Note 3 – Fixed Assets

Fixed assets are summarized as follows:

	March 31,		December 31,
	2017		2016
	(unaudited)
Machinery and equipment	$	757,000	$	662,000
Office furniture and equipment		147,000		141,000
Leasehold improvements		134,000		134,000
Right of use asset-operating leases		518,000		518,000
Accumulated depreciation and amortization		(954,000)		(894,000)
		602,000		561,000
Construction in progress		10,000		83,000
	$	612,000	$	644,000

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02 regarding leases for the purpose of providing more comprehensive and standardized presentation of an entity’s cost of property essential to its operations and its related funding. The new standard requires lessee recognition on the balance sheet of a right-of-use asset and a lease liability, initially measured at the present value of the lease payments. It further requires recognition in the income statement of a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. Finally, it requires classification of all cash payments within operating activities in the statements of cash flows. It is effective for fiscal years commencing after December 15, 2018 and early adoption is permitted. Management has elected early adoption of this standard to minimize the eventual cost of implementation.

The Company has a triple net operating lease for office and laboratory space in Seattle, Washington through March 2020. This lease was modified in November 2016 to extend its term from February 2017 to March 2020. Rent escalated annually by 3% through February 2017 and remains at a constant rate thereafter of $12,000 per month plus triple net operating costs. The Company also has a triple net operating lease for office space in Tulsa, Oklahoma with a term that began in September 2016 and will expire in August 2019 with monthly rent of $2,000 per month plus triple net operating costs. Both leases include lessee renewal options for three years at the then prevailing market rate.

With the retroactive adoption of ASU No. 2016-02, the new lease standard was applied in September 2016 to the Tulsa lease, the commencement of the lease term, and to the Seattle lease in November 2016, the time of the lease modification. A leasehold interest and corresponding lease liability was recognized related to the Tulsa lease and the Seattle lease retroactively in 2016 in the amounts of $71,000 and $447,000, respectively. These reflect the lease commitments over the lease term discounted at the Company’s estimated incremental borrowing rate of 5% per annum. The lessee renewal options were not included in the lease term as they were not considered to be reasonably probable of exercise nor measurable. In 2016, accumulated amortization of these assets amounted to $18,000 and principal payments of the lease liabilities amounted to $18,000. There was no meaningful effect on the 2016 results of operations or the December 31, 2016 accumulated deficit. Management elected to apply the practical expedients in the adoption of ASU No. 2016-02 and to not apply the standard to short term leases.

Lease costs for the three months ended March 31, 2017 and 2016 and other quantitative disclosures are as follows:

	For the three months ended March 31,
	2017		2016
Lease cost:
Operating lease cost	$	55,000	$	40,000
Short-term lease cost		-		11,000
Total lease cost	$	55,000	$	51,000

Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	42,000
For operating lease:
Weighted average remaining lease term (in years)		2.93
Weighted average discount rate		5.00	%

Minimum future payments under the Company’s leases at March 31, 2017 and their application to the corresponding lease liabilities are as follows:

	Discounted		Payments due
	lease liability		under lease
	payments		agreements
2017	$	114,000	$	130,000
2018		159,000		173,000
2019		158,000		164,000
2020		37,000		37,000
Total	$	468,000	$	504,000