Nov 5, 2020
Operator
Good afternoon, and welcome to the Semler Scientific Third Quarter 2020 Financial Results Call. [Operator Instructions] Please note that this event is being recorded.
Operator
Before we begin, Semler Scientific would like to remind you that this conference call may contain forward-looking statements. Such statements can be identified by words such as may, will, expect, anticipate, intend, estimate or words of similar meanings.
And such statements involve a number of risks and uncertainties that could cause Semler Scientific's actual results to differ materially from those discussed here. These risks include uncertainty due to the evolving COVID-19 pandemic along with other risks associated with Semler Scientific's business.
Operator
Please note that these forward-looking statements reflect Semler Scientific's opinions only as of the date of this presentation, and it undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Please refer to Semler Scientific's SEC filings for a more detailed description of the risk factors that may affect Semler Scientific's results and these forward-looking statements.
Operator
Now I would like to introduce Doug Murphy-Chutorian of Semler Scientific.
Douglas Murphy-Chutorian
Good afternoon, everybody, and thank you for joining the Semler Scientific Third Quarter and Year-to-Date 2020 Financial Results Call. I'd like to introduce Dennis Rosenberg, our Chief Marketing Officer, who will begin the presentation today.
Dennis?
Dennis Rosenberg
Thanks, Doug. We always like to begin our calls with a reminder about Semler's strategy.
Semler Scientific is a company that provides technology solutions to improve the clinical effectiveness and efficiency of health care providers. Our mission is to develop, manufacture and market innovative products that assist our customers in evaluating and treating chronic diseases.
We believe that our technology and software solutions enable our customers to identify when preventive care options are appropriate and to intervene before events like heart attacks and strokes occur.
Dennis Rosenberg
We're pleased to report that the company's financial performance during the third quarter of 2020 based on revenue and pretax net income was the best quarter in our company's history. Comparing results from the third quarter of 2020 to the second quarter of 2020, the highlights of today's report are as follows.
Revenues were higher by 68%, increasing to $10.7 million. Pretax net income was higher by 465%, increasing to $5.6 million.
Net income was higher by 353%, increasing to $4.9 million. Cash increased to $16.8 million at quarter end.
Dennis Rosenberg
Towards the end of the call, I'll give brief commentary about our recent investment in companies working in new product areas to potentially expand our product offering beyond Quantaflo for PAD. Now Andy Weinstein, our Senior Vice President of Finance and Accounting, will describe our financial performance in more detail.
Andy?
Andrew Weinstein
Thanks, Dennis. Please refer to the financial results described in the press release that was distributed before the market opened today.
Andrew Weinstein
For the quarter ended September 30, 2020, compared to the corresponding period of 2019, revenues were $10.7 million, an increase of $1.8 million or 21% compared to $8.9 million. Operating expenses, which includes cost of revenue, were $5.2 million, a decrease of $619,000 or 11% compared to $5.8 million.
Andrew Weinstein
Pretax net income was $5.6 million, which was an increase of $2.5 million or 80% compared to $3.1 million. Net income was $4.9 million, a decrease of $2.9 million or 37% from $7.8 million in the third quarter of 2019.
After excluding the $4.7 million income tax benefit recorded in the third quarter of 2019, which was primarily due to the release of a tax valuation allowance, net income increased by $1.8 million or 57% from $3.1 million in the third quarter of 2019.
Andrew Weinstein
The net income per share was $0.74 per basic share and $0.61 per diluted share, which compares to $1.20 per basic share and $0.96 per diluted share during the same period last year. When you exclude the $4.7 million tax benefit in the third quarter of 2019, net income in the third quarter of 2019 was $0.48 per basic share and $0.38 per diluted share.
Andrew Weinstein
For the quarter ended September 30, 2020, weighted average basic share count was 6,578,808, and the diluted share count was 8,038,513.
Andrew Weinstein
Analyzing the expense categories and earnings in the third quarter of 2020. As a percentage of quarterly revenue, cost of revenue was 8% of quarterly revenue.
Engineering and product development expense was 6% of quarterly revenue. Sales and marketing expense was 20%.
General and administrative expenses was 15% of quarterly revenue, and the total operating expense was 48% of quarterly revenue.
Andrew Weinstein
As of September 30, 2020, Semler had cash of $16.8 million, which is an increase of $8.3 million compared to $8.5 million as of September 30, 2019. As a result of these items, our stockholders' equity is now $22.1 million as of September 30, 2020.
Our quarterly report on Form 10-Q will include our cash flow statement and more discussion of our cash and liquidity. The Form 10-Q will be filed with the SEC shortly.
Andrew Weinstein
In the third quarter of 2020 compared to the second quarter of 2020, cash grew by $13.1 million. During the third quarter of 2020, in addition to net income, cash was primarily provided by other current liabilities amounting to $940,000, accrued expenses amounting to $512,000, accounts payable amounting to $129,000 and reconciliation of net income to net cash provided by operations which provided $381,000.
This was partially offset by cash used for accounts receivable in the amount of $2,474,000, prepaid expenses amounting to $791,000, a loan to a private company amounting to $500,000, deferred revenue amounting to $147,000 and purchases of inventory and other capital expenditures amounting to $163,000.
Andrew Weinstein
Our 2 largest customers comprised 39% and 30%, respectively, of quarterly revenues.
Andrew Weinstein
In the third quarter of 2020 compared to the second quarter of 2020, fixed fee software license revenues were approximately $6.3 million, an increase of $353,000 or 6%. Variable fee software license revenues were approximately $4,088,000, which is an increase of $3,798,000 or 1,310%.
Equipment and other sales were $332,000, an increase of $203,000 or 257%.
Andrew Weinstein
We experienced the effects of COVID-19 late in the first quarter, which continued into the second quarter. As restrictions were lifted in nonemergency medical services are resumed around the country, our business has returned to and even exceeded pre-COVID-19 levels.
Until the threat of the pandemic is over, we cannot quantify its effects on future quarters.
Andrew Weinstein
Operating expenses decreased in the third quarter of 2020 as a result of cost-cutting measures that have included vendor fee reductions and decreased spending on consultants. To date, staffing, salaries and inventory have been maintained at usual levels, while travel expenses and payroll taxes have decreased.
Operating expenses may increase during the fourth quarter of 2020 as we begin to hire more employees. Although we do not provide formal guidance, Semler Scientific intends to manage its expenses and other costs in line with changes in revenues.
Andrew Weinstein
Now I will ask Dennis to continue the discussion and provide concluding remarks. Dennis?
Dennis Rosenberg
In the third quarter of 2020, head count was 76 employees, an increase of 1. We continue to operate as close to normal as possible, notwithstanding the COVID-19 pandemic.
We have been a virtual company for more than 10 years, and we are comfortable with communicating and working out of our homes. Also, we have web-based training in place for our customers and are experienced in using it.
Dennis Rosenberg
There is also no plan to raise additional capital at this time. We reserve the right to change our financing plans as opportunity or as need arises.
We do not yet have a firm point in time when we plan to uplist to the Nasdaq market. The company did add a new member to its Board of Directors, which is necessary to better meet Nasdaq market governance requirements.
Dennis Rosenberg
As we stated on our last call, we increased our Investor Relations activities in the third quarter by participating in virtual investor conferences hosted by B. Riley, Colliers Securities, H.C.
Wainwright and Lake Street Securities. We plan to continue actively participating in virtual conferences and virtual non-deal road shows.
Dennis Rosenberg
Our R&D goals are to continue to upgrade the existing product and data services and to develop and in-license new services and products which provide enhanced services of value to our customers. In this regard, we announced some limited information today about our investments in companies working in 3 new product areas.
Number one, we will market and distribute a product line for a private company on an exclusive basis in the U.S. and Puerto Rico in a new product area.
Number two, we made a bridge loan to and an investment in the equity securities of the second private company working in a second new product area. And number three, we acquired a convertible note and made an investment in the equity securities of the third private company working in a third new product area.
Dennis Rosenberg
At this time, we can disclose the following information about these products. All are FDA-cleared or the equivalent.
All deal with better chronic disease management and may be used by primary care practitioners. None is directly cardiovascular per se.
2 of 3 seek to improve aspects or sequelae of the metabolic syndrome. And all produced positive clinical data.
Management may discuss these agreements and companies in further detail in the future if they become material to our business.
Dennis Rosenberg
In the third quarter of 2020, these arrangements had no material effect on financial results other than the commitment to purchase product inventory of $1.2 million from the first company and the bridge loan of $500,000 to the second company. In the fourth quarter of 2020, the company used 40,922 shares of its common stock to make an investment in equity securities in the second company.
Also, we made an investment of both debt and equity in the third company for cash amounting to $1,808,000. The Form 10-Q to be filed soon notes these transactions that occurred in the fourth quarter.
Dennis Rosenberg
In conclusion, we believe Semler Scientific is well positioned because we deliver cost-effective wellness solutions for the care of patients with chronic diseases. We may improve health outcomes for patients by identifying those who benefit from preventive health measures.
And we provide economics that work for the providers, the facilities, the insurance plans, the government and the patient.
Dennis Rosenberg
Thank you for your interest in the company and your continuing support. Now operator, please open the lines.
Doug, Andy and I will be happy to address your questions.
Operator
[Operator Instructions] Our first question today comes from Brooks O'Neil with Lake Street Capital Markets.
Brooks O'Neil
Extraordinary quarter. I think the thing that I'd like to hear the most about it is what it suggests about the future.
Let me ask a couple of questions. First, you highlighted, Dennis, the impact of coronavirus on the second quarter.
I'm curious if you can estimate in any way the impact of any catch-up revenue in Q3 that might have been captured in Q2 had conditions been more normal.
Dennis Rosenberg
Well, I think that clearly, there was a big slowdown, as you know, in the variable fee business, the home risk assessment business. And that picked up considerably, as you can see from the numbers in the third quarter.
And the overall market dynamics that we've discussed in the past are still in effect. That is that there are certain number of patients or members who are -- should be tested this year.
So the incentives are to test those patients, and the ones that were postponed from second quarter need to be done in third and fourth quarter. That's kind of the bottom line.
Brooks O'Neil
Okay. That's helpful.
I'd like to ask you a couple of questions about the new product initiatives you mentioned. I recognize you're probably reluctant to say a lot about it -- a lot more about it than you already have.
But I'm curious if you could maybe help us to understand the business dynamics of the 3 product areas and whether, for example, they would all be sold through the same basic distribution or selling strategy you use for Quantaflo, i.e., going primarily directly through the payer market or through a home risk assessment operations? And then two, any color you could give related to the revenue or the margin profile of these new product opportunities would be helpful as well.
Douglas Murphy-Chutorian
Brooks, you understand the reluctance to talk about it because we -- it's a work in process. We intend to sell it to the existing customers as well as expand it.
It may be sold to the existing [ customers to give them the ] benefit that they get. But we may choose to do another way of marketing as well.
So we have time to decide. And when it gets to the time that it's more important to the company, meaningful in terms of revenue, we'll talk more about it.
And that being said, we're going to try to follow it closely and give you the information you want when we're ready to impart it.
Brooks O'Neil
Great. I understand that it completely.
Let me just ask you a little bit about -- you highlighted that the 2 largest customers comprise roughly 70% of revenue this quarter. I'm curious if you'd be willing to say at all whether you believe you're having success attracting new customers to complement those 2 big existing customers.
Douglas Murphy-Chutorian
Dennis, can you answer this?
Dennis Rosenberg
Sure. As we've seen and talked about in previous quarters, we continue to see growth within current customers as well as growth among new customers.
And that was the case in the third quarter. So the answer is we're seeing movement in both areas.
Brooks O'Neil
Great. One more on the new product initiatives.
I have some recollection that beyond thinking about outside opportunities or opportunities to bring products into the company that you also had some efforts underway to develop organic new products. Can you say whether those are ongoing or whether you've shifted to an exclusive focus to these outside opportunities?
Douglas Murphy-Chutorian
This inside work we're doing is going along well, and we will tell you about it when it's completed. Dennis, do you want to add anything?
Dennis Rosenberg
No. Just to say that it is ongoing, and we are optimistic about that effort as well as what we just talked about.
Brooks O'Neil
Great. And then the last question I have is, as the cash pile grows, can you share with us what, if anything, you plan to do with it?
Or will it just become a bigger and bigger presence on the balance sheet?
Douglas Murphy-Chutorian
Well, we gained about $3.1 million this quarter to -- sixth sequential quarter. And we made a few investments along the way.
So this is what we intend to do with it, maybe make some major proprietary acquisitions, but we don't want to take ourselves into the corner. So we have to maintain.
Andy, can you talk about that some more? Andy?
Andrew Weinstein
Sure. It would be best to do both, maintain a cash pile and be able to use that cash for other opportunities.
And that's what I think we did in the second quarter. If everything continues the way it is, I could see both of those opportunities happening for us.
Brooks O'Neil
Great. Okay.
Congratulations on what I consider a truly extraordinary quarter.
Operator
Our next question comes from Kyle Bauser with Colliers Securities.
Kyle Bauser
I agree, phenomenal results here. Thanks for all the updates.
Maybe I'll start on the fixed sales business. It looks like we're just about back to Q1 levels for your top client.
Do you think maybe we'll stick around here until we get through COVID and then see some incremental step-ups? I mean our sense is that there's still quite a bit of runway within this top account.
So I'm curious how you see this channel kind of trending with new installations over the coming couple of months here.
Douglas Murphy-Chutorian
Well, it's more than it was in the first quarter. And so it's continuing to grow.
New products also and expansion with customers or adding new units. So everything is working for us far as we're concerned.
But we temper our enthusiasm by saying COVID is not over. So we don't pretend to have a thinking about what the future has in store because we could be surprised.
Kyle Bauser
Okay. And on the HRA side of the business, clearly, they made up some really nice ground in Q3 here.
Just kind following up from Brooks' question, I mean, what's your sense of the backlog of cases for the remainder of the year? I mean have they more than caught up for Q2?
Or are the list of home wellness visits that still need to be completed by year-end still going to keep things pretty busy? I'm just trying to get a sense of whether the HRAs have been anticipating a ramp-up in COVID this fall and therefore, kind of took care of their home visit obligations proactively in Q3 and could potentially plan on slowing down here in Q4.
Maybe that's not the case. Just kind of curious your thoughts.
Douglas Murphy-Chutorian
Dennis, can you answer that?
Dennis Rosenberg
Sure. We don't anticipate that they have worked through everything they need to do for the entire year at this point.
I don't think that's their mindset or their scenario at all. So I think we will continue to see good activity through the end of the year.
But as Doug said, we don't know what the results will be in terms of future impact of COVID.
Douglas Murphy-Chutorian
We also saw them make more equipment purchases in the third quarter. So they have more units in the field.
And so more units, generally speaking, leads to more cases.
Kyle Bauser
Got it. Yes.
And I love the updates on the investments into 3 different opportunities. I think it makes a lot of sense.
It's rather straightforward to be able to tuck those in and sell them through the same channels, particularly Medicare Advantage, obviously. Can you talk about what disease areas you're looking at?
You talked about it a little bit. And maybe if not, whether these diseases have the same, kind of similar prevalence level of undiagnosed patients, as is the case for PAD.
And I guess adding on to that, I mean, are these diagnostics, I'm assuming? Or I think you mentioned potentially exploring therapeutics.
So I guess any color on any of those topics would be helpful.
Douglas Murphy-Chutorian
Dennis, you want to take it?
Dennis Rosenberg
Sure. The only thing that we're talking about in regards to these products at this point is their relationship to metabolic syndrome, as I mentioned, which I know is kind of general.
But at least 2 of the 3 are working in that general area. And at this point, we're not providing any more detail about them.
And until they are a material part of our business, we probably won't. But look to that in 2021.
Kyle Bauser
Okay. Got it.
And then maybe just lastly, if I may, following up on that. I know you mentioned you get exclusive marketing rights for one of these products.
How about the other 2?
Douglas Murphy-Chutorian
Just this investment is what we announced in them. We haven't announced anything about distribution.
Kyle Bauser
Okay. All right.
Fair enough. And congrats on the quarter, guys.
Operator
[Operator Instructions] Our next question comes from Josh Nichols with B. Riley FBR.
Josh Nichols
Congratulations on the quarter. It's not often you see a business do north of 50% EBITDA margins.
I was going to ask -- so you mentioned on the last call that, in July, the HRA variable fee business was tracking around $750,000 for the month. So clearly, there was a big acceleration based on the kind of trajectory for what you did on the quarter.
It seems like it's reasonable that you're in a position where you could be doing like $2 million a month for the HRA business heading through the back quarter of this year. Is that kind of reasonable for the math that I'm backing into there?
Douglas Murphy-Chutorian
I will remind you that we said in the last call that we were over $750,000 for it. So that means that we had more than $750,000.
We didn't say what the top was. But your math is -- according to your math, it looks that it's going to be a good quarter for us.
But I just can't -- if I gave you the numbers, I will be giving you forward-looking statements. So I think it's better to leave it as such.
Andy, could you comment on this as well?
Andrew Weinstein
Yes. I mean obviously, based on your numbers, it was north of $700,000, and we're at levels in excess of Q1.
So without giving out numbers, your math is reasonable.
Josh Nichols
Fair enough. I appreciate the color on that.
And I know you mentioned the company is looking to do some more hiring and ramp a little bit up if things permit, depending on how COVID plays out. Could you talk about what you have for the expectations for hiring and what areas you would be looking to hire in first that could add the most value?
Douglas Murphy-Chutorian
Well, we're thinking about hiring in R&D. We think about hiring into sales and marketing.
And the only thing we're thinking about also, having a few people in G&A. So all the areas are -- but [ regarding this thing ], we have to get enough guys into the operations and sales and marketing to handle the anticipated volume.
So this is what we want to do. And it's the most important thing.
We have a good team to do hiring. And I think it's going to be the most important thing we do in the rest of this year and the beginning of 2021.
Josh Nichols
And then I did want to ask, I mean, the business has always had great margins, of course, given the pricing model, but some good margin expansion in the quarter. Is that due to the fact that the HRA margins are just a little bit accretive and you would expect that to kind of maintain as long as you have this elevated revenue of HRA business?
Douglas Murphy-Chutorian
The margins are very, very good. So I can't anticipate that they're going to be much higher.
But you never know. I didn't -- if you asked me last quarter, I said the same thing.
So I think we have the business model. Andy, can you comment about this as well?
Andrew Weinstein
Did you say, Andy?
Douglas Murphy-Chutorian
Yes, Andy, please.
Andrew Weinstein
Yes. Yes.
I mean we would like the margins continue the way they are. It's not only the HRA margins.
Our margins in general for all our products are very good at this time. And we hope to keep the margins the same.
It's hard to look into things and see what will happen, but margins are good on all our products.
Josh Nichols
And then last question for me and then I'll hop back in the queue. On the fixed fee software sales, that seems to be -- good to see that back on the growth track, up 6% quarter-over-quarter.
It seems like adding on an additional $100,000 of revenue a month seems to be kind of the pace that the company has been at if you average out the last year or so, excluding COVID. Is that the type of pace that you've been seeing so far as we look like through October?
Or is there any other things to think about as we look at the 4Q, whether it be seasonality or otherwise?
Douglas Murphy-Chutorian
I think that it's getting easier and easier to place units with existing customers and also new customers. So you can't make assumptions about this from the past performance, I think.
Josh Nichols
Well, great to hear that things could be accelerating, and it's easy to place those units. I'll hop back in the queue.
Operator
This will conclude our question-and-answer session. I would like to turn the call back over to Dennis Rosenberg for any closing remarks.
Dennis Rosenberg
Thank you for joining us today, and we look forward to updating you soon on our continued progress. And that ends today's call.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.