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Leases

6 Months Ended

Jun. 30, 2019

(7) LEASES

On January 1, 2019, the Company adopted ASC No. 842, Leases (“Topic 842”). Topic 842 primarily requires lessees to recognize at the lease commencement date a lease liability, which is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must either (i) apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements or (ii) recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Applying a full retrospective transition approach is not allowed. The Company elected to use the cumulative-effect transition method upon adoption.

Topic 842 also allows lessees and lessors to elect certain practical expedients. The Company elected the following practical expedients:

●

Transitional practical expedients, which must be elected as a package and applied consistently to all of the Company’s leases:

	○	The Company need not reassess whether any expired or existing contracts are or contain leases.

	○	The Company need not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in accordance with the previous guidance will be classified as operating leases, and all existing leases that were classified as capital leases in accordance with the previous guidance will be classified as finance leases).

	○	The Company need not reassess initial direct costs for any existing leases.

●

Hindsight practical expedient. The Company elected the hindsight practical expedient in determining the lease term (that is, when considering lessee options to extend or terminate the lease and to purchase the underlying asset) and in assessing impairment of the Company’s right-of-use assets.

●

As a lessor, the Company elected to not separate nonlease components from lease components when both of the following are met:

	○	The timing and patterns of transfer for the lease component and nonlease component associated with that lease component are the same; and

	○	The lease component, if accounted for separately, would be classified as an operating lease.

As Lessee

The Company has entered into operating leases for office and production facilities and equipment under agreements that expire at various dates through 2026. Certain of these leases contain renewal provisions and escalating rental clauses and generally require the Company to pay utilities, insurance, taxes and other operating expenses. The Company also has property held under financing leases that expire at various dates through 2021. The Company’s leases do not contain any residual value guarantees or material restrictive covenants.

Upon adoption of Topic 842, the Company recognized on its consolidated balance sheet as of January 1, 2019 an initial measurement of approximately $3,458,000 of operating lease liabilities, and approximately $2,336,000 of corresponding operating right-of use assets, net of tenant improvement allowances. The initial measurement of the financing leases under Topic 842 did not have a material change from the balances of the financing lease liabilities and assets recorded prior to the adoption of Topic 842. There was also no cumulative effect adjustment to retained earnings as a result of the transition to Topic 842. The Company recorded the initial recognition of the operating leases as a supplemental noncash financing activity on the accompanying statement of cash flows. The adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations.

The tables below show the initial measurement of the operating lease right-of-use assets and liabilities as of January 1, 2019 and the balances as of June 30, 2019, including the changes during the periods.

	Operating lease right-of-use assets
Initial measurement at January 1, 2019	$	3,458,000
Less tenant improvement allowance		(1,122,000	)
Net right-of-use assets at January 1, 2019		2,336,000
Initial measurement of new operating lease right-of-use-assets		53,000
Less amortization of operating lease right-of-use assets		(144,000	)
Operating lease right-of-use assets at June 30, 2019	$	2,245,000

	Operating lease liabilities
Initial measurement at January 1, 2019	$	3,458,000
Initial measurement of new operating lease liabilities		53,000
Less principal payments on operating lease liabilities		(58,000	)
Operating lease liabilities at June 30, 2019		3,453,000
Less non-current portion		(3,090,000	)
Current portion at June 30, 2019	$	363,000

As of June 30, 2019, the Company’s operating leases have a weighted-average remaining lease term of 6.7 years and a weighted-average discount rate of 7.25%. The maturities of the operating lease liabilities are as follows:

	As of
	June 30, 2019
2019	$	279,000
2020		633,000
2021		620,000
2022		634,000
2023		655,000
Thereafter		1,601,000
Total operating lease payments		4,422,000
Less imputed interest		(969,000	)
Present value of operating lease liabilities	$	3,453,000

Total lease expense was approximately $135,000 and $131,000 for the three months ended June 30, 2019 and 2018, respectively, and approximately $270,000 and $264,000 for the six months ended June 30, 2019 and 2018, respectively. Lease expense was recorded in selling, general and administrative expenses.

The tables below show the initial measurement of the financing lease right-of-use assets and liabilities as of January 1, 2019 and the balances as of June 30, 2019, including the changes during the periods. The Company’s financing lease right-of-use assets are included in “Fixed assets, net” on the accompanying consolidated balance sheet.

	Financing lease right-of-use assets
Initial measurement at January 1, 2019	$	80,000
Less depreciation of financing lease right-of-use assets		(28,000	)
Financing lease right-of-use assets at June 30, 2019	$	52,000

	Financing lease liabilities
Initial measurement at January 1, 2019	$	86,000
Less principal payments on financing lease liabilities		(30,000	)
Financing lease liabilities as of June 30, 2019		56,000
Less non-current portion		(31,000	)
Current portion at June 30, 2019	$	25,000

As of June 30, 2019, the Company’s financing leases have a weighted-average remaining lease term of 2.2 years and a weighted-average discount rate of 5.51%. The maturities of the financing lease liabilities are as follows:

	As of
	June 30, 2019
2019	$	16,000
2020		23,000
2021		21,000
Total financing lease payments		60,000
Less imputed interest		(4,000	)
Present value of financing lease liabilities	$	56,000

For the three months ended June 30, 2019 and 2018, total lease costs under financing leases were approximately $10,000 and $48,000, respectively. For the six months ended June 30, 2019 and 2018, total lease costs under financing leases were approximately $32,000 and $95,000, respectively.

As Lessor

Topic 842 did not make fundamental changes to lease accounting guidance for lessors. Therefore there was no financial statement impact due to the adoption of Topic 842. As a lessor, the Company has two types of customer contracts that involve leases: right-to-use operating leases and sales-type leases.

Right-to-use operating leases. Certain customers enter into contracts to obtain subscription services from the Company, which includes the Company’s content (nonlease component) and equipment installed in the customer locations so the customer can access the content (lease component). The timing and pattern of the transfer of both the subscription services and the equipment are the same, that is, the Company’s subscription services are made available to its customer at the same time as the equipment is installed. Additionally, the Company has determined that the lease component of these customer contracts is an operating lease. Accordingly, the Company has concluded that these contracts qualify for the practical expedient permitted under Topic 842 to not separate the nonlease component from the related lease component. Instead, the Company treats the combined component as a single performance obligation under Topic 606, Revenue from Contracts with Customers, as the Company has concluded that the nonlease component (subscription services) is the predominant component of the combined component.

Sales-type leases. As with the contracts under right-of-use operating leases, certain customers enter into contracts to obtain subscription services from the Company, which includes the Company’s content (nonlease component) and equipment installed in the customer locations so the customer can access the content (lease component). Generally, the equipment lease term is for three years and the customer prepays its lease in full. After the lease term, the lessee may purchase the equipment for a nominal fee or lease new equipment. Although the timing and pattern of the transfer of both the subscription services and the equipment may be the same, the provisions of the contract related to the equipment results in a sales-type lease, and therefore, the Company cannot treat both the nonlease component and the lease component as a combined component. Accordingly, the nonlease component is accounted for under Topic 606 and the sales-type lease is accounted for under Topic 842 and separately disaggregated on the Company’s statement of operations.