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Edited Transcript of SMLR earnings conference call or presentation 30-Oct-19 8:30pm GMT

Q3 2019 Semler Scientific Inc Earnings Call

PORTLAND Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Semler Scientific Inc earnings conference call or presentation Wednesday, October 30, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew B. Weinstein

Semler Scientific, Inc. - SVP of Finance & Accounting

* Dennis Rosenberg

Semler Scientific, Inc. - CMO

* Douglas Murphy-Chutorian

Semler Scientific, Inc. - CEO & Director

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Conference Call Participants

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* Brian W. Marckx

Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst

* Frank James Takkinen

Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst

* Kyle Royal Bauser

Dougherty & Company LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Semler Scientific Third Quarter 2019 Financial Results Conference Call. (Operator Instructions)

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, 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. 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 result of any revision of 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. Please note, this event is being recorded.

Now I would like to introduce Doug Murphy-Chutorian, CEO of Semler Scientific. Please go ahead.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [2]

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Good afternoon, everybody, and thank you for joining the Semler Scientific Third Quarter 2019 Financial Results Call. I am happy to report that I'm feeling quite well after having a mild stroke earlier this year, and I'm pleased with talking to all of you now. Thank you for your patience during the past few months.

And now I'd like to introduce Dennis Rosenberg, Chief Marketing Officer of Semler, to begin our presentation today. Dennis, please go ahead.

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [3]

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Thanks, Doug. We always like to begin our calls with a reminder about Semler's strategy. Semler is an emerging growth 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.

We're pleased to report that the company's financial performance during the third quarter of 2019, based on revenue and net income, was the best quarter in our company's history. Comparing results between the third quarter of 2019 and the third quarter of 2018, and revenue grew 60%. Pretax income grew 112%. Earnings per share, which includes an income tax benefit, were $1.20 per basic share and $0.96 per diluted share. Earnings per share, excluding the income tax benefit, were $0.47 per basic share and $0.38 per diluted share. Cash, as of September 30, was $8.5 million compared to $3.1 million one year prior.

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 I'd like to turn the call over to Andy Weinstein, our Senior Vice President of Finance and Accounting, to describe in more detail the ongoing improvement in financial performance. Andy?

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Andrew B. Weinstein, Semler Scientific, Inc. - SVP of Finance & Accounting [4]

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Thanks, Dennis. Please refer to the financial results described in the press release that was distributed at market close today. For the quarter ending September 30, 2019, compared to the corresponding period of 2018, revenue was $8.9 million, which is an increase of $3.3 million or 60% from $5.6 million at that time last year. Operating expense, which includes cost of revenue, was $5.8 million, an increase of $1.8 million or $0.46 from $4 million. Our pretax income was $3.1 million, which is an increase of $1.6 million over the $1.5 million at the same time last year.

We reported an income tax benefit of $4.7 million, which was primarily due to the release of the tax valuation allowance. Accordingly, we achieved net income of $7.8 million for the quarter, an increase of $6.3 million from $1.5 million. Net income per share, inclusive of the tax benefit, was $1.20 per basic share and $0.96 per diluted share, which compares to $0.24 per basic share and $0.19 per diluted share during the same period last year. Earnings per share, excluding this income tax benefit, was $0.47 per basic share and $0.38 per diluted share.

For the quarter ending September 30, 2019, basic share count was 6,492,501 and the diluted share count was 8,108,053. Analyzing the expense categories and earnings in the third quarter of 2019 as a percentage of quarterly revenue, cost of revenue was 11% of quarterly revenue. Engineering and product development expense was 7% of quarterly revenue, sales and marketing expense amounted to 26% of quarterly revenue, and general and administrative expenses were 21% of quarterly revenue. Pretax income was 35% of quarterly revenue.

As of September 30, 2019, Semler had cash of $8.5 million, which is an increase of $4.3 million compared to $4.2 million at June 30, 2019, the end of last quarter. This change is primarily due to cash provided by operations for net income as adjusted by such items as accounts receivable, which decreased $218,000. Deferred revenue increased $241,000 and accrued expenses increased $723,000. This was -- this cash was partially offset by purchase of inventory and capital expenditures, which now look at $508,000.

As a result of these items, our stockholders' equity is now $14.1 million as of September 30, 2019. Our quarterly report on Form 10-Q will be filed in several days. It will include our cash flow statement and more discussion of cash and our liquidity. The release of the income tax benefit this quarter was due to the recent history of positive earnings before income taxes for the past 8 straight quarters and a variety of other factors.

Our 3 largest customers comprised of -- comprised 47%, 15.7% and 12.4% of quarterly revenues. Our license fees were approximately $5.95 million. Variable priced revenues were approximately $2.66 million, and equipment sales were $291,000.

Although we do not provide formal guidance, we are intending to continue the annual revenue growth continuing our profitability and generating cash through the remainder of 2019 and 2020. The opinion of management team that this customer interest in our products and services is continuing to increase.

Now I will ask Dennis to continue the discussion and provide concluding remarks. Dennis?

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [5]

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We believe annual revenue will continue to grow through the end of 2019 and into 2020 as a result of increased numbers of installations of our product, more usage of our product and recurring revenue from the licensing business. Our goal is to make both new additions to our customer base and to expand orders from existing customers, both of which we did this quarter. During the third quarter, Semler again expanded its infrastructure and head count. We now have 62 employees.

Operating expenses are expected to increase from quarter-to-quarter during the remainder of 2019 and 2020. It is our intent to expand our infrastructure to accommodate anticipated future growth of the business. During the third quarter of 2019, we continued to add to our assets for lease with purchase of inventory. These increases are indicative of management optimism for future growth in installations and may include stocking of key components of the product and/or replacement inventory for sensors sold to licensed customers. The amount of purchases made in the third quarter will be disclosed in the Form 10-Q to be filed in several days.

We often get asked about uplisting to the NASDAQ exchange. Our position on uplisting has not changed. We are not focusing on this in 2019. We will update you if and when our plans change. 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.

Our goals for the remainder of 2019 and 2020 are to grow annual revenue, increase earnings 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 large relative to our current market penetration. So there is plenty of room for continued growth. We continue to invest in R&D with the goals of providing enhanced value to our customers now and in the future.

We believe Semler Scientific is well positioned in the current health care market environment 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. We provide economics that work for the providers, the facilities, the insurance plans, the government and the patient.

In conclusion, the third quarter of 2019 was an achievement record for our company in terms of both financial performance and the number of patients being tested with our products. 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Kyle Bauser with Dougherty & Company.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [2]

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Great to hear from you, Doug, and that you're recovering nicely. And good to meet you, Dennis and Andy.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [3]

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Thank you, Kyle.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [4]

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So another excellent quarter here. Dennis, we've seen some really nice growth within your largest customer, so 45% year-over-year growth. It comprises roughly half your business. And it's fortunate that you're able to kind of leverage their infrastructure regarding the rollout and training of the technology themselves. So how is your level of activity within this account start to change? Are you still actively marketing to new branches of operations and physician groups in this account? Or has your role become more support since the new business has been somewhat self-sustaining there?

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [5]

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I continue to -- yes, go ahead, Doug.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [6]

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Oh, yes. I think I was going to say go ahead, Dennis, please answer the question.

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [7]

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Sure. I'm going to say that we continue to see growth within the account as the account itself grows, and our presence in it continues to grow. It's not in stasis. So while we're in maintenance with the business we have, we are seeing expanded growth inside.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [8]

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Okay. And it looks like the new big customer, presumably that we heard about a year ago, is definitely a per-use client or likely an HRA that's now doing over $1 million a quarter, which is phenomenal. Are you finding that the remaining kind of large payers are electing to go with the HRAs to administer QuantaFlo rather than implementing it themselves? Or do you think we'll see some large new payers choose the licensing option in the coming months?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [9]

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We -- I think -- yes, the thing is we would like to think so. The new customers or HRAs, either way they start. They probably are going to [create] it to the other way because it's economically useful for them to do this, and because it's better for the patients. So these are the reasons there to consider future goals from all aspects of the business.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [10]

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And -- okay, that's helpful. And if we're kind of staying on that theme, if we're talking more broadly a bit about the sales and marketing strategy across the 3 channels. So large payer, licensing, QuantaFlo, the HRAs and then the individual practices. Can you talk a little bit about how you're addressing these? I mean selling into the big administrators like Medicare Advantage is likely quite a bit different than knocking on doors of the physician practices. So can you talk a bit about how you're addressing each of these channels? And how the head count might fluctuate as a result?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [11]

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Well, I think we're concentrating on the -- basically, the insured market because they are the drivers of all the other markets. So anyway, we are structuring to provide larger companies the services they need, and this change many forms. So we're constantly developing and further R&D [covers] to work constantly, improving the product and our delivery of it.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [12]

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Okay. And the financial question. Andy, I know you used contract manufacturers to produce, assemble and ship QuantaFlo, but can you remind me how many partners you have? And more specifically, kind of what the consolidated capacity is before you're going to have to qualify additional CMOs to keep up with demand?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [13]

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Okay. Andy, I will answer the question, and you can kind of speak to it later. I -- we have a capacity at more than one contract manufacturer that more than meets our perceivable demand into the future. We don't give a lot of details about this, but we haven't had done all American companies. And there is no problem meeting our demand or the demand for the market to this.

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Operator [14]

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Our next question comes from Frank Takkinen with Lake Street Capital.

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Frank James Takkinen, Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst [15]

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Congratulations on another great quarter. Doug, great to hear you're progressing well, and nice to meet you, Dennis and Andy.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [16]

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Thank you. Thank you very much.

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Frank James Takkinen, Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst [17]

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I just got a couple of questions. First one, big picture question. Obviously, we've seen very strong growth continue to perform. And given that you're still in the single digits from a penetration standpoint, I was just hoping you could talk a little bit about what are some of the big picture things you need to do, say, maybe double or triple your installed base over the long term?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [18]

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Well, I think that we are doing everything we can. I don't think, fundamentally, we have to do anything different. The margins are good. The sales team is effective, and the customers think our value cost position is agreeable. So it's more -- a matter of doing more of the same rather than doing anything different. So the challenge is hiring the number of people we are going to need, as you suggest, doing 4 or -- 3 or 4x more business, we need to hire trainers and technical support people. This is the challenge that we face. And I assume we have been doing a good job at that. So I'm assuming it won't be a problem in the future.

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Frank James Takkinen, Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst [19]

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That's great. And then just secondly, with your cash coming up as much as it did this quarter, just curious how you guys are thinking you may use some of that cash, if that's pursuing new products. Or if you potentially could go the opposite of what you were saying in fact in regards to issuing shares and potentially think about putting in place some sort of buyback?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [20]

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Well, I haven't -- we haven't decided what to do with the accumulating cash other than we tend to invest in ourselves, doing R&D and other things. And I think we want to stress this plan, not a plan of getting additional financing, or et cetera. So it's basically to invest in the current products and maybe invest in our sales with additional R&D.

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Operator [21]

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Our next question comes from Brian Marckx with Zacks Investment Research.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [22]

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Congrats on the quarter. Doug, great to hear your voice. Glad to hear you're back.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [23]

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Thank you.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [24]

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Just one on seasonality of the business. I think it was -- has been seasonally favoring Q4, maybe that's just the way that the growth is making it look. But if you could just talk about that, is there any seasonality in the business? And does it favor Q4?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [25]

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Well, we have thought that we're going to see seasonality in the business because one of the groups, HRAs, is a seasonal business. [Slower] in the first quarter and better throughout the year. But we have not seen that yet. Anyway, I think that by adding more customers, we have kind of [forged] the periods of seasonality. So I suspect that we're going to see it, but I don't have evidence [throughout with FX]. So I say not yet.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [26]

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Okay. Wondering about -- if you could just talk a little bit about if you're seeing anything competitive threats, whether it'd be technologies, new technologies or anything else in the space that you worry about that you could slow the growth?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [27]

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Dennis, you could answer this.

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [28]

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Sure, sure. What we're seeing competitive-wise is really just more of what we have been seeing, which is cough and doppler-based kind of traditional PAD systems that are out there and have been out there for some time. We're not really seeing anything other than that as far as a new competitive threat.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [29]

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Okay. And you talked a little bit about CapEx. I don't know if you can talk to this or not, but I'll ask the question, and you can tell me if you can talk about it. Just curious as to what you think in terms of CapEx levels on a yearly basis. Looks like 2017 and 2018 were roughly pretty close between -- right around $900,000, I think. And I'm talking about the assets for lease. Do you expect that to remain around there? Do you expect any significant increase going forward?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [30]

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Well, we have been growing CapEx at a good rate. Factors that are in the consideration are -- in earlier years, we had more capital equipment on our CapEx. But in later years, more sensors that are more inexpensive. So this CapEx is really, really growing on a per unit basis, but you don't see that as our absolute value basis. So it's a consideration, and all the units are now more than -- some of them are more than 3 years old. And so the situation is going away. So anyway, these are most of the factors that are answering your question. A little more details, then I will have time to go into.

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Operator [31]

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This concludes our question-and-answer session. I would like to turn the conference back over to Doug Murphy-Chutorian for any closing remarks.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [32]

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Thank you for joining us today. I appreciate the support and continued support of the business. If you have any additional questions, I can be contacted post the call at any time. You're free to call me, and I'll arrange appointment because I want to answer your questions completely, and it takes me a little longer to answer them now. So bear with me. And have a good day and evening to you all. Bye now.

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [33]

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Take care.

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Operator [34]

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