Commitments and Contingencies

9 Months Ended

Sep. 30, 2020

Commitments and Contingencies Disclosure [Abstract]

Note 13 - Commitments and Contingencies

Operating Leases

We lease office and warehouse space in Los Angeles, California; Boston, Massachusetts; Dallas, Texas; Los Altos, California; Herndon, Virginia; and Munich, Germany. These leases expire between October 2020 and 2023. Lease expense for the three and nine months ended September 30, 2020 and 2019 were $267,000, $915,000, $52,000, and $153,000, respectively. The year over year increases are the result of acquiring lease obligations as part of the October 1, 2019 Acquisition of Oblong Industries.

The Company primarily leases facilities for office and data center space under non-cancellable operating leases for its U.S. and international locations that expire at various dates through 2023. For leases with a term greater than 12 months, the Company recognizes a right-of-use asset and a lease liability based on the present value of lease payments over the lease term. Variable lease payments are not included in the lease payments to measure the lease liability and are expensed as incurred. The Company’s leases have remaining terms of one to four years and some of the leases include a Company option to extend the lease term for less than twelve months to five years, or more, which if reasonably certain to exercise, the Company includes in the determination of lease payments. The lease agreements do not contain any material residual value guarantees or material restrictive covenants.

As the Company's leases do not provide a readily determinable implicit rate, the Company uses the incremental borrowing rate at lease commencement, which was determined using a portfolio approach, based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses the implicit rate when a rate is readily determinable. Operating lease expense is recognized on a straight-line basis over the lease term.

Leases with an initial term of 12 months or less are not recognized on the balance sheet and the expense for these short-term leases is recognized on a straight-line basis over the lease term. Common area maintenance fees (or CAMs) and other charges related to these leases continue to be expensed as incurred.

The following provides balance sheet information related to leases as of September 30, 2020 (in thousands):


		September 30, 2020
Assets
	Operating lease, right-of-use asset, net	$	1,665

Liabilities
	Current portion of operating lease liabilities	$	907
	Operating lease liabilities, net of current portion	889
	Total operating lease liabilities	$	1,796

The following table summarizes the future undiscounted cash payments reconciled to the lease liability (in thousands):


Remaining Lease Payments
Remainder of 2020	$	258
2021	968
2022	566
2023	116
Total lease payments	$	1,908
Effect of discounting	(112)
Total lease liability	$	1,796

On January 1, 2019, the Company recognized ROU assets and lease liabilities of approximately $99,000 and $111,000, respectively, using an estimated incremental borrowing rate of 7.75%. On October 1, 2019 (the closing date of the Acquisition of Oblong Industries), the Company recognized ROU assets and lease liabilities for Oblong Industries of approximately $3,376,000 and $3,578,000, respectively, using an estimated incremental borrowing rate of 6%. The ROU assets and lease liabilities are recorded on the Company’s condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019. During the nine months ended September 30, 2020, non-cash immaterial out-of-period adjustments of approximately $195,000 were recorded to reduce the right of use asset and lease liability. These adjustments related to an error in the calculation of these amounts, in connection with the Oblong Acquisition.

During the nine months ended September 30, 2020, the Company entered into one new lease, in Los Angeles, for warehouse space. The new lease commences on September 1, 2020 and has a term of 18 months. The new lease resulted in an addition to ROU Assets, and corresponding increase to lease liability, of $116,000.

During the nine months ended September 30, 2020, the Company exited four of its leases, one in New York, one in London, one in Atlanta, and one in Los Angeles. The New York and London leases were exited in April 2020 when the Company elected not to renew the leases. The Atlanta and Los Angeles leases were exited in July 2020 and August 2020, respectively, when the Company negotiated terminations of the leases. These lease exits resulted in the reduction of ROU assets and the reduction of lease Liability.

The New York ROU Asset was fully amortized, and the lease liability had been fully paid, as of the date of exit resulting in a net effect of zero on the ROU asset and operating lease liability on the Company’s unaudited Condensed, Consolidated Balance Sheet durng the first quarter of 2020.

The Company had originally planned to renew the London Lease, and, pursuant to ASC 842, had recorded additional operating lease liability and ROU Asset value. Upon the exit of the London Lease, the Company recorded a disposal of ROU Asset value, and corresponding reduction of operating lease liability, of $214,000 on the Company’s unaudited Condensed, Consolidated Balance Sheet during the first quarter of 2020.

On April 24, 2020, the Company signed an amendment to the lease on our Los Angeles warehouse in order to exit the lease early. The original termination date of the lease was the end of May 2022 and we exited the lease at the end of August 2020. This transaction resulted in the disposal of $317,000 in ROU assets and a reduction of $333,000 of lease liability during the second quarter of 2020.

On July 31, 2020, the Company entered into a termination agreement related to our lease in Atlanta. The original termination date of the lease was the end of October 2020 and the termination agreement allows for the termination of the lease on July 31, 2020, in exchange for a cancellation fee of $10,000. Upon exit of the Atlanta lease, the Company recorded a disposal of ROU Asset value of $18,000, and a reduction of lease liability of $21,000, during the three months ended September 30, 2020.

Claim Related to Series A-2 Preferred Stock

As discussed in Note 3 - Oblong Industries Acquisition, on October 1, 2019, the Company closed its Acquisition of Oblong Industries, in connection with which it became a co-borrower under the SVB Loan Agreement. Following consummation of the Acquisition, the holder of the Company’s Series A-2 Preferred Stock communicated to the Company his belief that the Company’s execution of the joinder to the SVB Loan Agreement without his consent contravened approval rights in the Series A-2 Certificate of Designations. The Company has not accrued any liabilities for this matter as of September 30, 2020. As of the filing of this Report, there has been no further update regarding this matter.

COVID-19

On March 11, 2020, the World Health Organization announced that infections of the novel Coronavirus (COVID-19) had become pandemic, and on March 13, the U.S. President announced a National Emergency relating to the disease. There is a possibility of continued widespread infection in the United States and abroad, with the potential for catastrophic impact. National, state and local authorities have required or recommended social distancing and imposed quarantine and isolation measures on large portions of the population, including mandatory business closures. These measures, while intended to protect human life, have had, and may continue to have, serious adverse impacts on domestic and foreign economies of uncertain severity and duration. On June 8, 2020, the National Bureau of Economic Research indicated that the U.S. economy had entered a recession. The sweeping nature of the coronavirus pandemic makes it extremely difficult to predict how the Company’s business and operations will be affected in the longer run, but we expect that it may materially affect our business, financial condition and results of operations. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. Moreover, the coronavirus outbreak has begun to have indeterminable adverse effects on general commercial activity and the world economy, and our business and results of operations could be adversely affected to the extent that this coronavirus or any other epidemic harms the global economy generally and/or the markets in which we operate specifically. Any of the foregoing factors, or other cascading effects of the coronavirus pandemic that are not currently foreseeable, could materially increase our costs, negatively impact our revenues and damage the Company’s results of operations and its liquidity position, possibly to a significant degree. The duration of any such impacts cannot be predicted.

Effective April 30, 2020, an existing major customer of the Company suspended certain professional services we provided to the them, due to cost cutting measures due to COVID-19. These services accounted for $1.0 million (9%) of the Company’s revenue for the nine months ended September 30, 2020, none of which occurred during the three months ended September 30,

2020. Uncertainties resulting from COVID-19 may result in additional customers delaying budget expenditures or re-allocating resources, which would result in a decrease in orders from these customers. Any such decrease in orders from these customers could cause a material adverse effect on our revenues and financial results and our ability to generate positive cash flows, all of which cannot be predicted at this time.