Semler Scientific, Inc.

Good afternoon and welcome to the similar scientific 2023 third 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 that this event is being recorded. Before we begin, similar 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, similar scientific.com. Now I would like to introduce Doug Murphy-Tutorian, CEO of Summler Scientific.

Good afternoon, everyone. Thank you for joining us for our third quarter 2023 results kill. We are again achieved excellent year over year earnings and revenue growth. Now, I am pleased to introduce our CFO, Renee Cormier.

Thank you, Doug. Good afternoon, everyone, and thank you for being part of today's conference call. Today, I'll be presenting an overview of our third quarter 2023 financial results and discussing recent corporate events. We have with us today our Chief Operating Officer, Jennifer Oliva Harrington, who will be providing market developments and opportunities. Jennifer has been with Semler since 2010. She oversees our operations, sales, and customer-related departments, driving new strategies, and launching and delivering new products and programs. Following our remarks, Doug, Jennifer, and I will be available to address any questions you may have. I'm excited to announce continued revenue growth and strong margins in the third quarter. This achievement is a testament to the hard work of our team. as well as the ongoing support of our customers who continue to recognize the clinical benefits and value of our technology. Now for the specifics of our third quarter results. Total revenue in Q3 2023 was $16.3 million, an increase of 16% compared to the third quarter of 2022. We anticipate that revenues in the fourth quarter of 2023 will exceed fourth quarter of 2022. Our revenues continue to be driven primarily by continued sales of Quantiflow to existing and new customers to test for peripheral arterial disease, or 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. We are also marketing Quantiflow as an aid to diagnose heart dysfunction, or HD. While HD revenue is currently not significant, we anticipate that HD will assume an important role in our business over the coming years. Jennifer will provide you with more detail. Fixed fee revenues were $9.5 million, an increase of 11% year-over-year. we saw continued interest in our products from existing customers as well as new customers such as hospitals, value-based care providers, major pharmaceutical and retailer markets. Variable fee revenues were $6.3 million, an increase of 28% year over year. We continue to see strong demand from our home risk assessment customers using Quantiflow for PAD during in-home examination. Equipment and other revenues or half a million dollars, flat year over year. Equipment revenues remain strong versus historical levels. Because the majority of our equipment sales are to variable fee customers, we believe it's a sign of future potential annual growth in the fee protest market. In the third quarter of 2023, our three largest customers, including their related affiliates, comprised 36%, 28%, and 11% of quarterly revenue. Operating expenses in Q3 2023, which includes the cost of revenues, were $10 million, an increase of 5% year-over-year. As a percent of revenues, operating expenses improved to 61% compared to 68% in 2022. Last quarter, we announced a strategic plan to streamline operations and reduce employee headcount by approximately 30%. This plan is meant to be proactive and seeks to drive operational efficiency while maintaining high-quality service to our customers. As of the end of the third quarter, this streamlining has been completed. Headcount as of September 30, 2023, was 91 compared to 137 at the end of the second quarter, 2023. Included in operating expenses were streamlining and related costs of $600,000 offset by accrued compensation reversals of $700,000. We anticipate total operating expenses, which includes cost of revenues, in the fourth quarter will be similar to total operating expenses in the third quarter of 2023. Pre-tax net income was $7 million, an increase of $2.4 million, or 52% year-over-year. Net income was $5.5 million, or 82 cents per basic share, and 71 cents per fully diluted share, an increase of 50% year-over-year. We had cash, cash equivalents, and short-term investments at September 30, 2023, of $56 million. Now, I'd like to turn the call over to Jennifer to provide a more in-depth discussion of our market developments and opportunities.

Thank you, Renee. As I look into the future, I'm excited about Semler's potential to support the identification of chronic diseases by our customers, which is a large burden on our healthcare system. Cardiovascular disease is the number one cost to the healthcare system, as well as the number one cause of death worldwide, which makes early detection of chronic cardiac conditions so critical. Our launch of Quantiflow HD to support the diagnosis of heart dysfunction represents a paradigm shift in the industry. This is why introducing Quantiflow HD to healthcare providers is one of our main focuses. Our goal is to equip providers with a simple, cost-effective means of identifying asymptomatic heart dysfunction early, enabling these providers to encourage patients to adopt healthier lifestyles and optimize proven, guided, directed medical therapies. Ultimately, this approach could improve long-term health outcomes. Heart dysfunction encompasses a large, broad spectrum including heart failure, which affects around six and a half million adults in the US. With a lifetime risk of one in five 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 by transthoracic echocardiography, which is the current standard of care. ECHO, while reliable, is not a screening test. It involves a specialized lab, a trained ultrasonographer, and takes about an hour to complete, which is impractical for primary care offices or in-home settings. Quantico HD is a simple test that can be performed by a medical aide in usually less than five minutes, and it is clinically proven to provide accurate results. A clinical paper published in the Journal of Preventive Medicine earlier this year demonstrated a statistically significant correlation between Quantiflow HD and echocardiography. Again, the gold standard to diagnose heart failure. A link to the paper is available on our website and in our press release dated March 1st, 2023. There are CPT reimbursement codes for echocardiography and HCC diagnostic codes for heart dysfunction that were not affected by this year's CMS update. We expect detecting patients with HD will be valuable to our customers and their patients. Since our last quarterly update, we've installed additional units of Quantico HD and are continuing discussions with both existing and new customers who remain interested in our solution. We expect these conversations to result in future customer installs. While HD sales are showing positive early signs, we expect the market uptake process will take time as it is important for our customers to have clinical protocols in place for those patients testing positive. As we look forward, I'm excited about the possibilities that HD presents for similar. By enabling early diagnosis of both peripheral arterial disease and heart dysfunction, we are empowering healthcare providers to initiate preventative treatments and interventions at an early stage of chronic cardiovascular disease. We believe that this proactive approach not only saves lives, but also lowers healthcare expenditures. The same medical aid may perform both the PAD and HD tests on the same patients at risk for these diseases. This synergy and commonality allow our sales force many advantages like upselling to the same customers. As we look to the future, we envision a healthcare landscape where technology plays a pivotal role in shaping healthier outcomes for patients while delivering substantial economic benefits to our customers. Our sales and marketing goals are to further establish Quantiflow, for PAD as a standard of care given the approved clinical benefits of early diagnosis and preventative treatment, to expand orders from existing customers for HD and other products, and to diversify our customer base by adding medical centers, additional value-based care providers, penetrating deeper into the VA system, and growing the self-insured employer pharmaceutical and retail market. And now Renee will give our concluding remarks.

To achieve this plan, we are reinvesting in emerging growth opportunities, particularly focusing on established and new clients for Quantiflow HD and broadening of our customer base for PAD. We believe these growth opportunities may prove to show tremendous promise in the years to come and present an 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 in the forefront of innovation and continue delivering cost cutting or cost cutting edge solutions to our customers. 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 intervention. Finally, as part of our growth strategy, we will explore inorganic growth initiatives to further diversify our product portfolio. We have deep capital allocation expertise with the addition of Eric Sandler and Bill Chang to our board of directors earlier this year. By seeking new opportunities and partnerships, we aim to expand our offerings and broaden our impact on the market. We expect that entering into these opportunities will take time as we will carefully consider the potential impact to our business. Thank you for your interest in the company and your continued support. Now, operator, If you could please open the line. Doug, Jennifer, and I will be happy to address your questions.

Our first question comes from Aaron Wilkmer with Lake Street Capital Markets. Please go ahead.

Hey, good afternoon, guys. This is Aaron on the line for Brooks. Congrats on the strong momentum in the quarter. I guess my first question is, I'm just curious if there's been any sort of meaningful changes in either attitude or behavior from any of your significant customers related to the reimbursement change for PAD.

Hi, Aaron. Thanks for the question. So at this time, we're in constant contact with our customers. And as you can see from our results, We are continuing to see testing performed by our customers at increasing rate versus historical levels. So since the CMS announcement was not finalized until April, and it really won't come into effect until next year, at this time we have not seen a meaningful kind of change in attitude as well towards testing.

Gotcha, helpful. And then one other thing I was curious about, you know, it sounds like heart dysfunction is a big opportunity. Can you just describe what sort of conditions, I guess, are covered in heart dysfunction? And then in addition to that, if you could give us some sense of what risk adjustment payments are for patients diagnosed with heart dysfunction.

Sure. So heart dysfunction, there's many types of heart dysfunction. And once a patient is tested positive, there are other studies that will need to happen. So, for example, there could be problems with the valve. There could be arrhythmia, so electrical problems. There could also be problems with the actual heart muscle where it's damaged or weakened. Or there could be some coronary artery issues that are surrounding the patient there. And when you look at the HCC codes, so there are many of them out there, just like for PAD, including for asymptomatic. So again, our customers would code based on what is the underlying condition of the patient. And many of those codes for heart failure do pay more than what they do for PAD. And again, it would differ depending on what the underlying condition is.

Gotcha. Okay. That is extremely helpful. And again, thanks for taking the questions and congrats on the strong quarter.

Great. Thank you. Our next question comes from Herbert Semler with Semler Health.

Please go ahead.

Well, congratulations, everyone. That's wonderful for the people. I'm so happy to hear that you're growing and doing great. Has there been any way to educate the physician, the one who orders the echo or Has there been any movement on the company to try to get more physicians involved?

Yes, so as you can see with our growth, we obviously have a lot of units out there. And these units are placed in the physician's offices by many of our large customers. And these physicians, as they use our devices or if they don't, we do have the force out there and we are educating them to let them know that this test is out there. And again, it's a paradigm shift in the industry because typically asymptomatic patients will not be tested for.

Thank you. This concludes our question and answer session.

I would 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. Looking forward, our primary objective remains steadfast to maintain and enhance our current revenue opportunities and profitability in the chronic disease space with a focus on cardiovascular diseases. Thank you for joining us today. This concludes our conference.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.