Semler Scientific, Inc.

Good afternoon, and welcome to the Summer Scientific 2023 Second Quarter Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. Before we begin, some more scientific needs to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. These include statements regarding the expectations for expansion of the business and the development and marketing of additional products, as well as expected savings from the strategic corporate streamlining. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and our SEC filings. The forward-looking statements made today are as of the date of this call, and the company does not undertake any obligation to update the forward-looking statements. If you do not have a copy of today's release, you may obtain one by visiting the investor relations page of the website, Somerscientific.com. Now I would like to introduce Doug Murphy-Katorian, CEO of Somerscientific. Please go ahead.

Good afternoon, everyone. Thank you for joining us on our second quarter 2023 results call. Our Q2 results. performance represents the highest quarterly revenue and pre-tax net income that Sembler has ever achieved. Now I would like to introduce Renee Cormier, our newly appointed CFO. She plays a fundamental role in shaping our financial strategy all along with me and our board.

Thank you, Doug. Good afternoon, everyone, and thank you for being part of today's conference call. I'm excited for my new role in the future of Semmler. I look forward to working closely with our senior leadership team and our board to unlock stakeholder value. We are pleased that both Eric Semmler and Will Chang have joined our board in the second quarter of 2023. They bring deep expertise in capital allocation, corporate governance, strategic planning, and investment management. Furthermore, the board has decided to ask Doug to stay on as permanent CEO in order to bring continuity and direction to Semler, and he has agreed. Also, after 13 years with Semler, Dennis Rosenberg has retired as chief marketing officer. However, he will continue to assist me with our investor relations efforts. We thank Dennis for his valuable contributions and wish him a happy and fulfilling retirement. Today, I'll be presenting an overview of our second quarter 2023 financial results, providing market updates, and discussing recent corporate developments. Following my remarks, Doug and I will be available to address any questions you may have. I'm excited to announce record results for the second quarter. This achievement is a testament to the hard work of our team, as well as the ongoing support of our customers to continue to recognize the clinical benefits and value of our technology. By enabling early diagnosis of both PAD and heart dysfunction, we are empowering healthcare providers to initiate preventative interventions and treatments at an early stage. We believe that this proactive approach not only saves lives, but also lowers healthcare expenditures. As we look to the future, we envision a healthcare landscape where our technology plays a pivotal role in shaping healthier outcomes for patients while delivering substantial economic benefits. For now, the specifics of our second quarter results. Total revenue in Q2 2023 was $18.6 million, an increase of 25% compared to the second quarter of 2022. Driven by continued sales of Quantiflow, to existing and new customers to test for PAD. We believe the promising results that were published in two large independently conducted peer-reviewed studies by Quantiflow customers last year are having an impact. These studies underscore the importance of identifying asymptomatic PAD patients, enabling the implementation of preventative measures. Fixed fee revenues were $9.6 million, an increase of 13% year over year. We saw continued interest in our products from existing customers, as well as new customers, such as hospitals, major pharmaceutical and other retail chains, and delegated medical groups. Variable fee revenues were $8.4 million, an increase of 39% year over year. We continued to see strong demand from our home risk assessment customers using Quantiflow for PAD during in-home examinations. Equipment and other revenues were $600,000, an increase of 128% year-over-year. Because the majority of equipment sales are to variable-fee customers, we believe it is a sign of strength in the fee-per-test market. In the second quarter of 2023, our two largest customers, including their related affiliates, comprised 37%, and 34% of quarterly revenues. Operating expenses in Q2 2023, which includes cost of revenues, were $11.4 million, an increase of 18% year over year. As a percent of revenues, operating expenses decreased to 61% compared to 65% in 2022. Operating expenses increased primarily due to increased headcount, wage inflation, and increased professional fees. Pre-tax net income was $7.7 million, an increase of $2.5 million, or 48% year-over-year. Net income was $5.9 million, or $0.88 per basic share and $0.75 per diluted share, an increase of 44% year-over-year. During the quarter, we purchased outstanding warrants to acquire 76,000 shares of common stock from our CEO at a cost of $1.9 million. We have $15 million remaining under the board authorized stock repurchase program. We had cash, cash equivalents, and short-term investments at June 30th, 2023 of $51.8 million. As of June 30th, 2023, headcount was 137 employees compared to 134 at the end of the first quarter, 2023. We recently announced a strategic plan to streamline operations and reduce employee headcount by approximately 30% by September 15, 2023. This plan is meant to be proactive and seeks to drive operational efficiency while still providing high-quality service to our customers. We currently estimate that we will incur severance costs in the range of $700,000 to $900,000, consisting of one-time termination benefits which are expected to be paid by December 31st, 2023. We anticipate this result in a reduction in quarterly operating expenses of approximately $1.5 to $2 million, which are expected to be realized during the fourth quarter ended December 31st, 2023. Our primary objective remains steadfast to maintain and enhance our current revenue opportunities and profitability. To achieve this, we are reinvesting in emerging growth opportunities, particularly focusing on new customers for Quantiflow, both for PAD and HD. This broadening of our customer base may prove to show the tremendous promise and the exciting potential that we believe is in our company's future. Furthermore, we're committed to maintaining our investments in research and development. Upgrading existing products and data services is a priority for us. as we strive to stay at the forefront of innovation and continuing to deliver cutting-edge solutions to our customers. Last year, we unveiled Quantiflow HD to aid in the diagnosis of heart dysfunction, which is a product of our internal R&D efforts. The results of a clinical paper published in the Journal of Preventative Medicine demonstrated a statistically significant correlation with a p-value of less than 0.01, using transthoratic echocardiography, or ECHO, as a gold standard to diagnose heart failure. A link to the paper is available on our website in our press release dated March 1, 2023. Heart dysfunction encompasses a broad spectrum, including heart failure, which affects around 6.5 million adults in the U.S. with a lifetime risk of 1 in 5 at 40 years of age, the impact of heart failure on healthcare is significant, with over 1 million hospitalizations per year in the United States and an annual cost of care exceeding $30 billion. Unlike symptomatic heart disease, a considerable number of patients have asymptomatic heart disease. However, they are not routinely tested for in the current standard of care, because ECHO, while reliable, is not a screening test. It involves a specialized lab, a trained ultrasonographer, and takes about an hour, making it impractical for primary care offices or home settings. Our goal is to equip healthcare providers with a cost-effective means of identifying asymptomatic heart dysfunction early. enabling them to encourage patients to adopt healthier lifestyles and optimize proven guideline-directed medical therapies. Ultimately, this approach could improve long-term health outcomes. There are CPT reimbursement codes for echocardiography and HCC diagnosis codes for heart dysfunction that were not affected by this year's CMS updates. We are in discussions with customers of all sizes and have made initial installations of Quantiflow HD in the second quarter of 2023. While HD is showing positive early signs, we expect the market uptake process will take time. Finally, as part of our growth strategy, we will explore inorganic growth initiatives to further diversify our product portfolio, guided by our board that has deep experience in capital allocation. By seeking new opportunities and partnerships, We aim to expand our offerings and broaden our impact on the market. Thank you for your interest in the company and your continuing support. Now, Rocco, if you could please open the lines. Doug and I will be happy to address your questions.

Absolutely, ma'am. If you would like to ask a question, please press star then one on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Aaron Wilkmere with Lake Street Capital Markets. Please go ahead.

Hey, good afternoon, everyone. This is Aaron on the line for Brooks here. Just wanted to start by saying congrats on the strong quarter.

Thank you.

Thank you. So can you just give us sort of a general sense of the reaction of your health plan and your fee per test customers to sort of the pending changes to the risk model for PAD from CMS?

Sure. So, you know, as you mentioned, we did have very good first half results and we're very pleased with that. So it represents a really great start to the year. It's difficult to make any predictions right now, given the numbers of factors at play in our market. So now there really is no consistent pattern emerging among our customer base at this time. And it's really too early to speculate on any potential impacts to our customers. But for now, we are seeing testing at an increased rate, obviously, as you can see from our results.

Okay, that's fair. And can you sort of just give us some insight into the customer reaction and interest in your heart dysfunction product? When might we see some sort of revenue related to that opportunity for you guys?

Sure. So as I had mentioned in my prepared remarks, we are in discussions with customers of all sizes, and we do have initial installations of Quantiflow HD right now. So we are seeing positive feedback from that. We're not going to go into specifics of exactly what's out there and the customers. And we do think that the market uptake process will take time. We know that our customers want to get the product in and test it for themselves first before they roll it out. So while we already have these relationships with our customers, they will need to look at it themselves. And so because of this, we aren't really providing guidance right now on the uptake of it.

We have revenue generating accounts now, but it's not as meaningful revenue as we hope to have.

Sure. Okay. That's helpful. And then sort of my final inquiry here, you know, you mentioned some downsizing and streamlining initiatives. Can you just tell us what your priorities there are? Just a little bit more color there would be nice. Thanks for taking the questions.

Yeah, no problem. So on the streamlining here, as we look back over the past few years, we've really put increased efforts towards automation and improvement of technology, both internally and with integrating with our customers. So we do have a reduced need for certain staff areas because there are fewer touch points. So we're really viewing this as doing more for less. And so the realigning of the workforce to stream the operations, it's really to become a more nimble organization and, again, utilize the technology that we've been putting into place. And the resources that we do have We are going to focus on capitalizing on the potential emerging market opportunities such as diversifying our customer base for Quadflow PD, the customer adoption for Quadflow HD and within the market and our strategic initiatives and priorities within that besides focusing on our existing products are to maintain our R&D investment to upgrade the product data services. So PAD now is a lot less R&D intensive at this point than it has been in the past. And HD really is moving from core R&D to more of a refinement stage. And then we can also focus our R&D on potential other extensions there.

Okay. Awesome. Very helpful. Congrats again on the quarter. We're excited to keep following you guys.

Great. Thank you.

Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Renee Cormier for any closing remarks.

Thank you. As we conclude this conference, we want to reiterate our ongoing commitment to delivering clinical benefits through earlier diagnosis of chronic cardiovascular conditions. Our customers continue to recognize the value of this approach, and as the healthcare landscape evolves, our technology continues to play a vital role for patients, physicians, facilities, and payers alike. One of the unique strengths of our technology is its portability and accessibility, enabling us to be part of the solution in reducing health inequities that persist in cardiovascular disease. By providing tools that can be utilized in various settings, We contribute to breaking down barriers and ensuring that more individuals have access to early detection and interventions. Thank you for joining us today.

Thank you, ma'am. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.