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. 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.

These include risks relating to our strategy, our products and services, our preliminary estimates of variable-fee license revenues, as well as risks relating to the healthcare industry, a heavily regulated environment and the markets we and our customers operate in, including the ongoing COVID-19 pandemic.

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. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this report.

You should read this quarterly report and the documents that we reference herein and therein and have filed as exhibits to this report, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this quarterly report is accurate as of the date of this report only. Because the risk factors referred to above 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. ~~These~~The risks ~~and uncertainties, along with others, are~~ described ~~above~~ under the heading “Risk Factors” in our annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March ~~7, 2019.~~9, 2020, along with risks related to the ongoing COVID-19 pandemic and other risks could impact these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this quarterly report, and particularly our forward-looking statements, by these cautionary statements.

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Semler Scientific, Inc.

Condensed Statements of Income

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

(Unaudited) (Unaudited)
For the three months ended June 30 For the six months ended June 30
2019 2018 2019 2018

Revenues $ 7,953 $ 5,484 $ 14,714 $ 9,947
Operating expenses:
Cost of revenues 885 680 1,781 1,384
Engineering and product development 591 489 1,160 856
Sales and marketing 2,212 1,779 4,281 3,484
General and administrative 1,570 1,001 2,943 1,875
Total operating expenses 5,258 3,949 10,165 7,599
Income from operations 2,695 1,535 4,549 2,348

Interest income (expense) 1 (9 ) 2 (56 )
Related party interest expense - (72 ) - (131 )
Other expense - (1 ) (2 ) (2 )
Other income (expense) 1 (82 ) - (189 )
Income before income taxes 2,696 1,453 4,549 2,159
Provision for taxes 77 - 77 -
Net income $ 2,619 $ 1,453 $ 4,472 2,159
Net income per share:
Basic $ 0.41 $ 0.24 $ 0.70 $ 0.36
Diluted $ 0.32 $ 0.19 $ 0.55 $ 0.29
Weighted average number of shares used in computing: basic and diluted income per share
Basic 6,411,606 5,982,711 6,368,905 5,953,818
Diluted 8,086,140 7,534,846 8,128,241 7,403,498


	(unaudited)				(unaudited)
	For the three months ended June 30				For the six months ended June 30
	2020		2019		2020		2019
Revenue	$	6,373	$	7,953	$	15,803	$	14,714
Operating expenses:
Cost of revenue		700		885		1,550		1,781
Engineering and product development		762		591		1,605		1,160
Sales and marketing		2,473		2,212		5,168		4,281
General and administrative		1,478		1,570		3,069		2,943
Total operating expenses		5,413		5,258		11,392		10,165
Income from operations		960		2,695		4,411		4,549
Interest income (expense)		1		1		3		2
Other income (expense)		29		—		26		(2)
Other expense		30		1		29		—
Pre-tax net income	$	990	$	2,696	$	4,440	$	4,549
Income tax (benefit) provision		(85)		77		692		77
Net income		1,075		2,619		3,748		4,472
Net income per share, basic	$	0.16	$	0.41	$	0.57	$	0.70
Weighted average number of shares used in computing basic income per share		6,548,215		6,411,606		6,540,755		6,368,905
Net income per share, diluted	$	0.13	$	0.32	$	0.47	$	0.55
Weighted average number of shares used in computing diluted income per share		8,035,048		8,086,140		8,050,394		8,128,241

See accompanying notes to unaudited condensed financial statements.

Table of Contents

Semler Scientific, Inc.

Condensed Balance Sheets

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

(Unaudited)
June 30,
December 31,
2019 2018

Assets

Current Assets:
Cash $ 4,182 $ 3,284
Trade accounts receivable, net of allowance for doubtful accounts of $52 and $52, respectively 3,509 2,801
Prepaid expenses and other current assets 213 153
Total current assets 7,904 6,238

Assets for lease, net 1,690 1,243
Property and equipment, net 215 223
Long-term deposits 15 15
Total assets $ 9,824 $ 7,719

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable $ 405 $ 280
Accrued expenses 2,261 2,797
Deferred revenue 928 435
Total current liabilities 3,594 3,512

Long-term liabilities:

Deferred rent 9 11
Total long-term liabilities 9 11

Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 6,484,414 and 6,349,985 shares issued, and 6,459,414 and 6,324,985 outstanding (treasury shares of 25,000 and 25,000), respectively 6 6
Additional paid-in capital 23,161 25,608
Accumulated deficit (16,946 ) (21,418 )

Total stockholders' equity 6,221 4,196

Total liabilities and stockholders' equity $ 9,824 $ 7,719


	(unaudited)
	June 30,		December 31,
	2020		2019
Assets
Current Assets:
Cash	$	13,646	$	7,741
Trade accounts receivable, net of allowance for doubtful accounts of $56 and $36 respectively		982		3,486
Prepaid expenses and other current assets		639		216
Total current assets		15,267		11,443
Assets for lease, net		1,928		2,079
Property and equipment, net		287		249
Long-term deposits		—		15
Long-term deferred tax assets		3,905		4,501
Total assets	$	21,387	$	18,287

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable	$	207	$	338
Accrued expenses		3,343		3,914
Deferred revenue		813		955
Other short-term liabilities		5		—
Total current liabilities		4,368		5,207

Long-term liabilities:

Deferred Lease		—		7
Total long-term liabilities		—		7
Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 6,588,176, and 6,556,221 shares issued, and 6,563,176 and 6,531,221 shares outstanding (treasury shares of 25,000, and 25,000, respectively)		7		7
Additional paid-in capital		19,598		19,400
Accumulated deficit		(2,586)		(6,334)

Total stockholders’ equity		17,019		13,073

Total liabilities and stockholders’ equity	$	21,387	$	18,287

See accompanying notes to unaudited condensed financial statements.

Table of Contents

Semler Scientific, Inc.

Statements of ~~Stockholders'~~Stockholders’ Equity ~~(Deficit)~~

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

~~For the Three Months Ended June 30, 2018~~

Common Stock Treasury Stock

Shares
Issued

Common
Stock
Amount
Shares Amount
Additional
Paid-In
Capital

Accumulated
Deficit

Total
Stockholder's
Equity /
(Deficit)

Balance at March 31, 2018 5,969,834 $ 6 (25,000 ) $ - $ 24,196 $ (25,726 ) $ (1,524 )

Warrant Exercises 7,800 - - - - - -

Stock Option Exercises 70,763 - - - 149 - 149

Stock-based Compensation - - - - 138 - 138

Net income for three months ended June 30, 2018 - - - - - 1,453 1,453

Balance at June 30, 2018 6,048,397 $ 6 (25,000 ) $ - $ 24,483 $ (24,273 ) $ 216

~~For the Three Months Ended June 30, 2019~~

Common Stock Treasury Stock

Shares
Issued

Common
Stock
Amount
Shares Amount
Additional
Paid-In
Capital

Accumulated
Deficit

Total
Stockholder's
Equity /
(Deficit)

Balance at March 31, 2019 6,356,147 $ 6 (25,000 ) $ - $ 25,719 $ (19,565 ) $ 6,160

Warrant Re-purchase - - - - (2,687 ) - (2,687 )

Warrant Exercises 22,527 - - - - - -

Stock Option Exercises 105,740 - - - 31 - 31

Stock-based Compensation - - - - 98 - 98

Net income for three months ended June 30, 2019 - - - - - 2,619 2,619

Balance at June 30, 2019 6,484,414 $ 6 (25,000 ) $ - $ 23,161 $ (16,946 ) $ 6,221

~~For the Six Months Ended June 30, 2018~~

Common Stock Treasury Stock

Shares
Issued

Common
Stock
Amount
Shares Amount
Additional
Paid-In
Capital

Accumulated
Deficit

Total
Stockholder's
Equity /
(Deficit)

Balance at December 31, 2017 5,902,244 $ 6 (25,000 ) $ - $ 23,843 $ (26,432 ) $ (2,583 )

Warrant Exercises 40,775 - - - 64 - 64

Stock Option Exercises 105,378 - - - 245 - 245

Stock-based Compensation - - - - 331 - 331

Net income for six months ended June 30, 2018 - - - - - 2,159 2,159

Balance at June 30, 2018 6,048,397 $ 6 (25,000 ) $ - $ 24,483 $ (24,273 ) $ 216

~~For the Six Months Ended June 30, 2019~~

Common Stock Treasury Stock

Shares
Issued

Common
Stock
Amount
Shares Amount
Additional
Paid-In
Capital

Accumulated
Deficit

Total
Stockholder's
Equity /
(Deficit)

Balance at December 31, 2018 6,349,985 6 (25,000 ) - 25,608 (21,418 ) 4,196

Warrant Re-purchase - - - - (2,687 ) - (2,687 )

Warrant Exercises 22,527 - - - - - -

Stock Option Exercises 111,902 - - - 44 - 44

Stock-based Compensation - - - - 196 - 196

Net income for six months ended June 30, 2019 - - - - - 4,472 4,472

Balance at June 30, 2019 6,484,414 $ 6 (25,000 ) $ - $ 23,161 $ (16,946 ) $ 6,221

~~Semler Scientific, Inc.~~

~~Condensed Statements of Cash Flows~~

~~(In thousands of U.S. Dollars)~~

(Unaudited)
Six months ended June 30

2019 2018

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,472 $ 2,159

Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Amortization of debt discount - 16
Accretion of non-cash interest - 135
Depreciation 307 249
Loss on disposal of assets for lease 97 107
Bad debt expense 21 20
Stock-based compensation expense 196 331
Changes in Operating Assets and Liabilities:
Trade accounts receivable (730 ) (535 )
Prepaid expenses and other current assets (60 ) (105 )
Accounts payable 125 (303 )
Accrued expenses (538 ) (570 )
Deferred revenue 493 4
Net Cash Provided by Operating Activities 4,383 1,508

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (63 ) (105 )
Purchase of assets for lease, net (779 ) (138 )
Net Cash Used in Investing Activities (842 ) (243 )

CASH FLOWS FROM FINANCING ACTIVITIES:
Re-purchase of warrants (2,687 ) -
Exercise of warrants - 64
Exercise of stock options 44 245
Payments of loans payable - (1,022 )
Net Cash Used in Financing Activities (2,643 ) (713 )

INCREASE IN CASH 898 552
CASH, BEGINNING OF PERIOD 3,284 1,457

CASH, END OF PERIOD $ 4,182 $ 2,009
Cash paid for interest $ - $ 191

~~See accompanying notes to unaudited condensed financial statements~~

~~Semler Scientific, Inc.~~

~~Notes to Condensed Financial Statements~~

~~Unaudited~~

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


	For the Three Months Ended June 30, 2019
	Common Stock			Treasury Stock			Additional
		Common Stock					Paid-In		Accumulated		Total Stockholder’s
	Shares Issued	Amount		Shares	Amount		Capital		Deficit		Equity / (Deficit)
Balance at March 31, 2019	6,356,147	$	6	(25,000)	$	—	$	25,719	$	(19,565)	$	6,160
Warrant Re-purchase	—		—	—		—		(2,687)		—		(2,687)
Warrant Exercises	22,527		—	—		—		—		—		—
Stock Option Exercises	105,740		—	—		—		31		—		31
Stock-based Compensation	—		—	—		—		98		—		98
Net income	—		—	—		—		—		2,619		2,619
Balance at June 30, 2019	6,484,414	$	6	(25,000)	$	—	$	23,161	$	(16,946)	$	6,221

	For the Three Months Ended June 30, 2020
	Common Stock			Treasury Stock			Additional
		Common Stock					Paid-In		Accumulated		Total Stockholder’s
	Shares Issued	Amount		Shares	Amount		Capital		Deficit		Equity / (Deficit)
Balance at March 31, 2020	6,559,076	$	7	(25,000)	$	—	$	19,470	$	(3,661)	$	15,816
Stock Option Exercises	29,100		—	—		—		67		—		67
Stock-based Compensation	—		—	—		—		61		—		61
Net income	—		—	—		—		—		1,075		1,075
Balance at June 30, 2020	6,588,176	$	7	(25,000)	$	—	$	19,598	$	(2,586)	$	17,019

	For the Six Months Ended June 30, 2019
	Common Stock			Treasury Stock			Additional
		Common Stock					Paid-In		Accumulated		Total Stockholder’s
	Shares Issued	Amount		Shares	Amount		Capital		Deficit		Equity / (Deficit)
Balance at December 31, 2018	6,349,985	$	6	(25,000)	$	—	$	25,608	$	(21,418)	$	4,196
Warrant Re-purchase	—		—	—		—		(2,687)		—		(2,687)
Warrant Exercises	22,527		—	—		—		—		—		—
Stock Option Exercises	111,902		—	—		—		44		—		44
Stock-based Compensation	—		—	—		—		196		—		196
Net income	—		—	—		—		—		4,472		4,472
Balance at June 30, 2019	6,484,414	$	6	(25,000)	$	—	$	23,161	$	(16,946)	$	6,221

	For the Six Months Ended June 30, 2020
	Common Stock			Treasury Stock			Additional
		Common Stock					Paid-In		Accumulated		Total Stockholder’s
	Shares Issued	Amount		Shares	Amount		Capital		Deficit		Equity / (Deficit)
Balance at December 31, 2019	6,556,221		7	(25,000)		—		19,400		(6,334)		13,073
Stock Option Exercises	31,955		—	—		—		70		—		70
Stock-based Compensation	—		—	—		—		128		—		128
Net income	—		—	—		—		—		3,748		3,748
Balance at June 30, 2020	6,588,176	$	7	(25,000)	$	—	$	19,598	$	(2,586)	$	17,019

~~Basis of Presentation~~

Table of Contents

Semler Scientific, Inc.

Condensed Statements of Cash Flows

(In thousands of U.S. Dollars)


	For the six months ended June 30
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	3,748	$	4,472

Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Depreciation		235		307
Deferred tax expense		596		—
Loss on disposal of assets for lease		125		97
Allowance for bad debt		36		21
Stock-based compensation expense		128		196
Changes in Operating Assets and Liabilities:
Trade accounts receivable		2,468		(730)
Prepaid expenses and other assets		(408)		(60)
Accounts payable		(131)		125
Accrued expenses		(573)		(538)
Deferred revenue		(142)		493
Net Cash Provided by Operating Activities		6,082		4,383

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(100)		(63)
Purchase of assets for lease		(147)		(779)
Net Cash Used in Investing Activities		(247)		(842)

CASH FLOWS FROM FINANCING ACTIVITIES:
Re-purchase of warrants		—		(2,687)
Exercise of stock option		70		44
Net Cash Provided by (Used in) Financing Activities		70		(2,643)
INCREASE IN CASH		5,905		898
CASH, BEGINNING OF PERIOD		7,741		3,284
CASH, END OF PERIOD	$	13,646	$	4,182

See accompanying notes to unaudited condensed financial statements

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, ~~2018~~2019 filed with the SEC on March ~~7, 2019~~9, 2020 (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.

On January 30, 2020, the World Health Organization (“WHO”) declared the recent novel coronavirus (COVID-19) outbreak a global health emergency, which prompted national, state and local governments to begin putting actions in place to slow the spread of COVID-19. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic. The outbreak of COVID-19 has resulted in travel restrictions, quarantines, “stay-at-home” and “shelter-in-place” orders and extended shutdown of certain businesses around the world. For the three and six months ended June 30, 2020 the Company's revenues, primarily from variable-fee licenses were negatively impacted by the COVID-19 pandemic. The extent and duration of the pandemic is unknown, and the future effects on the Company's business are uncertain and difficult to predict. The Company is continuing to monitor the events and circumstances surrounding the COVID-19 pandemic, which may require adjustments to the Company's estimates and assumptions in the future.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In ~~May 2014,~~November 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting ~~Standard~~Standards Update (“ASU”) No. ~~2014-09,~~2019-08 – Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with ~~Customers (“ASU No. 2014-09”)~~Customer (Topic 606). The ~~amendment in this ASU provides guidance~~amendments on the revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle of this update ~~provides guidance~~require that an entity measure and classify share-based payment awards granted to ~~identify the performance obligations under the contract(s) with~~ a customer ~~and how to allocate~~by applying the guidance in Topic 718. The amount recorded as a reduction in the transaction price to the performance obligations in the contract. It further provides guidance to recognize revenue when (or as) the entity satisfies a performance obligation. This standard replaced most existing revenue recognition guidance. On August 8, 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU No. 2014-09 by one year, and permits early adoption as long as the adoption date is not before the original public entity effective date. Since the issuance of ASU 2014-09, the FASB has issued several amendments that clarify certain points, including ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing (“Topic 606”), ASU 2016-11, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force Meeting, and ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606. The updated revenue standard allows two methods of adoption: (1) retrospectively to each prior period presented (“full retrospective method”), or (2) retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption (“modified retrospective method”). The new standard further requires new disclosures about contracts with customers, including the significant judgments the company has made when applying the guidance. The Company adopted the new standard effective January 1, 2019, using the modified retrospective method. The Company determined that the adoption of this new standard did not have a material impact on its financial statements.

Topic 606 affects revenue recognition for the Company’s variable license fee contracts, which represents approximately $2,250 and $1,368 of revenues for the three month periods ended June 30, 2019 and 2018, respectively, and approximately $3,506 and $2,010 of revenues for the six month periods ended June 30, 2019 and 2018, respectively. Essentially all of the variable license fee contracts are with large healthcare organizations. The remainder of the revenue is earned from leasing the Company's testing product for a fixed monthly fee, which is not subject to Topic 606. It was determined that the impact of the new standard has no effectshould be based on the way revenue was currently being recognized. Reusable hardware equipment or accessories may be provided to a customer for a set price and then use of the associated software is billed to the customer monthly based on volume of use. Under this scenario, revenue is recognized when and only when the customer uses the product. The Company is rendering a service and recognizes revenue in direct proportion to how much service is rendered. The sale of the equipment or accessories is recognized as hardware sales upon shipment to the customer. The initial contract is for a specified time period with automatic renewal each period thereafter until canceled. In case there is a violation of any term of the contract, the Company may deactivate the service remotely, so that the customer cannot continue to use the product.

~~Semler Scientific, Inc.~~

~~Notes to Condensed Financial Statements~~

~~Unaudited~~

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

~~Accounting Pronouncements Not Yet Adopted~~

In January 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU No. 2016-02"). Under the new guidance in ASU No. 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged, however, certain targeted improvements were made. ASU No. 2016-02 also simplifies the accounting for sale and leaseback transactions. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lessees and lessors may not apply a full retrospective transition approach. The new standard also requires expanded disclosures regarding leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. This ASU provides another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. This ASU also provides further guidance on lessors accounting policy election to not separate non-lease components from the associated lease components and limits this to circumstances in which the non-lease component or components otherwise would be accounted for under the new revenue guidance and both (1) the timing and pattern of transfer are the same for the non-lease component(s) and associated lease component, and (2) the lease component, if accounted for separately, would be classified as a an operating lease. In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. This ASU provide narrow scope improvements for lessor accounting by permitting lessors, as an accounting policy election, to treat certain sales taxes and other similar taxes as lessee costs, to exclude lessor costs paid by lessees directly to third parties from variable payments, and clarify the accounting by lessors for variable payments that related to both a lease component and a nonlease component. In January 2019, the FASB issued ASU No. 2019-01, Leases Codification Improvements, which reinstates the exception for lessors that are not manufacturers or dealers for determininggrant-date fair value of the leased property as the underlying asset’s cost, clarifies the presentation on the statement of cash flows for sales type and direct financing leases for lessors that are depository and lending institutions and clarifies the transition disclosures related to accounting changes and error corrections in the year of adoption of the ASU.share-based payment award. This ~~update~~standard is effective for the Company’s annual periods beginning after December 15, 2019 , including interim periods within those fiscal years. The Company ~~is currently evaluating the impact that this new standard will have on its financial statements.~~

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“Topic 326”). This ASU requires timelier recording of credit losses on loans and other financial instruments held. Instead of reserves based on a current probability analysis, Topic 326 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. All organizations will now use forward-looking information to better inform their credit loss estimates. Topic 326 requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide information about the amounts recorded in the financial statements. In addition, Topic 326 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In April 2019, the FASB issued ASU2019-04 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 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, 2019, including interim periods within those fiscal years. The Company will adoptadopted the new standard inon January 1, 2020 and determined that the ~~first quarter~~adoption of ~~fiscal year 2020. The Company does not anticipate~~ this new ~~standard will~~accounting guidance did not have a material impact on its financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ~~(“ASU 2018-07”)~~. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of costs. The ASU specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This standard is effective for the Company’s annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company ~~will adopt~~adopted the new standard inon January 1, 2020 and determined that the ~~first quarter~~adoption of ~~fiscal year 2020. The Company does not anticipate~~this this new ~~standard will~~accounting guidance did not have a material impact on its financial statements.

~~Semler Scientific, Inc.~~

~~Notes to Condensed Financial Statements~~

~~Unaudited~~

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

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value ~~Measurement.~~Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements removing the requirements to disclosure amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. In addition, it modified certain disclosures related to Level 3 fair value measurements and added additional disclosures regarding the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period. This update is effective for the Company’s annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the new standard on January 1, 2020 and determined that the adoption of this this new accounting guidance did not have a material impact on its financial statements.

Table of Contents

Semler Scientific, Inc.

Notes to Condensed Financial Statements

Unaudited

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

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“Topic 326”). This ASU requires timelier recording of credit losses on loans and other financial instruments held. Instead of reserves based on a current probability analysis, Topic 326 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. All organizations will now use forward-looking information to better inform their credit loss estimates. Topic 326 requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide information about the amounts recorded in the financial statements. In addition, Topic 326 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326 Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, to introduce amendments which will affect the recognition and measurement of financial instruments, including derivatives and hedging. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments – Credit Losses (Topic 326); Targeted Transition Relief. The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments upon adoption of Topic 326. This standard and related amendments are effective for the Company’s fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company will adopt the new standard in the first quarter of fiscal year ~~2020.~~2023. The Company does not anticipate this new standard will have a material impact on its financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles for income taxes. This update is effective for the Company’s annual periods beginning after December 15, 2020, including interim periods within those fiscal years. The Company will adopt the new standard in the first quarter of fiscal year 2021. The Company does not anticipate this update to have a material impact on its financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The amendments in this ASU clarify the interaction between the accounting for investments in equity securities, investment in equity method and certain derivatives instruments. The ASU is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. This ASU is effective for fiscal years beginning after December 15, 2021. The adoption of this ASU is not expected to have any impact on the Company's results of operations, cash flows or financial position.

~~Assets for Lease, net~~

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

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

Table of Contents

Semler Scientific, Inc.

Notes to Condensed Financial Statements

Unaudited

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

2. Variable-fee Revenue

Topic 606 affects revenue recognition for the Company’s variable-fee licenses (i.e., fee per test) and sales of hardware equipment and accessories. Total fees from variable-fee licenses represent approximately $290 and $2,250 of revenues for the three months ended June 30, 2020 and 2019, respectively. Total fees from variable-fee licenses represent approximately $2,992 and $3,506 for the six months ended June 30, 2020 and 2019, respectively. Total sales of hardware and equipment accessories represent approximately $129 and $307 of revenues for the three months ended June 30, 2020 and 2019, respectively. Total sales of hardware and equipment accessories represent approximately $400 and $552 of revenues for the six months ended June 30, 2020 and 2019, respectively. Essentially all of the variable-fee licenses are with large healthcare organizations. The remainder of the revenue is earned from leasing the Company's testing product for a fixed fee, which is not subject to Topic 606.

3. 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. 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 assets associated with these leasing arrangements are identified below as assets for lease. During the three months ended June 30, 2020 and 2019, the Company recognized approximately $5,954 and $5,396, respectively, in lease revenues related to these arrangements. During the six months ended June 30, 2020 and 2019, the Company recognized approximately $12,411 and $10,656, 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:

	June 30, 2019			December 31, 2018


							June 30,		December 31,
							2020		2019
Assets for lease	$	2,824		$	2,218		$	3,308	$	3,374
Less: accumulated depreciation		(1,134	)		(975	)		(1,380)		(1,295)
Assets for lease, net	$	1,690		$	1,243		$	1,928	$	2,079

Depreciation expense amounted to ~~$126~~$44 and ~~$101~~$126 for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Depreciation expense amounted to ~~$236~~$172 and ~~$198~~$236 for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Reduction to accumulated depreciation for returned items was ~~$42~~$22 and ~~$28~~$42 for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Reduction to accumulated depreciation for returned items was ~~$77~~$87 and ~~$61~~$77 for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The Company recognized a loss on disposal of assets for lease in the amount of ~~$63~~$59 and ~~$38~~$63 for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The Company recognized a loss on disposal of assets for lease in the amount of ~~$97~~$125 and ~~$107~~$97 for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

4. Property and Equipment, net

Capital assets consist of the following:

	June 30, 2019			December 31, 2018


							June 30,		December 31,
							2020		2019
Capital assets	$	520		$	457		$	737	$	636
Less: accumulated depreciation		(305	)		(234	)		(450)		(387)
Capital assets, net	$	215		$	223		$	287	$	249

Depreciation expense amounted to ~~$37~~$32 and ~~$26~~$37 for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Depreciation expense amounted to ~~$71~~$63 and ~~$51~~$71 for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

Table of Contents

Semler Scientific, Inc.

Notes to Condensed Financial Statements

Unaudited

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

5. Accrued Expenses

Accrued expenses consist of the following:

	June 30, 2019		December 31, 2018


					June 30,		December 31,
					2020		2019
Compensation	$	1,838	$	2,442	$	2,365	$	2,803
Accrued taxes						615		378
Miscellaneous accruals		423		355		363		733
Total accrued expenses	$	2,261	$	2,797	$	3,343	$	3,914

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

Management periodically monitors the creditworthiness of its customers and believes that it has adequately provided for any exposure to potential credit loss. For the three months ended June 30, 2018, two customers accounted for 50.3% and 22.5% of the Company’s revenue, respectively. For the six months ended June 30, 2018, two customers accounted for 53.9% and 17.7% of the Company’s revenue, respectively. For the three months ended June 30, 2019, ~~three~~3 customers accounted for 50.8%, 14.8% and 13.8% of the Company’s ~~revenue,~~revenues, respectively. For the six months ended June 30, 2019, ~~three~~3 customers accounted for 53.0%, 13.2%, and 11.1% of the Company’s ~~revenue,~~revenues, respectively. For the three months ended June 30, 2020, 1 customer accounted for 62.1% of the Company’s revenues. For the six months ended June 30, 2020, 2 customers accounted for 52.5% and 14.0% of the Company’s revenues, respectively. As of December 31, ~~2018, two~~2019, 3 customers accounted for ~~43.5%~~55.9%, 17.6% and ~~40.4%~~12.0% of the Company’s accounts receivable, respectively. As of June 30, ~~2019, three~~2020, 3 customers accounted for ~~31.4%~~33.0%, ~~30.9%~~12.1% and ~~22.8%~~10.6% of the Company’s accounts receivable, respectively.The Company’s largest customer in terms of both revenues ~~for~~and accounts receivable in the three months ended June 30, ~~2019 and accounts receivable as of June 30, 2019~~2020 is a U.S. diversified healthcare company and its affiliated plans.

As of December 31, ~~2018, two~~2019, 3 vendors accounted for ~~11.0%~~23.3%, 20.3% and ~~10.8%~~11.1% of the Company’s accounts payable, respectively. As of June 30, ~~2019, three~~2020, 2 vendors accounted for ~~17.9%, 13.7%~~11.4%, and ~~10.6%~~10.3% of the Company’s accounts payable, respectively.

7. Commitments and Contingencies

Facilities Leases

The Company recognized facilities lease expenses of ~~$17~~$18 and ~~$18~~$17 for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The Company recognized facilities lease expenses of ~~$34~~$35 and ~~$35~~$34 for the six months ended June 30, 2020 and 2019, respectively.

Table of Contents

Semler Scientific, Inc.

Notes to Condensed Financial Statements

Unaudited

(In thousands of U.S. Dollars, except share and ~~2018, respectively.~~per share data)

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 ~~had~~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.

~~Semler Scientific, Inc.~~

~~Notes to Condensed Financial Statements~~

~~Unaudited~~

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

~~Warrant Repurchase – Related Party~~

On May 3, 2019, the Company entered into a Warrant Repurchase Agreement with the Murphy-Chutorian Family Trust U/D/T dated January 13, 1997, of which Douglas Murphy-Chutorian, M.D., the Company’s director and chief executive officer is co-Trustee with his spouse and of which he is a beneficiary. Pursuant to the warrant repurchase agreement, the Company repurchased a warrant to acquire 65,542 shares of the Company’s common stock held by the trust, which warrant had an exercise price equal to $4.50 per share and an expiration date of July 31, 2023, at an aggregate purchase price of $2,687. The purchase price reflects the difference between the aggregate exercise price of the warrant and the aggregate fair market value of the shares underlying the warrant, based on the last trade price of the Company’s common stock on May 3, 2019, the date of the warrant repurchase agreement. Following the warrant repurchase, the warrant was cancelled and is no longer issued and outstanding.

8. Stock Option Plan

The Company’s stock-based compensation program is designed to attract and retain employees while also aligning ~~employees'~~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”) or 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, ~~2015,~~2020, the Share Reserve increased by 188,640 shares due to the automatic 4% increase. On January 1, 2016, the Share Reserve increased by 204,943 shares due to the automatic 4% increase. On January 1, 2017, the Share Reserve increased by 204,943 shares due to the automatic 4% increase. On January 1, 2018, the Share Reserve increased by 235,090261,249 shares due to the automatic 4% increase. The Share Reserve is currently 2,783,616 shares as of June 30, ~~2019.~~

2020.

In light of stockholder approval of the 2014 Plan, the Company no longer grants equity awards under the 2007 Plan. As of June 30, ~~2019,~~2020, 0 shares of an aggregate total of 407,500 shares were available for future stock-based compensation grants under the 2007 Plan and ~~993,200~~1,258,557 shares of an aggregate total of 2,783,616 shares were available for future stock-based compensation grants under the 2014 Plan.

Table of Contents

Semler Scientific, Inc.

Notes to Condensed Financial Statements

Unaudited

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

Aggregate intrinsic value represents the difference between the closing market value as of June 30, ~~2019~~2020 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 six months ended June 30, ~~2019~~2020 is as follows:

Options Outstanding
Number of
Stock Options
Outstanding Weighted
Average
Exercise Price Weighted
Average
Remaining
Contractual
Term (In Years) Aggregate
Intrinsic Value
(in thousands)
Balance, January 1, 2019 1,761,447 $ 3.18 6.84 $ 55,000
Options exercised (117,765 ) 2.49
Balance, June 30, 2019 1,643,682 $ 3.22 6.35 $ 66,528
Exercisable as of June 30, 2019 1,478,808 $ 3.04 6.18 $ 60,129


	Options Outstanding
				Weighted
	Number of	Weighted		Average
	Stock	Average		Remaining	Aggregate
	Options	Exercise		Contractual	Intrinsic Value
	Outstanding	Price		Term (In Years)	(in thousands)
Balance, January 1, 2020	1,581,582	$	3.23	5.86	$	70,827
Options exercised	(32,567)		3.01	—		—
Balance, June 30, 2020	1,549,015	$	3.23	5.37	$	66,248
Exercisable as of June 30, 2020	1,482,272	$	3.10	5.28	$	63,588

~~Semler Scientific, Inc.~~

~~Notes to Condensed Financial Statements~~

~~Unaudited~~

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

The total compensation cost related to unvested stock option awards not yet recognized was ~~$598~~$307 as of June 30, ~~2019.~~2020. The weighted average period over which the total unrecognized compensation cost related to these unvested stock awards will be recognized is ~~1.38~~0.66 years.~~The weighted average fair value of~~ There were 0 options granted during the three or six months ended June 30, ~~2018 was $5.97 per share,~~2020 or ~~an aggregate grant date fair value of $806. There were no options granted during the six months ended June 30,~~ 2019.

On January 2, 2018, the Compensation Committee of the Company’s Board of Directors granted, and the full Board ratified, an option to acquire an aggregate of 125,000 shares under the 2014 Plan to the Company’s CEO. This option vests 25% on the one-year anniversary of the grant date and monthly thereafter for 36 months, such that the option is vested in full on the four-year anniversary of the grant date. On January 2, 2018, the Company’s Compensation Committee granted, and the full Board ratified, options to each of the then-seated non-employee Directors to acquire 5,000 shares, for an aggregate of 10,000 shares, under the 2014 Plan. These options vest on the one-year anniversary of their grant date. On February 28, 2018, the Compensation Committee of the Company’s Board of Directors accelerated the vesting on stock options issued to consultants such that all unvested shares were vested on that date. This resulted in a one-time expense of $49 during the three months ended March 31, 2018.

~~Determining the Fair Value of Stock Options~~

The Company uses the Black-Scholes pricing model to determine the fair value of stock options. The fair value of each option grant is estimated on the date of the grant. There were no stock options granted during the six months ended June 30, 2019. There were no stock options granted during the three months ended June 30, 2018. There were 135,000 stock options granted during the six months ended June 30, 2018. The following assumptions for the periods presented were:

Three months ended
June 30, Six months ended
June 30,
2019 2018 2019 2018
Expected term (in years) - - - 5
Risk-free interest rate - % - % - % 2.02 %
Expected volatility - % - % - % 0.99 %
Expected dividend rate - % - % - % - %

~~The assumptions are based on the following for each of the periods presented:~~

~~Valuation Method~~ ~~— The Company estimates the fair value of its stock options using the Black-Scholes option pricing model.~~

~~Expected Term~~ — The Company estimates the expected term consistent with the simplified method identified by the SEC. The Company elected to use the simplified method because of its limited history of stock option exercise activity and its stock options meet the criteria of the “plain-vanilla” options as defined by the SEC. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award.

~~Volatility~~ ~~— The Company derives this number from the historical stock volatilities of the Company’s stock over a period approximately equal to the expected term of the options.~~

~~Risk-free Interest Rate~~ ~~— The risk-free interest rate is based on median U.S. Treasury zero coupon issues with remaining terms similar to the expected term on the options.~~

~~Expected Dividend~~— The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore, used an expected dividend yield of zero in the valuation model.

~~Forfeiture~~ — Beginning in the first quarter of 2017, the Company implemented ASU 2016-09, and elected to true-up calculations at the time of forfeiture, rather than creating an estimate at the time of option issuance.

~~Semler Scientific, Inc.~~

~~Notes to Condensed Financial Statements~~

~~Unaudited~~

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

The Company has recorded an expense of$9761 and ~~$138~~$98 as it relates to stock-based compensation for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The Company has recorded an expense of $128 and $196 ~~and $331~~ as it relates to stock-based compensation for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively:

	Three months ended June 30,				Six months ended June 30
	2019		2018		2019		2018

									Three months ended June 30,				Six months ended June 30,
									2020		2019		2020		2019
Cost of Revenue	$	1	$	1	$	1	$	1	$	—	$	1	$	—	$	1
Engineering and Product Development		5		9		12		17		—		5		—		12
Sales and Marketing		15		22		31		51		—		15		—		31
General and Administrative		77		106		152		262		61		77		128		152
Total	$	98	$	138	$	196	$	331	$	61	$	98	$	128	$	196

9.Income Taxes

The Company’s income tax provision for the three and six months ended June 30, 2020 and June 30, 2019, respectively, 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 occur. The estimates are re-evaluated each quarter based on the estimated tax expense for the full year.

The effective tax rate for the three and six months ended June 30, 2020 was (8.59%) and 15.59%, respectively, compared to 2.86% and 1.69%, respectively, in the same periods of the prior year. The increase in the effective tax rate for the six months ended June 30, 2020 is primarily related to the release of the entire valuation allowance against the deferred tax assets for federal and state net operating loss (“NOL”) carryforwards and other related deferred tax assets in quarter ended September 30, 2019. The decrease in the effective tax rate for the three months ended June 30, 2020 is primarily related to tax benefit from discrete events that occurred during the quarter.

The effective tax rate for the three and six months ended June 30, 2020, respectively, differed from the U.S. federal statutory rate of 21% primarily due to state income taxes (net of federal benefit) partially offset by tax benefits associated with employee equity plans, federal and state research and development (“R&D”) credit benefit and the effect of changes in enacted tax laws. The difference between the U.S. federal statutory rate of 21% and the Company’s effective tax rate for the three and six months ended June 30, 2019,

Table of Contents

Semler Scientific, Inc.

Notes to Condensed Financial Statements

Unaudited

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

respectively, was primarily due to NOL carryforwards that offset potential current taxes for which a full valuation allowance had been previously provided.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act was signed into law. The Company has evaluated the impact of the new regulations and determined that there is no material impact to its financial statements.

10. 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 ~~net~~ EPS is calculated as follows:

	Three months ended June 30,
	2019						2018
	Shares		Net Income		EPS		Shares		Net Income		EPS
Basic EPS		6,411,606	$	2,619	$	0.41		5,982,711	$	1,453	$	0.24

													Three months ended June 30,
													2020					2019
													Shares	Net Income		EPS		Shares	Net Income		EPS
Basic													6,548,215	$	1,075	$	0.16	6,411,606	$	2,619	$	0.41
Common stock warrants		168,099		-				281,224		-			69,039		—			168,099		—
Common stock options		1,506,435		-				1,270,911		-			1,417,794		—			1,506,435		—
Diluted EPS		8,086,140	$	2,619	$	0.32		7,534,846	$	1,453	$	0.19
Diluted													8,035,048	$	1,075	$	0.13	8,086,140	$	2,619	$	0.32

	Six months ended June 30,
	2019						2018
	Shares		Net Income		EPS		Shares		Net Income		EPS
Basic EPS		6,368,905	$	4,472	$	0.70		5,953,818	$	2,159	$	0.36

													Six months ended June 30,
													2020					2019
													Shares	Net Income		EPS		Shares	Net Income		EPS
Basic													6,540,755	$	3,748	$	0.57	6,368,905	$	4,472	$	0.70
Common stock warrants		207,471		-				256,916		-			69,377		—			207,471		—
Common stock options		1,551,865		-				1,195,010		-			1,440,262		—			1,551,865		—
Diluted EPS		8,128,241	$	4,472	$	0.55		7,403,498	$	2,159	$	0.29
Diluted													8,050,394	$	3,748	$	0.47	8,128,241	$	4,472	$	0.55

The ~~following~~were no weighted average shares outstanding of common stock equivalents ~~were~~ excluded from the computation of diluted net ~~income~~loss per share for the three ~~and~~or six months ended June 30, ~~2019~~2020 and ~~2018 because including them would have been anti-dilutive:~~2019.

Three months ended
June 30, Six months ended
June 30,
2019 2018 2019 2018
Weighted average shares outstanding:
Common stock warrants - - - -
Options - 135,000 - 135,000
Total - 135,000 - 135,000

11.Subsequent Events

None

Table of Contents

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, ~~2018,~~2019, 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 ~~7, 2019,~~9, 2020, 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 our Annual ~~Report.~~Report and the ongoing COVID-19 pandemic.

Overview

We are ~~an emerging growth~~a company providing technology solutions to improve the clinical effectiveness and efficiency of healthcare providers. Our mission is to develop, manufacture and market innovative proprietary products and services that assist our customers in evaluating and treating chronic diseases. In 2011, we began commercializing our first patented and U.S. Food and Drug Administration, or FDA, cleared product, which measured arterial blood flow in the extremities to aid in the diagnosis of peripheral arterial disease, or PAD. In March 2015, we received FDA 510(k) clearance for the next generation version of our product, ~~QuantaFlo™~~QuantaFlo®, which we began commercializing in August 2015. We believe our products and services 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 June 30, ~~2019,~~2020, we had total revenues of $6,373,000 and net income of $1,075,000, compared to total revenues of $7,953,000 and net income of $2,619,000 ~~compared to total revenues of $5,484,000 and net income of $1,453,000~~ in the same period in ~~2018.~~2019. In the six months ended June 30, ~~2019,~~2020, we had total revenues of $15,803,000 and net income of $3,748,000 compared to total revenues of $14,714,000 and net income of $4,472,000 ~~compared to total revenues of $9,947,000 and net income of $2,159,000~~ in the same period in ~~2018.~~2019.

Recent Developments

~~Emerging Growth Company Elections~~Because we started to experience the effects of COVID-19 late in the first quarter, which continued into the second quarter, results in the second quarter are not indicative of any future quarter or the full fiscal year results. Overall, we have experienced decreased test volumes due to “social distancing” and other executive orders mandating “shelter-in-place” or similar restrictions, which limited patient visits by our customers. This volume decrease has primarily affected revenues from our variable-fee licenses, which are based on usage of our QuantaFlo® product, often during home visits by our customers.

We believe that as such restrictions are lifted around the country and non-emergency medical services are resumed, our business will return to pre-COVID-19 levels. We may also experience even higher test volumes if our customers accelerate usage due to a backlog of untested patients. However, we cannot be certain that this will occur, nor is there certainty that the recent roll-back in restrictions will be maintained. New, additional, or different restrictions could be imposed, which could impact the usage of our product by our customers. Other customers (who have fixed-fee licenses) could decide to cancel their licenses if they are not able to use our device as frequently as they had anticipated in light of such restrictions.

~~The JOBS Act provides~~Notably, as state and local governments eased restrictions during the second quarter, testing volumes increased, along with associated revenues. In June 2020 compared to May 2020, variable-fee license revenues increased to $249,000 from $19,000.

Although we do not provide formal guidance, we intend to manage our expenses and other costs in line with changes in revenues to conservatively preserve cash during these uncertain times. To date, we have maintained staffing, salaries and inventory at usual levels, and travel expenses have decreased. We expect that ~~an emerging growth company, such~~our operating expenses will increase during the third quarter of 2020 as our company, can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We have elected to avail ourselves of this exemption. As a result ~~our financial statements may not be comparable to other public companies that comply with public company effective dates. In~~of new hiring. Until the ~~future, we may elect to opt out~~effects of the ~~extended period for adopting new accounting standards. If~~COVID-19 pandemic on our business are more quantifiable, we do ~~so, we would need~~not plan to ~~disclose such decision and it would be irrevocable. We expect~~undertake any material changes to ~~cease being an emerging growth company as~~our business plan or operations.

Table of ~~December 31, 2019, the last day of the fiscal year following the fifth anniversary of our initial public offering.~~Contents

~~Factors Affecting Future Results~~

We have not identified any factors that have a recurring effect that are necessary to understand period to period comparisons as appropriate, nor any one-time events that have an effect on the financials.

Results of Operations

Three Months Ended June 30, ~~2019~~2020 Compared to Three Months Ended June 30, ~~2018~~2019

Revenues

We had revenues of ~~$7,953,000~~$6,373,000 for the three months ended June 30, ~~2019, an increase~~2020, a decrease of ~~$2,469,000,~~$1,580,000, or ~~45%~~20%, compared to ~~$5,484,000~~$7,953,000 in the same period in ~~2018.~~2019. Our revenues are primarily from fees charged to customers for use of our vascular testing products and from sale of accessories used with these products. We recognized revenues of ~~$7,647,000~~$6,244,000 from fees for our vascular testing products for the three months endedJune 30, ~~2019~~2020, ~~an increase~~a decrease of ~~$2,279,000~~$1,403,000 compared to ~~$5,368,000~~$7,647,000 in the same period of the prior year. The primary reason for the decrease is decreased testing volumes due to the ongoing COVID-19 pandemic, which significantly reduced revenues from variable-fee licenses. Fixed-fee license revenues were approximately $5,954,000, a decrease of $557,000, or 10%, variable-fee license revenues were approximately $290,000. The remainder of our revenues was from other items, such as the sale of equipment, supplies or accessories sales, which were ~~$306,000~~$129,000 in the three months endedJune 30, ~~2019~~2020, as compared to ~~$116,000~~$306,000 in the same period of the prior year.

Revenues from fees for vascular testing products are recognized monthly for each unit installed with a customer, usually billed as a monthly fixed-fee or as a monthly variable-fee dependent on usage

Operating expenses

We had total operating expenses of $5,413,000 for the three months ended June 30, 2020, an increase of $155,000 or 3%, compared to $5,258,000 in the same period in the prior year. The primary reason for this change was increased headcount of field sales and technical support personnel, which offset decreases in cost of revenues and general and administrative expenses. As a percentage of revenues, operating expenses increased to 85% in the second quarter of 2020 as compared to 66% 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 $700,000 for the three months ended June 30, 2020, a decrease of $185,000, or 21%, compared to $885,000 in the same period of the prior year. The primary reason for this change was decreased headcount and lower depreciation per unit per month as a greater percentage of installations were software and sensor only rather than laptop, software and sensor. As a percentage of revenues, cost of revenues was 11% in both periods.

Engineering and product development expense

We had engineering and product development expense of $762,000 for the three months ended June 30, 2020, an increase of $171,000, or 29%, compared to $591,000 in the same period of the prior year. The increase was primarily due to increased personnel and other costs associated with our product development and customization efforts, partially offset by lower consultant costs. As a percentage of revenues, engineering and product development expense increased to 12% in the second quarter of 2020, as compared to 7% in the prior year period.

Sales and marketing expense

We had sales and marketing expense of $2,473,000 for the three months ended June 30, 2020, an increase of $261,000, or 12%, compared to $2,212,000 in the same period of the prior year. The increase was primarily due to higher personnel expense associated with the continued expansion of existing customers, education, training, and associated expense, partially offset by lower travel expenses. As a percentage of revenues, sales and marketing expense increased to 39% in the second quarter of 2020, as compared to 28% in the prior year period.

Table of Contents

General and administrative expense

We had general and administrative expense of $1,478,000 for the three months ended June 30, 2020, a decrease of $92,000, or 6%, compared to $1,570,000 in the same period of the prior year. The decrease was primarily due to lower professional fees, partially offset by increased expenses to support a growing company, including higher infrastructure costs, insurance and other consultants’ fees. As a percentage of revenues, general and administrative expense increased to 23% in the second quarter of 2020, as compared to 20% in the prior year period.

Other income

We had other income of $30,000 for the three months ended June 30, 2020, compared to other income of $1,000 in the same period of the prior year. The increase was primarily due to miscellaneous income and interest income, partially offset by credit card merchant fees.

Pre-tax net income

For the foregoing reasons, we had pre-tax net income of $990,000, for the three months ended June 30, 2020, a decrease of $1,706,000, or 63%, compared to a pre-tax net income of $2,696,000 for the same period of the prior year.

Income tax expense (benefit)

We had income tax benefit of $85,000 for the three months ended June 30, 2020, compared to income tax expense of $77,000 in the same period of the prior year. The benefit was primarily due to discrete events that occurred during the quarter.

Net income

For the foregoing reasons, we had net income of $1,075,000, or $0.16 per basic share and $0.13 per diluted share, for the three months ended June 30, 2020, an decrease of $1,544,000, or 59%, compared to a net income of $2,619,000, or $0.41 per basic share and $0.32 per diluted share, for the same period of the prior year.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Revenues

We had revenues of $15,803,000 for the six months ended June 30, 2020, an increase of $1,089,000, or 7%, compared to $14,714,000 in the same period in 2019. Our revenues are primarily from fees charged to customers for use of our vascular testing products and from sale of accessories used with these products. We recognized revenues of $15,403,000 from fees for our vascular testing products for the six months ended June 30, 2020, an increase of $1,241,000 compared to $14,162,000 in the same period of the prior year, which is primarily due to an overall increase in our customer base with fixed-fee licenses, which offset the negative effects of the COVID-19 pandemic. Fixed-fee license revenues were approximately $12,411,000, an increase of $1,754,000, or 16%, variable-fee license revenues were approximately $2,992,000. The remainder of our revenues was from other items, such as the sale of equipment, supplies or accessories sales, which were $400,000 in the six months ended June 30, 2020, as compared to $552,000 in the same period of the prior year.

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

Operating expenses

We had total operating expenses of ~~$5,258,000~~$11,392,000 for the ~~three~~six months ended June 30, ~~2019,~~2020, an increase of ~~$1,309,000,~~$1,227,000 or ~~33%~~12%, compared to ~~$3,949,000~~$10,165,000 in the same period in the prior year. The primary reason for this change was overall growth in our business, ~~which led to~~ increased compensation of the sales team ~~as well as an increase in our~~and increased headcount of field sales and technical support personnel ~~headcount~~ to service the expanding number of ~~customers.~~customers, which offset the decrease in cost of revenues. As a percentage of revenues, operating expenses increased to 72% in the first half of 2020 as compared to 69% in the prior year period. The changes in the various components of our operating expenses are described below.

Table of Contents

Cost of revenues

We had cost of revenues of ~~$885,000~~$1,550,000 for the ~~three~~six months ended June 30, ~~2019, an increase~~2020, a decrease of ~~$205,000,~~$231,000, or ~~30%~~13%, compared to ~~$680,000~~$1,781,000 in the same period of the prior year.The The primary reason for this change was ~~increased costs due to increased sales volume of, placement of~~decreased headcount and ~~technical support for installations in the field. These increases were partially offset by~~ lower depreciation per unit per month as a greater percentage of installations were software and sensor only, rather than laptop, software and ~~sensor, as well as lower residual value for retired units.~~sensor. As a percentage of revenues, cost of revenues decreased to ~~11%,~~10% in the first half of 2020, as compared to 12%, in the prior year period, primarily due to ~~revenue~~revenues growing at a faster pace than cost of ~~revenue~~.revenues.

Engineering and product development expense

We had engineering and product development expense of ~~$591,000~~$1,605,000 for the ~~three~~six months ended June 30, ~~2019,~~2020, an increase of ~~$102,000,~~$445,000, or ~~21%~~38%, compared to ~~$489,000~~$1,160,000 in the same period of the prior year.The increase was primarily due to ~~consultant costs,~~increased personnel and other costs associated with ~~ongoing projects related to~~ our product development and customization ~~efforts, including new applications for our~~efforts. As a percentage of revenues, engineering and product development expense increased to 10% in the first half of 2020, as ~~well as other product enhancements.~~compared to 8% in the prior year period.

Sales and marketing expense

We had sales and marketing expense of ~~$2,212,000~~$5,168,000 for the ~~three~~six months ended June 30, ~~2019,~~2020, an increase of ~~$433,000,~~$887,000, or ~~24%~~21%, compared to ~~$1,779,000~~$4,281,000 in the same period of the prior year. The increase was primarily due to higher ~~sales compensation and~~ personnel expense ~~as well as increased headcount and expense, each~~ associated with the continued expansion of existing customers, education, training, and associated expense, partially offset by lower travel expenses. As a ~~growing business.~~percentage of revenues, sales and marketing expense increased to 33% in the first half of 2020, as compared to 29% in the prior year period.

General and administrative expense

We had general and administrative expense of ~~$1,570,000~~$3,069,000 for the ~~three~~six months ended June 30, ~~2019,~~2020, an increase of ~~$569,000,~~$126,000, or ~~57%~~4%, compared to ~~$1,001,000~~$2,943,000 in the same period of the prior year. The increase was primarily due to the growth in our business, which led to increased expenses to support a growing company, including higher infrastructure costs, insurance and other professional fees, as well as higher compensation and personnel expense. As a percentage of revenues, general and administrative expense decreased to 19% in the first half of 2020, as compared to 20% in the prior year period.

Other income ~~(expense)~~

We had other income of ~~$1,000~~$29,000 for the ~~three~~six months ended June 30, ~~2019, an increase of $83,000, or 102%,~~2020, compared to no other ~~expense of $82,000~~income in the same period of the prior year. The increase was primarily due to ~~a decrease in~~miscellaneous income and interest ~~expense of $81,000 associated with retirement of notes payable, and other~~ income, ~~of $1,000.~~partially offset by credit card merchant fees.

~~Provision for~~Pre-tax net income ~~taxes~~

We had provision for income taxes of $77,000 for the three months ended June 30, 2019 compared to no provision for income taxes in the same period of the prior year, which resulted from the growth in our business and expansion into new tax jurisdictions.

~~Net income~~

For the foregoing reasons, we had pre-tax net income of ~~$2,619,000, or $0.41 per basic share and $0.32 per diluted share,~~$4,440,000, for the ~~three~~six months ended June 30, ~~2019, an increase~~2020, a decrease of ~~$1,166,000,~~$109,000, or ~~80%~~2%, compared to a pre-tax net income of ~~$1,453,000, or $0.24 per basic share and $0.19 per diluted share,~~$4,549,000 for the same period of the prior year.

~~Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018~~

~~Revenues~~

Income tax expense

We had ~~revenues~~income tax expense of ~~$14,714,000~~$692,000 for the six months ended June 30, ~~2019, an increase of $4,767,000, or 48%,~~2020, compared to ~~$9,947,000 in the same period in 2018.~~Our revenues are primarily from fees charged to customers for use of our vascular testing products and from sale of accessories used with these products. We recognized revenues of $14,162,000 from fees for our vascular testing products for the six months ended~~June 30, 2019~~, an increase of $4,436,000 compared to $9,726,000 in the same period of the prior year. The remainder was from other items, such as the sale of equipment, supplies or accessories sales, which were $552,000 in the six months ended~~June 30, 2019, as compared to $221,000 in the same period of the prior year.~~

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

~~Operating expenses~~

We had total operating expenses of $10,165,000 for the six months ended June 30, 2019, an increase of $2,566,000, or 34%, compared to $7,599,000 in the same period in the prior year. The primary reason for this change was overall growth in our business, which led to increased compensation of the sales team, as well as an increase in our field sales and technical support personnel headcount to service the expanding number of customers. The changes in the various components of our operating expenses are described below.

~~Cost of revenues~~

~~We had cost of revenues of $1,781,000 for the six months ended June 30, 2019, an increase of $397,000, or 29%, compared to $1,384,000 in the same period of the prior year.~~The primary reason for this change was increased costs due to increased sales volume of, placement of and technical support for installations in the field. These increases were partially offset by lower depreciation per unit per month as a greater percentage of installations were software and sensor only rather than laptop, software and sensor, as well as lower residual value for retired units.~~As a percentage of revenues, cost of revenues decreased to 12%, as compared to 14%,~~ ~~primarily due to revenue growing at a faster pace than cost of revenue~~.

~~Engineering and product development~~$77,000 income tax expense

~~We had engineering and product development expense of $1,160,000 for the six months ended June 30, 2019, an increase of $304,000, or 36%, compared to $856,000 in the same period of the prior year.~~The increase was primarily due to consultant costs, personnel and other costs associated with ongoing projects related to our product development and customization efforts, including new applications for our product as well as other product enhancements.

~~Sales and marketing expense~~

~~We had sales and marketing expense of $4,281,000 for the six months ended June 30, 2019, an increase of $797,000, or 23%, compared to $3,484,000~~ in the same period of the prior year. The increase was primarily due to ~~higher sales compensation~~amortization of our deferred tax asset.

Net income

For the foregoing reasons, we had net income of $3,748,000, or $0.57 per basic share and ~~personnel expense, as well as increased headcount and expense, each associated with a growing business.~~

~~General and administrative expense~~

~~We had general and administrative expense of $2,943,000~~$0.47 per diluted share, for the six months ended June 30, ~~2019, an increase~~2020, a decrease of ~~$1,068,000,~~$724,000, or ~~57%~~16%, compared to ~~$1,875,000 in the same period of the prior year. The increase was primarily due to the growth in our business, which led to increased expenses to support~~ a ~~growing company, including higher infrastructure costs, insurance and other professional fees, as well as higher compensation and personnel expense.~~

~~Other income (expense)~~

We had no other expense for the six months ended June 30, 2019, a decrease of $189,000, or 100%, compared to $189,000 in the same period of the prior year. The decrease was primarily due to a decrease in interest expense of $187,000 associated with retirement of notes payable along with interest income of $2,000 in the current period.

~~Provision for income taxes~~

We had provision for income taxes of $77,000 for the six months ended June 30, 2019 compared to no provision for income taxes in the same period of the prior year, which resulted from the growth in our business and expansion into new tax jurisdictions.

~~Net income~~

~~For the foregoing reasons, we had~~ net income of $4,472,000, or $0.70 per basic share and $0.55 per diluted share, for the ~~six months ended June 30, 2019, an increase of $2,313,000, or 107%, compared to a net income of $2,159,000, or $0.36 per basic share and $0.29 per diluted share, for the~~ same period of the prior year.

Table of Contents

Liquidity and Capital Resources

We had cash of ~~$4,182,000~~$13,646,000 at June 30, ~~2019~~2020 compared to ~~$3,284,000~~$7,741,000 at December 31, ~~2018,~~2019, and total current liabilities of ~~$3,594,000~~$4,368,000 at June 30, ~~2019~~2020 compared to ~~$3,512,000~~$5,207,000 at December 31, ~~2018.~~2019. As of June 30, ~~2019,~~2020, we had working capital of approximately ~~$4,310,000.~~ $10,899,000.

Our cash is held in a variety of non-interest bearing bank accounts. We may also hold interest-bearing instruments subject to investment guidelines allowing for holdings in U.S. government and agency securities, corporate securities, taxable municipal bonds, commercial paper and money market accounts. In addition, we may also choose to invest some of our cash resources in other entities that may have complementary technologies or product offerings.

Operating activities

We generated ~~$4,383,000~~$6,082,000 of net cash from operating activitiesfor the six months ended June 30, ~~2019~~2020 compared to ~~generating $1,508,000~~$4,383,000 of net cash infrom operating activities for the same period of the prior year. The improvement was primarily due to ~~changes in net income, as well as both~~ non-cash adjustments and operating assets and liabilities, which occurred due to growth in our business, and ~~affected~~more than offset the decrease in net income. Non-cash adjustments to reconcile net income to net cash from operating activities were $1,120,000 and were primarily due to deferred tax expense of $596,000, depreciation ~~accrued~~of assets for lease of $172,000, stock-based compensation expense of $128,000, loss on disposal of assets for lease of $125,000, fixed assets depreciation and amortization of $63,000 and allowance for bad debt expense of $36,000. Changes in operating assets and liabilities provided $1,214,000 of net cash, primarily due to trade accounts receivable of $2,468,000, which were partially offset by cash used by accrued expenses of $573,000, prepaid expenses of $408,000, deferred revenue of $142,000, and accounts payable ~~deferred revenue~~of $131,000.

Investing activities

We used $247,000 of net cash in investing activities for the six months ended June 30, 2020, which reflects purchases of assets for lease of $147,000 and ~~trade accounts receivable.~~

~~Investing activities~~

fixed asset purchases of $100,000 to support our growing business.

We used $842,000 of net cash in investing activities for the six months ended June 30, 2019, which reflects purchases of assets for lease of $779,000 and fixed asset purchases of $63,000 to support our growing business.

Financing activities

We ~~used $243,000 of~~generated $70,000 in net cash ~~in investing~~from financing activities ~~for~~during the six months ended June 30, ~~2018, which reflects purchases~~2020, primarily due to proceeds from exercise of ~~assets for lease of $138,000 and fixed asset purchases of $105,000 to support our growing business.~~

~~Financing activities~~

stock options.

We used $2,643,000 in net cash in financing activities during the six months ended June 30, 2019, primarily due to the re-purchase of warrants of $2,687,000 from our chief executive officer in May 2019, partially offset by proceeds from exercise of stock options of $44,000.

We used $713,000 in net cash in financing activities during the six months ended June 30, 2018, reflecting the payment of loans payable of $1,022,000, partially offset by proceeds from exercise of warrants and stock options of $309,000.

Off-Balance Sheet Arrangements

As of each of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we had no off-balance sheet arrangements.

Commitments and Contingencies

As of each of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, other than employment/consulting agreements with key executive officers and our facilities lease obligation, we had no material commitments other than the liabilities reflected in our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
15
16

Table of Contents

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 Securities Exchange Act of 1934, as amended, or 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 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, ~~management recognizes~~we recognized that ~~any controls and procedures,~~a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of ~~achieving~~ the ~~desired~~ control ~~objectives,~~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 ~~management is~~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. ~~Our management,~~
Under the supervision of and with the participation of our ~~chief executive officer,~~management, including our ~~senior vice president, finance~~Chief Executive Officer, our Senior Vice President, Finance and ~~accounting~~Accounting and our ~~vice president, finance,~~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 June 30, 2020. Based upon that evaluation, our Chief Executive Officer, our Senior Vice President, Finance and Accounting and our Vice President, Finance concluded that, because of the material weaknesses in our internal control over financial reporting, our disclosure controls and procedures were not effective. Notwithstanding the material weaknesses, our management, including our Chief Executive Officer, our Senior Vice President, Finance and Accounting and our Vice President, Finance, has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly stated, in all material respects, in accordance with generally accepting accounting principles in the United States for each of the periods presented herein.
We previously identified the following material weaknesses in internal control over financial reporting as of the ~~end~~year ended December 31, 2019:

a. Insufficient segregation of duties, oversight of work performed and ineffective compensating controls in our finance and accounting functions due to limited personnel;
b. Our information technology general controls related to user access security and change management controls related to our enterprise resource planning system were not designed effectively to provide an adequate audit trail for system change management controls and for the periodic review and testing of user access rights and permissions.
c. We did not sufficiently design and effectively implement controls to validate the completeness and accuracy of underlying data used in the performance of various controls over accounting transactions and disclosures;
d. We did not design sufficient protocols and procedures to retain adequate documentary evidence related to the timely review and approval of manual journal entries including the review of the underlying information at a sufficient level of detail; and
e. We did not sufficiently design and retain adequate documentary evidence supporting the design and operating effectiveness of certain important management review controls including the precision of review and evidence of procedures performed.

Each of the ~~period covered by this quarterly report~~material weaknesses described above, combined with ineffective compensating financial close and review controls, had a pervasive impact on ~~Form 10-Q. Based~~our activity level cycles and accounts and creates a reasonable possibility that a material misstatement of the consolidated financial statements will not be prevented or detected on ~~that evaluation,~~a timely basis. Although we have continued to implement our ~~chief executive officer, our senior vice president, finance and accounting, and our vice president, finance~~remediation plan, these material weaknesses persist. Accordingly, management concluded that our disclosure controls and procedures were not effective ~~at the reasonable assurance level,~~ as of the end of the period covered by this report to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (1) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to management, including our chief executive officer, senior vice president, finance and accounting, and our vice president, finance as appropriate to allow timely decisions regarding required disclosure, due to the existence of a material weakness in our internal control over financial reporting.June 30, 2020.
16
Changes in Internal Control over Financial Reporting
~~There~~In an effort to remediate our prior material weaknesses, in the second quarter of 2020, we implemented additional procedures to segregate duties over the initiation of transactions, the recording of transactions, and the custody of assets and improved documentation for payroll approvals and review. Other than these remedial changes, 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 second fiscal quarter ended June 30, ~~2019.~~2020.

Table of Contents

PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
None.
~~Not applicable.~~
Item 1A. Risk Factors.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Exh. No.

~~Exh. No.~~
Exhibit Name
~~10.1~~
31.1
Warrant Repurchase Agreement between Semler Scientific, Inc. and Murphy-Chutorian Family Trust U/D/T dated January 13, 1997, dated May 3, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 7, 2019).
~~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 June 30, 2020 is formatted in Inline XBRL and it is contained in Exhibit 101

17

18
Table of Contents
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.
August ~~2, 2019~~ 6, 2020
SEMLER SCIENTIFIC, INC.
By:
/s/ Douglas Murphy-Chutorian, M.D.
Douglas Murphy-Chutorian, M.D.
Chief Executive Officer
By:
/s/ Andrew B. Weinstein
Andrew B. Weinstein
Senior Vice President, Finance and Accounting

18
19

Delaware	26-1367393
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification ~~Number)~~No.)

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
N/A		N/A		N/A

Large Accelerated Filer	¨ ☐	Accelerated Filer	¨ ☒

Non-Accelerated Filer	¨ ☐	Smaller Reporting Company	x ☒

Emerging growth company	x ☐

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

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

			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	12
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	15 16
Item 4.		Controls and Procedures	16 17

Part II.		Other Information	17 18

Item 1.		Legal Proceedings	17 18
Item 1A.		Risk Factors	17 18
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	17 18
Item 3.		Defaults upon Senior Securities	17 18
Item 4.		Mine Safety Disclosures	17 18
Item 5.		Other Information	17 18
Item 6.	Exhibits	~~Exhibits~~	17 18

Signatures		18 19

	(Unaudited)					(Unaudited)
	For the three months ended June 30					For the six months ended June 30
	2019		2018			2019			2018

Revenues	$	7,953	$	5,484		$	14,714		$	9,947
Operating expenses:
Cost of revenues		885		680			1,781			1,384
Engineering and product development		591		489			1,160			856
Sales and marketing		2,212		1,779			4,281			3,484
General and administrative		1,570		1,001			2,943			1,875
Total operating expenses		5,258		3,949			10,165			7,599
Income from operations		2,695		1,535			4,549			2,348

Interest income (expense)		1		(9	)		2			(56	)
Related party interest expense		-		(72	)		-			(131	)
Other expense		-		(1	)		(2	)		(2	)
Other income (expense)		1		(82	)		-			(189	)
Income before income taxes		2,696		1,453			4,549			2,159
Provision for taxes		77		-			77			-
Net income	$	2,619	$	1,453		$	4,472			2,159
Net income per share:
Basic	$	0.41	$	0.24		$	0.70		$	0.36
Diluted	$	0.32	$	0.19		$	0.55		$	0.29
Weighted average number of shares used in computing: basic and diluted income per share
Basic		6,411,606		5,982,711			6,368,905			5,953,818
Diluted		8,086,140		7,534,846			8,128,241			7,403,498

	*(Unaudited)* June 30,			December 31,
	2019			2018

Assets

Current Assets:
Cash	$	4,182		$	3,284
Trade accounts receivable, net of allowance for doubtful accounts of $52 and $52, respectively		3,509			2,801
Prepaid expenses and other current assets		213			153
Total current assets		7,904			6,238

Assets for lease, net		1,690			1,243
Property and equipment, net		215			223
Long-term deposits		15			15
Total assets	$	9,824		$	7,719

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable	$	405		$	280
Accrued expenses		2,261			2,797
Deferred revenue		928			435
Total current liabilities		3,594			3,512

Long-term liabilities:

Deferred rent		9			11
Total long-term liabilities		9			11

Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 6,484,414 and 6,349,985 shares issued, and 6,459,414 and 6,324,985 outstanding (treasury shares of 25,000 and 25,000), respectively		6			6
Additional paid-in capital		23,161			25,608
Accumulated deficit		(16,946	)		(21,418	)

Total stockholders' equity		6,221			4,196

Total liabilities and stockholders' equity	$	9,824		$	7,719

	Common Stock				Treasury Stock
	Shares Issued		Common Stock Amount		Shares			Amount		Additional Paid-In Capital		Accumulated Deficit			Total Stockholder's Equity / (Deficit)
Balance at March 31, 2018		5,969,834	$	6		(25,000	)	$	-	$	24,196	$	(25,726	)	$	(1,524	)

Warrant Exercises		7,800		-		-			-		-		-			-

Stock Option Exercises		70,763		-		-			-		149		-			149

Stock-based Compensation		-		-		-			-		138		-			138

Net income for three months ended June 30, 2018		-		-		-			-		-		1,453			1,453

Balance at June 30, 2018		6,048,397	$	6		(25,000	)	$	-	$	24,483	$	(24,273	)	$	216

	Options Outstanding
	Number of Stock Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (In Years)		Aggregate Intrinsic Value (in thousands)
Balance, January 1, 2019		1,761,447		$	3.18		6.84	$	55,000
Options exercised		(117,765	)		2.49
Balance, June 30, 2019		1,643,682		$	3.22		6.35	$	66,528
Exercisable as of June 30, 2019		1,478,808		$	3.04		6.18	$	60,129

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Expected term (in years)		-			-			-			5
Risk-free interest rate		-	%		-	%		-	%		2.02	%
Expected volatility		-	%		-	%		-	%		0.99	%
Expected dividend rate		-	%		-	%		-	%		-	%