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Leases | 9 Months Ended
--- | ---
Sep. 30, 2022
Leases [Abstract] |
Leases | NOTE 8 — Leases Adoption of ASC 842 The Company adopted ASC 842, as amended, using the modified retrospective transition method with an effective date of January 1, 2022. The modified retrospective approach permits a company to use its effective date as the date of initial application to apply the standard to its leases, and, therefore, not restate comparative prior period financial information. As such, results for reporting periods beginning on or after January 1, 2022 are presented under ASC 842. Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 840 (ASC 840). Further, disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2022. The adoption of the lease standard resulted in a cumulative adjustment to opening equity of $0.4 million, as provided in the table below. Subsequent to the Company’s January 1, 2022 adoption of the lease standard, the Company continued to review relevant lease contract elements and improve business processes, which resulted in adjustments to the Company’s adoption entries and presentation. The impacts of the adjustments were recorded in the nine months ended September 30, 2022, and are presented in the table below and in the condensed consolidated financial statements. Upon adoption, the Company recognized operating lease liabilities of $152.8 million based on the present value of the remaining lease payments for existing operating leases, and right-of-use assets of $150.7 million, net of reductions for the impacts of deferred rents. As part of the transition, the Company derecognized all landlord funded lease incentives and deemed landlord financing liabilities, including capital assets related to previous sale and leaseback transactions which were remeasured under ASC 842. The standard provides several optional practical expedients in transition. The Company elected the package of practical expedients, which permits it to not reassess, under the new standard, the Company's prior conclusions about lease identification, lease classification and initial direct costs. As such, the Company applied the modified retrospective transition method as of the adoption date to those lease contracts for which it had taken possession of the property as of January 1, 2022. The Company also elected the practical expedient pertaining to land easements and did not elect the practical expedient related to use-of-hindsight. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption and also the practical expedient to not separate lease and non-lease components for all its leases. Upon transition, the Company recorded the following increases (decreases) to the respective line items on its condensed consolidated balance sheet:
(in thousands) |  | Adjustments as of January 1, 2022 (As Reported) |  | Subsequent Adjustments |  | Cumulative Adjustments as of September 30, 2022 (As Corrected)
Property and equipment, net |  | $ | (79,821) |  |  | $ | (6,171) |  |  | $ | (85,992) |
Finance lease right-of-use assets |  | 111,826 |  |  | 3,745 |  |  | 115,571 |
Operating lease right-of-use assets |  | 150,689 |  |  | — |  |  | 150,689 |
Deferred rent |  | (3,153) |  |  | — |  |  | (3,153) |
Current portion of finance lease obligations |  | 607 |  |  | — |  |  | 607 |
Current portion of operating lease obligations |  | 8,430 |  |  | — |  |  | 8,430 |
Current portion of long-term debt |  | (46) |  |  | — |  |  | (46) |
Finance lease obligations, net of current portion |  | 32,534 |  |  | — |  |  | 32,534 |
Operating lease obligations, net of current portion |  | 144,405 |  |  | — |  |  | 144,405 |
Long-term debt, net of current portion |  | (1,426) |  |  | (1,506) |  |  | (2,932) |
Accumulated deficit |  | 386 |  |  | (264) |  |  | 122 |
Non-controlling interests |  | 957 |  |  | (656) |  |  | 301 |
Nature of Leases The Company leases all of its domestic company-operated shops, warehouse facilities, headquarters buildings, and certain equipment under various non-cancelable lease agreements that expire on various dates through 2041. The Company evaluates contracts entered into to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified in the contract. The Company evaluates whether it controls the use of the asset, which is determined by assessing whether it obtains substantially all economic benefits from the use of the asset, and whether the Company has the right to direct the use of the asset. If these criteria are met, a lease has been identified and has a term greater than one year, the Company accounts for the contract under the requirements of ASC 842. Lease commencement is determined when the Company takes possession of a leased asset, at which time the Company also determines the lease classification as an operating or finance lease. The Company’s real estate leases consist of commercial ground leases (land only) and build-to-suit leases (land and building). The real estate leases are a combination of both operating and finance leases, depending on evaluation of the lease terms. Generally, the Company’s real estate leases have an initial term of 15 years and typically include two to three renewal options of five-years each. These renewal options are included in the lease term when it is reasonably certain that the option will be exercised. For commercial ground leases, one five-year renewal is included in the Company’s initial lease term calculations. The Company’s real estate leases typically provide for fixed minimum rent payments. For operating leases, the Company recognizes lease expense on a straight-line basis over the lease term from the date the Company takes possession of the leased property. Lease expense incurred before a lease commences is included in the calculation of the right-of-use asset. Once a lease commences, the Company records lease expense in cost of sales on the Company’s condensed consolidated statements of operations. Variable lease costs generally include payments for additional rent such as real estate taxes, insurance, and common area maintenance, and are excluded from the measurement of the lease liability. Variable lease costs are included in cost of sales on the condensed consolidated statements of operations. The Company calculates right-of-use assets and lease liabilities based on the present value of the fixed lease payments, including any estimated lease incentives, at lease commencement using its incremental borrowing rate, applied on a portfolio basis. As the rate implicit in the Company’s leases cannot be readily determined, the discount rate used to measure the lease liability is equal to the rate the Company would pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The Company expends cash for leasehold improvements to build out and equip its leased premises. For certain leases, a portion of the leasehold improvements and building costs are reimbursed by landlords as landlord incentives pursuant to agreed-upon terms in the Company’s lease agreements. Landlord incentives, if obtained, are received in cash after the Company takes possession of the property, and as the Company meets required milestones during the construction of the property. The Company includes these amounts in the measurement of the initial right-of-use asset and lease liability. A summary of finance and operating lease right-of-use assets and lease liabilities as of September 30, 2022 is as follows:
(in thousands) |  | Balance Sheet Classification |  | September 30, 2022
Right-of-use assets |  |  |  |
Finance leases |  | Finance lease right-of-use assets, net |  | $ | 214,903 |
Operating leases |  | Operating lease right-of-use assets, net |  | 165,682 |
Total right-of-use assets |  |  |  | $ | 380,585 |
Lease liabilities |  |  |  |
Finance leases |  | Current portion of finance lease obligations |  | $ | 7,004 |
|  | Finance lease obligations, net of current portion |  | 209,257 |
Operating leases |  | Current portion of operating lease obligations |  | 9,462 |
|  | Operating lease obligations, net of current portion |  | 157,319 |
Total lease liabilities |  |  |  | $ | 383,042 |
The components of lease cost were as follows for the periods presented:
(in thousands) |  | Statement of Operations Classification |  | Three Months Ended September 30, 2022 |  | Nine Months Ended September 30, 2022
Finance lease cost |  |  |  |  |  |
Amortization of right-of-use assets |  | Cost of sales |  | $ | 3,121 |  |  | $ | 7,919 |
Interest on lease liabilities |  | Interest expense |  | 2,482 |  |  | 6,261 |
Total finance lease cost |  |  |  | 5,603 |  |  | 14,180 |
Operating lease cost |  | Cost of sales |  | 4,228 |  |  | 12,109 |
Variable lease cost |  | Cost of sales |  | 566 |  |  | 1,625 |
Total lease cost |  |  |  | $ | 10,397 |  |  | $ | 27,914 |
Future minimum lease payments for finance and operating lease liabilities as of September 30, 2022 were as follows:
(in thousands) |  | Finance |  | Operating
Remainder of 2022 |  | $ | 4,882 |  |  | $ | 4,363 |
2023 |  | 17,527 |  |  | 15,601 |
2024 |  | 18,185 |  |  | 15,291 |
2025 |  | 18,417 |  |  | 15,009 |
2026 |  | 18,741 |  |  | 14,868 |
Thereafter |  | 246,068 |  |  | 161,592 |
Total |  | $ | 323,820 |  |  | $ | 226,724 |
Less: imputed interest |  | (107,559) |  |  | (59,943) |
Present value of minimum lease payments |  | 216,261 |  |  | 166,781 |
Less: current portion |  | (7,004) |  |  | (9,462) |
Lease liabilities, net of current portion |  | $ | 209,257 |  |  | $ | 157,319 |
Future minimum lease payments under noncancellable operating leases and capital lease liabilities as of December 31, 2021 were as follows:
(in thousands) |  | Capital |  | Operating
2022 |  | $ | 8,824 |  |  | $ | 12,398 |
2023 |  | 8,672 |  |  | 12,002 |
2024 |  | 8,743 |  |  | 11,699 |
2025 |  | 8,926 |  |  | 11,420 |
2026 |  | 9,229 |  |  | 11,297 |
Thereafter |  | 85,985 |  |  | 125,774 |
Total |  | $ | 130,379 |  |  | $ | 184,590 |
Less: imputed interest |  | (47,402) |  |  |
Present value of minimum lease payments |  | 82,977 |  |  |
Less: current portion |  | (3,389) |  |  |
Lease liabilities, net of current portion |  | $ | 79,588 |  |  |
A summary of lease terms and discount rates for finance and operating leases as of September 30, 2022 is as follows:
|  | September 30, 2022
Weighted-average remaining lease term (years) |  |
Finance leases |  | 16.2
Operating leases |  | 15.1
Weighted-average discount rate (percentages) |  |
Finance leases |  | 5.2%
Operating leases |  | 4.1%
Supplemental cash flow information related to leases as of September 30, 2022 is as follows for the period presented:
(in thousands; unaudited) |  | Nine Months Ended September 30, 2022 |  |  |  |
Cash paid for amounts included in the measurement of lease liabilities |  |  |  |  |  |
Operating cash flows from finance leases |  | $ | 6,261 |  |  |  |  |
Operating cash flows from operating leases |  | 11,611 |  |  |  |  |
Financing cash flows from finance leases |  | 3,144 |  |  |  |  |
Right-of-use assets obtained in exchange for lease obligations 1 |  |  |  |  |  |
Finance leases |  | 135,987 |  |  |  |  |
Operating leases |  | 171,437 |  |  |  |  |
_________________ 1 Amounts include the transition adjustment for the adoption of ASU 2016-02, as amended.
Leases | NOTE 8 — Leases Adoption of ASC 842 The Company adopted ASC 842, as amended, using the modified retrospective transition method with an effective date of January 1, 2022. The modified retrospective approach permits a company to use its effective date as the date of initial application to apply the standard to its leases, and, therefore, not restate comparative prior period financial information. As such, results for reporting periods beginning on or after January 1, 2022 are presented under ASC 842. Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 840 (ASC 840). Further, disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2022. The adoption of the lease standard resulted in a cumulative adjustment to opening equity of $0.4 million, as provided in the table below. Subsequent to the Company’s January 1, 2022 adoption of the lease standard, the Company continued to review relevant lease contract elements and improve business processes, which resulted in adjustments to the Company’s adoption entries and presentation. The impacts of the adjustments were recorded in the nine months ended September 30, 2022, and are presented in the table below and in the condensed consolidated financial statements. Upon adoption, the Company recognized operating lease liabilities of $152.8 million based on the present value of the remaining lease payments for existing operating leases, and right-of-use assets of $150.7 million, net of reductions for the impacts of deferred rents. As part of the transition, the Company derecognized all landlord funded lease incentives and deemed landlord financing liabilities, including capital assets related to previous sale and leaseback transactions which were remeasured under ASC 842. The standard provides several optional practical expedients in transition. The Company elected the package of practical expedients, which permits it to not reassess, under the new standard, the Company's prior conclusions about lease identification, lease classification and initial direct costs. As such, the Company applied the modified retrospective transition method as of the adoption date to those lease contracts for which it had taken possession of the property as of January 1, 2022. The Company also elected the practical expedient pertaining to land easements and did not elect the practical expedient related to use-of-hindsight. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption and also the practical expedient to not separate lease and non-lease components for all its leases. Upon transition, the Company recorded the following increases (decreases) to the respective line items on its condensed consolidated balance sheet:
(in thousands) |  | Adjustments as of January 1, 2022 (As Reported) |  | Subsequent Adjustments |  | Cumulative Adjustments as of September 30, 2022 (As Corrected)
Property and equipment, net |  | $ | (79,821) |  |  | $ | (6,171) |  |  | $ | (85,992) |
Finance lease right-of-use assets |  | 111,826 |  |  | 3,745 |  |  | 115,571 |
Operating lease right-of-use assets |  | 150,689 |  |  | — |  |  | 150,689 |
Deferred rent |  | (3,153) |  |  | — |  |  | (3,153) |
Current portion of finance lease obligations |  | 607 |  |  | — |  |  | 607 |
Current portion of operating lease obligations |  | 8,430 |  |  | — |  |  | 8,430 |
Current portion of long-term debt |  | (46) |  |  | — |  |  | (46) |
Finance lease obligations, net of current portion |  | 32,534 |  |  | — |  |  | 32,534 |
Operating lease obligations, net of current portion |  | 144,405 |  |  | — |  |  | 144,405 |
Long-term debt, net of current portion |  | (1,426) |  |  | (1,506) |  |  | (2,932) |
Accumulated deficit |  | 386 |  |  | (264) |  |  | 122 |
Non-controlling interests |  | 957 |  |  | (656) |  |  | 301 |
Nature of Leases The Company leases all of its domestic company-operated shops, warehouse facilities, headquarters buildings, and certain equipment under various non-cancelable lease agreements that expire on various dates through 2041. The Company evaluates contracts entered into to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified in the contract. The Company evaluates whether it controls the use of the asset, which is determined by assessing whether it obtains substantially all economic benefits from the use of the asset, and whether the Company has the right to direct the use of the asset. If these criteria are met, a lease has been identified and has a term greater than one year, the Company accounts for the contract under the requirements of ASC 842. Lease commencement is determined when the Company takes possession of a leased asset, at which time the Company also determines the lease classification as an operating or finance lease. The Company’s real estate leases consist of commercial ground leases (land only) and build-to-suit leases (land and building). The real estate leases are a combination of both operating and finance leases, depending on evaluation of the lease terms. Generally, the Company’s real estate leases have an initial term of 15 years and typically include two to three renewal options of five-years each. These renewal options are included in the lease term when it is reasonably certain that the option will be exercised. For commercial ground leases, one five-year renewal is included in the Company’s initial lease term calculations. The Company’s real estate leases typically provide for fixed minimum rent payments. For operating leases, the Company recognizes lease expense on a straight-line basis over the lease term from the date the Company takes possession of the leased property. Lease expense incurred before a lease commences is included in the calculation of the right-of-use asset. Once a lease commences, the Company records lease expense in cost of sales on the Company’s condensed consolidated statements of operations. Variable lease costs generally include payments for additional rent such as real estate taxes, insurance, and common area maintenance, and are excluded from the measurement of the lease liability. Variable lease costs are included in cost of sales on the condensed consolidated statements of operations. The Company calculates right-of-use assets and lease liabilities based on the present value of the fixed lease payments, including any estimated lease incentives, at lease commencement using its incremental borrowing rate, applied on a portfolio basis. As the rate implicit in the Company’s leases cannot be readily determined, the discount rate used to measure the lease liability is equal to the rate the Company would pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The Company expends cash for leasehold improvements to build out and equip its leased premises. For certain leases, a portion of the leasehold improvements and building costs are reimbursed by landlords as landlord incentives pursuant to agreed-upon terms in the Company’s lease agreements. Landlord incentives, if obtained, are received in cash after the Company takes possession of the property, and as the Company meets required milestones during the construction of the property. The Company includes these amounts in the measurement of the initial right-of-use asset and lease liability. A summary of finance and operating lease right-of-use assets and lease liabilities as of September 30, 2022 is as follows:
(in thousands) |  | Balance Sheet Classification |  | September 30, 2022
Right-of-use assets |  |  |  |
Finance leases |  | Finance lease right-of-use assets, net |  | $ | 214,903 |
Operating leases |  | Operating lease right-of-use assets, net |  | 165,682 |
Total right-of-use assets |  |  |  | $ | 380,585 |
Lease liabilities |  |  |  |
Finance leases |  | Current portion of finance lease obligations |  | $ | 7,004 |
|  | Finance lease obligations, net of current portion |  | 209,257 |
Operating leases |  | Current portion of operating lease obligations |  | 9,462 |
|  | Operating lease obligations, net of current portion |  | 157,319 |
Total lease liabilities |  |  |  | $ | 383,042 |
The components of lease cost were as follows for the periods presented:
(in thousands) |  | Statement of Operations Classification |  | Three Months Ended September 30, 2022 |  | Nine Months Ended September 30, 2022
Finance lease cost |  |  |  |  |  |
Amortization of right-of-use assets |  | Cost of sales |  | $ | 3,121 |  |  | $ | 7,919 |
Interest on lease liabilities |  | Interest expense |  | 2,482 |  |  | 6,261 |
Total finance lease cost |  |  |  | 5,603 |  |  | 14,180 |
Operating lease cost |  | Cost of sales |  | 4,228 |  |  | 12,109 |
Variable lease cost |  | Cost of sales |  | 566 |  |  | 1,625 |
Total lease cost |  |  |  | $ | 10,397 |  |  | $ | 27,914 |
Future minimum lease payments for finance and operating lease liabilities as of September 30, 2022 were as follows:
(in thousands) |  | Finance |  | Operating
Remainder of 2022 |  | $ | 4,882 |  |  | $ | 4,363 |
2023 |  | 17,527 |  |  | 15,601 |
2024 |  | 18,185 |  |  | 15,291 |
2025 |  | 18,417 |  |  | 15,009 |
2026 |  | 18,741 |  |  | 14,868 |
Thereafter |  | 246,068 |  |  | 161,592 |
Total |  | $ | 323,820 |  |  | $ | 226,724 |
Less: imputed interest |  | (107,559) |  |  | (59,943) |
Present value of minimum lease payments |  | 216,261 |  |  | 166,781 |
Less: current portion |  | (7,004) |  |  | (9,462) |
Lease liabilities, net of current portion |  | $ | 209,257 |  |  | $ | 157,319 |
Future minimum lease payments under noncancellable operating leases and capital lease liabilities as of December 31, 2021 were as follows:
(in thousands) |  | Capital |  | Operating
2022 |  | $ | 8,824 |  |  | $ | 12,398 |
2023 |  | 8,672 |  |  | 12,002 |
2024 |  | 8,743 |  |  | 11,699 |
2025 |  | 8,926 |  |  | 11,420 |
2026 |  | 9,229 |  |  | 11,297 |
Thereafter |  | 85,985 |  |  | 125,774 |
Total |  | $ | 130,379 |  |  | $ | 184,590 |
Less: imputed interest |  | (47,402) |  |  |
Present value of minimum lease payments |  | 82,977 |  |  |
Less: current portion |  | (3,389) |  |  |
Lease liabilities, net of current portion |  | $ | 79,588 |  |  |
A summary of lease terms and discount rates for finance and operating leases as of September 30, 2022 is as follows:
|  | September 30, 2022
Weighted-average remaining lease term (years) |  |
Finance leases |  | 16.2
Operating leases |  | 15.1
Weighted-average discount rate (percentages) |  |
Finance leases |  | 5.2%
Operating leases |  | 4.1%
Supplemental cash flow information related to leases as of September 30, 2022 is as follows for the period presented:
(in thousands; unaudited) |  | Nine Months Ended September 30, 2022 |  |  |  |
Cash paid for amounts included in the measurement of lease liabilities |  |  |  |  |  |
Operating cash flows from finance leases |  | $ | 6,261 |  |  |  |  |
Operating cash flows from operating leases |  | 11,611 |  |  |  |  |
Financing cash flows from finance leases |  | 3,144 |  |  |  |  |
Right-of-use assets obtained in exchange for lease obligations 1 |  |  |  |  |  |
Finance leases |  | 135,987 |  |  |  |  |
Operating leases |  | 171,437 |  |  |  |  |
_________________ 1 Amounts include the transition adjustment for the adoption of ASU 2016-02, as amended.

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- Definition The entire disclosure for finance leases of lessee. Includes, but is not limited to, description of lessee's finance lease and maturity analysis of finance lease liability. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 842 -SubTopic 20 -URI https://asc.fasb.org/subtopic&trid=77888251 + Details
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- Definition The entire disclosure for operating leases of lessee. Includes, but is not limited to, description of operating lease and maturity analysis of operating lease liability. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 842 -SubTopic 20 -URI https://asc.fasb.org/subtopic&trid=77888251 + Details
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