Note 6 - Operating Leases

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Note 6 - Operating Leases

NOTE 6 – OPERATING LEASES

The Company adopted Topic 842, Leases, effective January 1, 2019 and adjusted the 2018 comparative period presented by applying the new standard as of January 1, 2018. As a result, the 2018 periods presented for comparative purpose have been adjusted to reflect the application of Topic 842 with an adjustment to opening balance of stockholders’ equity at January 1, 2018 for cumulative effect of the initial application (see Note 4).

The Company leases a 4,200 square foot facility in Oakland, California for $3,500 per month. After year one, the Landlord can increase the rent to fair market value, not to exceed $3.50 per square foot. The lease commenced August 1, 2018 and expires August 1, 2028. The lessor is Hong So Mac, a related party.

As a result of the adoption of ASC 842, the Company recognized an operating liability with a corresponding right-of-use (“ROU”) asset of the same amount based on the present value of the minimum rental payments of the lease as of August 1, 2018. The discount rate used to compute the present value of the minimum rental payments of the lease is the Company’s estimated borrowing rate of 10%. The ROU asset is amortized on a straight-line basis over the remaining term of the lease, which is recorded as rent expense.

Balance sheet information related to the lease is as follows:

	June 30,		December 31,
	2019		2018
Operating lease right-of-use asset	$	250,019		258,276
Operating lease liability, current portion		(17,799)		(16,935)
Operating lease liability, net of current portion		(232,220)		(241,341)

The components of lease expense are as follows:

	June 30,		June 30,
	2019		2018
Amortization of right-of-use asset recorded as rent expense	$	8,257		-
Interest on lease liability included in other expense		12,743		-
Total lease cost	$	21,000		-

Maturities of the lease liability for the twelve months ended June 30, 2019 are as follows:

Future Minimum Lease Payments
2020	$	42,000
2021		42,000
2022		42,000
2023		42,000
2024		42,000
Thereafter		171,500
Total future minimum lease payments	$	381,500
Less: amount representing interest		(131,481)
Present value of future payments	$	250,019
Current portion		17,799
Long-term portion		232,220

Other information related to the lease:

	June 30,		June 30,
	2019		2018
Operating cashflows
Cash paid related to operating lease obligations	$	10,500		-
Weighted average remaining lease term (in years)
Operating leases		9.08		-
Weighted average discount rate
Operating leases		10.0%		0.0%

On March 31, 2019, there was a fire on the property next to the location of the lease making the building uninhabitable since then. The city removed the red tag on the property on June 17 so now the landlord can get the insurance company to assess the water damage and begin repairing the building. It will likely continue to be uninhabitable through September 2019. According to the lease, the Company does not have to make lease payments while the building is uninhabitable and also has the option to terminate the lease if it chooses. The Company has not made a decision yet on whether to terminate the lease and stopped paying rent until the property is fixed. The ROU asset and lease liability will continue to decrease as originally scheduled.