The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting offersan offer to buy these securities in any jurisdictionstate where the offer or sale is not permitted.
Subject to completion, dated May 8, 2015
Prospectus
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of Common Stock
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Our common stock will be between $7.50 and $9.50 per share.
Investing in our common stock involves risks. You should consider carefully the risks that are describedand uncertainties in the section entitled “Risk Factors” section beginning on page 1110 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined ifpassed on the adequacy or accuracy of this prospectus is truthful or complete.prospectus. Any representation to the contrary is a criminal offense.
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The underwriters will receive compensation inIn addition, we have agreed to issue to theunderwriting discount.placement agent warrants to purchase up to a number of shares of common stock equal to % of the aggregate number of shares of common stock sold in this offering and to reimburse the out-of-pocket expenses of the placement agent in connection with this offering up to $100,000. See“Underwriting” beginning on page73the “Plan of Distribution” section of this prospectus fora description of compensation payable tomore information on theunderwriters.
We have grantedengaged H.C. Wainwright & Co., LLC (“Wainwright” or the underwriters“placement agent”) to act as our exclusive placement agent in connection with this offering. Wainwright is not purchasing or selling the securities offered by us, and is not required to sell any specific number or dollar amount of securities, but will use its reasonable best efforts to arrange for the sale of the securities offered. We have agreed to pay Wainwright a 45-day optionplacement fee equal to purchase up7% of the aggregate gross proceeds to 177,000 additional sharesus from the sale of common stock solelythe securities in the offering. Wainwright may engage one or more sub-agents or selected dealers in connection with this offering. We estimate total expenses of this offering, excluding the placement agent fees, will be approximately $ . Because there is no minimum offering amount required as a condition to cover over-allotments, if any.
H.C. Wainwright & Co.
The underwriters expect to deliver the shares against payment therefor on or aboutdate of this prospectus is , 2014.
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You should rely only on the information contained or incorporated by reference in this prospectus and any free-writing prospectus prepared by or in any free writing prospectus thaton behalf of us or to which we may specifically authorize to be delivered or made available tohave referred you. WeNeither we nor the placement agent have not, and the underwriters have not, authorized anyone to provide you with anyadditional or different information. We are offering to sell, and are seeking offers to buy these securities only in jurisdictions where offers and sales are permitted. The information other than that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus may only be used where it is legal to offer and sell our securities. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our securities. Our business, financial condition, results of operations, and prospects may have changed since that date. We are not, and the underwriters are not, making an offer of these securities
No action is being taken in any jurisdiction where the offer is not permitted.
We obtained industry and market data used throughout and incorporated by reference into this prospectus through our research, surveys and studies conducted by third parties and industry and general publications. We have not independently verified market and industry data from third-party sources.
The items in the following summary are described in more detail later in this prospectus. This summary highlightsprovides an overview of selected information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investingbefore buying our common stock. Therefore, you should read the entire prospectus carefully before deciding to invest in our securities, youcommon stock. Investors should carefully read this entire prospectus, including our financial statements and the related notes andconsider the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysisbeginning on page 10 of Financial Condition and Results of Operations” in each case included elsewhere in this prospectus. Unless otherwise stated orIn this prospectus, unless the context otherwise requires, otherwise, references in this prospectus to “Semler Scientific,“the Company,” “we,” “us,” “our” or “our”“Semler Scientific” refer to Semler Scientific, Inc.
We are an emerging medical risk-assessment company. Our mission is to develop, manufacture and market patented products that identify the risk profile of medical patients to allowassist healthcare providers to capture full reimbursement potential for their services.in monitoring patients and evaluating chronic diseases. Our first patented and U.S. Food and Drug Administration, or FDA cleared product, is FloChec™®. FloChec™FloChec® is used in the office setting to allow providers to measure arterial blood flow in the extremities and is a useful tool for internists and primary care physicians for whom it was previously impractical to conduct blood flow measurements. FloChec™ Our product initially received FDA 510(k) clearance in February 2010, we began Beta testing it in the third quarter of 2010, and we began commercially leasing FloChec™it in January 2011. In the year ended December 31, 2013March 2015 we had total revenue of $2,274,000 and a net loss of $2,233,000 compared to total revenue of $1,199,000 and a net loss of $2,741,000 in 2012. Our net loss attributable to common stockholders was $2,233,000received FDA 510(k) clearance for the year ended December 31, 2013 comparednext generation version. In March 2015 we also launched our multi-test platform, WellChec™, to $2,826,000perform risk assessments for our customers. We believe the combination of our proprietary risk assessment product, FloChec®2012., and our multi-test service platform, WellChec™, position us to provide valuable health risk assessment tools to our insurance company and physician customers, which in turn permit them to guide patient care and close the gap between the cost of patient care and compensation for providing that care.
Our Product
We currently have only one patented and FDA clearedFDA-cleared product, FloChec™®, that we market and lease license to our customers. FloChec™® is a four-minute in-office blood flow test. Healthcare providers can use blood flow measurements as part of their examinations of a patient’s vascular condition, including assessments of patients who have vascular disease. The following diagram illustrates the use of FloChec™®:
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FloChec™® features a sensor clamp that is placed on the toe or finger much like current pulse oximetry devices. Infrared light emitted from the clamp on the dorsal surface of the digit is scattered and reflected by the red blood cells coursing through the area of illumination. Returning light is ‘sensed’ by the sensor. A blood flow waveform is instantaneously constructed by our proprietary software algorithm and displayed on the video monitor. Both index fingers and both large toes are interrogated, which takes about 30 seconds for each. A hardcopy report form is generated that displays four waveforms and the ratio of each leg measurement compared with the arms. Results are classified as Flow Obstruction Borderline Flow Obstruction andor No Flow Obstruction.
We have developed a license model rather than an outright sales model for FloChec®. Our license model pricing is based on data collected on use rates of FloChec® and third-party payment rates to physicians and facilities using our product. The pricing model eliminates the need to make a capital
Our Chairman and co-founder, Dr. Herbert Semler, is an inventor of the technology behind FloChec®. Dr. Semler formed our company in 2007 to further develop, patent and commercialize his idea. We applied for our patent protecting our proprietary technology in 2007 and U.S. Patent No. 7,628,760 was granted in 2009. FloChec® initially received FDA 510(k) clearance in February 2010, and we began Beta testing it in the third quarter of 2010, and began commercially leasing FloChec® in January 2011. In March 2015, we received FDA 510(k) clearance of the next generation version. We have placed our FloChec® product with cardiologists, internists, nephrologists, endocrinologists, podiatrists and family practitioners and four insurance plans among the top 15 plans with the most Medicare Advantage members. Many of the 50 years or older patients under the care of these physicians have cardiovascular risk factors such as diabetes, cigarette smoking, high cholesterol or hypertension that lead to the development of peripheral arterial disease, or PAD.
Other Methods
Blood flow is the amount of blood delivered to a given region per unit time, whereas a blood pressure is the force exerted by circulating blood on the walls of arteries. Given a fixed resistance, blood flow and blood pressure are proportional. The traditional ankle brachial index, or ABI, with Doppler test uses a blood pressure cuff to measure the the systolic blood pressure in the lower legs and in the arms. A blood pressure cuff is inflated proximal to the artery in question. Using a Doppler device, the inflation continues until the pulse in the artery ceases. The blood pressure cuff is then slowly deflated. When the artery’s pulse is re-detected through the Doppler probe the pressure in the cuff at that moment indicates the systolic pressure of that artery. The test is repeated on all four extremities. Well-established criteria for the ratio of the blood pressure in a leg compared to the blood pressure in the arms are used to assess the presence or absence of flow obstruction. Generally these tests take 15 minutes to perform and require a vascular technician to be done properly. Like FloChec™®, the traditional analog ABI test with Doppler is a non-invasive physiologic measurement that may be abnormal in the presence of peripheral artery disease, or PAD. Alternatively, primary care physicians may palpate the pedal pulses to assess blood flow in the lower extremities. However, pulse palpation is generally not sensitive for the detection of vascular disease. Other options to detect arterial obstructions are imaging systems that use ultrasound, x-ray technology or magnetic resonance to obtain anatomic information about blood vessels in the legs. However, as compared to FloChec™®, imaging tests are much more expensive tests that are performed by specialists in special laboratories or offices.
Market Opportunity
Fee-for-service is a payment model where services are unbundled and paid for separately. In health care, it gives an incentive for physicians to provide more treatments because payment is dependent on the quantity of care, rather than quality of care. Capitation is a payment arrangement that pays a physician or group of physicians a set amount for each enrolled person assigned to them, per period of time, whether or
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not that person seeks care. The amount of remuneration is based on the average expected health carehealthcare utilization of that patient, with greater payment for patients with significant medical history. For Medicare Advantage patients, Centers for Medicare & Medicaid Services, or CMS pays thea fee per patient.patient, also known as capitation. CMS uses risk adjustment to adjust capitation payments to health plans, either higher or lower, to account for the differences in expected health costs of individuals. Accordingly, under CMS guidelines, risk factor adjustments per patient will provide payment that is higher for sicker patients who have conditions that are codified. Accordingly, there is a financial incentive to identify those Medicare Advantage patients that are sicker, including those that have undiagnosed ailments such as PAD.
The coding system used by CMS for the Medicare Advantage program is a hierarchical condition category, or HCC, diagnostic classification system that begins by classifying over 14,000 diagnosis codes into 805 diagnostic groups, or DXGs. Each code maps to exactly one DXG, which represents a well-specified medical condition, such as DXG 96.01 precerebral or cerebral arterial occlusion with infarction. DXGs are further aggregated into 189 condition categories, or CCs. CCs describe a broader set of similar diseases. Diseases within a CC are related clinically and with respect to cost. An example is CC96 Ischemic or Unspecified Stroke, which includes DXGs 96.01 and 96.02 acute but ill-defined cerebrovascular disease. We believe that quality of care measured by completeness and wellness will induce higher payments per patient. These changes are already in place for the approximately 1416 million participants in the Medicare Advantage program and are expected to expand to more types of insured patients as healthcare reform is deployed.
Undiagnosed vascular disease of the legs has been called a major under-diagnosed health problem in the United States by the National Institute of Health and the Wall Street Journal. We believe vascular disease in leg arteries is undiagnosed in 75% of cases, which is about 12 million Americans. Known as peripheral artery disease, or PAD, this condition is a common and deadly cardiovascular disease that is often undiagnosed. PAD develops when the arteries in the legs become clogged with plaque — fatty deposits — that limit blood flow to the legs. As with clogged arteries in the heart, clogged arteries in the legs place patients at an increased risk of heart attack and stroke. Published studies have shown that persons with PAD are four times more likely to die of heart attack, and two to threetwo-three times more likely to die of stroke. According to a study by P.G. Steg published in the Journal of the American Medical Association, or JAMA, patients with
PAD have a 21% event rate of cardiovascular death, heart attack, stroke or cardiovascular hospitalization within 12 months. The SAGE Group has estimated that as many as 18 million people are affected with PAD in the United States alone and A.T. Hirsch et al. in a JAMA published article further estimate that only 11% have claudication (pain on exertion), a classic symptom of PAD. One can lower the risks associated with PAD if the disease is detected, with early detection providing the greatest benefit.
Many people affected with PAD do not have noticeable symptoms. When symptoms of PAD are present, they often include fatigue, heaviness, cramping or pain in the legs during activity, leg or foot pain, sores, wounds or ulcers on the toes, feet, or legs, which are slow to heal. Persons with PAD may become disabled and not be able to work, and can even lead to amputations. According to the SAGE Group, there are approximately 160,000 amputations due to PAD per year and, according to the National Limb Loss Information Center, an estimated 2 million Americans are amputees.
Risk factors for developing PAD include:
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Age (over 50 years)
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Race (African-American)
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History of smoking
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Diabetes
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High blood pressure
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High blood cholesterol
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Personal history of vascular disease, heart attack, or stroke.
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We believe medical personnel who care for those older than 50 years are the target market for FloChec™.®, along with those insurance plans that have a high number of Medicare Advantage patients. Based on U.S. Census data, we believe there are more than 80 million older Americans who could be evaluated for the presence of PAD.
According to the Agency for Healthcare Research and Quality, there are over 200,000 internists, family practitioners and gerontologists in the United States. In addition, based on American Heart Association data, there are over 20,000 cardiologists and 7,500 vascular and cardiovascular surgeons. Also, there are millions of diabetic patients seen routinely by endocrinologists. Many podiatrists who see patients with these problems and orthopedic surgeons may see value in screening patients for circulation issues prior to leg procedures. Neurologists may need a tool to differentiate leg pain from vascular versus neurologic etiology. Nephrologists see patients with kidney disease, who have a higher frequency of PAD. Wound care centers need to know the adequacy of limb perfusion. We expect that each physician will have thousands ofmany patient visits annually from people older than 50 years. While, it is standard practice to ask about symptoms of PAD and to feel for diminished pulses on physical exam, we believe that it is often in the case in busy practices, that the questions go unasked.
In addition, the physical exam of the extremities is generally cursory in the absence of a patient complaint. Given the ease of use and speed of FloChec™®, we believe that many doctors will incorporate its use in their practice as a routine annual test.test to measure blood flow in an extremity. It is our intent that FloChec™® be incorporated as a tool in the routine physical exam of adult patients by primary care providers in a similar fashion to the use of a thermometer or stethoscope. Providers do not request payment for using a stethoscope during the physical examination. Similarly, we do not expect (or intend) for providers that use our FloChec™® to seek such a reimbursement approval. FloChec™FloChec® is not specifically approved under a third-party payor code and we do not track customer requests for reimbursements. Accordingly, our customers may or may not be successful in receiving reimbursement if sought.
Our Business Strategy
Our mission is to develop, manufacture and market patented products and solutions that identify the risk profile of medical patients to allowassist healthcare providers to capture full reimbursement potential for their services, while growing revenuesin monitoring patients and becoming and maintaining profitability.evaluating chronic diseases. We intend to do this by:
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- Capitalizing on opportunities provided by
the Health Care Reform Law.capitated payment programsUnder the Health Care Reform Law, for. For many capitated programs, payment is higher for sicker patients who have conditions that are codified. We believe a provider would prefer to have more remuneration for taking care of a patient. A provider expects to spend less time caring for a healthy patient than for a sicker patient. If payment per month was the same for both types of patients, therewouldcould be aperverse incentivedisincentive for the provider toonly want tocare forhealthymore unhealthy persons. Accordingly, CMS anticipated this situation and pays more per month for “sicker” patients who have chronic conditions that are identified on the medical record through use of an established coding system. This creates a business opportunity in finding low-cost, effective means to identify the conditions, which have been established in coding systems for risk adjustment of payments (higher payments paid to providers and healthcare plans to compensate them for caring for sicker or more risky patients). The more common and more dangerous a condition is, the greater the opportunity for profit. The goal is to provide cost-effective wellness.
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- Targeting customers with patients at risk of developing
PAD.PAD. Healthcare providers use blood flow measurements as part of their assessment of a patient’s vascular condition. Our strategy is to keep marketingour FloChec™ system,FloChec® on alease-based servicelicense-based model to insurance plans and medical personnel who care for those older than 50, including cardiologists, internists, nephrologists, endocrinologist, podiatrists, and family practitioners. Specifically, we believe there are more than 250,000 physicians and other potential customers in the United States alone, many ofthewhom care for patientsof whomwill be more than 50 years old and at increased risk of developing PAD. Based on U.S. Census data, the evaluable patient population forFloChec™FloChec® is estimated to be more than 80 million patients in the United States annually.
- Expanding the tools available to internists and non-peripheral vascular
experts.experts. Our intention is to provide a tool to internists and non-peripheral vascular experts, for whom it was previously impractical to conduct a blood flow measurement unless in a specialized vascular laboratory. For
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vascular specialists, FloChec™FloChec® does not require the use of blood pressure cuffs (which should not be used on some breast cancer patients), and measures without blood pressure in obese patients and patients with non-compressible, hard, calcified arteries. Currently, these patients often are unable to be measured satisfactorily with traditional analog ABI devices.
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- Developing additional
productsproduct and service offerings that allow healthcare providers tocapture the full reimbursement potentialdeliver cost-effective wellness and receive increased compensation for theirservices.services. Weare currently developingrecently received FDA 510(k) clearance of the next generation of our product, FloChec®, reflecting severalnew productsupdates and modifications to the original model that were developed in conjunction with our consultant engineeringgroups thatgroups. We areintendedalso exploring potential new product and service offerings. These product and service offerings are being designed to provide cost-effective wellness solutions for our growing, established customer base. The new products and service offerings under development ortothat may be developed may incorporate some of our current technology or new technology. The goal is to achieve a reputation for outstanding service and sell newcost effectivecost-effective wellness solutions to leverage our gains in the marketplace for such product offerings.
Risks Associated with Our Business
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- We have incurred significant losses since inception. There is no assurance that we will ever achieve or maintain
profitability.
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Ourindependent registered public accounting firm’s report for the year ended December 31, 2013 includes a “going concern” explanatory paragraph.
- If we do not successfully implement our business strategy, our business and results of operations will be adversely
affected.
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- We currently only have one product, FloChec
™®, that we market on a stand-alone basis, or incorporate into our multi-test platform, WellChec™;FloChec™neither FloChec® nor our multi-test platform WellChec™ maynotachieve broad market acceptance or be commerciallysuccessful.
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- Physicians may not widely adopt FloChec
™® unless they determine, based on experience, long-term clinical data and published peer reviewed journal articles, that the use ofFloChec™FloChec® provides a safe and effective alternative to other existing ABIdevices.
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- If healthcare providers and insurance plans are unable to obtain adequate
coverage andreimbursementeitherforprocedures performedpatient care based on health risk assessments done using our product orpatient care incorporating the use of our product,multi-test service platform, it is unlikely that our product or risk assessment platform will gain widespread acceptance.
- Our
product, FloChec™, is not specifically approved for reimbursement under any third-party payor codes; if third-party payors refuse to reimburse our customers for their use of our product, it could have a material adverse effect on our business.
We have limited experience marketing FloChec™, are dependent on our distribution partner and we may not be able to generate anticipated sales.
We face challenges and risk in managing and maintaining our distribution network and the partieswho make up that network.
To adequately commercialize FloChec™, we may need to increase our sales and marketing network, which will require us to hire, train, retain and supervise employees.
We do not require our customers to enter into long-term leases or maintenance contracts forFloChec™ and may therefore lose customers on short notice.
We rely heavily upon the talents of our Chief Executive Officer and Chief Operating Officer, theloss of either could severely damage our business.
We rely on a sole independent supplier and single facility for the manufacturing of FloChec™. Any delay or disruption in the supply of the product or facility, may negatively impact our operations.
Because we operate in an industry with significant product liability risk, and we may not besufficiently insured against this risk, we may be subject to substantial claims against our product.
We may implement a product recall or voluntary market withdrawal due to product defects orproduct enhancements and modifications, which would significantly increase our costs.
If we fail to properly manage our anticipated growth, our business could suffer.
Fluctuations in insurance cost and availability could adversely affect our profitability or our riskmanagement profile.
We will need to generate significant revenues to become and remain profitable.
Our future financial performance will depend in part on the successful improvements and softwareupdates to FloChec™ on a cost-effective basis.
We operate in an intensely competitive and rapidly changing business environment, and there is asubstantial risk our products could become obsolete or uncompetitive.
One of our business strategies is developing additional products that allow healthcare providers tocapture the full reimbursement potential for their services. The development of new products involves time and expense and we may never realize the benefits of this investment.
Our business is subject to many laws and government regulations governing the manufacture andsale of medical devices, including the FDA’s 510(k) clearance process.
The FDA may change its policies, adopt additional regulations, or revise existing regulations, inparticular relating to the 510(k) clearance process.
Our business is subject to unannounced inspections by FDA to determine our compliance withFDA requirements.
Although part of our business strategy is based on certain advantageous new payment provisionsenacted under the current government healthcare reform, we also face significant uncertainty in the industry regarding the implementation of the Health Care Reform Law.
Our business may be adversely impacted by the recent sequestration signed into law in the UnitedStates.
The applicable healthcare fraud and abuse laws and regulations, along with the increasedenforcement environment, may lead to an enforcement action targeting us, which could adversely affect our business.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective taxrates.
We are an “emerging growth company,” and the reduced disclosure requirements applicable toemerging growth companies may make our common stock less attractive to investors.
We will incur increased costs as a result of operating as a public company, and our managementwill be required to devote substantial time to new compliance initiatives and corporate governance practices.
We currently have material weaknesses in our internal control over financial reporting. If we areunable to successfully remediate these material weaknesses in our internal control over financial reporting, it could have an adverse effect on our company.
Our success largely depends on our ability to obtain and protect the proprietary information onwhich we base our product.
We may need to license intellectual property from third parties, and such licenses may not beavailable or may not be available on commercially reasonable terms.
We may be subject to claims by third parties asserting that our employees or we havemisappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Intellectual property litigation could cause us to spend substantial resources and distract ourpersonnel from their normal responsibilities.
If we are unable to protect the confidentiality of our trade secrets, our business and competitiveposition would be harmed.
After this offering, our executive officers, Directors and principal stockholders, if they choose toact together, will continue to have the ability to control all matters submitted to stockholders for approval.
Provisions in our corporate charter documents and under Delaware law could make an acquisitionof our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
If you purchase shares of common stock in this offering, you will suffer immediate dilution ofyour investment.
An active trading market for our common stock may not develop.
The price of our common stock may be volatile and fluctuate substantially, which could result insubstantial losses for purchasers of our common stock in this offering.
We have broad discretion in the use of the net proceeds from this offering and may not use themeffectively.
A significant portion of our total outstanding shares are eligible to be sold into the market in thenear future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeablefuture, capital appreciation, if any, will be your sole source of gain.
Corporate Information
We were foundedincorporated in Portland,the State of Oregon as an Oregon corporationon August 9, 2007, established C-corporation status in August 2007. In March 2012, we converted from an S-Corporation to a C-Corporation and in September 2013, we reincorporated as a Delaware corporation.corporation during 2013. Our principal executive offices are located at 2330 NW Everett St., Portland, OROregon 97210, and our telephone number is (877) 774-4211. Our website address is semlerscientific.com. Information contained in our website does not form part of the prospectus and is intended for informational purposes only.
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being permitted to provideonly two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
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reduced disclosure about our executive compensation arrangements;
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omitted compensation discussion and analysis;
not being required to comply with the auditor attestation requirements in the assessment of ourinternal control over financial reporting;
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