Mar 1, 2021
Operator
Good afternoon, and welcome to the Semler Scientific’s Fourth Quarter 2020 Financial Results Conference Call. All participants will be in a listen-only mode.
[Operator Instructions] Please note this event is being recorded. Before we begin, Semler Scientific would like to remind you 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 with similar meaning, 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 continued uncertainty due to the evolving COVID-19 pandemic, risks associated with our recent investments and entities of potential complementary products and other new distribution arrangement along with other risks associated with Semler Scientific’s business.
Please note that these forward-looking statements reflect Semler Scientific’s opinion only as of the date of this presentation, and it undertakes no obligation to revise or publicly release the result 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 in these forward-looking statements.
Now, I would like to introduce Doug Murphy-Chutorian, CEO of Semler Scientific.
Doug Murphy-Chutorian
Good afternoon, everybody. Thank you for joining us today for our fourth quarter and year-end results call.
I’d like to introduce you to Dennis Rosenberg, our Chief Marketing Officer, who will begin for us today. Dennis?
Dennis Rosenberg
Thanks, Doug. We always like to begin our calls with a reminder about Semler’s strategy.
Semler is a company that provides technology solutions to improve the clinical effectiveness and efficiency of healthcare 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. We are pleased to report that the company’s financial performance during the fourth quarter of 2020 based on revenue and pretax net income was the best quarter in our company’s history.
We also had the best year in terms of revenue and pretax net income in our company’s history. Comparing results from the fourth quarter of 2020 to the fourth quarter of 2019, the highlights of today’s report are as follows.
Revenues were higher by 32% increasing to $12.1 million. Pretax net income was higher by 117% increasing to $6.5 million.
Net income was higher by 93% increasing to $5.4 million and cash increased to $22.1 million at quarter end. During the quarter, we saw increased orders and usage for our QuantaFlo product from our current insurance company customers and from our home-risk assessment customers.
We also received orders from new customers. Now, Andy Weinstein, our Senior Vice President of Finance and Accounting will describe our financial performance in more detail, including a comparison of our financial performance for the full year 2020.
Andy?
Andy Weinstein
Thanks, Dennis. Please refer to the financial results described in the press release that was distributed at market close today.
For the year of 2020, compared to 2019, annual revenues were $38.6 million, an increase of $5.8 million or 18% compared to $32.8 million. Operating expenses, which includes cost of revenues, were $22.6 million, an increase of $500,000 or 3% compared to $22.1 million.
Pretax net income was $16.5 million, which was an increase of $5.8 million or 54% compared to $10.7 million. Net income of $14 million or $2.13 per basic share and a $1.74 per diluted share, a decrease of $1.1 million or 7% compared to $15.1 million or $2.34 per basic share and a $1.88 per diluted share.
Please recall that 2019 reflected the full release of the tax valuation. After excluding the $4.4 million income tax benefit recorded in 2019, net income in 2020 increased by $3.3 million or 31% from $10.7 million in 2019.
In 2020, earnings per share was calculated using a basic share count of 6,584,441 and a diluted share count of 8,066,561. Analyzing the expense categories and earnings in 2020, as a percentage of annual revenue, cost of revenue was 9% of annual revenue, engineering and product development expense was 8% of annual revenue, sales and marketing expense was 26%, general and administrative expense was 17%, and net income was 36% of annual revenue.
For the quarter ended December 31, 2020, compared to the corresponding period of 2019, revenue was $12.1 million, which represents an increase of $2.9 million or 32% from $9.2 million. Operating expenses, which includes cost of revenue was $6.1 million and that’s unchanged from the corresponding period of 2019.
Net income was $5.4 million, an increase of $2.6 million or 93% from $2.8 million. Net income per share was $0.81 per basic share and $0.66 per diluted share, and that compares to $0.43 per basic share and $0.35 per diluted share during the same period last year.
For the quarter ended December 31, 2020, the basic share count was 6,676,854, and the diluted share count was 8,125,009 shares. Analyzing the expense categories and earnings in the fourth quarter of 2020, as the percentage of quarterly revenue, cost of revenue represented 8% of quarterly revenue, engineering and product development expense was 5% of quarterly revenue, sales and marketing expense was 22%, general and administrative expense was 15% and net income was 45% of quarterly revenue.
As of December 31, 2020, Semler had cash of $22.1 million, which represents an increase of $14.4 million compared to $7.7 million at December 31, 2019. Our stockholders' equity is $29.8 million as of December 31, 2020.
We expect to file our Annual Report on form 10-K on or before March 16, 2021, which will include our cash flow statement and more discussion of our cash and liquidity. Our two largest customers comprised 47.2% and 22.8% of our annual revenues.
In 2020 compared to 2019, revenues from fixed price software license fee arrangements were approximately $25.7 million, which is an increase of $2.8 million, or 12%. Variable fee software license revenues were approximately $11.6 million, an increase of $2.7 million, or 30%.
And equipment/other sales were $1.3 million, an increase of $300,000 or 30%. In the fourth quarter of 2020 compared to the corresponding period of 2019, fixed fee software license revenues were approximately $7 million, an increase of $700,000 or 11%.
Variable fee software license revenues were approximately $4.5 million, which is an increase of $1.8 million, or 67%. And equipment/other sales were $500,000, which is an increase of $400,000 million or 400%.
We experienced the greatest effects of COVID-19 late in the first quarter of 2020, which continued into the second quarter. as restrictions were lifted in non-emergency medical services resumed around the country, our business returned to or even exceeded pre-COVID-19 levels in the third quarter, which continued through the fourth quarter of the year.
until the threat of the pandemic is over, we cannot quantify its effects on future quarters. to-date, staffing, salaries and inventory have been maintained or are increased from our usual levels.
Travel expenses declined in 2020 due to the COVID-19 and payroll taxes have decreased in 2020 due to the employee retention payroll credit, which is available under the CARES Act. During the fourth quarter of 2020, we hired several employees, although we do not provide formal guidance, we are intent on continuing annual revenue growth, continuing profitability and generating cash during 2021.
It is the opinion of the management team that the customer interest in our product and services is increasing. Now, I will ask Dennis to continue the discussion and provide concluding remarks.
Dennis?
Dennis Rosenberg
At year-end 2020, headcount was 86 employees, compared to 77 at the end of third quarter 2020. we continue to operate as close to normal as possible, notwithstanding the COVID-19 pandemic.
We’ve been a virtual company for more than 10 years, and we’re 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.
There is also no plan to raise additional capital at this time. we reserve the right to change our financing plans as opportunity or need arises.
During Q4, we continued our Investor Relations activities by participating in virtual investor conferences, hosted by B. Riley FBR, Colliers Securities, H.C.
Wainwright, and Lake street securities. During 2021, we will continue to participate in virtual conferences and virtual non-deal road shows.
We do not yet have a firm point in time when we plan to uplift to the NASDAQ market. In 2020, we added two new independent members to our board of directors to better meet NASDAQ corporate governance requirements.
Our R&D goals are to continue to upgrade the existing product and data services to commercialize other internally developed services and products, and to in-license since new services and products, which provide enhanced value to our customers. in our form 10-Q for the third quarter filed with the SEC in November 2020, we provided some limited information about our recent arrangements with three private companies.
We have nothing further to report at this time, except as follows. Our bridge loan to one of the private companies was repaid in equity securities of such company.
Our convertible note from a third private company was repaid in equity securities of such company, and we then sold such equity securities along with the warrants we had obtained in conjunction with the convertible note to a third party, resulting in a net gain of about $400,000. management may discuss these agreements and get more information about these companies and products in the future if they become material to our business.
overall, we believe annual revenue will continue to grow in 2021 as a result of increased number of installations of our product, more usage of our product and recurring revenue from the licensing business. Our goal continues to be to both make new additions to our customer base and to expand orders from existing customers.
Operating expenses are expected to increase from quarter-to-quarter during 2021. It is our intent to expand our infrastructure, to accommodate anticipated future growth of the business.
During 2020, we continue to add to our assets for lease with purchase of inventory. The amounts of purchases made in the year will be disclosed in the form 10-K, which we expect to file on or before March 16.
Our goals for 2021 are to grow annual revenue to continue to be profitable and to further establish our QuantaFlo product as a standard of care in the industry. We believe that the market for vascular disease testing is larger than our current market penetration.
So, there’s room for a continued growth. We continue to invest in R&D with the goals of providing new products that enhanced value to our customers now and in the future.
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 patients.
notwithstanding COVID-19, 2020 was an achievement record for our company in terms of both financial performance and the number of patients being tested with our products. We are optimistic for the future, given our performance in what was an extraordinary year.
Thank you for your interest in the company and your continued support. Now operator, please open the lines, Doug, Andrew, and I will be happy to address your questions.
Operator
Thank you. [Operator Instructions] And the first question will come from Kyle Bauser with Colliers Securities.
Please go ahead.
Kyle Bauser
Great, thanks. Hi, everyone.
Another incredible quarter, thanks for all the updates here. So maybe, on the fixed fee side of things, sales to your largest clients stepped up significantly, maybe in part, since they paused some of the new installations throughout the year and are fully back online.
Was the strength in this bucket from pent-up demand? Or could we see other outsized quarters like this?
Doug Murphy-Chutorian
This is both for existing investors and customers and also, new categories. We saw a record [ph] of growth in these areas.
Andy, could you answer this more? Andy?
Andy Weinstein
No. I agree with both of you.
I think there was some pent-up demand and we did see increases from our current customers plus we did add a decent amount of additional new customers. So, I think that the increase had to do with actually both.
Kyle Bauser
Got it. Thank you.
And on the variable fee side of things, we saw a massive step up and back of the envelope math if we look at equipment sales of 500,000 in the quarter would imply another nearly 1,700 new placements made in the quarter to the HRA channel, so that the strength doesn’t seem to be slowing down – and am I thinking about this correctly? And have you seen any new seasonality in this part of the business?
Doug Murphy-Chutorian
Yes. I think – yes, please go ahead.
Andy Weinstein
Yes. I mean, I would agree with you and it is a little cyclical when the hardware sales come in based on how many new installations our customers have.
So, when we do see a lot of installations in the fourth quarter, that’s good news to us, meaning that, there are going to be new installations with our customers. So, at back of the envelope, thinking that does make some sense.
Doug Murphy-Chutorian
Yes. we don’t specify the numbers, but you have your own.
but if you have things differently like…
Kyle Bauser
Right. Yes.
I’m just assuming kind of $300 for the QuantaFlo to the HRA clients. Got it.
And then lastly, if I may, I know you said in the past that you expect other companies to come into the PAD diagnostic space given how massive this market is and under-developed it is, have you seen any new entrance into the PAD diagnostic space pop onto your radar?
Doug Murphy-Chutorian
Dennis?
Dennis Rosenberg
No, Kyle as you point out and as we’ve indicated in the past that predominantly PAD testing is traditionally done with blood pressure-cuffs, Doppler machines done in the vascular lab. And there are many companies that market this type of product; we are seeing a new entrance into the market with digital devices that seek to provide fast results that may be used outside of the specialized vascular lab.
Today, we believe these companies have had minor effects on our market. And also, as you point out given the potential size of the PAD market, we do expect competitors to enter this space.
Kyle Bauser
Okay, understood. Thanks for all the updates and congratulations on a great year.
Dennis Rosenberg
Thanks, Kyle.
Doug Murphy-Chutorian
Thanks, Kyle.
Operator
And the next question will be from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.
Brooks O'Neil
Yes. Good afternoon, guys.
I just want to follow up on Kyle’s – one of the Kyle’s questions, obviously, the variable fee business growth rate was elevated this quarter. I’m curious if you can help us to think about how much of a COVID impact there was a pent-up demand from Q2, Q3 that got unlocked in Q4, or whether you think a $4.5 million revenue run rate from Q4 in that business is the new kind of baseline revenue run rate for that business.
What can you tell us?
Doug Murphy-Chutorian
Okay. Dennis, can you comment what do we dig it on that?
Dennis Rosenberg
Sure. So, as we know – and hi Brooks, how are you?
Brooks O'Neil
Fine. Thanks, Dennis.
Dennis Rosenberg
as we know, 2020 was an extraordinary year, as far as COVID and in relation to our business, the flexibility that the HRA approach gives our large insurance companies was very beneficial for 2020, in that their ability to move quickly in testing either patients that – where their tests had been postponed, where offices were closed down for a period of time, et cetera. So, we are seeing good growth in this market.
We expect to see continued growth in the market, as far as what the rate is. We’re just going to have to see how much of an effect COVID really was in 2020 compared to 2021.
Brooks O'Neil
Absolutely, I get that. So, you continue to deliver extraordinary results on the cost of revenue line.
And I’m curious when we should expect that line to go to zero?
Doug Murphy-Chutorian
never, but that’s kind of nice to see these numbers.
Brooks O'Neil
Absolutely, it’s fantastic, it’s incredible. I’m curious, I know you don’t want to talk a lot about the new business, but should we assume since you converted the note from your – the convertible note from one of your new relationships and sold the equity security that you’re no longer interested in that company product opportunity, or is that just a financing situation and sort of a cash use?
Doug Murphy-Chutorian
Yes. I think, the comment is, we turned it further to the notes and to first shares.
And so the proposal there is and the – but we retained about a certain amount of the investment that we make otherwise. So, we have still as of an interest.
So that was a matter of cleaning with the way to the Investment Act of 1940, to be able to do some more things. Then, they say it gets into technical discos, but we sold to interested third-party, who’s – has a big shareholder in December.
So, we have – we made a little bit of money, but we still basically, in a shareholder, who’s aligned with our interests.
Brooks O'Neil
Okay. That makes sense.
I totally understand that. When you think about the $1.2 million of the inventory you have for the other new products, can you give us any sense for how quickly you might be able to turn that into revenue?
And I mean, any details on any of the three new products or the diabetes related or anything you can tell us would be great.
Doug Murphy-Chutorian
Dennis, can you comment please?
Dennis Rosenberg
Sure, sure. Yes.
we are moving ahead with our planning in relation to these products and very specifically, in terms of the one product that we have purchased the inventory and have the distribution agreement with. And as we’ve indicated before, we’re looking carefully at which market segments we want to enter with this.
we’re looking at all of the related strategies in terms of pricing, in terms of reimbursement, et cetera, et cetera. So that we don’t feel a pressure to move super quickly on that, we want to make sure the ducks are in a row and that we do it the right way.
So that continues to be our thinking in relation to that product.
Brooks O'Neil
Yes. Okay.
Let me just ask one or two more. I’m curious if you feel the $7 million from the fixed price software business.
It’s kind of a good base up to think of for growth for 2021.
Doug Murphy-Chutorian
Exactly. We think that we’re – this business is continuing, and we have older clients and new clients, who are coming to the – to use our products.
So, we’re quite interested. Andy, can you say anything about it?
Andy Weinstein
No, I agree with you there totally. I mean, we do have these – our existing clients are growing and we’re adding on new clients every month.
So, I agree with him, not much to add to that.
Brooks O'Neil
Okay, great. And then just lastly obviously, the cash continues to build, and I know you’re investing in new products and growing your employment dates, et cetera, but are you thinking we’re going to turn similar into a bank or what are you going to do with the money?
Doug Murphy-Chutorian
Well, the point is we’re spending the money on products and projects that are and seeing our future growth. So, we tend to do the same thing in the future, maybe, squeeze the expenses, for example, R&D, you will tend to assume that we’re going to be increased.
but if we think about it, is there – we would like to treat about 8% to 10% R&D budget, but we’ve been going so fast. We can’t able to do it.
So, we would like to get this up in future, because we want to do more things, but we don’t want to lose focus on the main product. So, the main product that got a lot of lags to it.
So we – of course, then we do what we have to do to support the minor product and to make improvements in the main product.
Brooks O'Neil
Makes sense, Doug. thank you very much for those comments and congratulations on terrific results.
Doug Murphy-Chutorian
Thank you.
Operator
[Operator Instructions] The next question will be from Aman Gulani with B. Riley.
Please go ahead.
Aman Gulani
Hey, guys. thanks for taking my question, and congratulations on another great quarter here.
So, I mean, it appears that a lot of the large Medicare advantage, providers are really pushing for in-home care with either new investments or expanding their existing HRA business. But given the material push on that front, do you think that could mute some of the seasonality that you typically, do see in the first quarter of the year?
Doug Murphy-Chutorian
It is possible. We are too much into – with the first of the year, so we can’t comment, I’d tell you the things that we don’t want to disclose yet.
So, we’ll find out in April or what you take aback when we do the next call.
Aman Gulani
Okay, thanks. And what is your growth expectation for the fixed fee business given the ramp in HRA side of the business?
Doug Murphy-Chutorian
I think that Dennis, can you take that? We had – in the last quarter, we reported about 40% of the business was licenses that are variable for price.
but now, it’s a comment value of what you think as you can be in the future. Please, Dennis.
Dennis Rosenberg
So, I think that again, we refer back to 2020 as an extraordinary year in terms of the flexibility that the insurance companies needed in getting the patients tested. So, it’s hard to look at the numbers in 2020 and read too much into that in terms of whether what the future holds for the mix between these two types of licenses.
For us, we’re happy with either type of business. They’re both very high margin businesses for us and we just want to get as many people, who fall into the criteria to be tested as possible, whether that’s home or whether that’s fixed fee.
The combination, I think, gives us a lot of leverage in the market to be getting everyone tested, who needs to get tested. We just have to see what COVID brings for this year and kind of what the trends are looking back at 2020 to see what the real indicators work.
Aman Gulani
Got it. Okay.
And then outside of your recent investments, can you comment on any internal – internally developed initiatives that you’re working on that could compliment QuantaFlo, any comments on the time to market for some of those internally developed products?
Doug Murphy-Chutorian
We’ve been very quiet about that, because we don’t feel in a rush to do it, but we’ve been making moves and you see some of the things that we reported, not by us, but they reported that private that has been made. So, I think – I have to say to you that we liked what we’re doing, but it’s not completed yet.
And when it’s done material will be the first to know, and I think we have a good feeling about it, but I don’t want to say more than that. Dennis, can you comment on that?
Dennis Rosenberg
It’s the same approach that we’re taking with the outside products in that we want to make sure everything is done, right. We are in a fortunate position of having a stellar main product with a lot of growth left to go.
So, we don’t feel pressure on these products. We don’t want to drag our feet obviously, but we want to make sure that all the ducks are in a row and that we do it right.
Aman Gulani
Got it. Okay.
And last question for me. Can you talk about your recent hiring activity?
Like what are some of the new hires focused on? Well maybe, mostly, on your new products or largely focused on expanding QuantaFlo.
Doug Murphy-Chutorian
All the above. We’ve made several hires supporting the new products, but most of the hires support QuantaFlo, we made some R&D hires as the world, as the operation to hires, as well as expanded to sales team.
So, we continue to do this and reasons we do it is that management is entirely confident about the next year to be a bigger one. So, we want to get the infrastructure in place to have to be prepared for the growth that we’re going to see in 2021.
Aman Gulani
Great. Thank you.
Congratulations on the quarter, guys. I’ll pass it on.
Doug Murphy-Chutorian
Thank you.
Operator
The next question will come from Madison Woodward with Avalon Advisors. Please go ahead.
Madison Woodward
Hi, thanks for taking my call. I was just wondering if you could elaborate a little bit on the sale of the preferred securities and to the related party and just clarify that a little bit and what’s going on there.
Doug Murphy-Chutorian
Okay. It’s going to be disclosed in the 10-K that is soon to be released.
So, I don’t think it’s appropriate to get into the details, but the thinking is that we sold it to someone, who’s also a shareholder of the main company. So, he’s got a certain line of interest to do it, and we didn’t sell it to him at what we bought it for.
We sell it to for a little bit more. So, it was – the thinking is if you refer to an investment of Act of 1940, we have a limit to what we can invest in any company it’s a minority investment.
So, we want to make many other little bets and we want to take on more distribution to the products that we have invested in. So that is – we should make the investment.
But we don’t want to get into anything that hurts our earnings. But that being said, if these companies are successful, we are – maybe, take them to buy them eventually.
It isn’t that a big thing is that we have. But first of all, we want to take smaller steps and to get some more distribution rights and get a better product mix that we had before.
Dennis, can you say anything about this?
Dennis Rosenberg
Yes. I think that the key point of what Doug is saying there is the idea of placing small bets on things that look good to us that we can expand in the future as their performance or potential increases in our eyes.
And that’s really what this is all about is expanding on our relationships with our customers, our leveraged distribution model, in which future products are going to fit into that the best.
Operator
Thank you. Ladies and gentlemen, this concludes our question-and-answer session.
I would like to turn the conference 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 our call today.
Thank you.
Operator
And thank you, sir. The conference has now concluded.
Thank you for attending today’s presentation. You may now disconnect.