Note 17: Commitment and Contingencies

In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases.” The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. For practically all leases, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018.

In July 2018, the FASB issued ASU 2018-11, Leases (“Topic 842”), Targeted Improvements, which allows for an additional optional transition method where comparative periods presented in the financial statements in the period of adoption will not be restated and instead those periods will be presented under existing guidance in accordance with ASC 840, Leases. Management will use this optional transition method. As of January 1, 2019, management recorded lease liability of $2,071,903, right-of-use asset of $2,153,747, accumulated amortization of $124,070, a reversal of previously recorded deferred rent of $37,920 and the increase in accumulated deficit of $4,306.

As of June 30, 2020, weighted-average lease term for operating leases equals to 76.52 months. Weighted-average discount rate equals to 10.31%.

On February 6, 2018, the Company entered into an operating lease for 6,969 square feet of general office space at 131 South Rodeo Drive, Suite 250, Beverly Hills, CA 90212 pursuant to a 91-month lease that commenced on May 25, 2018. We will pay rent of $364,130 annually, subject to annual escalations of 3.5%.

Effective January 21, 2019, the Company entered into a sublease for the 6,969 square feet of general office space located at 131 South Rodeo Drive, Suite 250, Beverly Hills, CA 90212 pursuant to an 83-month sublease that commenced on February 4, 2019, 2019. The subtenant will pay us rent of $422,321 annually, subject to annual escalations of 3.5%. Since on or about April 2020, the subtenant has failed to make any rent payments. Consequently, the Company, which had been passing through the subtenant’s rental payments to the landlord declined to pay the rent due. The Company is engaged in ongoing discussions with both the subtenant and the landlord to resolve the default by the subtenant.

On January 30, 2019, we entered into an operating lease for 5,838 square feet of general office space at 190 N. Canon Drive, Suite 400, Beverly Hills, CA 90210 pursuant to a 96-month lease that is scheduled to commence on August 1, 2019. We will pay rent of $392,316 annually, subject to annual escalations of 3.5%. Due to the ongoing pandemic, the Company has not been able to lawfully enjoy the use of its office space and the majority of the employees are working remotely. Consequently, the Company has elected to defer the payment of rent. We are currently in ongoing discussions with our landlord regarding a rent deferral or possible abatement.

In addition, the Company has contractual commitments for employment agreements of certain employees.

Rental expenses incurred for operating leases during the three months ended June 30, 2020 and June 30, 2019 were $207,839 and $176,664, respectively. Rental expenses incurred for operating leases during the six months ended June 30, 2020 and June 30, 2019 were $415,678 and $321,457, respectively. During the three months ended June 30, 2020, we received sub-lease income of $121,070. During the six months ended June 30, 2019, we received sub-lease income of $238,484.

The following is a schedule of future minimum contractual obligations as of June 30, 2020, under the Company’s operating leases and employment agreements: