NOTE 9. LEASES

Lessee

We have operating leases for corporate offices, two satellite facilities in the state of Washington and certain equipment. We account for lease components (such as rent payments) separately from the non-lease components (such as common-area maintenance costs, real estate and sales taxes and insurance costs). Discount rate represents the interest rate implicit in each lease or our incremental borrowing rate at lease commencement date.

Some leases include one or more options to renew and the exercise of lease renewal options is at our sole discretion. The depreciable life of assets and leasehold improvements is limited by the expected lease term.

As of June 30, 2019, our leases have remaining lease terms ranging from six months to 36 months. Gross right-of-use assets recorded under finance leases and operating leases were $14,286 and $285,616, respectively, and the related accumulated amortization was $14,286 and $123,313, respectively.

Effective April 1, 2014, we entered into a five-year lease for a new corporate office in Las Vegas, Nevada with an unrelated third party (the “Spencer Lease”). The Spencer Lease is for approximately 24,000 square feet of space, comprising of approximately 16,000 square feet of office space and 8,000 square feet of warehouse space.

The initial term of the Spencer Lease commenced on April 1, 2014 and was to expire on June 30, 2019. Annual base rent was $153,000 in the first year, which increases by approximately 4% each year and we are also obligated to pay real estate taxes and other building operating costs. Subject to certain conditions, we have certain rights under the Spencer Lease, including rights of first offer to purchase the premises if the landlord elects to sell.

On January 28, 2019, we executed a first amendment to the Spencer Lease to amend the lease expiration date from June 30, 2019 to December 31, 2019 with monthly base rents of $20,508 from July 1, 2019 to December 31, 2019. As a result of the amendment, we recorded a $117,755 increase to operating lease right-of-use asset and operating lease liability.

In connection with the Spencer Lease, the landlord agreed to finance tenant improvements of $150,000 (“TI Allowance”). The base rent is increased by an amount sufficient to fully amortize the TI Allowance through the initial Spencer Lease term upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of 5.5% per annum. The TI Allowance was classified as a finance lease on the condensed balance sheet upon the adoption of ASC 842 and was paid in full by June 30, 2019.

Supplemental balance sheet information related to leases is as follows:

The components of lease expense are as follows:

Supplemental cash flow information related to leases is as follows:

As of June 30, 2019, future maturities of our operating lease liabilities are as follows:

Lessor

Our agreements with the casino clients for the license of proprietary tables games are outside of the scope of ASC 842 as such agreements are related to the license of intellectual properties.

Enhanced table systems are electronic enhancements used on casino table games to add to player appeal and enhance game security.  An example in this category is our Bonus Jackpot System (“BJS”), an advanced electronic system installed on gaming tables designed to collect data by detecting player wagers and other game activities.  Typically, the BJS system includes a server, a laptop, an electronic video display, known as TableVision, which shows game information designed to generate player interest and to promote various aspects of the game and other electronic components.  Our BJS agreements with clients convey the rights to use equipment to our clients. However, these agreements are month-to-month and there is no penalty for either party to terminate the agreements without permission from the other party. As a result, these agreements are not considered leases and, therefore, are outside of the scope of ASC 842 as well.