Leases

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Leases

Note 6. Leases

The Company leases approximately 37,729 rentable square feet of office and warehouse space from an unaffiliated third party for our corporate office, manufacturing, assembly, warehouse and shipping facility located at 7970 South Kyrene Road, Tempe, Arizona 85284. From 2016 through March 2019, the Company leased approximately 4,529 rentable square feet of office and industrial space from an unaffiliated third party for our machine shop at 2169 East 5th St., Tempe, Arizona 85284. In April 2019, the Company relocated the machine shop from the Fifth St. location to 7910 South Kyrene Road, located within the same business complex as our main office. The Company executed a lease amendment to add an additional 5,131 rentable square feet for the machine shop and extended its existing office lease through April 2024. The Company’s lease agreements do not contain any residual value guarantees, restrictive covenants or variable lease payments. The Company has not entered into any financing leases.

In addition to base rent, the Company’s lease generally provides for additional payments for other charges, such as rental tax. The lease includes fixed rent escalations. The Company’s lease does not include an option to renew.

The Company determines if an arrangement is a lease at inception. Operating leases are recorded in operating lease right of use assets, net, operating lease liability – short term, and operating lease liability – long-term on its condensed balance sheet.

Operating lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s lease does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate used at adoption was 4.5%. Significant judgement is required when determining the Company’s incremental borrowing rate. The Company uses the implicit rate when readily determinable. Lease expense for lease payments are recognized on a straight-line basis over the lease term.

Effective January 1, 2019, the Company obtained a right-of-use asset in exchange for a new operating lease liability in the amount of $1,721,380 and derecognized $46,523 deferred rent for an adjusted operating lease right-of-use asset in the net amount of $1,674,857.

The balance sheet classification of lease assets and liabilities was as follows:

Balance Sheet Classification	September 30, 2019
Assets
Operating lease right-of-use assets, January 1, 2019	$	1,674,857
Amortization for the nine months ended September 30, 2019		(211,935	)
Total operating lease right-of-use asset, September 30, 2019	$	1,462,922
Liabilities
Current
Operating lease liability, short term	$	291,373
Non-current
Operating lease liability, long term		1,251,098
Total lease liabilities	$	1,542,471

Future minimum lease payments as of September 30, 2019 under non-cancelable operating leases are as follows:

2019	$	167,891
2020		357,452
2021		368,060
2022		379,097
2023		390,562
Thereafter		131,152
Total lease payments		1,794,214
Less: imputed interest		(251,743	)
Operating lease liability	$	1,542,471

The Company had a deferred rent liability of $0 and $46,523 as of September 30, 2019 and December 31, 2018, respectively, relative to the increasing future minimum lease payments. Rent expense for the three months ended September 30, 2019 and 2018 was $124,303 and $120,655, respectively. Rent expense for the nine months ended September 30, 2019 and 2018 was $368,170 and $356,513, respectively.