10-Q Q2 2019

10-Q 1 ctek_10q.htm 10-Q  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 000-27507

CYNERGISTEK, INC.

(Exact name of registrant as specified in its charter)

Delaware

37-1867101

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

11940 Jollyville Road, Suite 300-N

Austin, Texas 78759

(Address of principal executive offices, zip code)

(949) 614-0700

(Issuer’s telephone number)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Shares, $.001 par value

CTEK

NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No o.

Indicated by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer oAccelerated filer o 

Non-accelerated filer þSmaller reporting company þ 

Emerging growth company  ¨

Indicate by check mark whether the registrant is a shell company (as defined by Section 12b-2 of the Exchange Act).  Yes oNo þ. 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act.


 

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of August 12, 2019, was 9,795,147.



CYNERGISTEK, INC.

FORM 10-Q

TABLE OF CONTENTS

Page

Table of Contents

PART I – FINANCIAL INFORMATION4 

ITEM 1.  FINANCIAL STATEMENTS.4 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.22 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.29 

ITEM 4.  CONTROLS AND PROCEDURES.29 

PART II - OTHER INFORMATION29 

ITEM 1A.  RISK FACTORS.29 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS29 

ITEM 6.  EXHIBITS.31 

SIGNATURES32 


3



PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

June 30, 2019 (unaudited)

December 31, 2018

ASSETS

 

 

Current assets:

 

 

Cash and cash equivalents 

$ 10,845,464   

$ 6,571,381   

Accounts receivable, net 

4,810,332   

5,572,467   

Prepaid and other current assets 

3,511,465   

1,425,858   

Refundable income taxes 

-   

472,059   

Current assets held for sale 

201,965   

8,427,408   

Total current assets 

19,369,226   

22,469,173   

 

 

 

Property and equipment, net

818,842   

887,874   

Deposits

79,710   

87,778   

Deferred income taxes

1,615,173   

2,146,020   

Intangible assets, net

8,184,521   

9,089,989   

Goodwill

17,008,189   

17,008,189   

Noncurrent assets held for sale

-   

1,844,349   

Total assets

$ 47,075,661   

$ 53,533,372   

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

Current liabilities:

 

 

Accounts payable and accrued expenses 

$ 432,679   

$ 1,370,336   

Accrued compensation and benefits 

1,022,593   

1,592,765   

Deferred revenue 

1,649,026   

918,165   

Income taxes payable 

4,253,173   

-   

Note payable 

-   

343,750   

Current portion of long-term liabilities 

866,995   

3,271,052   

Current liabilities held for sale 

70,000   

7,299,561   

Total current liabilities 

8,294,466   

14,795,629   

 

 

 

Long-term liabilities:

 

 

Term loan, less current portion 

-   

12,851,617   

Promissory notes to related parties, less current portion 

984,375   

5,015,625   

Capital lease obligations, less current portion 

-   

1,570   

Operating lease liability, less current portion 

268,343   

436,805   

Noncurrent liabilities held for sale 

-   

58,967   

Total long-term liabilities 

1,252,718   

18,364,584   

Commitments and contingencies

 

 

Stockholders’ equity:

 

 

Common stock, par value at $0.001, 33,333,333 shares authorized, 9,795,147 shares issued and outstanding at June 30, 2019, and 9,630,050 shares issued and outstanding at December 31, 2018 

9,795   

9,630   

Additional paid-in capital 

32,610,001   

31,910,831   

Accumulated earnings (deficit) 

4,908,681   

(11,547,302)  

Total stockholders’ equity 

37,528,477   

20,373,159   

Total liabilities and stockholders’ equity 

$ 47,075,661   

$ 53,533,372   

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


4



CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

Three Months Ended June 30,

Six Months Ended June 30,

 

2019

2018

2019

2018

Net revenues

$ 5,057,460   

$ 4,308,015   

$ 10,831,117   

$ 8,682,584   

Cost of revenues

2,963,636   

2,476,264   

6,448,275   

4,885,044   

Gross profit 

2,093,824   

1,831,751   

4,382,842   

3,797,540   

 

Operating expenses:

 

 

 

 

Sales and marketing 

1,335,732   

1,324,198   

2,817,115   

2,692,069   

General and administrative 

1,465,144   

1,368,233   

3,118,777   

3,537,524   

Depreciation 

49,115   

35,915   

88,100   

70,979   

Amortization of acquisition-related intangibles 

452,734   

452,734   

905,468   

905,468   

Total operating expenses 

3,302,725   

3,181,080   

6,929,460   

7,206,040   

Loss from operations

(1,208,901)  

(1,349,329)  

(2,546,618)  

(3,408,500)  

 

Other income (expense):

 

 

 

 

Other income 

17   

9   

26   

29   

Interest income 

16,638   

-   

16,638   

-   

Interest expense 

(113,545)  

(341,579)  

(409,450)  

(741,312)  

Total other income (expense) 

(96,890)  

(341,570)  

(392,786)  

(741,283)  

 

 

 

 

 

(Loss) before provision for income taxes

(1,305,791)  

(1,690,899)  

(2,939,404)  

(4,149,783)  

Income tax benefit

366,524   

16,532   

510,738   

619,004   

Net loss from continuing operations

(939,267)  

(1,674,367)  

(2,428,666)  

(3,530,779)  

Income (loss) from discontinued operations, including gain on sale, net of tax

(152,181)  

1,795,500   

18,884,649   

2,944,569   

Net income (loss)

$ (1,091,448)  

$ 121,133   

$ 16,455,983   

$ (586,210)  

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

From continuing operations:

 

 

 

 

Basic 

$ (0.10)  

$ (0.17)  

$ (0.25)  

$ (0.37)  

Diluted 

$ (0.10)  

$ (0.17)  

$ (0.25)  

$ (0.37)  

 

 

 

 

 

From discontinued operations:

 

 

 

 

Basic 

$ (0.02)  

$ 0.19   

$ 1.94   

$ 0.31   

Diluted 

$ (0.02)  

$ 0.18   

$ 1.91   

$ 0.31   

 

 

 

 

 

Net income:

 

 

 

 

Basic 

$ (0.11)  

$ 0.01   

$ 1.69   

$ (0.06)  

Diluted 

$ (0.11)  

$ 0.01   

$ 1.66   

$ (0.06)  

 

 

 

 

 

Number of weighted average shares outstanding:

 

 

 

 

Basic 

9,791,744   

9,613,566   

9,732,991   

9,600,120   

Diluted 

9,791,744   

9,827,686   

9,911,140   

9,600,120   

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


5



CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2019

(UNAUDITED)

 

 

 

 

 

Additional

 

Accumulated

 

Total

 

Common Stock

 

Paid-in

 

(Deficit)

 

Stockholders’

 

Shares

 

Amount

 

Capital

 

Earnings

 

Equity

Balance at December 31, 2018

9,630,050   

 

$ 9,630   

 

$ 31,910,831   

 

$ (11,547,302)  

 

$ 20,373,159   

Stock compensation expense for options and warrants granted to employees and directors

-   

 

-   

 

11,286   

 

-   

 

11,286   

Stock compensation expense for restricted stock units granted to employees

-   

 

-   

 

395,406   

 

-   

 

395,406   

Restricted stock units exercised

70,000   

 

70   

 

(70)  

 

-   

 

-   

Stock options exercised

23,015   

 

23   

 

2,505   

 

-   

 

2,528   

Net income

-   

 

-   

 

-   

 

17,547,431   

 

17,547,431   

Balance at March 31, 2019

9,723,065   

 

$ 9,723   

 

$ 32,319,958   

 

$ 6,000,129   

 

$ 38,329,810   

Stock compensation expense for options and warrants granted to employees and directors

-   

 

-   

 

993   

 

-   

 

993   

Stock compensation expense for restricted stock units granted to employees

-   

 

-   

 

280,169   

 

-   

 

280,169   

Restricted stock units exercised

47,455   

 

47   

 

(47)  

 

-   

 

-   

Stock options exercised

24,627   

 

25   

 

8,928   

 

-   

 

8,953   

Net loss

-   

 

-   

 

-   

 

(1,091,448)  

 

(1,091,448)  

Balance at June 30, 2019

9,795,147   

 

$ 9,795   

 

$ 32,610,001   

 

$ 4,908,681   

 

$ 37,528,477   

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


6



CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2018

(UNAUDITED)

 

 

 

 

 

Additional

 

Accumulated

 

Total

 

Common Stock

 

Paid-in

 

(Deficit)

 

Stockholders’

 

Shares

 

Amount

 

Capital

 

Earnings

 

Equity

Balance at December 31, 2017

9,576,028   

 

$ 9,576   

 

$ 31,156,362   

 

$ (14,320,560)  

 

$ 16,845,378   

Stock compensation expense for options and warrants granted to employees and directors

-   

 

-   

 

11,516   

 

-   

 

20,704   

Stock compensation expense for restricted stock units granted to employees

-   

 

-   

 

176,746   

 

-   

 

281,430   

Stock options exercised

16,519   

 

17   

 

(17)  

 

-   

 

-   

Cumulative effect of adoption of revenue recognition standard ASC 606

-   

 

-   

 

-   

 

879,666   

 

879,666   

Net loss

-   

 

-   

 

-   

 

(707,343)  

 

(707,343)  

Balance at March 31, 2018

9,592,547   

 

$ 9,593   

 

$ 31,344,607   

 

$ (14,148,237)  

 

$ 17,205,963   

Stock compensation expense for options and warrants granted to employees and directors

-   

 

-   

 

9,188   

 

-   

 

9,188   

Stock compensation expense for restricted stock units granted to employees

-   

 

-   

 

104,684   

 

-   

 

104,684   

Stock options exercised

23,586   

 

23   

 

(23)  

 

-   

 

-   

Net income

-   

 

-   

 

-   

 

121,133   

 

121,133   

Balance at June 30, 2018

9,616,133   

 

$ 9,616   

 

$ 31,458,456   

 

$ (14,027,104)  

 

$ 17,440,968   

 

The accompanying notes are an integral part of these condensed consolidated financial statements

.


7



CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

Six Months Ended June 30,

 

2019

2018

Cash flows from operating activities:

 

 

Net income (loss) 

$ 16,455,983   

$ (586,210)  

Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activities:

 

 

Depreciation 

124,735   

180,584   

Amortization of intangible assets 

905,468   

905,467   

Deferred income taxes 

530,847   

(230,000)  

Bad debts 

-   

83,070   

Stock compensation expense for warrants and options granted to employees and directors

12,279   

20,704   

Stock compensation expense for restricted stock units granted to employees and directors

675,575   

281,430   

Note payable issued in consideration for severance pay

-   

343,750   

Interest expense related to loan acquisition costs

85,883   

9,534   

Gain on sale of discontinued operations before income taxes

(23,839,119)  

-   

Changes in operating assets and liabilities:

 

 

Accounts receivable 

(625,796)  

3,240,943   

Supplies 

75,252   

185,080   

Prepaid and other current assets 

1,568,537   

(132,778)  

Deposits 

8,068   

(402)  

Accounts payable and accrued expenses 

101,015   

(1,753,767)  

Income taxes payable 

4,725,233   

(183,321)  

Accrued compensation and benefits 

(1,725,230)  

(837,159)  

Deferred revenue 

739,708   

941,154   

Net cash (used for) provided by operating activities 

(181,562)  

2,468,079   

Cash flows from investing activities:

 

 

Proceeds from sale of net assets of discontinued operations 

24,370,254   

-   

Purchases of property and equipment 

(127,705)  

(80,979)  

Net cash provided by (used for) investing activities 

24,242,549   

(80,979)  

Cash flows from financing activities:

 

 

Proceeds from term loan 

-   

17,250,000   

Loan acquisition fees paid 

-   

(111,250)  

Payments on term loans 

(15,401,786)  

(11,818,333)  

Payments on promissory notes to related parties 

(4,375,000)  

(6,890,625)  

Payments on capital leases 

(21,599)  

(67,303)  

Proceeds from issuance of common stock through stock options and warrants 

11,481   

-   

Net cash used for financing activities 

(19,786,904)  

(1,637,511)  

Net increase (decrease) in cash and cash equivalents

4,274,083   

749,589   

Cash and cash equivalents, beginning of period

6,571,381   

4,252,060   

Cash and cash equivalents, end of period

$ 10,845,464   

$ 5,001,649   

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


8



CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

 

Six Months Ended June 30,

 

2019

2018

Supplemental disclosure of cash flow information:

 

 

Interest paid

$ 588,397   

$ 644,895   

Income taxes paid

$ 122,741   

$ 178,262   

 

 

 

Non-cash investing and financing activities:

 

 

Capitalized right-to-use asset resulting from the adoption of ASC 842                                      

$             -   

$ 808,841   

Capitalized operating lease liability resulted from the adoption of ASC 842

$             -   

$ 683,797   

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


9



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(UNAUDITED)

1.BASIS OF PRESENTATION 

The accompanying unaudited condensed consolidated financial statements of CynergisTek, Inc. and its subsidiaries (the “Company”, “we”, “us” or “CynergisTek”) have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the Securities and Exchange Commission (“SEC”) on March 27, 2019.

The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly our financial position and results of operations as of and for the periods presented.  The results for such periods are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  As a result, actual results could differ from those estimates.

The accompanying unaudited condensed consolidated financial statements include the accounts of CynergisTek and its wholly owned subsidiaries.  All intercompany balances and transactions have been eliminated.

Based on our integration strategies, and an analysis of how our Chief Operating Decision Makers review, manage and are compensated, we have determined that the Company operates as one segment. As described in Note 17, we sold the assets used in our managed print services business division (the “MPS Business”) on March 20, 2019. For the periods presented, all revenues were derived from domestic operations.

We have performed an evaluation of subsequent events through the date of filing these unaudited condensed consolidated financial statements with the SEC.

Certain balances have been reclassified to conform to current period presentation.

2.RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS 

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard on leasing. The new standard requires companies to record most leased assets and liabilities on the balance sheet, and also proposed a dual model for recognizing expense. The Company adopted the standard as of January 1, 2019, with retroactive reporting for prior periods (the comparative option). Adoption of the new standard resulted in the recording of operating lease right-of-use ("ROU")  assets and operating lease liabilities of $808,841 and $683,797, respectively, as of January 1, 2018, with the difference due to deferred rents that were reclassified to the ROU asset value. The standard did not affect our consolidated net income or cash flows. See Note 6 for further details.

In August 2016, the FASB issued a new accounting standard which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. This guidance was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted, provided that all of the amendments are adopted in the same period. Adoption of these accounting changes did not have a material impact on our consolidated financial statements.


10



In January 2017, the FASB issued a new accounting standard which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance was effective for the Company beginning in 2019. Adoption of these accounting changes did not have a material impact on our consolidated financial statements.

In January 2017, the FASB issued a new accounting standard simplifying the test for goodwill impairment. Currently, the fair value of the reporting unit is compared with the carrying value of the reporting unit (identified as "Step 1"). If the fair value of the reporting unit is lower than its carrying amount, then the implied fair value of goodwill is calculated. If the implied fair value of goodwill is lower than the carrying value of goodwill an impairment is recognized (identified as "Step 2"). The new standard eliminates Step 2 from the impairment test; therefore, a goodwill impairment will be recognized as the difference of the fair value and the carrying value. The new standard becomes effective on January 1, 2020, with early adoption permitted. We adopted this standard on January 1, 2019.This new standard had no impact on our consolidated financial position, results of operations and cash flows.

In May 2017, the FASB issued a new accounting standard which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This guidance is effective for the Company beginning in 2019. Adoption of these accounting changes did not have a material impact on our consolidated financial statements.

In June 2018, the FASB issued a new accounting standard which provides guidance that expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The new guidance is effective for the Company beginning in 2019, with early adoption permitted. Adoption of these accounting changes did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued a new accounting standard which modifies the disclosure requirements on fair value measurements. This guidance will be effective for fiscal years beginning after December 15, 2019. The amendments related to the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this guidance and delay adoption of the additional disclosures until their effective date. We do not anticipate adoption to have a material impact on our consolidated financial statements.

 

3.ACCOUNTS RECEIVABLE 

A summary of accounts receivable is as follows:

 

 

June 30, 2019

December 31, 2018

Trade receivables

$ 4,810,332   

$ 5,572,467   

Allowance for doubtful accounts

-   

-   

Total accounts receivable, net 

$ 4,810,332   

$ 5,572,467   


11



4.DEFERRED COMMISSIONS 

Our incremental costs of obtaining a contract, which consist of sales commissions, are deferred and amortized over the period of contract performance. Effective January 1, 2018, we adopted the modified retrospective method of the new revenue recognition pronouncement. Deferred commissions are included in prepaid and other current assets in our consolidated balance sheets. We had $961,463 and $961,371 of unamortized deferred commissions as of June 30, 2019 and 2018, respectively. We had $273,881 and $574,798 of commissions expense for the three and six months ended June 30, 2019, respectively. Commissions expense for the three and six months ended June 30, 2018 were $211,663 and $362,971, respectively.

5.PROPERTY AND EQUIPMENT 

A summary of property and equipment follows:

 

June 30, 2019

December 31, 2018

Furniture and fixtures

$ 195,586   

$ 316,926   

Computers and office equipment

305,255   

563,856   

Right of use assets

683,797   

683,797   

Property and equipment at cost 

1,184,638   

1,564,579   

Less accumulated depreciation and amortization

(365,796)  

(555,365)  

 

$ 818,842   

$ 887,874   

 

6.LEASES 

We lease approximately 17,000 square feet of office space at 27271 Las Ramblas, Suite 200, Mission Viejo, California. This lease terminates in April 2021. During the first quarter of 2019, we subleased this space to two subtenants. The terms of these subleases end concurrently with the end of our lease obligation in April 2021.We also lease approximately 3,600 square feet of office space at 11410 Jollyville Road, Suite 2201, Austin, Texas. This lease terminates in September 2019. During the first quarter of 2018, we subleased this space to a subtenant. The terms of this sublease ends concurrently with the end of our lease obligation in September 2019. We also lease approximately 9,600 square feet of office space at 11940 Jollyville Road, Austin, Texas. This lease terminates in May 2020. Operating lease expense totaled $214,705 and $361,377 for the six months ended June 30, 2019 and 2018, respectively.

We used a discount rate of 5.5% as of January 1, 2018 in determining our operating lease liability. This rate represented our incremental borrowing rate at that time. Short-term leases with initial terms of twelve months or less are not capitalized.

We determine if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.

Right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. Certain of the leases contain extension options; however, we have not included such options as part of its right-of-use assets and lease liabilities because it does not expect to extend the leases. We measure and records a right-of-use asset and lease liability based on the discount rate implicit in the lease, if known. In cases where the discount rate implicit in the lease is not known, we measure the right-of-use assets and lease liabilities using a discount rate equal to our estimated incremental borrowing rate for loans with similar collateral and duration.

We elected to not apply the recognition requirements of Topic 842 to leases of all classes of underlying assets that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. Instead, lease payments for such short-term leases


12



are recognized in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

We also lease certain office equipment under a finance lease arrangement.

Operating lease expense is comprised of the following:

 

Three Months Ended June 30,

Six Months Ended June 30,

 

2019

2018

2019

2018

Operating lease cost

$ 201,709   

$ 221,379   

$ 289,633   

$ 312,956   

Sublet income

(46,433)  

(59,254)  

(69,245)  

(67,566)  

Net operating lease cost 

$ 155,276   

$ 162,125   

$ 220,388   

$ 245,400   

 

Maturities of lease liabilities are as follows:

 

Operating Leases

Finance Leases

2019

$ 316,146   

$      405   

2020

512,632   

-   

2021

132,926   

-   

     Total lease payments

961,704   

405   

Less imputed interest

(389,271)  

-   

     Total lease liabilities

572,433   

405   

Less current portion of lease liabilities

(304,090)  

(405)  

     Long-term lease liabilities

$ 268,343   

$          -   

 

7.INTANGIBLE ASSETS 

 

Intangible assets are amortized over expected useful lives ranging from 1.5 to 10 years and consist of the following:

 

June 30, 2019

December 31, 2018

 

Carrying

Amount

Accumulated

Amortization

Net Book

Value

Carrying

Amount

Accumulated

Amortization

Net Book

Value

 

 

 

 

 

 

 

Acquired technology

$ 9,220,608   

$ (2,650,678)  

$ 6,569,930   

$ 9,220,608   

$ (2,202,291)  

$ 7,018,317   

Customer relationships

2,933,257   

(2,127,007)  

806,250   

2,933,257   

(1,858,257)  

1,075,000   

Trademarks

1,693,978   

(918,978)  

775,000