Quarterly report pursuant to Section 13 or 15(d)


6 Months Ended
Jun. 30, 2019
Commitments and Contingencies Disclosure [Abstract]  





On January 1, 2019 the Company adopted ASC Topic 842 “Leases” (“ASC 842”), which supersedes ASC Topic 840 “Leases” (“ASC 840”), using the alternative transition method of adoption. Under this method of adoption, the Company has recognized and measured all leases that exist as at January 1, 2019 (the effective date) using a modified retrospective transition approach. Comparative periods are presented in accordance with Topic 840 and do not include any retrospective adjustments to comparative periods to reflect the adoption of Topic 842. Any cumulative-effect adjustments to retained earnings is recognized as of January 1, 2019. Upon adoption, we recognized our leases with greater than one year in duration on the balance sheet as right-of-use assets and lease liabilities. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification is based on criteria that are largely similar to those applied in prior lease accounting, but without explicit lines. We have made certain assumptions in judgments when applying ASC 842. Those judgments of most significance are as follows:


  · We elected the package of practical expedients available for transition which allow us to not reassess the following:


  o Whether expired or existing contracts contain leases under the new definition of the lease;


  o Lease classification for expired or existing leases; and


  o Whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.


  · We did not elect to use hindsight for transition when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.


  · For all asset classes, we elected to not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less.


  · For all asset classes, we elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component.


We determine if an arrangement is a lease at inception. Operating leases are included in our consolidated balance sheet as right-of-use assets, operating lease liabilities - current and operating lease liabilities – long term. Upon adoption, the Company determined there were no financing leases. Our current operating leases are for facilities and office equipment. Our leases may contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. Some of our lease agreements may contain rent escalation clauses, rent holidays, capital improvement funding, or other lease concessions. We recognize our minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. Payments are set on a pre-determined schedule within each lease agreement. We amortize this expense over the term of the lease beginning with the date of the standard adoption for current leases and beginning with the date of initial possession, which is the date we enter the leased space and begin to make improvements in the preparation for its intended use, for future leases. Variable lease components represent amounts that are not fixed in nature and are not tied to an index or rate, and are recognized as incurred. Variable lease components consist primarily of common area maintenance, taxes and insurance.


The Company does not, upon adoption of ASC 842, control a specific space or underlying asset used in providing a service by a third-party service provider, under any third party service agreements. There are no such arrangements that meet the definition under ASC 842.


In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. When we cannot readily determine the discount rate implicit in the lease agreement, we utilize our current borrowing rate on our outstanding line of credit. The Company’s line of credit utilizes market rates to assess an interest rate. Refer to Note F for further discussion.


We lease certain property under non-cancelable operating leases, primarily facilities. The impact of the adoption of ASC 842 at January 1, 2019 created a right-of-use asset of $1,042,004, lease liability of $1,095,761 and unwound the $71,877 balance of the deferred lease liability account.


The components of lease expense for the six months ended June 30, 2019 were as follows:


Operating lease expense:      
Operating lease cost - fixed   $ 118,949  
Variable lease cost     61,883  
Total operating lease cost   $ 180,832  


Other information related to leases as of June 30, 2019 was as follows:


Operating lease liability - current   $ 218,614  
Operating lease liability - long-term   $ 830,907  
Operating cash outflows from operating leases   $ 109,794  
Weighted-average remaining lease term of operating leases     6.1 years  
Weighted-average discount rate of operating leases     8.5%  


Future annual minimum operating lease payments as of June 30, 2019 were as follows:


2019 (excluding the six months ended June 30, 2019)   $ 110,005  
2020     223,835  
2021     242,299  
2022     195,176  
2023     193,169  
2024 and thereafter     384,119  
Total minimum lease payments   $ 1,348,603  
Less imputed interest     (299,082 )
Total   $ 1,049,521  


Future annual minimum lease payments under non-cancelable leases as of December 31, 2018 prior to our adoption of ASU 2016-02, Leases (Topic 842) are as follows:


2019   $ 211,448  
2020     223,417  
2021     242,785  
2022     195,176  
2023     193,168  
2024 and thereafter     380,714  
Total   $ 1,446,708  


Rental expenses charged to operations for the three ended June 30, 2019 and 2018 was $91,306 and $87,067. Rental expenses charged to operations for the six months ended June 30, 2019 and 2018 was $180,832 and $170,949, respectively.




The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.


Sales Tax


The following table sets forth the change in the sales tax accrual as of June 30, 2019 and December 31, 2018:


    June 30,
    December 31,
Balance, beginning of year   $ 43,400     $ 83,282  
Sales tax collected     92,226       101,145  
Provisions     (3,544 )     30,465  
Interest and penalties            
Payments     (63,707 )     (171,492 )
Balance, end of period   $ 68,375     $ 43,400