12. Leases

6 Months Ended

Jun. 30, 2019

Leases [Abstract]

Leases

Lessee Accounting

We determine if an agreement is a lease at inception. We lease our corporate office space and equipment under operating leases. We lease data center equipment, including maintenance contracts under finance leases.

Operating leases are recorded as right-of-use (“ROU”) assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. The Company’s lease agreements do not contain any variable lease payments, material residual value guarantees or any restrictive covenants. Our lease terms may include options, at our sole discretion, to extend or terminate the lease. At the adoption date of ASC Topic 842, the Company is reasonably certain that we would exercise our option to renew our corporate office space operating lease. Lease expense is recognized on a straight-line basis over the lease term.

We lease the corporate office space in Tempe, Arizona from a Company that is owned by the major shareholder and CEO of the Company. Effective March 1, 2017, the lease agreement was renewed for a three year term with monthly rent payments of $25,000. There is a renewal option for another three year term at the end of the lease that was considered in valuing the ROU asset as we are reasonably certain we would exercise the renewal option. Amortization of the ROU assets and operating lease liabilities for the three months ended June 30, 2019 and 2018 was $58,000 and $0, respectively, and for the six months ended June 30, 2019 and 2018 was $115,000 and $0, respectively. Rental expense incurred on operating leases for the three months ended June 30, 2019 and 2018 was approximately $75,000 and $80,000, respectively, and for the six months ended June 30, 2019 and 2018 was approximately $150,000 and $160,000, respectively.

We have lease agreements with lease and non-lease components, and we account for the lease and non-lease components as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company leases equipment and support under a finance lease agreement which extends through 2023. The outstanding balance for finance leases was $127,000 and $0 as of June 30, 2019 and 2018, respectively. The Company recorded assets classified as property and equipment under finance lease obligations of $129,000 and $129,000 as of June 30, 2019 and 2018, respectively. Related accumulated depreciation totaled $28,000 and $2,000 as of June 30, 2019 and 2018, respectively. The $25,000 support contract was classified as a prepaid expense and is being amortized over the service period of 3 years. Amortization expense is included in general and administrative expenses and totaled $2,000 and $4,000 for the three months ended June 30, 2019 and 2018, respectively, and $4,000 and $4,000 for the six months ended June 30, 2019 and 2018, respectively. The interest rate on the finance lease obligation is 6.7% and interest expense was $2,000 and $0 for the three months ended June 30, 2019 and 2018, respectively, and $5,000 and $0 for the six months ended June 30, 2019 and 2018, respectively.

The maturity of operating leases and finance lease liabilities as of June 30, 2019 are as follows:

Year ending December 31,	Operating Leases			Finance Leases
2019 remaining	$	150		$	15
2020		301			37
2021		300			36
2022		300			37
2023		50			21
Total minimum lease payments		1,101			146
Less: amount representing interest		(127	)		(19	)
Present value of minimum lease payments	$	974		$	127

Lease term and discount rate	June 30, 2019
Weighted-average remaining lease term (years)
Operating leases		3.7
Finance leases		4.0
Weighted-average discount rate
Operating leases		6.7	%
Finance leases		6.7	%

	Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	150
Operating cash flows from finance leases		5
Financing cash flows from finance leases		17

We adopted ASC Topic 842 utilizing a practical expedient that does not require application to periods prior to adoption. As previously disclosed in our 2018 Annual Report on Form 10-K and under ASC Topic 840, the predecessor to Topic 842, future aggregate minimum lease obligations under the operating lease and sale-leaseback as of December 31, 2018, exclusive of taxes and insurance, are as follows (in thousands):

Year ending December 31,
2019	$	300
2020		50
Total	$	350

Lessor Accounting

Lessor accounting remained substantially unchanged with the adoption of ASC Topic 842. Crexendo offers its customers lease financing for the lease of our cloud telecommunication equipment (IP or cloud telephone desktop devices). We account for these transactions as sales-type leases. The vast majority of our leases that qualify as sales-type leases are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. Revenue from operating leases is recognized ratably over the applicable service period.

Equipment finance receivables arising from the rental of our cloud telecommunications equipment through sales-type leases, were as follows (in thousands):

	June 30, 2019			December 31, 2018
Gross financing receivables	$	693		$	392
Less unearned income		(236	)		(141	)
Financing receivables, net		457			251
Less: Current portion of finance receivables, net		(99	)		(67	)
Finance receivables due after one year	$	358		$	184

Future minimum lease payments as of June 30, 2019, consisted of the following:

Year ending December 31,	Lease Receivables
2019 remaining	$	103
2020		191
2021		179
2022		123
2023		84
2024		13
Gross equipment financing receivables		693
Less: unearned income		(236	)
Equipment financing receivables, net	$	457