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Leases

6 Months Ended

Jun. 30, 2020

(9)

LEASES

As Lessee

The Company has operating leases for its warehouse facility and for equipment under agreements that expire at various dates through 2023. Certain of these leases contain renewal provisions and the warehouse lease requires the Company to pay utilities, insurance, taxes and other operating expenses. The Company terminated its lease for its corporate headquarters as of June 30, 2020, which is discussed further below. 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, Leases (“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 amounts of which were primarily related to the Company’s corporate headquarters. 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.

Lease Termination

As part of the Company’s on-going efforts to implement measures designed to reduce operating expenses and preserve capital as it continues to seek to mitigate the substantial negative impact of the COVID-19 pandemic on the Company’s business, on June 25, 2020, the Company entered into a Lease Termination, Surrender and Buy-Out Agreement (the “Lease Termination Agreement”) with Burke Aston Partners, LLC (the “Lessor”) to terminate, effective June 30, 2020, the lease dated July 26, 2018 for the Company’s corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired in accordance with its terms in April 2026. Since January 1, 2020, the Company reduced its headcount from 74 to 19 employees, all of whom are currently working remotely, and the Company did not currently need a corporate headquarters of the size subject to that lease. After paying all the amounts the Company potentially could be required to pay under the Lease Termination Agreement, including both contingent payments described below, the Company will have reduced its future cash obligations under the lease by approximately $3.5 million as compared to the amount of rent the Company would have otherwise paid if the lease remained in effect for the duration of its original term.

Pursuant to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to (i) allow the Lessor to keep its security deposits of approximately $260,000, which includes $200,000 of restricted cash under a letter of credit, (ii) pay the Lessor approximately $121,000 for past due rent, and (iii) pay the Lessor $80,000 if the Company sells all or any material part of its assets or all or any material part of its equity interests and $5,000 if the Lessor needs to dispose of furniture that remained in the office space.

As a result of the lease termination, the Company recorded a gain on the termination of the lease of approximately $8,000 during the three months ended June 30, 2020, which includes writing off the remaining balances of the right-of-use asset of approximately $1,913,000 and the corresponding lease liability of approximately $3,135,000, applying the principal portion of past due rents to be paid in July 2020 of approximately $64,000, writing off of the unamortized tenant improvement allowance of approximately $890,000, and applying the security deposit of approximately $260,000.

Additionally, as part of the lease termination and vacating the facility, the Company recorded a loss on the disposal of fixed assets of approximately $282,000 during the three months ended June 30, 2020, which includes approximately $197,000 in furniture and fixtures and the Company’s vehicle, and $85,000 in other leasehold improvement assets.

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 June 30, 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		(146,000	)
Addition of operating lease right-of -use asset		28,000
Write-off of right-of-use asset related to January 2020 asset sale		(26,000	)
Write-off of right-of-use asset due to lease termination		(1,913,000	)
Operating lease right-of-use assets at June 30, 2020	$	44,000

	Operating lease liabilities
Operating lease liabilities at January 1, 2020	$	3,300,000
Principal payments on operating lease liabilities		(120,000	)
Addition of operating lease liability		28,000
Write-off of lease liability related to January 2020 asset sale		(27,000	)
Write-off of lease liability related to lease termination		(3,135,000	)
Operating lease liabilities at June 30, 2020		46,000
Less non-current portion		(28,000	)
Current portion at June 30, 2020	$	18,000

As of June 30, 2020, the Company’s operating leases have a weighted-average remaining lease term of 2.1 years and a weighted-average discount rate of 6.23%. The maturities of the operating lease liabilities are as follows:

	As of
	June 30, 2020
2020	$	26,000
2021		8,000
2022		8,000
2023		8,000
Total operating lease payments		50,000
Less imputed interest		(4,000	)
Present value of operating lease liabilities	$	46,000

For the three months ended June 30, 2020 and 2019, total lease expense under operating leases was approximately $131,000 and $135,000, respectively. For the six months ended June 30, 2020 and 2019, total lease expense under operating leases was approximately $264,000 and $270,000, respectively. Lease expense is 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 June 30, 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		(10,000	)
Finance lease right-of-use assets at June 30, 2020	$	31,000

	Finace lease liabilities
Finance lease liabilities at January 1, 2020	$	41,000
Principal payments on finance lease liabilities as of June 30, 2020		(8,000	)
Finance lease liabilities at June 30, 2020		33,000
Less non-current portion		(9,000	)
Current portion at June 30, 2020	$	24,000

As of June 30, 2020, the Company’s finance leases have a weighted-average remaining lease term of 1.4 years and a weighted-average discount rate of 5.52%. The maturities of the finance lease liabilities are as follows:

	As of
	June 30, 2020
2020		13,000
2021		21,000
Total Finance lease payments		34,000
Less imputed interest		(1,000	)
Present value of Finance lease liabilities	$	33,000

For the three months ended June 30, 2020 and 2019, total lease costs under finance leases were approximately $4,000 and $10,000, respectively. For the six months ended June 30, 2020 and 2019, total lease costs under finance leases were approximately $10,000 and $32,000, 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. The Company has not recognized any sales-type lease revenue for the three or six months ended June 30, 2020.