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Leases

3 Months Ended

Mar. 31, 2020

(10)

LEASES

On January 1, 2019, the Company adopted ASC No. 842, Leases (“ASC No. 842”). ASC No. 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.

ASC No. 842 also allows lessees and lessors to elect certain practical expedients. The Company elected the following practical expedients:

●

Transitional practical expedients:

	○	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 finance 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 ASC No. 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 finance leases under ASC No. 842 did not have a material change from the balances of the finance lease liabilities and assets recorded prior to the adoption of ASC No. 842. There was also no cumulative effect adjustment to retained earnings as a result of the transition to ASC No. 842. The Company recorded the initial recognition of the operating leases as a supplemental noncash financing activity on the accompanying consolidated statement of cash flows. The adoption of ASC No. 842 did not have a material impact on the Company’s consolidated statement of operations.

The tables below show the beginning balances of the operating lease right-of-use assets and liabilities as of January 1, 2019 and the ending balances as of March 31, 2020, including the changes during the periods.

	Operating lease right-of-use assets
Operating lease right-of use assets at January 1, 2020	$	2,101,000
Amortization of operating lease right-of-use assets		(73,000	)
Write-off of right-of-use asset related to asset sale (Note 5)		(26,000	)
Operating lease right-of-use assets at March 31, 2020	$	2,002,000

	Operating lease liabilities
Operating lease liabilities at January 1, 2020	$	3,300,000
Principal payments on operating lease liabilities		(106,000	)
Write-off of lease liability related to asset sale (Note 5)		(27,000	)
Operating lease liabilities at March 31, 2020		3,167,000
Less non-current portion		(2,782,000	)
Current portion at March 31, 2020	$	385,000

As of March 31, 2020, the Company’s operating leases have a weighted-average remaining lease term of 6.0 years and a weighted-average discount rate of 7.25%. The maturities of the operating lease liabilities are as follows:

	As of
	March 31, 2020
2020	$	450,000
2021		613,000
2022		634,000
2023		655,000
2024		670,000
Thereafter		931,000
Total operating lease payments		3,953,000
Less imputed interest		(786,000	)
Present value of operating lease liabilities	$	3,167,000

For the three months ended March 31, 2020 and 20198, total lease expense under operating leases was approximately $134,000 and $135,000, respectively, and was recorded in selling, general and administrative expenses.

The tables below show the beginning balances of the finance lease right-of-use assets and liabilities as of January 1, 2020 and the ending balances as of March 31, 2020, including the changes during the periods. The Company’s finance lease right-of-use assets are included in “Fixed assets, net” on the accompanying consolidated balance sheet.

	Finance lease right-of-use assets
Finance lease right-of use assets at January 1, 2020	$	41,000
Depreciation of finance lease right-of-use assets		(5,000	)
Finance lease right-of-use assets at March 31, 2020	$	36,000

	Finace lease liabilities
Finance lease liabilities at January 1, 2020	$	41,000
Principal payments on finance lease liabilities as of March 31, 2020		(5,000	)
Finance lease liabilities at March 31, 2020		36,000
Less non-current portion		(21,000	)
Current portion at March 31, 2020	$	15,000

As of March 31, 2020, the Company’s finance leases have a weighted-average remaining lease term of 1.7 years and a weighted-average discount rate of 5.52%. The maturities of the finance lease liabilities are as follows:

	As of
	March 31, 2020
2020		17,000
2021		21,000
Total Finance lease payments		38,000
Less imputed interest		(2,000	)
Present value of Finance lease liabilities	$	36,000

For the three months ended March 31, 2020 and 2019, total lease costs under finance leases were approximately $6,000 and $22,000, respectively.

As Lessor

ASC No. 842 did not make fundamental changes to lease accounting guidance for lessors. Therefore there was no financial statement impact due to the adoption of ASC No. 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 ASC No. 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. The Company does not anticipate entering into any sales-type lease arrangements after December 31, 2019.