Semler Scientific, Inc.

For example, on December 22, 2017, President Trump signed into law U.S. federal income tax legislation, informally titled the Tax Cuts and Jobs Act, or the Tax Act, which significantly revised the Internal Revenue Code of 1986, as amended, or the Code. Future guidance from the U.S. Internal Revenue Service and other tax authorities with respect to the Tax Act may affect us, and certain aspects of the Tax Act could be repealed or modified in future legislation. Changes in corporate tax rates, the realization of net deferred tax assets relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses under the Tax Act or future tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable years, and could increase our future U.S. tax expense. The foregoing items, as well as any other future changes in tax laws, could have a material adverse effect on our business, cash flow, financial condition, or results of operations. In addition, it is uncertain if and to what extent various states will conform to the Tax Act or any newly enacted federal tax legislation.

In connection with their evaluation of our internal control over financial reporting for the year ended December 31, 2019, our management identified material weaknesses in our control activities, information

and communication and monitoring activities. Namely, we had insufficient segregation of duties, oversight of work performed and ineffective compensating controls in our finance and accounting functions due to limited personnel; certain of our information technology and change management controls were not designed effectively to provide an adequate audit trail; we have sufficient controls to validate the completeness and accuracy of underlying data; we did not design sufficient protocols and procedures to retain adequate documentary evidence related to the timely review and approval of manual journal entries; and we did not sufficiently design and retain adequate documentary evidence supporting the design and operating effectiveness of certain important management review controls. While we have implemented a remediation plan, which we commenced in 2019, there is no guarantee that we will successfully remediate these material weaknesses. In prior years, we have identified certain other deficiencies and material weaknesses in connection with management’s evaluation of our internal control over financial reporting that we have remedied. These weaknesses have included issues arising from our size and inability to segregate duties, as well as, even more recently, a lack of controls to identify and analyze related party transactions and a lack of technical accounting competence, and inadequate procedures and controls to appropriately comply with, and account for, certain payroll tax withholdings and related expenses.

Our board of directors has adopted a written related person transaction policy setting forth the policies and procedures for the review and approval or ratification of related-person transactions. This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships in which we were or are to be a participant, where the amount involved exceeds $120,000 (or if we are a “smaller reporting company’ at such time, the lesser of   (x) $120,000 or (y) 1% of our average total assets at year-end for the last two completed fiscal years) and a related person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person. In reviewing and approving any such transactions, our audit committee is tasked to consider all relevant facts and circumstances, including, but not limited to, whether

In February 2016, the FASB issued ASU No. 2016-02, Leases. This standard, along with other guidance subsequently issued by the FASB (collectively, “ASC 842”), requires lessees to recognize lease assets and liabilities for all leases with lease terms of more than 12 months. The standard makes similar changes to lessor accounting and aligns key aspects of the lessor accounting model with the revenue recognition standard. Presentation of leases within the statements of operations and statements of cash flows will primarily depend on its classification as a finance or operating lease. ASC 842 is effective for the Company in the first quarter of fiscal 2020 with early adoption permitted. The Company adopted ASC 842 on January 1, 2019 using the modified retrospective transition method. Therefore, upon adoption, the Company recognized and measured leases without revising comparative period information or disclosures. The adoption of this standard did not have an impact on the Company’s revenue recognition. In addition, the Company has elected to apply the package of practical expedients permitted under the transition guidance within ASC 842 which does not require reassessment of initial direct costs, classification of a lease and definition of a lease which resulted in the Company foregoing a reassessment of  (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) the initial direct costs for an existing lease. See Note 7 for additional information and details of the effects of adopting the new standard.

The Company enters into contracts with customers for the Company’s QuantaFlo® product. The Company has determined these contracts meet the definition of a lease under Topic 842. The lease portfolio primarily consists of operating leases that are short-term in nature (monthly, quarterly or one year, all of which have renewal options). The Company allocates the consideration in a bundled contract with its customers based on relative standalone selling prices of the lease and non-lease components. The Company made an accounting policy election to apply the practical expedient to not separate lease and eligible non-lease components. The lease component is the predominant component and consists of fees charged for use of the equipment over the period of the arrangement. The nature of the eligible non-lease component is primarily software support. The assets associated with these leasing arrangements are separately identified in the Balance Sheet as Assets for Lease and separately disclosed in Note 3. During the year ended December 31, 2019, the Company recognized approximately $22,858 in lease revenue related to these arrangements, which is included in revenue on the Statements of Income.