NOTE 11. COMMITMENTS AND CONTINGENCIES

Concentration of risk. We are exposed to risks associated with two clients who represent a significant portion of total revenues. As of December 31, 2018 and 2017, we had the following client revenue concentrations:

Operating lease.  In February 2014, we entered into a lease (the “Spencer Lease”) for a new corporate office with an unrelated third party.  The five-year Spencer Lease is for a building with approximately 24,000 square feet, which is comprised of approximately 16,000 square feet of office space and 8,000 square feet of warehouse space.  The property is located in Las Vegas, Nevada.

The initial term of the Spencer Lease commenced on April 1, 2014 and expires on June 30, 2019.  We were obligated to pay approximately $153,000 in annual base rent in the first year, and the annual base rent will increase by approximately 4% each year.  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.  

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 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 has been classified as a capital lease on the balance sheet (Note 9).

Total rent expense was $299,519 and $292,227 for the year ended December 31, 2018 and 2017, respectively.

In January 2019, we entered into a first amendment to the Spencer Lease to extend the lease expiration date to December 31, 2019. The amendment requires monthly base rent payments of $20,508 between July 1, 2019 and December 31, 2019.

Estimated future minimum operating lease payment obligations on the Spencer Lease total $242,508, which are based upon the terms of our operating leases through the filing date of this report and are all due within the twelve months ending December 31, 2018.

Legal proceedings. In the ordinary course of conducting our business, we are, from time to time, involved in various legal proceedings, administrative proceedings, regulatory government investigations and other matters, including those in which we are a plaintiff or defendant, that are complex in nature and have outcomes that are difficult to predict.  We record accruals for such contingencies to the extent we conclude that it is probable that a liability will be incurred and the amount of the related loss can be reasonably estimated.  Our assessment of each matter may change based on future unexpected events.  An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position.  Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity, but may be material to the results of operations in any given period.  We assume no obligation to update the status of pending litigation, except as may be required by U.S. GAAP, applicable law, statue or regulation.

In September 2018, we were served with a complaint by TMAX regarding the TMAX Agreement.  The complaint, filed in the Eighth Judicial District Court in Clark County, Nevada, alleges that we breached the TMAX Agreement, among other allegations. We filed an answer denying the allegations and counterclaiming for breach of contract, abuse of process and fraud in the inducement, among other counterclaims.  We also filed a partial motion for summary judgment seeking dismissal of the plaintiff’s claims.  Pursuant to a motion to dismiss brought by the co-defendant and former CEO of TMAX, the suit has been dismissed, subject to the right of the plaintiff to file an amended complaint on or before March 20, 2019.  The plaintiff did not file an amended complaint within the time period set by the Judge.  We will move to strike the late filing if TMAX attempts to file an untimely amended complaint.

Uncertain tax positions. As further discussed in Note 13, in accordance with ASC 740, we have recorded a liability of $29,124 related to a potentially uncertain tax position as of December 31, 2018.  However, due to the inherent uncertainty of the underlying tax positions, it is not possible to forecast the payment of this liability to any particular year.