doubtful accounts of $0.1 million, partially offset by gain on short-term investments of $0.3 million and deferred tax income of $0.1 million. Changes in operating assets and liabilities used $4.8 million of net cash. These changes in operating assets and liabilities included cash used by

19

trade receivables of $5.5 million due to timing of revenue recognition, prepaid expenses other assets of $1.3 million, trade payables of $0.5 million, partially offset by cash provided by accrued expenses of $2.5 million.

Investing activities

We used $18.4 million of net cash in investing activities for the three months ended March 31, 2023, which reflects the purchase of short-term treasury bills of $37.5 million, the purchase of a promissory note held for investment of $0.5 million, funding to purchase assets for lease of $0.5 million and fixed asset purchases of $0.1 million to support our growing business, partially offset by the proceeds from maturities of short-term treasury bills of $20.2 million.

We used $0.3 million of net cash in investing activities for the three months ended March 31, 2022, which reflects funding of purchases of assets for lease of $0.2 million and fixed asset purchases $0.1 million to support our growing business.

Financing activities

We used $0.1 million in net cash from financing activities during the three months ended March 31, 2023, which reflects payment of taxes withheld for stock grants of $0.1 million.

We used $0.1 million in net cash from financing activities during the three months ended March 31, 2022, which reflects payment of taxes withheld for stock grants of $0.1 million and $0.1 million for the treasury stock acquisition, under our recently announced share purchase program, partially offset by proceeds from exercise of stock options of $0.1 million.

Critical Accounting Policies and Estimates

There have been no material changes to the Company’s critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 23, 2023.

New Accounting pronouncements recently adopted

We have considered recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our condensed consolidated financial statements. See Note 1 to Condensed Financial Statements for the new accounting pronouncements adopted in the first quarter of 2023.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer, our Senior Vice President, Finance and Accounting and our Vice President, Finance, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of and with the participation of our management, including our Interim Chief Executive Officer, our Senior Vice President, Finance and Accounting and our Vice President, Finance, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2023.

20

Based upon that evaluation, our Interim Chief Executive Officer, our Senior Vice President, Finance and Accounting and our Vice President, Finance concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during our first fiscal quarter ended March 31, 2023.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) Recent Sales of Unregistered Securities

None.

(b) Use of Proceeds

Not Applicable.

(c) Issuer Purchases of Equity Securities.

None.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

21

Item 6. Exhibits.

Exh. No.

    

Exhibit Name

3.1

Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of our Form 8-K filed with the Securities and Exchange Commission on November 2, 2015).

3.2

Third Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of our Form 8-K filed with the Securities and Exchange Commission on April 19, 2023)

10.1

Employment Agreement with Wayne T. Pan dated March 29, 2023

31.1

 

Rule 13a-14(a) Certification of Principal Executive Officer of Registrant

31.2

 

Rule 13a-14(a) Certification of Principal Financial Officer of Registrant

32.1*

 

Section 1350 Certification

 

 

 

101.INS

 

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

 

Inline XBRL Taxonomy Extension Schema

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase

104

The cover page from Semler Scientific's Quarterly Report on Form 10-Q for the three months ended March 31, 2023 is formatted in Inline XBRL and it is contained in Exhibit 101

* These certifications are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

22

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

May 12, 2023

SEMLER SCIENTIFIC, INC.

 

 

 

By:

/s/ Douglas Murphy-Chutorian

 

 

Douglas Murphy-Chutorian

 

 

Interim Chief Executive Officer

 

 

 

 

By:

/s/ Andrew B. Weinstein

 

 

Andrew B. Weinstein

 

 

Senior Vice President, Finance and Accounting

23

Exhibit 10.1

EXECUTIVE EMPLOYMENT AGREEMENT

In consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, this Employment Agreement (“Agreement”) is made between Semler Scientific, Inc. (the “Company”) and Wayne T. Pan (“Executive”). The Company and Executive are referred to collectively as the “Parties” and individually as a “Party.” This Agreement is effective as of the date it is signed by the Parties.

1.Employment.
(a)Term.   The Company will employ Executive pursuant to this Agreement, commencing as of April 3, 2023 (the “Start Date”) and continuing until such employment is terminated (the time between the Start Date and the Date of Termination is the “Term”).
(b)At-Will Employment. Executive’s employment with the Company will be “at will,” meaning that Executive’s employment may be terminated by the Company or Executive at any time, for any reason or no reason, with or without notice, and with or without Cause. In addition, the Board of Directors of the Company (the “Board”) may modify Executive’s job title, supervisor, wages, work location, and benefits from time to time in its discretion. Although Employee’s job duties, title, location, compensation, and benefits, as well as the Company’s personnel policies and procedures, may change from time to time, the “at will” nature of Executives’ employment may only be changed in an express written agreement signed by Executive and a duly authorized officer of the Company other than Executive.
(c)Position and Duties.  Executive shall serve as the Chief Executive Officer of the Company and shall have such powers and duties as may from time to time be prescribed by the Board. Executive agrees that during the term of Executive’s employment with the Company, Executive will not (i) engage in any other employment, occupation, consulting, or other business activity directly related to the business in which the Company is now involved or becomes involved during the Term, (ii) own more than five percent (5%) of the stock of any other Company, or (iii) engage in any other activities that conflict with Executive’s obligations to the Company. Notwithstanding the foregoing, Executive may serve on other boards of directors, with the approval of the Board or engage in religious, charitable or other community activities as long as such services and activities do not create a conflict of interest or interfere with Executive’s performance of Executive’s duties to the Company.
2.Compensation and Related Matters.
(a)Base Salary.  Executive’s initial base salary during the Term will be Four Hundred and Fifty Thousand Dollars ($450,000.00) per year, less applicable deductions and withholdings. Executive’s base salary will be subject to periodic review by the Board or the Compensation Committee of the Board (the “Compensation Committee”). The base salary in effect at any given time is referred to herein as “Base Salary.” The Base Salary

will be payable in a manner that is consistent with the Company’s usual payroll practices for its executive officers. 
(b)Incentive Compensation.  Executive will be eligible to receive cash incentive compensation as determined by the Board or the Compensation Committee from time to time. Initially, Executive will be eligible to earn an annual discretionary bonus of up to 100% of Executive’s base salary; provided that for calendar year 2023, Executive will be eligible to earn a discretionary bonus of up to a dollar amount equal to the product of (A) 100% of Executive’s base salary, and (B) a fraction, the numerator of which is the number of days in the calendar year measured from Executive’s Start Date and the denominator of which is 365. The target annual incentive compensation in effect at any given time is referred to herein as “Target Bonus.” The actual amount of Executive’s annual incentive compensation, if any, will be determined in the sole discretion of the Board or the Compensation Committee. Executive must be employed by the Company on the date such incentive compensation is paid in order to earn or receive any annual incentive compensation.  Any incentive compensation that becomes payable hereunder shall be paid no later than March 15th of the calendar year following the calendar year to which the bonus pertains.
(c)Expenses.  The Company will reimburse Executive for all reasonable and necessary expenses incurred by Executive in connection with the performance of Executive’s duties hereunder upon receipt of documentation in accordance with the Company’s regular reimbursement procedures and practices in effect from time to time.
(d)Other Benefits.  Executive will be eligible to participate in any retirement plans and any health, life, accident, general liability, employees’ and officers’ liability or disability insurance, paid time off, or other benefit plans or programs made available to other similarly situated employees of Company when such plans are established and as long as they are kept in force by the Company, provided that Executive meets the eligibility requirements and other terms, conditions and restrictions of the respective plans and programs.
3.Termination of Employment.
(a)Death.  Executive’s employment hereunder shall terminate upon Executive’s death.
(b)Disability.  The Company may terminate Executive’s employment if Executive is disabled and unable to perform or expected to be unable to perform the essential functions of Executive’s then existing position or positions under this Agreement with or without reasonable accommodation for a period of 365 days (which need not be consecutive) in any 24-month period. If any question shall arise as to whether during any period Executive is disabled so as to be unable to perform the essential functions of Executive’s then existing position or positions with or without reasonable accommodation, Executive may, and at the request of the Company shall, submit to the Company a certification in reasonable detail by a physician selected by the Company to whom Executive or Executive’s guardian has no reasonable objection as to whether Executive is so disabled or how long such disability is expected to continue, and such certification shall for the

purposes of this Agreement be conclusive of the issue. Executive shall cooperate with any reasonable request of the physician in connection with such certification. If such question arises and Executive fails to submit such certification, the Company’s determination of such issue shall be binding on Executive. Nothing in this Section 3(b) waives Executive’s rights, if any, under existing law including, without limitation, the Family and Medical Leave Act of 1993, 29 U.S.C. §2601 et seq. and the Americans with Disabilities Act, 42 U.S.C. §12101 et seq.  
(c)Termination by the Company for Cause. For purposes of this Agreement, “Cause” means any of the following:  
(i)conduct by Executive constituting a material act of misconduct in connection with the performance of Executive’s duties, including, without limitation, (A) willful failure or refusal to perform material responsibilities that have been requested by the Board; (B) dishonesty to the Board with respect to any material matter; or (C) misappropriation of funds or property of the Company or any of its subsidiaries or affiliates;
(ii)the commission by Executive of acts satisfying the elements of (A) any felony or (B) a misdemeanor involving moral turpitude, deceit, dishonesty or fraud;
(iii)any misconduct by Executive, regardless of whether or not in the course of Executive’s employment, that would reasonably be expected to result in material injury or reputational harm to the Company or any of its subsidiaries or affiliates if Executive were to continue to be employed in the same position;
(iv)continued unsatisfactory performance or non-performance by Executive of Executive’s duties hereunder (other than by reason of Executive’s physical or mental illness, incapacity or disability) which has continued for more than 30 days following written notice of such unsatisfactory performance or non-performance from the Board;
(v)a breach by Executive of any of the provisions contained in Section 10 of this Agreement;
(vi)a material violation by Executive of any of the Company’s written employment policies; or
(vii)Executive’s failure to cooperate with a bona fide internal investigation or an investigation by regulatory or law enforcement authorities, after being instructed by the Company to cooperate, or the willful destruction or failure to preserve documents or other materials known to be relevant to such investigation or the inducement of others to fail to cooperate or to produce documents or other materials in connection with such investigation.
(d)Termination by the Company without Cause.  The Company may terminate Executive’s employment hereunder at any time without Cause. Any termination by the Company of Executive’s employment under this Agreement which does not constitute a termination for Cause under Section 3(c) and does not result from the death or disability of Executive under Section 3(a) or (b) shall be deemed a termination without Cause.

(e)Termination by Executive.  Executive may terminate employment hereunder at any time for any reason, including but not limited to, Good Reason. For purposes of this Agreement, “Good Reason” means Executive has completed all steps of the Good Reason Process (hereinafter defined) following the occurrence of any of the following events without Executive’s consent (each, a “Good Reason Condition”):  
(i)a material diminution in Executive’s job title, responsibilities, authority or duties;
(ii)a material diminution in Executive’s Base Salary except for across-the-board salary reductions based on the Company’s financial performance similarly affecting all or substantially all senior management employees of the Company;
(iii)a material change in the geographic location of the principal office of the Company to which Executive is assigned, such that there is an increase of at least thirty (30) miles of driving distance to such location from Executive’s principal residence as of such change; or
(iv)a material breach of this Agreement by the Company.  

The “Good Reason Process” consists of the following steps:

(i)Executive reasonably determines in good faith that a Good Reason Condition has occurred;
(ii)Executive notifies the Company, in writing, of the first occurrence of the Good Reason Condition within 60 days of the first occurrence of such condition;
(iii)Executive cooperates in good faith with the Company’s efforts, for a period of not less than 30 days following such notice (the “Cure Period”), to remedy the Good Reason Condition;
(iv)notwithstanding such efforts, the Good Reason Condition continues to exist at the end of the Cure Period; and
(v)Executive terminates employment within 60 days after the end of the Cure Period.  

If the Company cures the Good Reason Condition during the Cure Period, Good Reason shall be deemed not to have occurred.

4.Matters Related to Termination.
(a)Notice of Termination.  Except for termination as specified in Section 3(a), any termination of Executive’s employment by the Company or any such termination by Executive shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon.

(b)Date of Termination.  “Date of Termination” shall mean:  (i) if Executive’s employment is terminated by death, the date of death; (ii) if Executive’s employment is terminated on account of disability under Section 3(b) or by the Company for Cause under Section 3(c), the date on which Notice of Termination is given; (iii) if Executive’s employment is terminated by the Company without Cause under Section 3(d), the date on which a Notice of Termination is given or the date otherwise specified by the Company in the Notice of Termination; (iv) if Executive’s employment is terminated by Executive under Section 3(e) other than for Good Reason, 30 days after the date on which a Notice of Termination is given, and (v) if Executive’s employment is terminated by Executive under Section 3(e) for Good Reason, the date on which a Notice of Termination is given after the end of the Cure Period. Notwithstanding the foregoing, in the event that Executive gives a Notice of Termination to the Company, the Company may unilaterally accelerate the Date of Termination and such acceleration shall not result in a termination by the Company for purposes of this Agreement.
(c)Accrued Obligations.  If Executive’s employment with the Company is terminated for any reason, the Company shall pay or provide to Executive (or to Executive’s authorized representative or estate) (i) any Base Salary earned through the Date of Termination and, if applicable, any accrued but unused vacation through the Date of Termination; (ii) unpaid expense reimbursements (subject to, and in accordance with, Section 2(c) of this Agreement); and (iii) any vested benefits Executive may have under any employee benefit plan of the Company through the Date of Termination, which vested benefits shall be paid and/or provided in accordance with the terms of such employee benefit plans (collectively, the “Accrued Obligations”).
(d)Resignation of All Other Positions.  To the extent applicable, Executive shall be deemed to have resigned from all officer and board member positions that Executive holds with the Company or any of its respective subsidiaries and affiliates upon the termination of Executive’s employment for any reason. Executive shall execute any documents in reasonable form as may be requested to confirm or effectuate any such resignations.
5.Severance Pay and Benefits Upon Termination by the Company without Cause or by Executive for Good Reason Outside the Initial Term.  If Executive’s employment is terminated by the Company without Cause, or Executive terminates employment for Good Reason, in each case outside of the Initial Term (as defined below), then, in addition to the Accrued Obligations, and subject to (i) Executive signing a separation agreement and release in a form and manner satisfactory to the Company, which shall include, without limitation, a general release of claims against the Company and all related persons and entities (but that shall not release Executive’s rights to unpaid amounts to which he is entitled under this Agreement), a reaffirmation of all of Executive’s continuing obligations (as set forth in the Confidentiality Agreement) and shall provide that if Executive breaches any of those continuing obligations, all payments of the Severance Amount shall immediately cease (the “Separation Agreement”), and (ii) the Separation Agreement becoming irrevocable, all within 60 days after the Date of Termination or such shorter period as set forth in the Separation Agreement (the conditions in 5(i) and 5(ii) are the “Release Requirement”):

(a)the Company shall pay Executive an amount equal to nine (9) months of Executive’s Base Salary (the “Severance Amount”); and
(b)subject to Executive’s copayment of premium amounts at the applicable active employees’ rate and Executive’s proper election to receive benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), the Company shall pay to the group health plan provider or the COBRA provider a monthly payment equal to the monthly employer contribution that the Company would have made to provide health insurance to Executive if Executive had remained employed by the Company for up to nine (9) months following the Date of Termination; provided, however, that if the Company determines that it cannot pay such amounts to the group health plan provider or the COBRA provider (if applicable) without potentially violating applicable law (including, without limitation, Section 2716 of the Public Health Service Act), then the Company shall convert such payments to payroll payments directly to Executive for the time period specified above. Such payments to Executive shall be subject to tax-related deductions and withholdings and paid on the Company’s regular payr