S-1/A 1 t1300803-s1a.htm AMENDMENT NO. 2 TO FORM S-1
As filed with the Securities and Exchange Commission on January 2 , 201 4
Registration No. 333-192362
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
Amendment No. 2 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
SEMLER SCIENTIFIC, INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
 
3845
 
 
26-1367393
 
 
(State or other jurisdiction
of incorporation or organization)
 
 
(Primary Standard Industrial
Classification Code Number)
 
 
(I.R.S. Employer
Identification No.)
 
2330 NW Everett St.
Portland, OR 97210
Telephone: (877) 774-4211
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)
Douglas Murphy-Chutorian, M.D.
Chief Executive Officer
Semler Scientific, Inc.
2330 NW Everett St.
Portland, OR 97210
Telephone: (877) 774-4211
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
 
 
Yvan-Claude Pierre, Esq.
Marianne C. Sarrazin, Esq.
Reed Smith LLP
599 Lexington Avenue
New York, NY 10022
Telephone: (212) 521-5400
Facsimile: (212) 521-5450
 
 
Brad L. Shiffman, Esq.
Blank Rome LLP
405 Lexington Avenue
New York, NY 10174
Telephone: (212) 930-9700
Facsimile: (212) 885-5001
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.
If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box:   
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering:   
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering:   
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering:   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer   
 
 
Accelerated filer                
 
 
Non-accelerated filer     (Do not check if smaller reporting company)
 
 
Smaller reporting company   
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
 
 

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 offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
 
 
PRELIMINARY PROSPECTUS
 
 
SUBJECT TO COMPLETION
 
 
DATED JANUARY 2 , 201 4
 
 
1,150,000 Shares
Common Stock
[MISSING IMAGE: t1300651_logo1.jpg]

 
This is a firm commitment initial public offering of 1,150,000 shares of common stock by Semler Scientific, Inc. No public market currently exists for our common stock. We anticipate that the initial public offering price of our common stock will be between $12.00 and $14.00 per share.
We have applied to list our common stock on The NASDAQ Capital Market under the symbol “SMLR.” No assurance can be given that our application will be approved.
We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and have elected to comply with certain reduced public company disclosure standards.
Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 11 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
 
 
 
Per Share
 
 
 
Total
 
 
Public offering price
 
 
$
               
 
 
$
               
 
 
Underwriting discounts and commissions(1)
 
 
$
 
 
$
 
 
Proceeds, before expenses, to us
 
 
$
 
 
$
 
 
(1)
  • The underwriters will receive compensation in addition to the underwriting discount. See “Underwriting” beginning on page 74 of this prospectus for a description of compensation payable to the underwriters.
We have granted the underwriters a 45-day option to purchase up to 172,500 additional shares of common stock solely to cover over-allotments, if any.
The underwriters expect to deliver the shares against payment therefor on or about            , 201 4 .
Aegis Capital Corp
           , 201 4

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TABLE OF CONTENTS
 
You should rely only on the information contained in this prospectus or in any free writing prospectus that we may specifically authorize to be delivered or made available to you. We have not, and the underwriters have not, authorized anyone to provide you with any 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 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 in any jurisdiction where the offer is not permitted.
For investors outside the United States: We have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of securities and the distribution of this prospectus outside the United States.


Prospectus Summary
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our securities, you should carefully read this entire prospectus, including our financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in each case included elsewhere in this prospectus. Unless otherwise stated or the context requires otherwise, references in this prospectus to “Semler Scientific,” “we,” “us,” or “our” refer to Semler Scientific, Inc.
Semler Scientific, Inc.
Business Overview
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 allow healthcare providers to capture full reimbursement potential for their services. Our first patented and U.S. Food and Drug Administration, or FDA, cleared product, is 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 received FDA 510(k) clearance in February 2010, we began Beta testing in the third quarter of 2010, and we began commercially leasing FloChec in January 2011. In the year ended December 31, 2012 we had total revenue of $1,199,000 and a net loss of $2,741,000 compared to $316,000 and $1,876,000, respectively, in 2011. In the first nine months of 2013 we had total revenue of $1,493,000 and a net loss of $1,707,000 compared to $772,000 and $2,085,000, respectively, in the same period in 2012. Our net loss attributable to common stockholders was $1,707,000 for the nine months ended September 30, 2013 compared to $2,170,000 for the same period 2012, and was $2,826,000 for the year ended December 31, 2012 as compared to $1,876,000 for 2011.
Our Product
We currently have only one patented and FDA cleared product, FloChec, that we market and lease 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:
[MISSING IMAGE: t1300651_flocheclr-col.jpg]

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 and No Flow Obstruction.
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
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Health Care Reform Law. The Health Care Reform Law has brought a new way of doing business for providers and health insurance plans. We believe that fee-for-service programs will be reduced in favor of capitated programs that pay a monthly fee per patient. 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 not that person seeks care. The amount of remuneration is based on the average expected health care 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 the fee per patient. 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 adjustments per patient will provide payment that is higher for sicker patients who have conditions that are codified. 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 14 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. 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. Published studies have shown that persons with PAD are four times more likely to die of heart attack, and two to 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.
We believe medical personnel who care for those older than 50 years are the target market for FloChec. 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 of 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. 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 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 that identify the risk profile of medical patients to allow healthcare providers to capture full reimbursement potential for their services, while growing revenues and becoming and maintaining profitability. We intend to do this by:
  • Capitalizing on opportunities provided by the Health Care Reform Law.   Under the Health Care Reform Law, for 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, there would be a perverse incentive for the provider to only want to care for healthy 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.
  • Targeting customers with patients at risk of developing PAD.   Healthcare providers use blood flow measurements as part of their assessment of a patient’s vascular condition. Our strategy is to keep marketing our FloChec system, on a lease-based service model, to 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 of the patients of whom will be more than 50 years old and at increased risk of developing PAD. Based on U.S. Census data, the evaluable patient population for 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.   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 vascular specialists, 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.
  • Developing additional products that allow healthcare providers to capture the full reimbursement potential for their services.   We are currently developing several new products in conjunction with our consultant engineering groups that are intended to provide cost-effective wellness solutions for our growing, established customer base. The new products under development or to be developed may incorporate some of our current technology or new technology. The goal is to achieve a reputation for outstanding service and sell new cost effective wellness solutions to leverage our gains in the marketplace for such product offerings.
Risks
Since inception, we have incurred substantial losses. Our business and our ability to execute our business strategy are subject to a number of risks of which you should be aware before you decide to buy our common stock. In particular, you should carefully consider the following risks, which are discussed more fully in “Risk Factors” beginning on page 11 of this prospectus.
  • We have incurred significant losses since inception. There is no assurance that we will ever achieve or maintain profitability.
  • If we do not successfully implement our business strategy, our business and results of operations will be adversely affected.
  • We currently only have one product, FloChec; FloChec may not achieve broad market acceptance or be commercially successful.
  • 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 of FloChec provides a safe and effective alternative to other existing ABI devices.
  • If healthcare providers are unable to obtain adequate coverage and reimbursement either for procedures performed using our product or patient care incorporating the use of our product, it is unlikely that our product 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 parties who 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 for FloChec and may therefore lose customers on short notice.


  • We rely heavily upon the talents of our Chief Executive Officer and Chief Operating Officer, the loss 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 be sufficiently 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 or product 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 risk management 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 software updates to FloChec on a cost-effective basis.
  • We operate in an intensely competitive and rapidly changing business environment, and there is a substantial risk our products could become obsolete or uncompetitive.
  • One of our business strategies is developing additional products that allow healthcare providers to capture 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 and sale of medical devices, including the FDA’s 510(k) clearance process.
  • The FDA may change its policies, adopt additional regulations, or revise existing regulations, in particular relating to the 510(k) clearance process.
  • Our business is subject to unannounced inspections by FDA to determine our compliance with FDA requirements.
  • Although part of our business strategy is based on certain advantageous new payment provisions enacted 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 United States.
  • The applicable healthcare fraud and abuse laws and regulations, along with the increased enforcement 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 tax rates.
  • We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging 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 management will 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 are unable 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 on which we base our product.
  • We may need to license intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.
  • We may be subject to claims by third parties asserting that our employees or we have misappropriated 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 our personnel from their normal responsibilities.
  • If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
  • After this offering, our executive officers, Directors and principal stockholders, if they choose to act 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 acquisition of 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 of your 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 in substantial 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 them effectively.
  • A significant portion of our total outstanding shares are eligible to be sold into the market in the near 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 foreseeable future, capital appreciation, if any, will be your sole source of gain.
Corporate Information
We were founded in Portland, Oregon as an Oregon corporation 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. Our executive offices are located at 2330 NW Everett St., Portland, OR 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.
Implications of Being an Emerging Growth Company
As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from specified disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:
  • being permitted to provide only 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;


  • not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
  • not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
  • reduced disclosure obligations regarding executive compensation; and
  • exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We may take advantage of these provisions, including the extended adoption period for new or revised accounting pronouncements described below, for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700.0 million in market value of our capital stock held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. Even if we cease to be an emerging growth company, we may still enjoy reduced reporting obligations insofar as we remain a smaller reporting company. As an emerging growth company, we may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of some reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. However, if we later decide to opt out of the extended period for adopting new accounting standards, we would need to disclose such decision and it would be irrevocable.


THE OFFERING
Common Stock offered by us
1,150,000 shares.
Common stock to be outstanding immediately after this offering
4,804,993 shares. If the underwriter’s over-allotment option is exercised in full, the total number of shares of common stock outstanding immediately after this offering would be 4,977,493.
Over-allotment option
The underwriters have an option for a period of 45 days to purchase up to 172,500 additional shares of our common stock to cover over-allotments, if any.
Use of proceeds
We intend to use the net proceeds received from this offering for working capital and general corporate purposes. See “Use of Proceeds” on page 28.
Risk factors
See “Risk Factors” beginning on page 11 and the other information included in this prospectus for a discussion of factors you should carefully consider before investing in our securities.
Proposed Symbol and Listing
We have applied to list our common stock on The NASDAQ Capital Market under the symbol “SMLR.”
Unless we indicate otherwise, all information in this prospectus:
  • is based on 786,750 shares of common stock issued and outstanding as of December  31 , 2013;
  • assumes the automatic conversion into 2,012,152 shares of common stock of all of our outstanding shares of convertible preferred stock effective upon the closing of this offering;
  • assumes the cashless exercise of outstanding warrants for 228,656 shares of our Series A-1 Preferred Stock and 1,067,210 shares of our Series A Preferred Stock in accordance with their terms, all of which shares of convertible preferred stock will be automatically converted into shares of our common stock, resulting in the issuance of an aggregate of 856,091 shares of common stock effective upon the closing of this offering assuming an offer price of $13.00 per share (which is the mid-point of the range set forth on the cover page of this prospectus);
  • excludes 288,214 shares of common stock issuable upon exercise of outstanding warrants to acquire 25,000 shares of our Series A-2 Preferred Stock at a purchase price of $2.00 per share, 16,875 shares of our Series A-1 Preferred Stock at a purchase price of $4.00 per share, and 246,339 shares of our Series A Preferred Stock at a purchase price of $4.50 per share, which will become exercisable for common stock rather than convertible preferred stock upon closing of this offering in accordance with their terms;
  • assumes no exercise by the underwriters of their option to purchase up to an additional 172,500 shares of common stock to cover over-allotments, if any; and
  • excludes 57,500 shares of common stock underlying the warrants to be issued to the underwriters in connection with this offering.


SUMMARY FINANCIAL DATA
The following table sets forth our summary statement of operations data for the fiscal years ended December 31, 2012 and 2011 derived from our audited financial statements and related notes included elsewhere in this prospectus. The summary financial data for the nine months ended September 30, 2013 and 2012, and as of September 30, 2013, are derived from our unaudited financial statements appearing elsewhere in this prospectus and are not indicative of results to be expected for the full year. Our financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States. The results indicated below are not necessarily indicative of our future performance. You should read this information together with the sections entitled “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.
 
 
 
 
 
(unaudited)
Nine Months Ended September 30,
 
 
 
 
Year Ended December 31,
 
 
 
 
 
 
2013
 
 
 
2012
 
 
 
2012
 
 
 
2011
 
 
Revenue
 
 
$
1,493,000
 
 
$
772,000
 
 
$
1,199,000
 
 
$
316,000
 
 
Operating expenses:
 
                    
 
Cost of revenue
 
 
 
276,000
 
 
 
232,000
 
 
 
364,000
 
 
 
145,000
 
 
Engineering and product development
 
 
 
254,000
 
 
 
220,000
 
 
 
277,000
 
 
 
246,000
 
 
Sales and marketing
 
 
 
1,585,000
 
 
 
1,312,000
 
 
 
1,718,000
 
 
 
647,000
 
 
General and administrative
 
 
 
958,000
 
 
 
995,000
 
 
 
1,255,000
 
 
 
1,057,000
 
 
Total
 
 
 
3,073,000
 
 
 
2,759,000
 
 
 
3,614,000
 
 
 
2,095,000
 
 
Loss from operations
 
 
 
(1,580,000
)
 
 
 
(1,987,000
)
 
 
 
(2,415,000
)
 
 
 
(1,779,000
)
 
 
Other Income (expenses)
 
                    
 
Interest expense
 
 
 
(83,000
)
 
 
 
(90,000
)
 
 
 
(120,000
)
 
 
 
(64,000
)
 
 
Other expense
 
 
 
(34,000
)
 
 
 
(3,000
)
 
 
 
(203,000
)
 
 
 
(31,000
)
 
 
Loss before income tax expense
 
 
 
(1,697,000
)
 
 
 
(2,080,000
)
 
 
 
(2,738,000
)
 
 
 
(1,874,000
)
 
 
Income tax expense
 
 
 
10,000
 
 
 
5,000
 
 
 
3,000
 
 
 
2,000
 
 
Net loss
 
 
$
(1,707,000
)
 
 
$
(2,085,000
)
 
 
$
(2,741,000
)
 
 
$
(1,876,000
)
 
 
Deemed dividend
 
 
 
 
 
 
(85,000
)
 
 
 
(85,000
)
 
 
 
 
 
Net loss attributable to common stockholders
 
 
$
(1,707,000
)
 
 
$
(2,170,000
)
 
 
$
(2,826,000
)
 
 
$
(1,876,000
)
 
 
Net loss per share, basic and diluted
 
 
$
(2.17
)
 
 
$
(1.77
)
 
 
$
(2.54
)
 
 
$
(1.40
)
 
 
Weighted average share outstanding
 
 
 
786,750
 
 
 
1,223,777
 
 
 
1,113,622
 
 
 
1,341,629
 
 
Weighted average number of shares excluded in basic and diluted net loss per share:
 
                    
 
Convertible preferred stock
 
 
 
1,480,042
 
 
 
226,790
 
 
 
542,678
 
 
 
 
 
Preferred stock warrants
 
 
 
1,285,839
 
 
 
196,617
 
 
 
471,161
 
 
 
 
 
Common stock warrants
 
 
 
 
 
 
227,493
 
 
 
170,152
 
 
 
175,963
 
 
Options
 
 
 
337,500
 
 
 
259,112
 
 
 
267,758
 
 
 
212,505
 
 
Total
 
 
 
3,103,381
 
 
 
910,012
 
 
 
1,451,749
 
 
 
388,468
 


 
 
 
 
 
As of September 30, 2013
 
 
 
 
 
 
Actual
 
 
 
Pro Forma(1)(3)
 
 
 
Pro Forma,
As Adjusted(2)(3)
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
$
1,504,000
 
 
$
1,504,000
 
 
$
14,325,000
 
 
Total assets
 
 
 
2,382,000
 
 
 
2,382,000
 
 
 
15,203,000
 
 
Total liabilities
 
 
 
1,963,000
 
 
 
1,963,000
 
 
 
1,963,000
 
 
Total stockholders’ equity
 
 
 
419,000
 
 
 
419,000
 
 
 
13,240,000
 
 
(1)
  • Pro forma amounts give effect to the issuance of 2,868,243 shares of common stock upon the closing of this offering reflecting (i) the automatic conversion into 2,012,152 shares of common stock of all our outstanding shares of convertible preferred stock and (ii) the issuance of 856,091 shares of common stock upon the cashless exercise at the assumed initial public offering price of $13.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) of outstanding warrants for convertible preferred stock and subsequent automatic conversion of that convertible preferred stock into common stock.
(2)
  • The pro forma as adjusted balance sheet data reflects the items described in footnote (1) above and gives effect to our receipt of estimated net proceeds from the sale of 1,150,000 shares of common stock at an assumed initial public offering price of $13.00 per share, the midpoint of the price range on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share would increase (decrease) each of cash and cash equivalents, working capital, total assets, additional paid-in capital, and total stockholders’ equity by $1,058,000, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.
(3)
  • The pro forma and pro forma as adjusted data are illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

Risk Factors
Any investment in our securities involves a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in this prospectus before deciding whether to purchase our common stock. Our business, financial condition or results of operations and trading price or value of our securities could be materially adversely affected by these risks if any of them actually occur. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this prospectus.
Risks Related to our Business
We have incurred significant losses since inception. There is no assurance that we will ever achieve or maintain profitability.
Since inception, we have incurred significant operating losses. Our net loss was $1,707,000 for the nine months ended September 30, 2013 compared to $2,085,000 for the nine months ended September 30, 2012, and $2,741,000 for the year ended December 31, 2012 compared to $1,876,000 for the year ended December 31, 2011. Our net loss attributable to common stockholders was $1,707,000 for the nine months ended September 30, 2013 compared to $2,170,000 for the same period 2012, and was $2,826,000 for the year ended December 31, 2012 as compared to $1,876,000 for 2011. As of September 30, 2013, we had an accumulated deficit of $8,826,000. To date, we have financed our operations primarily through private placements of our equity securities and, to a limited extent, bank financing. In the current economic environment, financing for technology and medical device companies has become increasingly difficult to obtain. Additional financing may not be available in the amount that we need or on terms favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of us by our stockholders would be diluted. In addition, in order to raise additional funds we may have to issue equity or debt securities that have rights, preferences and privileges senior to our existing securities. We have devoted substantially all of our financial resources and efforts to research and development and marketing of our FloChec system. There can be no assurance that we will be able to achieve or maintain profitability.
If we do not successfully implement our business strategy, our business and results of operations will be adversely affected.
Our business strategy was formed based on assumptions about the peripheral arterial disease, or PAD, market that might prove wrong. We believe that various demographics and industry-specific trends, including the aging of the general population, growth of capitated payment programs, numbers of undiagnosed patients with PAD and the importance of codifying vascular disease will help drive growth in the PAD market and our business. However, these demographics and trends, and our assumptions about them, are uncertain. Actual demand for our product could differ materially from projected demand if our assumptions regarding these factors prove to be incorrect or do not materialize, or if alternatives to FloChec gain widespread acceptance.
In addition, we may not be able to successfully implement our business strategy. To implement our business strategy we need to, among other things, find new applications for and improve FloChec and educate healthcare providers about the clinical and cost benefits of our product, all of which we believe could increase acceptance of our product by physicians. In addition, we are seeking to increase our sales and, in order to do so, will need to expand our direct and distributor sales forces in existing and new territories, all of which could result in our becoming subject to additional or different regulatory requirements, with which we may not be able to comply. Moreover, even if we successfully implement our business strategy, our operating results may not improve or may decline. We may decide to alter or discontinue aspects of our business strategy and may adopt different strategies due to business or competitive factors not currently foreseen, such as new medical technologies that would make our product obsolete. Any delay or failure to implement our business strategy may adversely affect our business, results of operations and financial condition.

We currently only have one product, FloChec; FloChec may not achieve broad market acceptance or be commercially successful.
We currently only have one product. Accordingly, we expect that revenues from FloChec will account for the vast majority of our revenues for at least the next several years. FloChec may not gain broad market acceptance unless we continue to convince physicians of its benefits. Moreover, even if physicians understand the benefits of FloChec, they still may elect not to use FloChec for a variety of reasons, such as the familiarity of the physician with other devices and approaches. We may not be successful in gaining market acceptance of a technique measuring comparative blood flows using our proprietary algorithm to indicate flow obstruction as opposed to existing techniques that measure comparative blood pressures using well-accepted criteria to indicate flow obstruction, or imaging techniques that visualize anatomy of the arteries. Physicians may also object to renting an examining tool with on-going monthly payments rather than making a one-time capital purchase, or be reluctant to pay monthly fees for tools in the examining room when they have many such tools, such as thermometer and stethoscope, that only required one-time minimal purchases.
If physicians do not perceive FloChec as an attractive alternative to other products, procedures and techniques, we will not achieve significant market penetration or be able to generate significant revenues. To the extent that FloChec is not commercially successful or is withdrawn from the market for any reason, our revenues will be adversely impacted, and our business, operating results and financial condition will be harmed.
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 of FloChec provides a safe and effective alternative to other existing ABI devices.
We believe that physicians will not widely adopt FloChec unless they determine, based on experience, long-term clinical data and published peer reviewed journal articles, that the use of FloChec provides a safe and effective alternative to other existing ABI devices.
We cannot provide any assurance that the data collected from our past, current and any future clinical trials will be sufficient to demonstrate that FloChec is an attractive alternative to other ABI devices or procedures. If we fail to demonstrate safety and efficacy that is at least comparable to other ABI devices that are available on the market, our ability to successfully market FloChec will be significantly limited. Even if the data collected from clinical studies or clinical experience indicate positive results, each physician’s actual experience with FloChec will vary. We also believe that published per-reviewed journal articles and recommendations and support by influential physicians regarding FloChec will be important for market acceptance and adoption, and we cannot assure you that we will receive these recommendations and support, or that supportive articles will be published. Accordingly, there is a risk that FloChec may not be adopted by many physicians, which would negatively impact our business, financial condition and results of operations.
If healthcare providers are unable to obtain adequate coverage and reimbursement either for procedures performed using our product or patient care incorporating the use of our product, it is unlikely that our product will gain widespread acceptance.
Maintaining and growing revenues from FloChec depends on the availability of adequate coverage and reimbursement from third-party payors, including government programs such as Medicare and Medicaid, private insurance plans and managed care programs. Healthcare providers that use medical devices such as FloChec to test their patients generally rely on third-party payors to pay for all or part of the costs and fees associated with the procedures performed with these devices, or to compensate them for their patient care services. The existence of adequate coverage and reimbursement for the procedures or patient care performed with FloChec by government and private insurance plans is central to the acceptance of FloChec and any future products. During the past several years, third-party payors have undertaken cost-containment initiatives including different payment methods, monitoring healthcare expenditures, and anti-fraud initiatives. We may not be able to achieve or maintain profitability if third-party payors deny coverage or reduce their current levels of payment, or if our costs of production increase faster than increases in reimbursement levels. Further, many private payors use coverage decisions

and payment amounts determined by the Centers for Medicare and Medicaid Services, or CMS, which administers the Medicare program, as guidelines in setting their coverage and reimbursement policies. Future action by CMS or other government agencies may diminish payments to physicians, outpatient centers and/or hospitals. Those private payors that do not follow the Medicare guidelines may adopt different coverage and reimbursement policies for procedures or patient care performed with FloChec. For some governmental programs, such as Medicaid, coverage and reimbursement differ from state to state, and some state Medicaid programs may not pay an adequate amount for the procedures or patient care performed with FloChec if any payment is made at all. As the portion of the U.S. population over the age of 65 and eligible for Medicare continues to grow, we may be more vulnerable to coverage and reimbursement limitations imposed by CMS. Furthermore, the healthcare industry in the United States has experienced a trend toward cost containment as government and private insurers seek to control healthcare costs by imposing lower payment rates and negotiating reduced contract rates with service providers. Therefore, we cannot be certain that the procedures or patient care performed with our product will be reimbursed at a cost-effective level.
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.
Our product, FloChec, is purchased by healthcare providers, who bill various third-party payors, including governmental healthcare programs, such as Medicare and Medicaid, private insurance plans and managed care programs for procedures in which FloChec is used. Reimbursement is a significant factor considered by healthcare providers in determining whether to acquire medical devices or systems such as FloChec. Although 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 (such that reimbursement is not sought), we cannot control whether or not providers who use FloChec will seek reimbursement. Therefore, our ability to successfully commercialize FloChec could depend on the adequacy of coverage and reimbursement from these third-party payors.
Currently, FloChec is not specifically approved for any particular reimbursement code. Although most of our customers report being covered and reimbursed by third-party payors consistently for procedures using a variety of different reimbursement codes, there is a risk that third-party payors may disagree with the reimbursement under a particular code. In addition, some potential customers have deferred renting our product given the uncertainty regarding reimbursement. We do not track denial of requests for reimbursement made by the users of our product. It is our belief that such denials have occurred and might occur in the future with more or less frequency. Even if our product and procedures are often currently covered and reimbursed by third-party payors and Medicare, problems for customers to receive reimbursement or adverse changes in payors’ coverage and reimbursement policies that affect our product could harm our ability to market FloChec. Obtaining approval for a particular reimbursement code is timely and can be costly. Accordingly, at this time, and given the way we intend FloChec to be used, we do not intend to pursue formal approval for FloChec for any particular code.
Moreover, we are unable to predict what changes will be made to the reimbursement methodologies used by third-party payors. We cannot be certain that under current and future payment systems, in which healthcare providers may be reimbursed a set amount based on the type of procedure performed, such as those utilized by Medicare and in many privately managed care systems, the cost of our product will be justified and incorporated into the overall cost of the procedure.
We have limited experience marketing FloChec and may not be able to generate anticipated sales.
Because we launched FloChec in the first quarter of 2011, we have limited experience marketing our product. As of December  31 , 2013, our U.S. sales force consisted of 5 exclusive sales representatives. In August 2012, we signed a co-exclusive supply and distribution agreement with Bard Peripheral Vascular, Inc., a large medical device company, to distribute FloChec. Our operating results are directly dependent upon our sales and marketing efforts and to a lesser extent, the efforts of our co-exclusive contract distributor. While we expect our sales representatives and our co-exclusive contract distributor to develop long-lasting relationships with the physicians and healthcare providers they serve and provide services in

accordance with our standards. However, we do not control our co-exclusive contract distributor, and it operates and oversees its own daily operations. There is a risk that our co-exclusive contract distributor will not always act consistent with our best interests. If our co-exclusive contract distributor fails to adequately promote and market FloChec, our revenues could decrease and we might not be able to achieve or maintain profitability and it could have a material adverse effect on our business and financial condition.
We face challenges and risk in managing and maintaining our distribution network and the parties who make up that network.
We face significant challenges and risks in managing our distribution network and retaining the parties who make up that network. If any of our direct sales representatives were to leave us, or if our distributor were to cease to do business with us, our sales could be adversely affected. Our co-exclusive distributor accounted for less than 20% of our revenue for the year ended December 31, 2012 and nine months ended September 30, 2013. If our co-exclusive distributor were to cease to distribute our product, it would slow down our efforts to gain widespread market acceptance of FloChec. Although we have a good relationship with our co-exclusive distributor and have no reason to believe that our current contract will not be renewed when it expires at the end of 2014, or that our co-exclusive distributor will terminate our arrangement prior to expiration (which it is permitted to do upon 90 days’ notice under our contract), we may need to seek out alternatives, such as increasing our direct sales force or contracting with external independent sales representatives or enter another distributor relationship. There is no guarantee that we would be successful in our efforts to find independent sales representatives or another large distributor, or that we would be able to negotiate contract terms favorable to us. Failure to hire or retain qualified direct sales representatives or independent distributors would prevent us from expanding our business and generating revenues, which would have a material adverse effect on our ability to achieve or maintain profitability.
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.
If we increase our marketing efforts with respect to FloChec, or launch new products we will need to expand the reach of our marketing and sales network. Our future success will depend largely on our ability to continue to hire, train, retain and motivate skilled direct sales representatives, independent sales representatives or distributors with significant technical knowledge about our product. New hires require training, supervision and take time to achieve full productivity. If we fail to train and supervise new hires adequately, or if we experience high turnover in our sales force in the future, we cannot be certain that new hires will become as productive as may be necessary to maintain or increase our sales. If we are unable to expand our sales and marketing capabilities, we may not be able to effectively commercialize FloChec which would adversely affect our business, results of operations and financial condition.
We do not require our customers to enter into long-term leases or maintenance contracts for FloChec and may therefore lose customers on short notice.
Our business is based on a service model rather than an outright sale of our FloChec product. Our service model pricing is based on data collected on use rates of FloChec and third-party payment rates to physicians and facilities using our product. We require no down payment, long-term commitment or maintenance contract or fees from our customers and replace damaged products free of charge in the service model. If we lose current customers on short notice, we may not be able to find new customers to replace them with in a timely manner and that could adversely affect our business, results of operations and financial condition. In addition, our business model of replacing damaged products free of charge may prove to be costly and affect the profitability of our service model.
We rely heavily upon the talents of our Chief Executive Officer and Chief Operating Officer, the loss of either could severely damage our business.
Our performance depends to a large extent on a small number of key scientific, technical, managerial and marketing personnel. In particular, we believe our success is highly dependent upon the services and reputation of our Chief Executive Officer, Dr. Douglas Murphy-Chutorian, and our Chief Operating Officer, Robert G. McRae. Dr. Murphy-Chutorian and Mr. McRae each provide highly valuable

contributions in instituting a strong focus of specification methods, test method development and improved product quality. In particular, Mr. McRae has defined our product development pipeline and budget, provided design controls and enhanced the customer support functions. Although we have key man insurance for Mr. McRae, we do not have such insurance for Dr. Murphy-Chutorian. The loss of either Dr. Murphy-Chutorian or Mr. McRae’s services could still severely damage our business prospects, which could have a material adverse effect on our financial condition and results of operations.
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.
We manufacture our product, FloChec, through a sole independent contractor. The loss or disruption of our relationships with outside vendors could subject us to substantial delays in the delivery of our product to customers. Significant delays in the delivery of our product could result in possible cancellation of orders and the loss of customers. Although we expect our vendor to comply with our contract terms, we do not have control over our vendor. Our inability to provide a product that meets delivery schedules could have a material adverse effect on our reputation in the industry, which could have a material adverse effect on our financial condition and results of operations.
Further, we manufacture FloChec through this sole contract manufacturer in one single facility. If an event occurred that resulted in material damage to this manufacturing facility or our manufacturing contractor lacked sufficient labor to fully operate the facility, we may be unable to transfer the manufacture of FloChec to another facility or location in a cost-effective or timely manner, if at all. This potential inability to transfer production could occur for a number of reasons, including but not limited to a lack of necessary relevant manufacturing capability at another facility, or the regulatory requirements of the FDA or other governmental regulatory bodies. Even if there are many qualified contract manufacturers available around the country and our product is relatively easy to manufacture, such an event could have a material adverse effect on our financial condition and results of operations.
Because we operate in an industry with significant product liability risk, and we may not be sufficiently insured against this risk, we may be subject to substantial claims against our product.
The development, manufacture and sale of products used in a medical setting entails significant risks of product liability claims. Although we maintain product liability insurance to cover us in the event of liability claims, and as of the date of this prospectus, no such claims have been asserted or threatened against us, our insurance may not be sufficient to cover all possible future product liabilities. Accordingly, we may not be adequately protected from any liabilities, including any adverse judgments or settlements, we might incur in connection with the development, clinical testing, manufacture and sale of our product. A successful product liability claim or series of claims brought against us that result in an adverse judgment against or settlement by us in excess of any insurance coverage could seriously harm our financial condition or reputation. Moreover, even if no judgments, fines, damages or liabilities are imposed on us, our reputation could suffer, which could have a material adverse effect on our business, financial condition and results of operations. In addition, product liability insurance is expensive and may not always be available to us on acceptable terms, if at all.
We may implement a product recall or voluntary market withdrawal due to product defects or product enhancements and modifications, which would significantly increase our costs.
The manufacturing and marketing of FloChec and any future products that we may develop involves an inherent risk that our products may prove to be defective. In that event, we may voluntarily implement a recall or market withdrawal or may be required to do so by a regulatory authority. A recall of FloChec or one of our future products, or a similar product manufactured by another manufacturer, could impair sales of the products we market as a result of confusion concerning the scope of the recall or as a result of the damage to our reputation for quality and safety.
If we fail to properly manage our anticipated growth, our business could suffer.
Our growth has placed, and will continue to place, a significant strain on our management and on our operational and financial resources and systems. Failure to manage our growth effectively could cause us to over-invest or under-invest, and result in losses or weaknesses. Additionally, our anticipated growth will

increase the demands placed on our supplier, resulting in an increased need for us to carefully monitor for quality assurance. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.
Fluctuations in insurance cost and availability could adversely affect our profitability or our risk management profile.
We hold a number of insurance policies, including product liability insurance, directors’ and officers’ liability insurance, and workers’ compensation insurance. If the costs of maintaining adequate insurance coverage increase significantly in the future, our operating results could be materially adversely affected. Likewise, if any of our current insurance coverage should become unavailable to us or become economically impractical, we would be required to operate our business without indemnity from commercial insurance providers. If we operate our business without insurance, we could be responsible for paying claims or judgments against us that would have otherwise been covered by insurance, which could adversely affect our results of operations or financial condition.
We will need to generate significant revenues to become and remain profitable.
We intend to increase our operating expenses substantially as we add sales representatives to increase our geographic sales coverage, increase our marketing capabilities, pursue research and new product development and increase our general and administrative functions to support our growing operations. We will need to generate significant sales to achieve and maintain profitability and we might not be able to do so. Even if we do generate significant sales, we might not be able to become profitable or sustain or increase profitability on a quarterly or annual basis in the future. If our sales grow more slowly than we anticipate or if our operating expenses exceed our expectations, our financial performance will likely be adversely affected.
Our future financial performance will depend in part on the successful improvements and software updates to FloChec on a cost-effective basis.
Our future financial performance will depend in part on our ability to influence, anticipate, identify and respond to changing consumer preferences and needs and the technologies relating to the care and treatment of vascular problems. We can provide no assurances that FloChec will achieve significant commercial success as in the past and that it will gain meaningful market share. We may not correctly anticipate or identify trends in consumer preferences or needs, or may identify them later than competitors do. In addition, difficulties in manufacturing or in obtaining regulatory approvals may delay or prohibit improvements to FloChec. Further, we may not be able to develop improvements and software updates to FloChec at a cost that allows us to meet our goals for profitability. Service costs relating to our product may be greater than anticipated, rentals may be returned prior to the end of the lease term, and we may be required to devote significant resources to address any quality issues associated with FloChec.
Failure to successfully introduce improve or update FloChec on a cost-effective basis, or delays in customer decisions related to the evaluation of FloChec could cause us to lose market acceptance and could materially adversely affect our business, financial condition and results of operations.
We operate in an intensely competitive and rapidly changing business environment, and there is a substantial risk our products could become obsolete or uncompetitive.
The market for medical systems, equipment and other devices is highly competitive. We compete with many medical service companies in the United States and internationally in connection with FloChec and products under development. We face competition from numerous companies in the diagnostic area, as well as competition from academic institutions, government agencies and research institutions. Most of our current and potential competitors have, and will continue to have, substantially greater financial, technological, research and development, regulatory and clinical, manufacturing, marketing and sales, distribution and personnel resources than we do. There can be no assurance that we will have sufficient resources to successfully commercialize FloChec or any other future products that we may develop, if and when they are approved for sale or lease. Our future success will depend largely upon our ability to anticipate and keep pace with developments and advances. Current or future competitors could develop

alternative technologies or products that are more effective, easier to use or more economical than what we or any potential licensee develop. If our technologies or products become obsolete or uncompetitive, our related product sales and licensing revenue would decrease. This would have a material adverse effect on our business, financial condition and results of operations.
One of our business strategies is developing additional products that allow healthcare providers to capture 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.
As part of our business strategy, we intend to develop additional products that allow healthcare providers to capture the full reimbursement potential for their services. Such product development may require substantial investments and we may commit significant resources and time before knowing whether our efforts will translate into profits for our company. It is possible that our development efforts will not be successful and that we will not be able to develop new products, or if developed that such products will obtain the necessary regulatory approvals for commercialization. Even if approved, there is no guarantee that such products will achieve market acceptance and we may never realize the benefits of any investment in this strategy.
Risks Related to our Legal and Regulatory Environment
Our business is subject to many laws and government regulations governing the manufacture and sale of medical devices, including the FDA’s 510(k) clearance process.
FloChec and any future are medical devices that we may develop are subject to extensive regulation in the United States by the federal government, including by the FDA. The FDA regulates virtually all aspects of a medical device’s design, development, testing, manufacturing, labeling, storage, record keeping, adverse event reporting, sale, promotion, distribution and shipping. We must report to the FDA when evidence suggests that one of our devices may have caused or contributed to death or serious injury or has malfunctioned and the device or a similar device would be likely to cause or contribute to death or serious injury if the malfunction were to recur. If such adverse event occurred, we could incur substantial expense and harm to our reputation and our business and results of operations could be adversely affected.
Before a new medical device can be marketed in the United States, it must first receive either premarket approval or 510(k) clearance from the FDA, unless an exemption exists. The same rule applies when a manufacturer plans to market a medical device for a new use. The process can be costly and time-consuming. The FDA is expected to respond to a section 510(k) notification in 90 days, but often takes much longer. The premarket approval process usually takes six months to three years, but may take longer. We cannot assure that any new medical devices or new use for FloChec that we develop will be cleared or approved in a timely or cost-effective manner, if cleared or approved at all. Even if such devices are cleared or approved, the products may not be cleared or approved for all indications. Because medical devices may only be marketed for cleared or approved indications, this could significantly limit the market for that product and may adversely affect our results of operations.
FloChec was cleared through the 510(k) clearance process in February 2010. However, any modification to a cleared 510(k) device that could significantly affect its safety or efficacy, or that would constitute a significant change in its intended use, will require a new clearance process. The FDA requires device manufacturers to make their own determination regarding whether a modification requires a new clearance; however, the FDA can review and invalidate a manufacturer’s decision not to file for a new clearance. We cannot guarantee that the FDA will agree with our decisions not to seek clearances for particular device modifications or that we will be successful in obtaining 510(k) clearances for modifications. Any such additional clearance processes with the FDA could delay our ability to market a modified product and may adversely affect our results of operations.
The FDA may change its policies, adopt additional regulations, or revise existing regulations, in particular relating to the 510(k) clearance process.
The FDA also may change its policies, adopt additional regulations, or revise existing regulations, each of which could prevent or delay premarket approval or 510(k) clearance of a device, or could impact our ability to market our currently cleared device. We anticipate significant changes in the near future that will

affect the way the 510(k) clearance program will operate. On August 3, 2010, the FDA released for public comment two internal working group reports with numerous recommendations to improve the 510(k) clearance process and utilize science in regulatory decision making to encourage innovation yet maintain predictability of the clearance process. In July, 2011, the Institute of Medicine, which was asked by the FDA to evaluate and make recommendations on the 510(k) clearance program, released its report entitled “Medical Devices and the Public’s Health, The FDA 510(k) Clearance Process.” The report contained numerous and broad recommendations that, if followed, will have a significant impact on the medical device industry. Also in July, 2011, the FDA issued a draft guidance titled “510(k) Device Modifications: Deciding When to Submit a 510(k) for a Change to an Existing Device.” This draft guidance document was withdrawn on July 17, 2012 in accordance with Section 510(n)(2)(B) of the Federal Food, Drug, and Cosmetic Act as amended by the Food and Drug Administration Safety and Innovation Act. An existing 1997 guidance on the same topic therefore remains in effect, but any future reforms could require us to file new 510(k) clearances and could increase the total number of 510(k) clearance to be filed. We cannot predict what effect these reforms will have on our ability to obtain 510(k) clearances in a timely manner. We also cannot predict the nature of other regulatory reforms and their resulting effects on our business.
Our business is subject to unannounced inspections by FDA to determine our compliance with FDA requirements.
FDA inspections can result in inspectional observations on FDA’s Form-483, warning letters or other forms of more significant enforcement action. More specifically, if FDA concludes that we are not in compliance with applicable laws or regulations, or that FloChec or any future medical device we develop is ineffective or pose an unreasonable health risk, the FDA could:
  • require us to notify health professionals and others that our devices present unreasonable risk of substantial harm to public health;
  • order us to recall, repair, replace or refund the cost of any medical device that we manufactured or distributed;
  • detain, seize or ban adulterated or misbranded medical devices;
  • refuse to provide us with documents necessary to export our product;
  • refuse requests for 510(k) clearance or premarket approval of new products or new intended uses;
  • withdraw 510(k) clearances that are already granted;
  • impose operating restrictions, including requiring a partial or total shutdown of production;
  • enjoin or restrain conduct resulting in violations of applicable law pertaining to medical devices; and/or
  • assess criminal or civil penalties against our officers, employees or us.
If the FDA concludes that we failed to comply with any regulatory requirement during an inspection, it could have a material adverse effect on our business and financial condition. We could incur substantial expense and harm to our reputation, and our ability to introduce new or enhanced products in a timely manner could be adversely affected.
Although part of our business strategy is based on certain advantageous new payment provisions enacted under the current government healthcare reform, we also face significant uncertainty in the industry regarding the implementation of the Health Care Reform Law.
Political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. In March 2010, President Obama signed into law the Health Care Reform Law. The Health Care Reform Law has brought a new way of doing business for providers and health insurance plans. We believe that fee for service programs will be reduced in favor of capitated programs that pay a monthly fee per patient. Risk factor adjustments per patient will provide payment that is higher for sicker patients who have conditions that are codified. Quality of care measured by completeness and wellness will induce higher payments per patient. These changes are already in place for 14 million participants in the Medicare

Advantage program and are expected to expand to more types of insured patients as healthcare reform is deployed. Although we expect these measures to be mainly positive for our business given the ability of FloChec to measure blood flow in an in-office setting, which can assist doctors and other providers to suspect PAD and other vascular diseases, due to uncertainties regarding the ultimate features of the new federal legislation and its implementation, we cannot predict what impact the Health Care Reform Law may have on us, our customers or our industry. If the Health Care Reform Law is not implemented as we anticipate, or if changes are made in the implementation of the Health Care Reform Law such that there are no incentives for identifying sicker patients, it would negatively affect our business prospects and strategy, and could materially adversely affect our business, financial condition and results of operations.
In addition, the Health Care Reform Law imposes a 2.3% excise tax on the sale, lease, rental or use of any taxable human medical device after December 31, 2012, subject to certain exclusions, by the manufacturer, producer or importer of such device. Generally, the lease of a taxable medical device by the manufacturer will be treated as a sale for purposes of the medical device excise tax, and the medical device excise tax will be imposed on the portion of the lease payment that relates to the use of the taxable medical device (subject to limitation in certain circumstances). The total cost to the industry is expected to be approximately $30 billion over ten years. This new and significant tax burden could have a negative impact on our results of our operations. Further, the Health Care Reform Act encourages hospitals and physicians to work collaboratively through shared savings programs, such as accountable care organizations, as well as other bundled payment initiatives, which may ultimately result in the reduction of medical device acquisitions and the consolidation of medical device suppliers used by hospitals. While passage of the Health Care Reform Law may ultimately expand the pool of potential patients for FloChec, the above-discussed changes could adversely affect our financial results and business.
Our business may be adversely impacted by the recent sequestration signed into law in the United States.
On March 1, 2013, most agencies of the federal government automatically reduced their budgets according to an agreement made by Congress in 2012 known as “sequestration.” Originally devised as an incentive to force Congressional agreement on budget issues, the sequestration order was approved on March 1, 2013 by the President of the United States. For claims submitted with dates of service or dates of discharge after April 1, 2013, these cuts will result in Medicare payments to health care providers, health care plans and drug plans being reduced by 2%.
The applicable healthcare fraud and abuse laws and regulations, along with the increased enforcement environment, may lead to an enforcement action targeting us, which could adversely affect our business.
We are subject to healthcare fraud and abuse laws and regulations including, but not limited to, the Federal Anti-Kickback Statute, state anti-kickback statutes, the Federal False Claims Act, and state false claims acts. Additionally, to the extent we maintain financial relationships with physicians and other healthcare providers, we may be subject to Federal and state physician payment sunshine laws and regulations, which require us to track and disclose these financial relationships. These and other laws regulate interactions amongst health care entities and with sources of referrals of business, among other things. The Federal Anti-Kickback Statute is a criminal statute that imposes substantial penalties on persons or entities that offer, solicit, pay or receive payments in return for referrals, recommendations, purchases or orders of items or services that are reimbursable by Federal healthcare programs. The False Claims Act imposes liability, including treble damages and per claim penalties, on any person or entity that submits or causes to be submitted a claim to the Federal government that he or she knows (or should know) is false. The Health Care Reform Law further provides that a claim submitted for items or services, the provision of which resulted from a violation of the Anti-Kickback Statute, is “false” under the False Claims Act and certain other false claims statutes.
We may be subject to liability under these laws and may also be subject to liability for any future conduct that is deemed by the government or the courts to violate these laws. Additionally, over the past ten years, partially as the result of the passage of the Health Insurance Portability and Accountability Act of 1996 and of the Health Care Reform Law, the government has pursued an increasing number of enforcement actions. This increased enforcement environment may increase scrutiny of us, directly or indirectly, and could increase the likelihood of an enforcement action targeting us. We have entered into a

supply and distribution agreement with Bard Peripheral Vascular, Inc., as well as purchase agreements with a number of our customers, including parties that bill Federal healthcare programs for use of our product, all of whom may be subject to government scrutiny. Finally, to the extent that any of the agreements are breached or terminated, our business may experience a decrease in revenues. In addition, to the extent that our customers, many of whom are providers, may be affected by this increased enforcement environment, our business could correspondingly be affected. It is possible that a review of our business practices or those of our customers by courts or government authorities could result in a determination with an adverse effect on our business. We cannot predict the effect of possible future enforcement actions on our business.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.
We are subject to income and other taxes in the United States. Significant judgment is required in evaluating our provision for income taxes. During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain. For example, there could be changes in the valuation of our deferred tax assets and liabilities or changes in the relevant tax, accounting, and other laws, regulations, principles and interpretations. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation, or the effects of a change in tax policy in the United States, could have a material effect on our operating results in the period or periods for which that determination is made.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:
  • being permitted to provide only 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;
  • not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
  • not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
  • reduced disclosure obligations regarding executive compensation; and
  • exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result of this election, our financial statements may not be comparable to other companies that comply with public company effective dates.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.
As a public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The NASDAQ Capital Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our Board of Directors.
We are evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we will be required to furnish a report by our management on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
We currently have material weaknesses in our internal control over financial reporting. If we are unable to successfully remediate these material weaknesses in our internal control over financial reporting, it could have an adverse effect on our company.
In connection with the audit of our financial statements for the year ended December 31, 2012, our management and independent registered public accounting firm identified certain material weaknesses in our internal control over financial reporting. These material weaknesses related to our lack of a sufficient complement of personnel with an appropriate level of knowledge and experience in the application of U.S. generally accepted accounting principles, or GAAP, commensurate with our financial reporting requirements and the fact that policies and procedures with respect to the review, supervision, and monitoring of our accounting and reporting functions were either not designed and in place or not operating effectively. As a result, numerous audit adjustments to our financial statements were identified during the course of the audit. Our management and independent registered public accounting firm did not perform an evaluation of our internal control over financial reporting as of December 31, 2012 in accordance with the provisions of the Sarbanes-Oxley Act. Had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional control deficiencies may have been identified by management or our independent registered public accounting firm, and those control deficiencies could have also represented one or more material weaknesses.
In an effort to remediate these material weaknesses, soon after the closing of the initial public offering, we intend to increase the number of our finance and accounting personnel, including hiring a Chief

Financial Officer with public company experience. We cannot assure you that these measures will significantly improve or remediate the material weakness described above. We also cannot assure you that we have identified all or that we will not in the future have additional material weaknesses. Accordingly, material weaknesses may still exist when we report on the effectiveness of our internal control over financial reporting for purposes of our attestation when required by reporting requirements under the Exchange Act or Section 404 of the Sarbanes-Oxley Act after this offering. If we are not able to remedy these material weaknesses in our internal control over financial reporting, or if we have additional material weaknesses in our internal control over financial reporting in the future, it could have an adverse effect on our company.
Risks Related to Our Intellectual Property
Our success largely depends on our ability to obtain and protect the proprietary information on which we base our product.
Our success depends in large part upon our ability to establish and maintain the proprietary nature of our technology through the patent process, as well as our ability to license from others patents and patent applications necessary to develop our product. If our patent or any future patents are successfully challenged, invalidated or circumvented, or our right or ability to manufacture our product was to be limited, our ability to continue to manufacture and market our product could be adversely affected. In addition to patents, we rely on trade secrets and proprietary know-how, which we seek to protect, in part, through confidentiality and proprietary information agreements. The other parties to these agreements may breach these provisions, and we may not have adequate remedies for any breach. Additionally, our trade secrets could otherwise become known to or be independently developed by competitors.
As of December  31 , 2013, we have been issued, or have rights to, one U.S. patent. In addition, we have filed three U.S. patent applications that are still pending. The patent we hold may be successfully challenged, invalidated or circumvented, or we may otherwise be unable to rely on this patent. These risks are also present for the process we use for manufacturing our product. In addition, our competitors, many of whom have substantial resources and have made substantial investments in competing technologies, may apply for and obtain patents that prevent, limit or interfere with our ability to make, use and sell our product, either in the United States or in international markets. The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. We may institute, become party to, or be threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our product and technology, including interference or derivation proceedings before the U.S. Patent and Trademark Office, or USPTO. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing our product and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business. The defense and prosecution of intellectual property suits, USPTO proceedings and related legal and administrative proceedings are both costly and time consuming. Any litigation or interference proceedings involving us may require us to incur substantial legal and other fees and expenses and may require some of our employees to devote all or a substantial portion of their time to the proceedings.
We may need to license intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.
A third party may hold intellectual property, including patent rights that are important or necessary to the development of FloChec or any future products. It may be necessary for us to use the patented or proprietary technology of a third party to commercialize our own technology or products, in which case we would be required to obtain a license from such third party. A license to such intellectual property may not

be available or may not be available on commercially reasonable terms, which could have a material adverse effect on our business and financial condition.
We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Although we try to ensure that we and our employees and independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or that these employees or independent contractors or we have used or disclosed intellectual property in violation of the rights of others. These claims may cover a range of matters, such as challenges to our trademarks, as well as claims that our employees or independent contractors are using trade secrets or other proprietary information of any such employee’s former employer or independent contractors. Although we do not expect the resolution of the proceeding to have a material adverse effect on our business or financial condition, litigation to defend ourselves against claims can be both costly and time consuming, and divert management’s attention away from growing our business.
In addition, while it is our policy to require our employees and independent contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Our and their assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.
If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.
Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for some of our technology and product, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also generally enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party infringed a patent or illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by

a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.
Risks Related to our Common Stock and this Offering
After this offering, our executive officers, Directors and principal stockholders, if they choose to act together, will continue to have the ability to control all matters submitted to stockholders for approval.
Upon the closing of this offering, and assuming the sale of 1,150,000 shares of our common stock at an assumed initial public offer price of $13.00 per share (which is the midpoint of the price range on the cover page of this prospectus) our executive officers and Directors, combined with our other existing stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately 55.0% of our common stock. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership control may:
  • delay, defer or prevent a change in control;
  • entrench our management and the Board of Directors; or
  • impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of 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.
Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our Board of Directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Among other things, these provisions:
  • allow the authorized number of our Directors to be changed only by resolution of our board of directors;
  • establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our Board of Directors;
  • require that stockholder actions must be effected at a duly called stockholder meeting; and
  • limit who may call stockholder meetings.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.
The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent shares subsequently are issued, you will incur further dilution. Based on an assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth

on the cover page of this prospectus, you will experience immediate dilution of $10.33 per share, representing the difference between our pro forma net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately 62% of the aggregate price paid by all purchasers of our stock but will own only approximately 24% of our common stock outstanding after this offering.
An active trading market for our common stock may not develop.
Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. Although we have applied to have our common stock approved for listing on The NASDAQ Capital Market, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop, it may be difficult for you to sell shares you purchase in this offering without depressing the market price for the shares or at all.
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock in this offering.
Our stock price is likely to be volatile. The stock market in general and the market for smaller medical device companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:
  • the success of competitive products, services or technologies;
  • regulatory or legal developments in the United States and other countries;
  • developments or disputes concerning patent applications, issued patents or other proprietary rights;
  • the recruitment or departure of key personnel;
  • actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
  • variations in our financial results or those of companies that are perceived to be similar to us;
  • changes in the structure of healthcare payment systems;
  • market conditions in the medical device sector;
  • general economic, industry and market conditions; and
  • the other factors described in this “Risk Factors” section.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, and cause the price of our common stock to decline. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
A significant portion of our total outstanding shares are eligible to be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that the holders of a large number of stockholders intend to sell shares, could reduce the market price of our common stock. After this offering, we will have 4,804,993 outstanding shares of common stock based on the number of shares outstanding as of December  31 , 2013 and reflecting the

automatic conversion of all of our outstanding shares of convertible preferred stock and the cashless exercise of warrants to acquire additional shares of our convertible preferred stock (which will convert into common stock) in connection with the offering based on an assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus. This number includes the 1,150,000 shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates or existing stockholders. All of the remaining outstanding shares of our common stock are currently restricted as a result of securities laws or lock-up agreements but will become eligible to be sold at various times after the offering. In addition, the current holders of our outstanding shares of common stock and convertible preferred stock have certain registration rights with respect to their shares of common stock, including shares of common stock issuable upon conversion thereof and shares of common stock issued as a dividend or other distribution with respect to or in exchange for or in replacement of the foregoing shares. See “Description of Securities — Registration Rights.”
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

Cautionary Note Regarding Forward-Looking Statements and Industry Data
This prospectus contains forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.
In some cases, you can identify forward-looking statements by terminology, such as “expects,” “anticipates,” “intends,” “estimates,” “plans,” “believes,” “seeks,” “may,” “should,” “continue,” “could” or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this prospectus.
You should read this prospectus and the documents that we reference herein and therein and have filed as exhibits to the registration statement, of which this prospectus is part, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. These risks and uncertainties, along with others, are described above under the heading “Risk Factors.” Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this prospectus, and particularly our forward-looking statements, by these cautionary statements.
This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third party research, surveys and studies are reliable, we have not independently verified such data.

Use of Proceeds
We estimate that the net proceeds from our issuance and sale of shares of our common stock in this offering will be approximately $ 12,821,000 , assuming an initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $ 14,525,000 .
A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, would increase (decrease) the net proceeds from this offering by approximately $1,058,000, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We currently intend to use the net proceeds from this offering for working capital and general corporate purposes. We anticipate using the proceeds from this offering to continue to grow and invest in our business. We currently anticipate that we will use approximately 54% of the proceeds to invest in our sales and marketing efforts to commercialize our product, and use approximately 32% for general and administrative expenditures, including addressing compliance with U.S. public company requirements, such as hiring additional personnel and investing in our corporate infrastructure. The anticipated general and administrative expenditures also include payment over 25 months of $722,000 of accrued expenses owed to Dr. Murphy-Chutorian, our Chief Executive Officer (see “Certain Relationships and Related Party Transactions — Financings” for more information regarding these accrued expenses). We also anticipate using approximately 9% of the proceeds on research and development efforts and plan to use approximately 5% of the proceeds to acquire additional FloChec devices for lease.
This expected use of the net proceeds from this offering represents our intentions based upon our current financial condition, results of operations, business plans and conditions. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.
Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities.

Dividend Policy
We have not declared or paid any cash dividends on our common stock, and we do not anticipate declaring or paying cash dividends for the foreseeable future. We are not subject to any legal restrictions respecting the payment of dividends, except that we may not pay dividends if the payment would render us insolvent. Any future determination as to the payment of cash dividends on our common stock will be at our Board of Directors’ discretion and will depend on our financial condition, operating results, capital requirements and other factors that our Board of Directors considers to be relevant.
Determination of Offering Price
The offering price of the common stock has been arbitrarily determined and bears no relationship to any objective criterion of value. The price does not bear any relationship to our assets, book value, historical earnings or net worth. No valuation or appraisal has been prepared for our business.
Prior to this offering, there has been no public market for our shares. The public offering price will be determined through negotiations between us and Aegis Capital Corp., as representative of the underwriters. The factors to be considered in determining the public offering price may include our future prospects and those of our industry in general, sales, earnings and certain of our other financial operating information in recent periods, and the market prices of securities and certain financial and operating information of companies engaged in activities similar to those we engage in. The estimated public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors.
We cannot assure you that the public offering price will correspond to the price at which the shares will trade in the public market subsequent to the offering or that an active trading market for the shares will develop and continue after the offering.

Dilution
If you invest in our common stock in this offering, your interest will be immediately and substantially diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after giving effect to this offering.
Our historical net tangible book value as of September 30, 2013 was $419,000, or $0.53 per share of our common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding as of September 30, 2013.
Our pro forma net tangible book value as of September 30, 2013 was $419,000, or $0.11 per share of our common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the pro forma number of shares of our common stock outstanding as of September 30, 2013, which includes 2,868,243 additional shares after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 2,012,152 shares of our common stock upon the closing of this offering and the cashless exercise (at the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus) of outstanding warrants for shares of convertible preferred stock resulting in the issuance of an aggregate of 856,091 shares of common stock upon exercise and subsequent conversion thereof effective upon the closing of this offering.
After giving effect to the sale of the 1,150,000 shares in this offering at the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at September 30, 2013 would have been approximately $ 13,240,000 , or $ 2.76 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of approximately $ 2.65 per share to our existing stockholders, and an immediate dilution of $ 10.24 per share to investors purchasing shares of common stock in this offering.
Dilution in pro forma as adjusted net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.
The following table illustrates the per share dilution to investors purchasing shares in the offering:
 
 
Assumed initial public offering price per share
 
 
 
 
 
 
$
13.00
 
 
Historical net tangible book value per share as of September 30, 2013
 
 
$
0.53
 
 
 
 
 
 
Decrease attributable to the conversion of outstanding convertible preferred stock and cashless exercise of warrants to acquire shares of convertible preferred stock
 
 
$
0.42
 
 
 
 
 
 
Pro forma net tangible book value per share as of September 30, 2013
 
 
$
0.11
 
 
 
 
 
 
Increase in net tangible book value per share attributable to new investors
 
 
$
2.65
 
 
 
 
 
 
Pro forma as adjusted net tangible book value per share after this offering
 
 
 
 
 
 
$
2.76
 
 
Dilution per share to new investors
 
 
 
 
 
 
$
10.24
 
If the underwriter exercises its over-allotment option in full, the pro forma as adjusted net tangible book value will increase to $ 3.00 per share, representing an immediate dilution of $ 10.00 per share to new investors, assuming that the initial public offering price will be $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus.

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share would increase (decrease) the pro forma as adjusted net tangible book value by $1,058,000, the pro forma as adjusted net tangible book value per share by $0.22 per share, and the dilution in pro forma as adjusted net tangible book value per share to investors in this offering by $0.22 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and without taking into account the change in number of shares that will be issued upon cashless exercise of our warrants at the new price.
The following table summarizes, on a pro forma as adjusted basis as of September 30, 2013, the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid by existing stockholders and by investors participating in this offering, before deducting estimated underwriting discounts and commissions and estimated offering expenses, at an assumed initial public offering price of $13.00 per share, the midpoint of the price range shown on the cover page of this prospectus.
 
 
 
 
 
Shares Purchased
 
 
 
 
Total Consideration
 
 
 
 
Average Price
Per Share
 
 
 
 
 
Number
 
 
 
Percentage
 
 
 
Amount
 
 
 
Percentage
 
 
Existing stockholders
 
 
 
3,654,933
 
 
 
76
%
 
 
$
8,982,721
 
 
 
38
%
 
 
$
2.46
 
 
New investors
 
 
 
1,150,000
 
 
 
24
%
 
 
$
14,950,000
 
 
 
62
%
 
 
$
13.00
 
 
Total
 
 
 
4,804,993
 
 
 
100
%
 
 
$
23,932,721
 
 
 
100
%
 
 
$
4.98
 

Capitalization
The following table sets forth our capitalization, as of September 30, 2013:
  • on an actual basis;
  • on a pro forma basis to give effect to the issuance of 2,868,243 shares of common stock upon the closing of this offering, which reflects (i) the automatic conversion of all such outstanding shares of our convertible preferred stock into an aggregate of 2,012,152 shares of our common stock and (ii) the issuance of an aggregate of 856,091 shares of common stock as result of the cashless exercise at the assumed initial public offering price of $13.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) of outstanding warrants for convertible preferred stock and the automatic conversion of such convertible preferred stock into common stock;
  • on a pro forma as adjusted basis to give further effect to the sale of the 1,150,000 shares of our common stock in this offering at the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us.
You should consider this table in conjunction with our financial statements and the notes to those financial statements included elsewhere in this prospectus.
 
 
 
 
 
As of September 30, 2013
 
 
 
 
 
 
Actual
 
 
 
Pro Forma
 
 
 
Pro Forma
As
Adjusted
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible Preferred Stock, $0.001 par value per share:
 
               
 
Series A Preferred Stock
 
 
$
6,020,000
 
 
$
0
 
 
$
0
 
 
Series A-1 Preferred Stock
 
 
 
482,000
 
 
 
0
 
 
 
0
 
 
Series A-2 Preferred Stock
 
 
 
208,000
 
 
 
0
 
 
 
0
 
 
Common Stock, $0.001 par value
 
 
 
1,000
 
 
 
3,000
 
 
 
5,000
 
 
Additional paid-in capital
 
 
 
2,534,000
 
 
 
9,242,000
 
 
 
22,061,000
 
 
Accumulated deficit
 
 
 
(8,826,000
)
 
 
 
(8,826,000
)
 
 
 
(8,826,000
)
 
 
Total stockholders’ equity
 
 
$
419,000
 
 
$
419,000
 
 
$
13,240,000
 
A $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders’ deficit on a pro forma as adjusted basis by approximately $1,058,000, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
Overview
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 allow healthcare providers to capture full reimbursement potential for their services. Our first patented and U.S. Food and Drug Administration, or FDA, cleared product, is 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. We received FDA 510(k) clearance for FloChec in February 2010, began Beta testing in the third quarter of 2010, and began commercially leasing FloChec in January 2011. In the year ended December 31, 2012 we had total revenue of $1,199,000 and a net loss of $2,741,000 compared to $316,000 and $1,876,000, respectively, in 2011. In the first nine months of 2013 we had total revenue of $1,493,000 and a net loss of $1,707,000 compared to $772,000 and $2,085,000, respectively, in the same period in 2012. Our net loss attributable to common stockholders was $1,707,000 for the nine months ended September 30, 2013 compared to $2,170,000 for the same period 2012, and was $2,826,000 for the year ended December 31, 2012 as compared to $1,876,000 for 2011.
Sources of Revenues and Expenses
Revenue
We generate revenue from the rental of our FloChec system to our customers. We expect physicians and other providers that use FloChec to provide a recurring source of revenue during the lease term. We recognize revenue from the rental of our FloChec product as earned, on a month-to-month basis. FloChec rentals are billed at the rates established in our lease agreements.
Cost of revenue
Our cost of revenue consists primarily of three components: the depreciation expense of our FloChec systems for lease; the write-off of the residual value of FloChec systems retired from active leasing; and other miscellaneous items, such as freight, that are not directly related to FloChec production. Each FloChec unit has a depreciation schedule based on the cost of the unit. The cost of each unit is depreciated on a straightline basis over 36 months. Each unit has its own cost of production, which varies from time to time. We believe that the cost of each unit is a function of manufacturing efficiencies, supply costs and fixed overhead expense as affected by volume of units produced, which change from time to time. When costs of production is lower, the new units have a lower monthly depreciation and decrease the average depreciation per unit per month, which means our cost of revenue is lower. Similary, if cost of production is higher, the new units will have a higher monthly depreciation and increase the average depreciation per unit per month, which means our cost of revenue is higher. We believe growth in the number of monthly depreciation charges is predominately due to our sales and marketing efforts, which add new customers to an established customer base. The retirement of units from active leasing is primarily a function of the aggregate number of FloChec™ units rented and the occurrence from time to time of system upgrades. The other costs of revenue vary primarily as a function of the aggregate number of FloChec units rented and changes in operations such as manufacturing, delivery or maintenance.
Engineering and product development expense
Our engineering and product development expense consists of costs associated with the design, development, testing and enhancement of our FloChec product and other products in development. We

also include salaries and related employee benefits, research-related overhead expenses and fees paid to external service providers in our engineering and product development expense.
Sales and marketing expense
Our sales and marketing expense consists primarily of sales commissions and support costs, salaries and related employee benefits, travel, education, trade show and marketing costs.
General and administrative expense
Our general and administrative expense consists primarily of salaries and related employee benefits, professional service fees, associated travel costs and depreciation and amortization expense.
Total other income (expense)
Our total other income (expense) primarily reflects other taxes and fees as well as interest income and expense.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 2 to our audited financial statements, appearing elsewhere in this prospectus.
Revenue Recognition
We recognize revenue for renting our FloChec product to customers as earned, on a month-to-month basis. FloChec rent is billed at our established rates.
Stock-Based Compensation
We recognize compensation expense in an amount equal to the estimated grant date fair value of each option grant, or stock award over the estimated period of service and vesting. This estimation of the fair value of each stock-based grant or issuance on the date of grant involves numerous assumptions by management. Although we calculate the fair value under the Black Scholes option pricing model, which is a standard option pricing model, this model still requires the use of numerous assumptions, including, among others, the expected life (turnover), volatility of the underlying equity security, a risk free interest rate and expected dividends. The model and assumptions also attempt to account for changing employee behavior as the stock price changes and capture the observed pattern of increasing rates of exercise as the stock price increases. The use of different values by management in connection with these assumptions in the Black Scholes option pricing model could produce substantially different results. As of September 30, 2013, all outstanding stock options are fully vested.
Accounting for Income Taxes
Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates. Future tax benefits are subject to a valuation allowance when management is unable to conclude that our deferred tax assets will more-likely-than-not be realized from the results of operations. Our estimate for the valuation allowance for

deferred tax assets requires management to make significant estimates and judgments about projected future operating results. If actual results differ from these projections or if management’s expectations of future results change, it may be necessary to adjust the valuation allowance.
Emerging Growth Company Elections
The JOBS Act provides that an emerging growth company, such as our company, can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We have elected to avail ourselves of this exemption. As a result, our financial statements may not be comparable to other public companies that comply with public company effective dates. In the future, we may elect to opt out of the extended period for adopting new accounting standards. If we do so, we would need to disclose such decision and it would be irrevocable.
Factors Affecting Future Results
We have not identified any factors that have a recurring effect that are necessary to understand period to period comparisons as appropriate, nor any one-time events that have an effect on the financials.
Results of Operations
Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
Revenue
We had revenue of $1,493,000 for the nine months ended September 30, 2013, an increase of $721,000 or 93%, compared to $772,000 in the same period in 2012. We invoice rental revenue monthly for each unit installed with a customer. The average amount per invoice is affected by the mix of units rented by direct customers or distributors, by price changes and by discounts. The primary reasons for the increase in revenue were that the number of monthly invoices grew 83% and the average amount per invoice grew 6% compared to the same period in 2012. We believe that growth in the number of monthly invoices is predominately due to our sales and marketing efforts, which add new customers to an established customer base.
Operating expenses
We had total operating expenses of $3,073,000 for the nine months ended September 30, 2013, an increase of $314,000, or 11%, compared to $2,759,000 in the same period in 2012. The primary reason for the increase was increased sales and marketing expense. The changes in the various components of our operating expenses are described below.
Cost of revenue
We had cost of revenue of $276,000 for the nine months ended September 30, 2013, an increase of $44,000, or 19%, from $232,000 for the same period in 2012. The primary reasons for the increase were that aggregate depreciation of our FloChec systems for lease increased $39,000, or 83%, in the 2013 period compared to the 2012 period as there was an 83% increase in the number of monthly depreciation charges corresponding to the 83% increase in number of monthly rental invoices. Average depreciation per unit per month was unchanged. Other cost of revenue items, such as freight and other miscellaneous items, which are not associated with FloChec system production, were $27,000 higher in the 2013 period compared to the 2012 period, which was partially offset by $20,000 less cost of units that were retired. There was a system upgrade in 2012 that was responsible for more units retired in that period.
Engineering and product development expense
We had engineering and product development expense of $254,000 for the nine months ended September 30, 2013, an increase of $34,000, or 15%, compared to $220,000 in the same period in 2012. The increase was primarily due to increased consulting costs, offset by lower cost of product development.

Sales and marketing expense
We had sales and marketing expense of $1,585,000 for the nine months ended September 30, 2013, an increase of $273,000, or 21%, compared to $1,312,000 in the same period in 2012. The primary reasons for the increase in sales and marketing expense were $174,000 higher sales commissions associated with higher rental revenue and $81,000 higher salary expense compared to the corresponding prior period.
General and administrative expense
We had general and administrative expense of $958,000 for the nine months ended September 30, 2013, a decrease of $37,000, or 4%, compared to $995,000 in the same period in 2012. The decrease was primarily due to less salaries and fees for employees and consultants than the corresponding prior period, which was partially offset by stock compensation expense associated with accelerating the vesting of stock options.
Net loss
For the foregoing reasons, we had a net loss of $1,707,000 for the nine months ended September 30, 2013, a decrease of $378,000, or 18%, compared to a net loss of $2,085,000 for the nine months ended September 30, 2012, and had a net loss attributable to common stockholders of $1,707,000 for the nine months ended September 30, 2013 compared to $2,170,000 for the nine months ended September 30, 2012.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenue
We had revenue of $1,199,000 for the year ended December 31, 2012, an increase of $883,000 or 279% compared to $316,000 in the same period in 2011. We invoice rental revenue monthly for each unit installed with a customer. The average amount per invoice is affected by the mix of units rented by direct customers or distributors, by price changes and by discounts. The primary reasons for the increase in revenue were that the number of monthly invoices grew 218% and the average amount per invoice grew 19% compared to 2011. We believe that growth in the number of monthly invoices is predominately due to our sales and marketing efforts, which add new customers to an established customer base.
Operating expenses
We had total operating expenses of $3,614,000 for the year ended December 31, 2012, an increase of $1,519,000, or 73%, compared to $2,095,000 in the same period in 2011. The primary reason for the increase was increased sales and marketing expense. The changes in the various components of our operating expenses are described below.
Cost of revenue
We had cost of revenue of $364,000 for the year ended December 31, 2012, an increase of $219,000 or 151%, compared to $145,000 for the same period in 2011. The primary reasons were that aggregate depreciation of our FloChec systems for lease increased $46,000, or 197%, in 2012 compared to 2011 as there was a 218% increase in the number of monthly depreciation charges corresponding to the 218% increase in number of monthly rental invoices. Average depreciation per unit per month in was 8% lower in 2012 as compared to 2011. Cost of units that were retired increased $198,000 in 2012 as compared to 2011, as 245% greater number of units were retired due to a system upgrade in 2012. This increase was partially offset by lower other cost of revenue items, such as freight and other miscellaneous items, which are not associated with FloChec system production, which were $26,000 lower.
Engineering and product development expense
We had engineering and product development expense of $277,000 for the year ended December 31, 2012, an increase of $31,000, or 13%, compared to $246,000 in the same period in 2011. The primary reason for the increase in engineering and product development expense was $70,000 more of consulting expenses performing updates to our FloChec system offset by $42,000 lower wages and salaries for employees, compared to the corresponding period of 2011.

Sales and marketing expense
We had sales and marketing expense of $1,718,000 for the year ended December 31, 2012, an increase of $1,071,000, or 166%, compared to $647,000 in the same period in 2011. The primary reasons for the increase in marketing expense were $123,000 more consulting fees, $111,000 more trade show expenses and $28,000 more marketing material costs compared to the corresponding period of 2011. The primary reasons for increase in sales expenses were $282,000 higher sales commissions associated with higher rental revenue, $412,000 in sales salaries, benefits and payroll taxes, and $131,000 in travel and related expenses, compared to the corresponding period of 2011.
General and administrative expense
We had general and administrative expense of $1,255,000 for the year ended December 31, 2012, an increase of $198,000, or 19%, compared to $1,057,000 in the same period in 2011. The primary reason for the increase is due to $191,000 reserve for the principal and interest on the Company’s long-term note receivable to a related party.
Net loss
For the foregoing reasons, we had a net loss of $2,741,000 for the year ended December 31, 2012 compared to a net loss of $1,876,000 for the year ended December 31, 2011,and had a net loss attributable to common stockholders of $2,826,000 for the year ended December 31, 2012 as compared to $1,876,000 for the year ended December 31, 2011.
Liquidity and Capital Resources
We had cash and cash equivalents of $1,504,000 at September 30, 2013 compared to $731,000 at December 31, 2012, and total current liabilities of $1,773,000 at September 30, 2013 compared to $1,179,000 at December 31, 2012. As of September 30, 2013 we had a working capital deficit of approximately $36,000.
Our principal sources of cash have included the issuance of equity and borrowings under loan agreements. We expect that as our revenues grow, our operating expenses will continue to grow and, as a result, we will need to generate significant additional net revenues to achieve profitability. We believe that cash on hand plus cash from our operating activities will be sufficient to fund our operations for at least the next 12 months. Although we do not have any current capital commitments, we expect that we will increase our expenditures following completion of this offering once we have additional capital on hand in order to continue our efforts to grow our business and commercialize FloChec. Accordingly, following completion of the offering, we expect to make additional expenditures in both sales and marketing, as well as general and administrative to address the material weaknesses in our internal control over financial reporting, and invest in our corporate infrastructure. We also expect to invest in our research and development efforts. However, we do not have any definitive plans as to the exact amounts or particular uses at this time, and the exact amounts and timing of any expenditures may vary signficantly from our current intentions. See ‘‘Use of Proceeds’’ and ‘‘Risk Factors — We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.’’
Operating activities
We used $956,000 of net cash in operating activities for the nine months ended September 30, 2013. Non-cash adjustments to reconcile net loss to net cash provided by operating activities plus changes in operating assets and liabilities provided $751,000 of cash in the nine months ended September 30, 2013. These non-cash adjustments primarily reflect deferred revenue, accrued expenses, accounts payable and stock-based compensation expense, slightly offset by higher trade accounts receivable.
We used $1,821,000 of net cash in operating activities for the year ended December 31, 2012. Non-cash adjustments to reconcile net loss to net cash provided by operating activities plus changes in operating assets and liabilities provided $920,000 of cash in the year ended December 31, 2012. These adjustments primarily reflect accrued expenses, a provision for non-payment of long-term notes receivable – related party, stock based compensation expense, and amortization of deferred financing costs.

We used $1,275,000 of net cash in operating activities for the year ended December 31, 2011. Non-cash adjustments to reconcile net loss to net cash provided by operating activities plus changes in operating assets and liabilities provided $601,000 of cash in the year ended December 31, 2011. These adjustments primarily reflect accrued expenses, warrants issued in exchange for services and amortization of deferred financing costs.
Investing activities
We used $121,000 of net cash in investing activities for the nine months ended September 30, 2013, primarily for purchases of our FloChec systems for lease.
We used $381,000 of net cash in investing activities for the year ended December 31, 2012, reflecting the loan extended to Semler HealthPerks, Inc., as well as the purchase of our FloChec systems for lease.
We used $187,000 of net cash in investing activities for the year ended December 31, 2011, primarily due to the purchase of our FloChec systems for lease.
Financing activities
We generated $1,850,000 of net cash from financing activities during the nine months ended September 30, 2013, primarily from proceeds from sales of shares of our Series A Preferred Stock and warrants to acquire our Series A Preferred Stock in the quarter ending September 30, 2013, which proceeds were partially offset by offering costs and payment of current portion of long-term liabilities.
We generated $2,905,000 of net cash from financing activities during the year ended December 31, 2012, primarily from sales of equity, offset by offering costs and payment of current portion of long-term liabilities.
We generated $1,157,000 of net cash from financing activities during the year ended December 31, 2011, primarily from sales of equity and proceeds from advances payable from investors that would acquire shares of our Series A Preferred Stock and warrants to acquire our Series A Preferred Stock in the quarter ended September 30, 2012, proceeds from loans payable and leases payable, offset by offering costs and payment of current portion of long-term liabilities.
Description of Indebtedness
We currently have no material outstanding indebtedness. See Note 7 to our audited financial statements appearing elsewhere in this prospectus for description of our outstanding indebtedness.
Off-Balance Sheet Arrangements
As of each of September 30, 2013 and December 31, 2012, we had no off-balance sheet arrangements.
Commitments and Contingencies
As of each of September 30, 2013 and December 31, 2012, other than employment/consulting agreements with key executive officers, we had no material commitments other than the liabilities reflected in our financial statements.
JOBS Act
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this extended transition period, and, as a result, we will not adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Internal Control Over Financial Reporting
In connection with the audit of our financial statements for the year ended December 31, 2012, our management and independent registered public accounting firm identified certain material weaknesses in our internal control over financial reporting. These material weaknesses related to our lack of a sufficient complement of personnel with an appropriate level of knowledge and experience in the application of U.S. generally accepted accounting principles, or GAAP, commensurate with our financial reporting requirements and the fact that policies and procedures with respect to the review, supervision, and monitoring of our accounting and reporting functions were either not designed and in place or not operating effectively. As a result, numerous audit adjustments to our financial statements were identified during the course of the audit. Our management and independent registered public accounting firm did not perform an evaluation of our internal control over financial reporting as of December 31, 2012 in accordance with the provisions of the Sarbanes-Oxley Act. Had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional control deficiencies may have been identified by management or our independent registered public accounting firm, and those control deficiencies could have also represented one or more material weaknesses.
In an effort to remediate these material weaknesses, soon after the closing of the initial public offering, we intend to increase the number of our finance and accounting personnel, including hiring a Chief Financial Officer with public company experience. Assessing our procedures to improve our internal control over financial reporting is an ongoing process. We are currently not required to comply with Section 404 of the Sarbanes-Oxley Act, and are therefore not required to make an assessment of the effectiveness of our internal control over financial reporting. As a result, our management did not perform an evaluation of our internal control over financial reporting as of December 31, 2012. Further, our independent registered public accounting firm has not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting. We currently do not have an internal audit function.

Business
General
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 allow healthcare providers to capture full reimbursement potential for their services. Our first patented and U.S. Food and Drug Administration, or FDA, cleared product, is 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 received FDA 510(k) clearance in February 2010, we began Beta testing in the third quarter of 2010, and we began commercially leasing FloChec in January 2011. In the year ended December 31, 2012 we had total revenue of $1,199,000 and a net loss of $2,741,000 compared to $316,000 and $1,876,000, respectively, in 2011. In the first nine months of 2013 we had total revenue of $1,493,000 and a net loss of $1,707,000 compared to $772,000 and $2,085,000, respectively, in the same period in 2012. Our net loss attributable to common stockholders was $1,707,000 for the nine months ended September 30, 2013 compared to $2,170,000 for the same period 2012, and was $2,826,000 for the year ended December 31, 2012 as compared to $1,876,000 for 2011.
Our Product
We currently have only one patented and FDA cleared product, FloChec, that we market and lease 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 and No Flow Obstruction.
We have developed a service model rather than an outright sales model for FloChec. Our service 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 equipment sale. Consequently, we require no down payment, long-term commitment or maintenance contract or fees from our customers. We replace damaged products free of charge in the service model. FloChec has an expected average lifetime of at least three years. We intend to reevaluate the monthly price periodically in consideration of the revenue generation associated with FloChec. To date, we roughly estimated that routine office usage of the FloChec has ranged from a few tests per week up to 10 tests per day.

Our Chairman and co-founder, Dr. Herbert Semler, is an inventor of the technology behind FloChec. Dr. Semler formed Semler Scientific, Inc., 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 received FDA 510(k) clearance in February 2010, we began Beta testing in the third quarter of 2010, and we began commercially leasing FloChec in January 2011. We have placed our FloChec product with cardiologists, internists, nephrologists, endocrinologists, podiatrists and family practitioners. 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 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
In March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. This legislation includes reforms and reductions that could affect Medicare reimbursements and health insurance coverage for certain services and treatments. The Health Care Reform Law has brought a new way of doing business for providers and health insurance plans. We believe that fee-for-service programs will be reduced in favor of capitated programs that pay a monthly fee per patient. 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 not that person seeks care. The amount of remuneration is based on the average expected health care utilization of that patient, with greater payment for patients with significant medical history. For Medicare Advantage patients, CMS pays the fee per patient. 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. 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 14 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. 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-three times more likely to die of stroke. According to a study by P.G. Steg published in the 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 2.0 million Americans are amputees.
Risk factors for developing PAD include:
  • Age (over 50 years)
  • Race (African-American)
  • History of smoking
  • Diabetes
  • High blood pressure
  • High blood cholesterol
  • Personal history of vascular disease, heart attack, or stroke.
We believe medical personnel who care for those older than 50 years are the target market for FloChec. 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 of 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 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 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 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.
Strategy
Our mission is to develop, manufacture and market patented products that identify the risk profile of medical patients to allow healthcare providers to capture full reimbursement potential for their services, while growing revenues and becoming and maintaining profitability. We intend to do this by:
  • Capitalizing on opportunities provided by the Health Care Reform Law.   Under the Health Care Reform Law, for 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, there would be a perverse incentive for the provider to only want to care for healthy 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.
  • Targeting customers with patients at risk of developing PAD.   Healthcare providers use blood flow measurements as part of their assessment of a patient’s vascular condition. Our strategy is to keep marketing FloChec on a lease-based service model, to 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 potential customers in the United States alone, many of the patients of whom will be more than 50 years old and at increased risk of developing PAD. Based on U.S. Census data, the evaluable patient population for 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.   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 vascular specialist, 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.
  • Developing additional products that allow healthcare providers to capture the full reimbursement potential for their services.   We are currently developing several new products in conjunction with our consultant engineering groups that are intended to provide cost-effective wellness solutions for our growing, established customer base. The new products under development or to be developed may incorporate some of our current technology or new technology. The goal is to achieve a reputation for outstanding service and sell new cost effective wellness solutions to leverage our gains in the marketplace for such product offerings.
Sales and Marketing
We provide our FloChec product and services to our customers through our salespersons and through our co-exclusive distributor, Bard Peripheral Vascular, Inc., or Bard, a large medical device company with a worldwide presence in both interventional cardiology and dialysis. We signed a co-exclusive supply and distribution agreement with Bard in late 2012 in an effort to increase our sales and marketing reach, which agreement accounted for less than 20% of our revenues in each of 2012 and the first nine

months of 2013. With certain exceptions, we appointed Bard on a co-exclusive basis to lease FloChec to certain customers, and we retained the right to lease directly to such customers as well. In addition to our co-exclusive distributor, we have direct sales representatives who have experience in the fields of family practice and podiatry.
We generally make available to our sales team (including our distributor) an inventory of FloChec products consistent with their needs. Our product is then directly delivered to our customer by the salesperson at the time he/she conducts in-service training to the customer. Because FloChec is relatively easy to use, training can generally be accomplished in less than 15 minutes.
Our customers generally pay by credit card on the 15th of each month as an advance for usage during the next 30 days. We provide technical support daily, coupled directly to the manufacturing operation so that replacement products, if needed, can be shipped overnight directly to the customer. The majority of the support is over the telephone and focuses on software and connectivity issues, rather than hardware. We plan to upgrade FloChec operating systems as appropriate by direct shipments. In the future, we plan to ship directly to customers and handle the installation and training remotely if appropriate.
Manufacturing
We manufacture our product, FloChec through an independent contractor. We entered into our service and supply agreement with the contract manufacturer in April 2011 and pay our manufacturer for finished goods. The contract provides for subassemblies, product final assembly, test, serialization, finished goods, inventory and shipping operations. Our current contract will remain in force until terminated by us upon three months written notice, or until terminated by either party for cause. Although we believe we have a good working relationship with our current contract manufacturer, there are many such qualified contract manufacturers available around the country should we need to replace them or if they are not able to meet demand as we grow our business as anticipated. We believe FloChec is relatively easy to manufacture. We employ a consultant vendor qualification expert to monitor and test the quality controls and quality assurance procedures of our contract manufacturer.
Competition
The principal competitor for FloChec is the standard blood pressure cuff ankle-brachial index, or ABI, device. FloChec does not include a blood pressure cuff. We are not aware of another product that performs digital ABI without the use of a blood pressure cuff. There are several companies that manufacture the traditional ABI device, which range in price from $2,500 to $20,000. Some of these companies are much larger than us and have more financial resources and their own distributor network. The traditional ABI devices are differentiated by the degree of automation designed into each product. ABI devices that rely more heavily on operator assessment (i.e., listening to the return of pulse while decreasing cuff pressure), are thought to have less objectivity in their measurement. We know of no direct ‘digital ABI’ competitor to FloChec. Because standard ABI devices require a better trained operator, the products are usually sold to specialized vascular labs that are supervised by a vascular surgeon, with the tests performed by a licensed vascular technician. It is not uncommon for such ABI devices to be marketed to the offices of internists, podiatrists, endocrinologists or most cardiologists.
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 vascular specialists, 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 with traditional analog ABI devices.
Research and Development Program
We have dedicated, engineering consultants that are well integrated into our overall business, ranging from customer requirements to technical support. The engineering group uses our in-house quality system as its framework for new product development and release. The majority of the engineering is circuit design and software development, as FloChec is PC-based. We are currently developing several new products in

conjunction with our consultant engineering groups. These new products are being designed to provide cost-effective wellness solutions for our growing, established customer base. The new products under development or that may be developed may incorporate some of our current technology or new technology. We are also directing much of our activity to building our patent portfolio and protecting proprietary positions.
We have sponsored two recent studies of FloChec. One of these studies, the results of which were compiled in 2012 and published in a peer reviewed journal in 2013, sought to determine the frequency of finding undiscovered vascular disease in primary care practices using FloChec. In the study of 632 patients at 19 office practices, the frequency of flow obstruction was 12% and of these patients, 75% did not have classic symptoms of PAD. Among other limitations of the study, the publication mentions the study’s retrospective design, no direct comparison to other vascular tests, and passive data collection such that 8% of patients had one or more missing data fields.
The other recent study we sponsored was designed to assess the side by side performance of FloChec compared with traditional analog ABI with Doppler measurements in medical practices. In the study of 181 limbs from 121 patients at 5 medical practices during 2012 and 2013, three techniques were used on all limbs: FloChec, traditional analog ABI with Doppler, and Duplex ultrasound imaging. Traditional analog ABI with Doppler was unable to perform a conclusive study in 8.7% of limbs. In the remaining limbs, the FloChec measurement and the ABI with Doppler measurements were in agreement, or in other words concordant, in 78% of limbs. Among the discordant limbs, Duplex imaging judged that the true positive rate of FloChec was significantly higher than that of ABI with Doppler by a 2 to 1 margin. The results of the study have not been submitted for publication in a peer reviewed journal and are available as a white paper that may be shown to potential customers or other interested parties. Among other limitations of the study, the study had a small sample size, was conducted at specialty practices not primary care practices, had a retrospective design with incomplete collection of demographic information and clinical characteristics of the population, was not peer reviewed and was sponsored by us.
Patents and Licenses
We have been issued one patent for our apparatus and method, U.S. Patent No. 7,628,760 , which expires December 7, 2026. Three other U.S. patent applications are pending. Other patents are in process.
Governmental Regulation
FloChec received FDA 510(k) clearance in February 2010 as a Class II Medical Device. Advanced Vascular Technologies, an entity formerly affiliated with our founder and Chairman, Dr. Semler, applied for and obtained for the 510(k) clearance. However, any interests it may have had in such 510(k) clearance were subsequently assigned to us and it did not manufacture any products for our company. The Class II Medical Device designation means that FloChec is a commercial device and is currently being sold in the United States. Class II devices are subject to FDA’s general controls, and any other special controls as deemed necessary by FDA to provide reasonable assurance of the safety and effectiveness of the device. Pre-market review and clearance by FDA for Class II devices are generally accomplished through the 510(k) pre-market notification procedure. Pre-market notification submissions are subject to user fees, unless a specific exemption applies.
As our business is subject to extensive federal, state, local and foreign regulations, we currently employ an established regulatory consultant specializing in medical devices to maintain our regulatory filings, monitor our on-going activities, and ensure compliance with all federal and state regulations.
Some of the pertinent laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of subjective interpretations. In addition, these laws and their interpretations are subject to change. Both federal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. We believe that we have structured our business operations and relationships with our customers to comply with all applicable legal requirements. However, it is possible that governmental entities or other third parties could interpret these laws differently and assert otherwise. We discuss below the statutes and regulations that are most relevant to our business.

U.S. Food and Drug Administration Regulation
FloChec is a medical device subject to extensive regulation by the FDA and other federal, state, local and foreign regulatory bodies. FDA regulations govern, among other things, the following activities that we or our partners perform and will continue to perform:
  • product design and development;
  • product testing;
  • product manufacturing;
  • product safety;
  • post-market adverse event reporting;
  • post-market surveillance;
  • product labeling;
  • product storage;
  • record keeping;
  • pre-market clearance or approval;
  • post-market approval studies;
  • advertising and promotion; and
  • product sales and distribution.
FDA’s Pre-market Clearance and Approval Requirements
To commercially distribute in the United States, FloChec or any future medical device we develop requires or will require either prior 510(k) clearance or prior approval of a premarket approval, or PMA, application from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risk are placed in either class I or II, which requires the manufacturer to submit to the FDA a pre-market notification requesting permission for commercial distribution. This process is known as 510(k) clearance. Some low risk devices are exempt from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device are placed in class III, requiring approval of a PMA application. Both pre-market clearance and PMA applications are subject to the payment of user fees, paid at the time of submission for FDA review. The FDA can also impose restrictions on the sale, distribution or use of devices at the time of their clearance or approval, or subsequent to marketing.
510(k) Clearance Pathway
To obtain 510(k) clearance, a medical device manufacturer must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of PMA applications. The FDA’s 510(k) clearance pathway usually takes from three to 12 months from the date the application is completed, but it can take significantly longer and clearance is never assured. Although many 510(k) pre-market notifications are cleared without clinical data, in some cases, the FDA requires significant clinical data to support substantial equivalence. In reviewing a pre-market notification, the FDA may request additional information, including clinical data, which may significantly prolong the review process. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new 510(k) clearance or could require a PMA application. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination regarding whether a new pre-market submission is required for the modification of an existing device, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k)

clearance or approval of a PMA application is obtained. If the FDA requires us to seek 510(k) clearance or approval of a PMA application for any modifications to FloChec we may be required to cease marketing or recall the modified device until we obtain this clearance or approval. Also, in these circumstances, we may be subject to significant regulatory fines or penalties for failure to submit the requisite PMA application(s). We have made and plan to continue to make minor additional product enhancements that we believe do not require new 510(k) clearances. In addition, the FDA is currently evaluating the 510(k) clearance process and may make substantial changes to industry requirements, including which devices are eligible for 510(k) clearance, the ability to rescind previously granted 510(k) clearance and additional requirements that may significantly impact the process.
Pre-market Approval Pathway
A PMA application must be submitted if the device cannot be cleared through the 510(k) clearance process and requires proof of the safety and effectiveness of the device to the FDA’s satisfaction. Accordingly, a PMA application must be supported by extensive data including, but not limited to, technical information regarding device design and development, preclinical and clinical trials, data and manufacturing and labeling to support the FDA’s determination that the device is safe and effective for its intended use. After a PMA application is complete, the FDA begins an in-depth review of the submitted information, which generally takes between one and three years, but may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with Quality System Regulations, or QSRs, which impose elaborate design development, testing, control, documentation and other quality assurance procedures in the design and manufacturing process. The FDA may approve a PMA application with post-approval conditions intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution and collection of long-term follow-up data from patients in the clinical study that supported approval. Failure to comply with the conditions of approval can result in materially adverse enforcement action, including the loss or withdrawal of the approval. New PMA applications or PMA application supplements are required for significant modifications to the manufacturing process, labeling and design of a device that is approved through the PMA process. PMA supplements often require submission of the same type of information as a PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application, and may not require as extensive clinical data or the convening of an advisory panel.
Pervasive and Continuing FDA Regulation
After a device is placed on the market, regardless of its classification or pre-market pathway, numerous regulatory requirements apply. These include, but are not limited to:
  • establishing registration and device listings with the FDA;
  • quality system regulation, which requires manufacturers to follow stringent design, testing, process control, documentation and other quality assurance procedures;
  • labeling regulations, which prohibit the promotion of products for uncleared or unapproved, i.e., “off-label,” uses and impose other restrictions on labeling;
  • medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur;
  • corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the U.S. Federal Food, Drug, and Cosmetic Act, or FDCA, that may present a risk to health; and
  • requirements to conduct post-market surveillance studies to establish continued safety data.

The FDA enforces these requirements by inspection and market surveillance. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
  • untitled letters or warning letters;
  • fines, injunctions and civil penalties;
  • recall or seizure of our products;
  • operating restrictions, partial suspension or total shutdown of production;
  • refusing our request for 510(k) clearance or pre-market approval of new products;
  • withdrawing 510(k) clearance or pre-market approvals that are already granted; and
  • criminal prosecution.
We are subject to unannounced device inspections by the FDA and the California Food and Drug Branch. These inspections may include our suppliers’ facilities.
Sales and Marketing Commercial Compliance
Federal anti-kickback laws and regulations prohibit, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for, or to induce either the referral of an individual, or the purchase, order or recommendation of, any good or service paid for under federal healthcare programs such as the Medicare and Medicaid programs. Possible sanctions for violation of these anti-kickback laws include monetary fines, civil and criminal penalties, exclusion from Medicare and Medicaid programs and forfeiture of amounts collected in violation of such prohibitions.
In addition, federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Off-label promotion has been pursued as a violation of the federal false claims laws. Pursuant to FDA regulations, we can only market our products for cleared or approved uses. Although surgeons are permitted to use medical devices for indications other than those cleared or approved by the FDA based on their medical judgment, we are prohibited from promoting products for such off-label uses. Additionally, the majority of states in which we market our products have similar anti-kickback, false claims, anti-fee splitting and self-referral laws, which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and violations may result in substantial civil and criminal penalties.
To enforce compliance with the federal laws, the U.S. Department of Justice, or DOJ, has increased its scrutiny of interactions between healthcare companies and healthcare providers, which has led to an unprecedented level of investigations, prosecutions, convictions and settlements in the healthcare industry. Dealing with investigations can be time- and resource-consuming. Additionally, if a healthcare company settles an investigation with the DOJ or other law enforcement agencies, the company may be required to agree to additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement.
The U.S. and foreign government regulators have increased regulation, enforcement, inspections and governmental investigations of the medical device industry, including increased U.S. government oversight and enforcement of the Foreign Corrupt Practices Act. Whenever a governmental authority concludes that we are not in compliance with applicable laws or regulations, that authority can impose fines, delay or suspend regulatory clearances, institute proceedings to detain or seize our products, issue a recall, impose operating restrictions, enjoin future violations and assess civil penalties against us or our officers or employees and can recommend criminal prosecution. Moreover, governmental authorities can ban or request the recall, repair, replacement or refund of the cost of devices we distribute.
Additionally, the commercial compliance environment is continually evolving in the healthcare industry as some states, including California, Massachusetts and Vermont, mandate implementation of corporate compliance programs, along with the tracking and reporting of gifts, compensation and other remuneration